A Reminder of Eurozone Problem Down the Road

Investors will pay the price for failing to grasp the mechanical and obvious point that currency unions do not eliminate risk: they switch it from exchange risk to default risk. Read about Germany's insistence on an EU treaty change that will protect Germany here.

This just reinforces to me that beside Gold, the only fiat currencies that can be considered safe havens are the CAD, AUD, and CHF. A secondary lot of fiat currencies would be NKR, SEK, NZD, and SGD.

Taylor Says Fed Easing Mostly Priced Into Currencies

John Taylor, chairman and founder of FX Concepts Inc., discusses the outlook for currency markets. He mangages one of the world largest currency hedge funds and oversees $8.5 billion. He has over 30 years of experience in the foreign exchange and related fixed income markets. He is recognized as an expert in the management of foreign exchange and a pioneer in the analysis of cyclicality of foreign exchange and interest rate markets.

Taylor, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," says another round of quantitative easing is mostly priced into the market and that the U.S. dollar will weaken through the end of November before recovering.

The Week Ahead by MarketWatch Videos

Asia's Week Ahead: Monetary Policy Decisions
Oct. 29, 2010
Monetary policy decisions from Australia, India and Japan will take center stage in Asia this week while Coal India debuts and Toyota and Nissan announce earnings. MarketWatch's Phani Kumar reports.



Europe's Week Ahead: Telecoms and Banks
Oct. 29, 2010
BP, Alcatel-Lucent and BNP Paribas report earnings next week. Bank of England unveils latest rate decision.



U.S. Week Ahead: Vote, Fed in the Spotlight
Oct. 29, 2010
Midterm elections and central bank moves to spur economic growth will be the top headlines in the market in the coming week. MarketWatch's Rex Crum has more news and economic events that will be in the spotlight for investors.

Bonfire of the Currencies

World governments just can’t get enough conflict these days. They’ve now resorted to battling each other with money printing. The devaluation race is in full gear, and it’s tough to keep track of who’s winning. Read the rest below ...

Eric Sprott - Markets at a Glance: Bonfire of the Currencies, October 2010

Bailout Funny Math

A must listen interview.

Brazil Demands IMF Create An FX-Manipulation Index

It looks like Brazil's Finance Minister Guido Mantega has had enough of Ben Bernanke and his monetary policy of printing money. Mantega didn't find the need to go to last week's G20 meeting for finance ministers and now we know why - he has had it. Mantega has announced that he will propose at the G20 nations meeting next month that the International Monetary Fund create an index measuring currency manipulation. The idea is to identify who is keeping their currency artificially low to boost exports, Mantega said, lending support to eventual actions against illegal subsidies at the World Trade Organization. Read the rest of the article here.

Why the West is Losing

Here is a a piece from the Swiss website thedailybell.com which alludes to something much bigger is going on nowadays - the Western power elite itself is struggling and even failing. The following except will give you an idea of what this article is about:  ... the Anglo-American axis has embarked on its most ambitious battle, which is to stitch together a global currency using the resources of the BRIC countries. But the trouble the axis is running into, and it is an obvious trouble, is that the axis does not control the decision-making process of the BRIC countries...

Inflation in the Real World

This little piece published by Casey Research demonstrates the big difference between what the government statistics are reporting and what’s going on in the real world. How the government can claim that the inflation rate, as measured by the CPI, is only 1.1% is beyond me when you see the increase in prices of commodities in the chart above. This is akin to the government's use of the core inflation indicator, which is a measure of inflation which excludes certain items that face volatile price movements, notably food and energy. So the government tries to play down inflation by using the core indicator; so I guess as long as you don't have to eat, heat or cool your home, and drive a car there is no inflation, NOT.

Morning Currency Wrap for Thursday October 28, 2010

QE How Much and for How Long - Yesterday USD short covering rally has run out of steam but the USD remains confined to yesterday's trading range. I'm sure that central banks around the world took every opportunity to sell USD into the rally in order to further diversify their reserves. Yesterday USD rally stemmed from speculation that the Federal Reserve might announce plans to buy less assets to stimulate the economy next week as the guessing game about how much they would purchase continues. Bloomberg has reported that the Fed has surveyed bond dealers and investors over the size and impact of a quantitative easing program, with scenarios ranging from zero up to $1 trillion. I would conclude that the Fed is trying to determine the market's expectation on next week's QE so that they don't disappoint the market. A similar Rueters poll suggests that analysts expect the Fed to buy $80 billion to $100 billion worth of assets per month. In Asia, the big news is not the downgrade of growth by the Bank of Japan or the details of the different assets that the BOJ plans to buy in its QE program, but the fact that the BOJ is bringing forward the date of its next policy meeting to follow next week’s Fed decision. Why? - because they are afraid that next week's Fed decision will cause the Yen to appreciate. Wow, I wounder what happened to last week's G20 communicate that they would not engage in currency devaluations? Not to be out done, China Yuan fell to its weakest level this month after the central bank set a lower reference rate for a third day, spurring speculation the government is limiting appreciation. It looks like to me that China is taking every opportunity to fix the Yuan lower so that the Yuan appreciation they have to deliver ahead of G-20 summit in Seoul on Nov. 11-12 will not be too strong. Also in Asia, the NZD was up after Reserve Bank Governor Alan Bollard said interest rates will probably need to rise in the future. In Canada, the CAD was slightly firmer on a softer tone for the USD. It looks like to me that after yesterday's action market players are positioned for the Fed's November 3rd QE announcement.

Definition of Inflation

Inflation is defined as an increase in the amount of money and credit in relation to the supply of goods and services. Often, inflation is erroneously defined by the effect that it has on the economy. When people notice that gas and food is getting more expensive, they often label that phenomenon inflation. Rising prices, however, are really just the result of inflation. The reason I bring this up is that today I read a headline that is completely inaccurate. Either the reporter doesn't know what he is talking about or the news is being manipulated. Here is the Bloomberg Businessweek headline:

Dollar Gains on Prospects Fed Will Succeed in Sparking Inflation

This is just not possible, the USD cannot move higher if inflation is expected. Now here is a headline from Yahoo Finance written by an AP business writer:

China official: dollar printing causing inflation

Now this headline is completely accurate.

China's Yuan vs. Dollar

Airtime: Tues. Oct. 26 2010 | 7:15 AM ET

Discussing U.S. and Chinese economic ties, with Stephen Roach, Morgan Stanley non-executive chairman.

Greece reignites Europe debt woes

Spreads on 10-year Greek bonds jumped 31 basis points to 9.57pc and the euro tumbled 2 cents to $1.385 against the dollar as investors awoke to the risk of political upheaval in Greece, not helped by warnings from bond giant PIMCO that Athens will default within three years.

Most investors seem to agree that the EU-IMF plan is unworkable, merely buying time for German and French banks to shift Greek liabilities on to EU taxpayers.

Read more about the Euro's potential problems ahead here.

Morning Currency Wrap for Wednesday October 27, 2010

A Tale of Two Articles - overnight trading took its cue from two news articles. The Financial Times reported that China and the U.S. were closer on trade targets that would address the G20 issue of rebalance world trade by numerical targets for current account balances. The other article from the Wall Street Journal suggests that the Fed would take a gradualist approach to further quantitative easing, making bond purchases of a few hundred billion dollars over several months. These two articles play into would I suggested in my blog a couple weeks ago about a possible deal being worked out between China and the U.S. I suggested that the reason that the U.S. Treasury withheld its report on currency manipulation because they working on a deal on a revaluation of the Yuan and current account surplus in exchange for a much smaller QE 2.0 program. Let's see how this plays out over the next week. On to the market, the two articles caused traders to pare back their bets and cover their USD short positions. Short covering and political upheaval in Greece caused the Euro to fall. Europe's debt woes have returned to the fore after Greek premier George Papandreou threw open the door to fresh elections and vowed to liberate the nation from "slavery and surveillance". In Asia, the Yen fell towards the 82 Yen handle as option-related stops were pulling it lower. The Bank of Japan meets tomorrow and it is not expected to change policy after unexpectedly cutting rates earlier this month. With the limited success of the September 15 intervention, the BOJ needs to do more to curb the Yen’s advance by increasing its purchases of government bonds with longer maturities, according to Merrill Lynch Japan Securities Co. Meanwhile, the air came out of the AUD as the weaker than expect inflation reading pared back expectations of near term interest rate hikes. Swaps prices indicate a 15% chance the Reserve Bank of Australia will increase its 4.50% benchmark rate by a quarter-percentage point when policy makers meet in November. In Canada, the CAD was down as the USD rose broadly on speculation the Fed would take a gradual approach to quantitative easing next week and on remarks that Bank of Canada Governor Mark Carney was concerned over the CAD's elevated level. Carney said that the BOC could conduct transactions in the market for the country’s currency if the exchange rate poses a serious risk to the economy.

Finance Quote of the Week

The Governor of the Bank of England, Mervyn King, in a speech titled “Banking: From Bagehot to Basel, and Back Again” said this:

The words “banking” and “crises” are natural bedfellows. If love and marriage go together like a horse and carriage, then banking and crisis go together like Oxford and the Isis, intertwined for as long as anyone can remember.

Is Dollar Headed for a Crash?

Airtime: Mon. Oct. 25 2010 | 7:11 PM ET

Is the sinking U.S. dollar headed for a full fledged dollar crash? Art Laffer, Laffer investments and Brian Kelly, Kanundrum Capital.

RIP: Paul the Octopus

The oracle octopus who shot to fame in the World Cup this summer is dead.

Great, now how is Ben Bernanke going to make decisions for the Fed?

Currency Wars for Dummies

The Financial Times has put together an interactive info graphic and  map called "The Currency Wars Explained". You may need a subscription to FT in order to access this here. You might be able to get around the need to subscribe by using google and searching for "The Currency Wars Explained".

Morning Currency Wrap for Tuesdat October 26, 2010

The GBP is STERLING today - the GBP surged after the U.K. economy grew at double the pace forecast by economists in the third quarter and the nation’s credit outlook was raised at Standard & Poor’s damping concern the Bank of England will restart its bond-purchase program next month to boost the economy. GDP rose 0.8% in Q3, the Office for National Statistics said in London today. Also supporting the GBP was news that S&P, which affirmed its AAA rating on U.K. debt, today restored its outlook to “stable” from “negative” after saying in May last year that Britain was at risk of a downgrade. Right next door, SEK was the second biggest mover as the SEK fell after Sweden's central bank, the Riksbank, increased the main rate by a quarter percentage point to 1% today as expected but said future rate hikes would be more gradual than previously expected. In Asia, the Yen fell against the Euro and USD after Japan's finance minister Yoshihiko Noda warned the government would "act decisively" in currency markets if needed. Japan’s Vice Finance Minister Fumihiko Igarashi  said yesterday that currency-market intervention is most effective when it’s unexpected - wow what a short memory he has, did they surprise the market on September 15 with their intervention and today the Yen is 5% stronger. Yesterday's decision by Japan to make 1.5 trillion yen ($18.5 billion) from its foreign-exchange special account available to Japan Bank for International Cooperation for overseas investment and infrastructure projects could be construed by some as indirect intervention. Meanwhile, the USD rebounded from yesterday lows as investors are wary of pushing it lower due to some uncertainty about what easing measures the Federal Reserve may take next week. The Fed is keeping the market off balance by having different reporters speculated on the size of the QE 2.0 so that shorting the USD is a bit less of a one-way bet. Last night it was New York Fed President William Dudley's turn to keep the market off balance by saying the Fed could provide "essential" support to the U.S. economy, although it was uncertain whether an incremental or big bang approach to asset purchases was better. In Canada, the CAD was down for the first time in three days on lower commodity prices as the USD was up across the board. The main event for the CAD this week will be Friday's Q3 GDP report.

Goldman: The Fed Needs To Print $4 Trillion In New Money

Image from endthefedusa.ning.com

Since 2007, the U.S. Government has increasingly used short term bonds (3-year term) to finance the budget. This year and next this has to be rolled over and if there are no buyers then the Fed will be forced to buy it up, i.e. print more USD. Read the latest analysis by Goldman Sachs on how high QE 2.0 could get here at ZeroHedge.

Gold/Dollar Outlook

Airtime: Mon. Oct. 25 2010 | 5:13 PM ET

Insight on commodities and the Dollar, with Peter Schiff, Euro Pacific Capital president.

Dress for the cause for the Breast Cancer Society of Canada

Cambridge Mercantile raised $1,700 in a one day event called "dress for the cause" held on Friday October 22, 2010 for the Breast Cancer Society of Canada. Employees pledged their support by wearing pink and raising funds for the cause. Pictured here are EVP Gary McDonald, sales administrator Nadine Esrock, and our President Jacques Feldman.

Morning Currency Wrap for Monday October 25, 2010

G20 - Much To Do About Nothing. G20 finance ministers pledged to avoid competitive currency devaluation - what does this mean? I'm not sure but I will guess that they couldn't agree so hence the pledge. As long as the U.S., UK, and Japan embark on QE then emerging countries will likely respond with currency and capital controls. In other words, the status quo remains. One thing that they did agree on was to give emerging nations a bigger voice in the IMF, recognizing the quickening shift in economic power away from the West to the East. Back to the market, with no G20 currency agreement the risk on trade is back on. The Euro regained the 1.40 handle and the Yen is fast approaching the 80 Yen level. The battle of 80 Yen between the speculators and the Bank of Japan looks to happen this week as chances of Japanese Yen-selling intervention increases as we approach 80 and tests its record low of 79.75 yen. News that Toshiba Corp. will prepare ways to withstand an exchange rate of 70 Yen to the USD, including halting unprofitable operations will give the speculators a shot in the arm. Elsewhere,  the SEK was up before a meeting of Sweden’s central bank, which should result in the main rate’s increase to 1% from 0.75%. Meanwhile in Australia, the AUD moved closer to parity with the USD as producer prices index advanced 1.3% in the third quarter from the prior three months, when it gained 0.3%, the Bureau of Statistics said in Sydney. The data caused the odds that the central bank will raise interest rates next month to rise to 53% from 38% last week. In the UK, the GBP looks to be in deeper trouble than the USD as the decline in the GBP suggests investors are losing confidence in Prime Minister David Cameron’s ability to restore growth while promising the deepest spending reductions in British history to shrink the biggest deficit in the G20. The 81 billion pounds ($128 billion) of cuts through 2015 will force Bank of England Governor Mervyn King to print cash by way of QE. This morning, analysts notes from Goldman Sachs suggest that the Fed's QE program could be anywhere between $2 to $4 trillion. In Canada, the CAD moved higher with the risk trade as commodity prices and global equity markets rallied.

G-20: A Green Light to Beat Down the Buck

The end result of this G20 meeting is to maintain the status quo which means a weaker USD.

You can read a sampling of analyst notes on the G-20 meeting from Citigroup, Goldman Sachs, and Faros Trading in this WSJ article here.

Leaving the euro might well be Ireland 'least bad' option

With the ESRI now predicting that further tax increases and spending cuts of up to €15bn will be needed to meet the Government's target of cutting the budget deficit to 3 per cent of GDP by 2014, Ireland faces the bleak choice of either quitting the euro or facing a decade or more of depression and deflation.
 In virtually every sovereign debt crisis in which it has been involved, a central part of the IMF's shock therapy has been a hefty currency devaluation. By making exports cheaper and imports dearer, it helps offset the impact of public spending cuts.
Unfortunately our membership of the euro deprives us of this safety valve. Instead, we are condemned to a decade or more of deflation and depression. While this might win us kudos in Brussels and Frankfurt, Irish voters are likely to prove less tolerant. Read the full article here.

Germany Calls Out Geithner's Hypocrisy

We can always count on ZeroHedge to give us the no nonsense version of key events like this weekend's G20. Here is a tidbit ..... After months of US bitching and moaning about China's so called unfair exchange policies, when it is the US Fed which is the biggest currency manipulator in the world by orders of magnitude, one country finally had the guts to stand up and call out Tim Geithner on his endless bullshit. At the G-20 meeting, per Bloomberg, German Economic Minister Rainer Bruederle said that the Fed's "push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar. Read the rest here.

Geithner Says China to `Continue To Move' on Yuan

Watch

Geithner Interview
Oct. 24 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner talks with Bloomberg's Peter Cook about China's policy on yuan appreciation and the outcomes from meetings of the Group of 20 finance ministers. Geithner, speaking yesterday in Gyeongju, South Korea, also discusses strengthening the International Monetary Fund's surveillance powers and Federal Reserve monetary policy. To watch the video please click on the word watch under the picture of Geithner.

If you would rather read about the interview, you can read the Reuters version here.

The Week Ahead by MarketWatch Videos

Asia's Week Ahead: Bank of Japan
Oct. 22, 2010
A policy decision from the Bank of Japan, AIA's initial public offering on the Hong Kong Stock Exchange and a slew of economic data will dominate news in Asia's week ahead. MarketWatch's Phani Kumar reports.



Europe's Week Ahead: Banks, Car Makers Report
Oct. 22, 2010
Some of Europe's biggest firms are due to report earnings over the coming week, with banks UBS and Deutsche Bank, car maker Volkswagen and oil giant Royal Dutch Shell among the blue chip companies in focus, while on the economic front, the U.K's third quarter gross domestic product is expected to slow sharply from the second quarter.



U.S. Week Ahead: Blue Chips, Midterms
Oct. 22, 2010
Earnings from top companies such as Microsoft, DuPont, Exxon and Merck will be in the spotlight next week, helping close out October on the way toward the upcoming midterm elections. Rex Crum reports.

Morning Currency Wrap for Friday October 22, 2010

Position Squaring ahead of G20 - last night's action was choppy as traders exited their short term trades in order to be neutral ahead of this weekend's G20 finance ministers meeting. Let the politicking begin - U.S. Treasury Secretary Timothy Geithner, in a letter to G-20 finance leaders, said emerging economies with undervalued currencies and solid reserves must allow their currencies to adjust in line with fundamentals. He called on countries to avoid using their currencies to gain an economic advantage, but his proposal to put a numerical cap on current account balances ran into stiff opposition from Japan, Germany and some emerging countries. I have my doubts about whether a new currency deal can be achieved, but you have to remain cautious just in case we get a surprise, hence the position squaring. I suppose that if the U.S. were to agree to a QE lite then maybe the Asian countries would sign up for upward currency revaluation at the same time so that neither would steel market share from each other. No use speculating here, the possibilities are endless. In Europe, the Euro was able to claw back some of its losses after the German Ifo institute's business sentiment index unexpectedly rose in October to 107.6 from 106.8. Meanwhile in Asia, the Yen was slightly down but confined to a tight range as traders remain wary of possible intervention by the Bank of Japan, after Tokyo stepped into the market in September for the first time in six years to rein in the Yen. In Canada, the CAD was firm off its overnight lows after Canadian inflation rose as expected; prompting analysts to predict the Bank of Canada would keep interest rates steady. Canada's annual inflation rate rose to 1.9% in September from 1.7% in August, in line with consensus, in part due to higher prices for energy, autos and electricity. Even though the inflation data is up, I doubt that it is enough to turn the Bank of Canada back to a hawkish stance after this week's comments by the BOC that it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth.

G-20 to Tackle Currency Fears

The threat of a currency war is spooking the markets and is at the top of the agenda at this weekend's G-20 meeting in South Korea. Stephen Gallo, of Schneider Foreign Exchange, and Win Thin, of Brown Brothers Harriman, share their insight.

Season Finale Of The "FOMC Shore"

The Players:

1. The senior trio - Bernanke, Dudley, and Yellen - who clearly favor more action.

2. Other in favor of additional easing soon - Bullard, Evans, Lockhart, Pianalto, and Rosengren.

3. Regulatory experts - Duke, Raskin, Tarullo - likely to vote with the Chairman.

4. Skeptical but undecided - Fisher, Kocherlakota, and Warsh.

5. Those opposed - Hoenig, Lacker, and Plosser.

Read all the details of this cliff hanger at ZeroHedge here.

Man up France!

Funny video from Business Insider on France's pension reforms, raising the retirement age from 60 to 62.

Morning Currency Wrap for Thursday October 21, 2010

Flash Crash - the correction that wasn't. I'm running out of superlatives to describe Tuesday's sell off. It reminds me of May's stock market flash crash, it happened and we moved on. These markets have become so screwed up, how can you invest or trade when you would be hard pressed to find a trade that is non-correlated to the USD. Anyway back to the grind, the USD trimmed gains against the Euro as market players deciphered earlier comments by U.S. Treasury Secretary Timothy Geithner. The Wall Street Journal quoted Geithner as saying major currencies were roughly in alignment and that he would use a weekend meeting of G20 finance ministers to advance efforts to rebalance the world economy and move toward norms on currency policy. He divided currencies into three categories. The first, including China's yuan, were undervalued by any measure, while the second group were those of emerging economies with flexible exchange rates that intervene or impose taxes. The third comprised major currencies "which are roughly in alignment now", a comment the WSJ said suggested he saw no reason for the USD to fall further against the Euro and Yen. Personally, I think Geithner was talking up his book, the USD, ahead of the massive money printing the U.S. will embark on in November. He sure could not say that he believes in a strong USD policy. Later, the Euro moved higher after a gauge of regional manufacturing unexpectedly increased. Elsewhere, the GBP remained under pressure on concern the Bank of England will boost the economy by printing cash as Prime Minister David Cameron’s government reduces the deficit. Meanwhile, the USD approached a 15-year low against the Yen but did press its advantage as market players are wary that Japanese authorities could intervene to slow the Yen's rise again, after they did so on Sept. 15, selling Yen for the first time in more than six years. Also, Asian currencies were up on news that China’s economy  grew 9.6% in the third quarter and inflation accelerated to the fastest pace in almost two years. In Canada, the CAD was up on China's news but later gave up those gains on news that Canada’s index of leading economic indicators unexpectedly fell in September, the first decline since April 2009, led by housing and manufacturing. 

Bank of Canada turns dovish

The Bank of Canada has downgraded its global and Canadian economic growth outlook for a second straight Monetary Policy Report, revising their Canadian economic growth forecast by an average of 0.5 percentage points in 2010 and 2011. The BoC forecasts economic growth to be 3.0% in 2010, 2.3% in 2011, and 2.6% in 2012. Read the full report by TD Bank Financial Group here.

I get the feeling that Bank of Canada Governor Mark Carney would love to take back that last 25bps rate hike in September.

You've heard of QE 2.0, What about TARP 2

Remember all the talk about the bank's toxic assets in 2008, well it looks like that is starting to resurface. Two articles that caught my attention yesterday made me think that Tarp 2 can't be far behind. If Tarp 2 doesn't materialize then I would think that QE 2.0 will be bigger than anyone thought.

From the first Bloomberg Businessweek article here:

JPMorgan analysts said mortgage repurchase costs stem from $2 trillion of loans that have defaulted or are likely to go bad, among the $6 trillion of U.S. mortgages and home-equity debt originated from 2005 through 2007. The defaults will create about $1.1 trillion of losses for banks, government-supported Fannie Mae and Freddie Mac, bond investors and insurers.

From the second article here:

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.

I guess I should have known this was coming after the March 2009 decision by Financial Accounting Standards Board (FASB) to relax fair-value accounting rules. This meant that banks no longer had to value assets utilizing mark to market and instead could use the mark to "whatever number the bank wants" method.

Currency Humour

A few weeks ago, the Fed announced that the new $100 dollar note has been delayed, and will not make broad circulation by the February 2011 scheduled date. Contrary to prior rumors that either the Fed's printer had finally broken ..... Read the funny details at the ZeroHedge blog here.

Morning Wrap for Wednesday October 20, 2010

Give back time. The USD fell against a basket of currencies on Wednesday, as appetite for higher-yielding currencies revived after being thrown for a loop by China's surprise interest rate hike. Yesterday's reaction was way overblown, especially when you consider that the Fed is about to embark on a massive QE program. I suspect the Chinese rate hike made speculators nervous so they started to cover their over extended USD short positions - I do not subscribe to the bubblevision talking heads calling yesterday's move a risk off trade with investors moving to the safe haven of the USD. Come on, the USD and safe haven should not be used in the same sentence. Yesterday's parade of Fed voting members were all on the same page indicating the central bank will soon offer further monetary stimulus, with one saying $100 billion a month in bond buying may be appropriate. In the UK, the minutes from the Bank of England's last monetary policy committee meeting showed a three-way split, with one member voting for QE, causing the GBP to fall. Later, the GBP was able to claw back some of its losses after UK finance minister George Osborne gave details of the harshest government spending cuts in decades, taking an axe to the welfare state in an effort to reduce a record budget deficit. Of course these cuts would probably hurt growth and keep monetary policy easy, thus putting more pressure on the GBP. In Canada, the CAD was up as commodity prices rose from yesterday's lows do to the overblown reaction to China's interest rate hike.

The Euro and tomorrow's vote in France

Strikes by public sector workers and students continued to cause disruptions across France on Tuesday, with sporadic outbursts of violence punctuating the final day before the expected vote in the Senate on President Nicolas Sarkozy's pension reform bill. If the protests causes tomorrow's vote to be suspended or to delay pension reform look for the Euro to buckle towards the 1.35 handle. For more pictures click here.

Did China just halt exports of Rare Earth Metals to the world?

According to industry experts, the embargo of the rare earth metal is expanding beyond Japan . They said Chinese customs officials imposed the broader shipment restrictions Monday morning, hours after a top Chinese official had summoned international news media Sunday night to denounce United States trade actions. Is sounds like Chinese officials are sending a message to stop pressuring them to revalue its currency and to cut unfair subsidies for Chinese clean tech. American trade officials announced last Friday that they would investigate whether China was violating international trade rules by subsidizing its clean energy industries. This China and U.S. row is starting to get ugly. Read all the details here.

Morning Wrap for Tuesday October 19, 2010

Correction or just another bounce? Yesterday question has been answered, a correction has finally started so it is safe to say it is a change in trend. The trigger was an interest rate hike by China's central bank. The People's Bank of China surprised markets by raising its benchmark one-year lending and deposit rate by 25 basis points effective from Oct. 20, the first rate increase since 2007. Last Friday, I wrote in my blog at www.fxdeskcambridge.blogspot.com that one of the reasons that the U.S. withheld their currency report, which would have labeled China a currency manipulator, was that they were negotiating with China to address the currency issue and as part of that deal that they would be raising interest rates this week. The USD surged higher against all currencies after news broke of the rate hike. The biggest loser was the AUD as investors were concerned that the move could dampen growth in China, hitting commodity-linked economies in particular. The Euro extended its losses after Germany's ZEW institute said its economic sentiment index was at -7.2 in October, down from -4.3 in September but better than forecasts of -8.0. Yesterday, the USD began its advance after Treasury Secretary Timothy F. Geithner said that the U.S. will work to preserve confidence in a strong currency and won’t pursue a strategy of devaluation. Geithner's comments ahead of the G-20 meeting would suggest that the U.S. was trying to work out an agreement with emerging economies like China which would ease the currency tensions that have marked the past few weeks. Currency tensions flared up after Fed Chairman Ben Bernanke's Jackson's Hole speech where he suggested that he was going to embark on QE2.0. Now, the USD will rally until the market knows how sizeable the QE will actually be. A host of speakers from the Fed are due to speak on today. More and more policymakers are signing up for QE, so any indications how far the U.S. central bank will go to stimulate the economy could weigh on the USD. In Canada, the CAD sold off to a two-week low after the Bank of Canada left interest rates unchanged and cut its growth forecast. The BOC cut its growth forecast for this year to 3% from 3.5% and next year to 2.3% from 2.9%.

Saxo Bank FX Monthly Report for October 2010

Here are the highlights of the FX market for October as seen through the eyes of Saxo Bank.

Saxo FX Monthly, October 2010

Morning Wrap for Monday October 18, 2010

Correction or just another bounce? The USD extended its move from Friday against the majors, except the Yen, as market players trimmed bearish bets on the USD on uncertainty over how far the Federal Reserve will go in easing monetary policy. With the many false starts that we have had over the last of couple of weeks on the oversold USD, it is difficult to determine if this is a bounce due to profit taking or the beginning of a real correction. If I had to guess I would say it is just a bounce because there has been no fundamental driven change. Perhaps we get some sideways trading until the November U.S. mid-term elections and the FOMC meeting on November 2 and 3, respectively. In Asia, the Yen did move higher against the USD but was confined to a tight range between 81.10 to 81.50. Most market players believe that Japanese authorities will be reluctant to intervene ahead of this week’s meeting of policy makers from Group of 20 nations. Finance ministers and central bankers of the G-20 nations are due to meet on Oct. 22 and 23 in South Korea, which will also host a summit meeting of top G-20 politicians next month. Kyodo News reported yesterday that the nation plans to set up a Cabinet Office study group to examine how to increase the amount of trade settled in yen so as to minimize the impact of currency fluctuations, possibly signaling that Japan would simply accept a strong Yen. In Europe, more is being made of ECB President Jean-Claude Trichet's rebuke of  Bundesbank President Axel Weber’s call to end bond purchases. This is not news but is getting profile because Weber is seen as a lead candidate to replace Trichet when his terms expires at the end of Oct 2011. Meanwhile, a voice of reason emerged from Australia. Australian Treasurer Wayne Swan warned against any efforts to artificially lower the value of the AUD against the USD because it could create hyperinflation in Australia. The AUD reached parity with the USD on Friday for the first time since it was floated in 1983. Swan said efforts to depress the value of the AUD would be counterproductive, driving inflation and interest rates higher, while damaging all sectors of the economy. In Canada, the CAD fell more than a cent in overnight trading on the USD's bounce and ahead of tomorrow's Bank of Canada interest rate decision. The market will be looking at the tone of the BOC's statement as the market fully expects the bank to hold its overnight target rate at 1%.

Finally a voice of reason from down under

Australian Treasurer Wayne Swan warned against any efforts to artificially lower the value of the AUD against the USD because it could create hyperinflation in Australia. The AUD reached parity with the USD on Friday for the first time since it was floated in 1983. Swan said efforts to depress the value of the AUD would be counterproductive, driving inflation and interest rates higher, while damaging all sectors of the economy. "Some of us remember well the last time Australia attempted to fix its currency at the same time we were experiencing a terms of trade boom in the mid 1970s. The result was headline inflation rose from around 5% to 17.6% in a little over two years," Swan said. Read the Bloomberg article here.

Not to be out done by the Fed, We will keep printing GBP and Euros too

The Centre for Economics and Business Research said today that the Bank of England will soon increase its emergency bond-purchase plan by 100 billion pounds ($160 billion) to aid the economy as the government cuts spending. Read the Bloomberg article here.

European Central Bank President Jean-Claude Trichet went out of his way to rebuke fellow ECB member and Bundesbank leader Axel Weber's call to end the ECB's bond buying program. Asked by reporter about the remarks, Trichet responded with “No! This is not the position of the Governing Council, with an overwhelming majority.”  Read the Bloomberg article here.

The Week Ahead by MarketWatch Videos

Asia's Week Ahead: China's New Five-Year Plan
Oct. 15, 2010
A new five-year plan from China and a slew of economic data will dominate the news from Asia next week. MarketWatch's David Callaway reports.



Europe's Week Ahead
Oct. 15, 2010
European earnings season kicks into top gear Monday, with earnings from a string of blue chips, including Philips, Nokia and Credit Suisse, while on the economic front the U.K. government will reveal details of its comprehensive spending review.



U.S. Week Ahead: Apple, IBM, Seagate to report
Oct. 15, 2010
Apple earnings highlight a busy schedule of financial results in the U.S. week ahead.

Currency Deal in the Works??

From the IBTIMES.com today - The International Monetary Fund (IMF) said it will sponsor a high-level conference on “Macro-Prudential Policies: Asian Perspectives in Shanghai” on October 18, with the participation of central bank governors and other officials from Asia, Africa, Europe, and North and South America.

It looks like some sort of currency deal, akin to the Plaza Accord, is in the works. Notice how the meeting is being held in Shanghai, China - I guess the balance of power has shifted from the west to the east. Looks like a good time to start thinking about shorting the Euro versus some Asian currencies.

SEK, Leader of the pack

The above chart, by way of Bloomberg, Morgan Stanley, and businessinsider.com, shows which currencies have appreciated the most against the USD. With the Swedish Krona up over 20% against the USD, you would think that Sweden would have intervened in the currency markets to slow the SEK's appreciation, not. Notice how the Japanese Yen is in the middle of the pack - perhaps the intervention in September and the repeated threat of it is working. Also, notice how the CAD is under performing, probably due to the intercontectivity between the economies of Canada and the U.S.

Treasury Department delays release of Semi-Annual Currency Report

The Obama administration looks set to delay a much-anticipated decision on whether to label China as a currency manipulator. Maybe there is something to yesterday's rumour about a possible deal between the U.S. and China. Perhaps China has offered to raise interest rates in order to buy time for some sort of currency deal at the next G20 meeting in Seoul on November 11. Remember, Treasury also delayed its April 15 report to give China more time to make currency reforms. It eventually was released on July 8. Read more here.

墳數字的第一個製造者 - Translation, someone who has set a bad precedent

The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the USD , a Chinese economist said in an official newspaper on Thursday. Li Xiangyang, a director at the Chinese Academy of Social Sciences, a leading government think tank, accused America of being "the first maker of tomb figures" a phrase which in Chinese translates as someone who has set a bad precedent. "The USD's depreciation appears to be market-driven," Li wrote in the People's Daily newspaper. "In reality, it is a depreciation coloured by very strong, deliberate actions." "The motives were plain enough. Without a weaker USD, the United States would have no hope of  meeting President Barack Obama's goal to double exports in five years", Li said. Read more here.

Morning Wrap for Friday October 15, 2010

Inflation is too low and unemployment is too high - that's what Federal Reserve Chairman Ben S. Bernanke said about the need for additional monetary stimulus at this morning's speech to the Federal Reserve Bank of Boston Conference titled "Monetary Policy Objectives and Tools in a Low-Inflation Environment". He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting. Bernanke said the central bank could expand asset purchases or change the language in its statement, while saying “non-conventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.” Now back to reality, the USD extended its losses against the euro on Friday after data showed stronger-than-expected U.S. retail sales and softer-than-expected consumer inflation. This data combination is enough to keep the risk trade on. Funny how in the east they call rising commodities a risk trade while in the west they call rising financials a risk trade. In Asia, the USD dropped to a 15-year low versus the Yen after Bernanke's speech was seen as a confirmation of already highly expected quantitative easing measures. In the U.S. today, the US Treasury Department is suppose to publish its Semi-Annual Currency Report, possibly labeling China as a currency manipulator. The reports official release dates are April 15 and October 15, but it is almost always delayed by 1-2 months. While Treasury has been pressured and criticized by Congress for never naming China as a currency manipulator; if it doesn't release the report today then there may be some truth to yesterday's rumour that a deal was in the works with China. The deal would involve China agreeing to either a revaluation of the Renminbi or allowing it to appreciate faster in exchange for not labeling China a currency manipulator and a much smaller Fed QE program. In Canada, the CAD moved higher on news that Canadian factory sales rose four times faster than economists expected in August and on Bernanke's remarks. Next week, Bank of Canada Governor Mark Carney is expected not to raise interest rates after the U.S. Federal Reserve indicated it may add new stimulus, which may strengthen the CAD and hurt exports.

Asia Market Focus: Singapore Surprise, FX policy changes

The affects of the weakening USD has kept all central banks on edge as they try to keep the lid on their own currencies, and Asia has taken much of the spotlight. With the much publicized intervention by the Bank of Japan, calls from the US FED of China's currency manipulation. Now a surprise action from the Monetary Authority of Singapore adjusting their FX policy. Andrew Robinson discusses the insights behind this move.

For Day Traders Only

Source: PivotFarm

Today PivotFarm contrarian analysis shows that retail longs in USD/JPY and USD/CHF continue to be strong and that it doesn’t look like it will be stopping any time soon. More detail can be seen here.

Also, if you are interested in pivot points for different currency pairs, PivotFarm has proved them for free today at their site here.

Friday's speech by Fed Chairman Ben Bernanke could be a game changer

This Friday, Fed Chairman Ben Bernanke will give a speech at the Federal Reserve Bank of Boston Conference titled "Monetary Policy Objectives and Tools in a Low-Inflation Environment". Jon Hilsenrath of the Wall Street Journal has outlined a preview of the speech,  Fed Chief Gets Set to Apply Lessons of Japan's History. The article hints that Bernanke might discuss possible future steps the Fed could take in addition to buying longer-term Treasury securities, as the Bank of Japan as recently done. God help us, hasn't he already fanned fears of currency devaluation. My view on QE is this: QE is to monetary policy what steroids is to sports, we have banned the use of steroids in sports so we should also ban QE.

Morning Wrap for Thursday October 14, 2010

Pummeled, this is the only word that comes to mind when I think of what happen to the USD in overnight markets. Last night trigger was news that Singapore widened the trading band for its currency in response to rising market volatility. Effectively, Singapore's move is a form of policy tightening aimed at containing rising inflation and is a signal that officials are embracing a stronger currency after already seeing about an 8% currency appreciation so far this year. With interest rates at record lows in developed countries, yield-hungry investors are piling cash into emerging markets. The tide of money is rising ahead of an anticipated second round of quantitative easing by the Fed. Also out of Asia, the verbal jousting between South Korea and Japan demonstrates the tensions ahead of a G20 meeting next week. State media in South Korea reported Seoul had complained to Japan after Tokyo questioned its leadership of the G20 forum of major economies because of repeated intervention to curb the won. Seoul was angered by unusually direct remarks on Wednesday by Japanese Finance Minister Yoshihiko Noda, who said emerging market countries with current account surpluses, like China and South Korea, should allow their currencies to be more flexible. In Europe, the Euro surged to over 1.41 as the USD continues to move lower in anticipation of QE2.0. Riksbank Deputy Governor Barbro Wickman-Parak said Sweden’s economic recovery calls for more interest-rate rises and any delays in continuing monetary tightening might require more dramatic increases in future. Policy makers have raised the repo rate twice since July, bringing it to 0.75% at their September meeting. They announce their next decision on Oct. 26. Elsewhere, the USD dropped below 81 Yen for the first time since April 1995 as initial jobless claims unexpectedly rose and the trade deficit widened. Trade during August resulted in a deficit of $46.3 billion, which is up from the $42.6 billion deficit recorded for the prior month. It was also worse than the $44.5 billion deficit that had been generally expected among economists. In Canada, the CAD pushed through parity against the USD for the first time since April in overnight trading, but was unable to sustain that move on news that Canada’s trade deficit narrowed more than expected in August from a record the previous month, as imports fell and shipments abroad increased. 

'ChiAmerica' in Action

The weak dollar and yuan policies are beneficial to the U.S. and China but leaves other countries, for example South Korea, in quite a tight spot, says Niall Ferguson, Professor, Harvard University. He explains more to CNBC's Chloe Cho.

I never tire of hearing anything that Mr. Ferguson has to say. I think his knowledge of monetary history is unparalleled and I find it invaluable to my investment thesis.

Currency Wars, what's at stake at the next G20 meeting

After last's week IMF meeting failed to make any progress on currency issues, G20 nations will be under pressure to resolve disputes or risk a new crisis for the world economy as protectionism takes hold. Reuters has put together a 12 page report outlining the key issues for the November 11 meeting in South Korea, which can be viewed here.

Morning Wrap for Wednesday October 13, 2010

What was thought to be the beginning of a correction in the USD yesterday turned out to be just a run of the mill short squeeze. Today's forex driver is policy divergence, which has led to broad selling in the USD once again. Last night's hawkish comments by European Central Bank Governing Council member Axel Weber reaffirmed the ECB's continued commitment to an exit strategy from monetary easing. Weber said yesterday that the risk of recession in Europe is “negligible” and the central bank should stop its bond-purchase program. Weber, who also heads Germany’s Bundesbank, said “these securities purchases should now be phased out permanently.” In contrast, yesterday's release of the FOMC minutes from the September meeting reinforced expectations of more monetary easing in the form of QE. The Euro has been unable to sustain a move above the key psychological $1.40 level, as stops and options barriers at that level were helping to cap gains. However, the Euro was able to make gains against the Yen, CHF, and GBP because it is the only central bank talking about an exit strategy. In Asia, the USD traded in a tight range against the Yen as traders remained nervous that Japanese authorities could intervene the closer it gets to its record low of 79.75 yen. Bank of Japan Governor Masaaki Shirakawa indicated he may examine enhancing a 5 trillion yen ($61 billion) fund to buy government debt. Elsewhere, news out of China shows that it added to its foreign-exchange reserves, the world’s largest, surging to a record $2.65 trillion at the end of September, adding fuel to complaints that the nation’s curbs on gains in the Yuan are undermining the global recovery. However, Chinese officials can also point to improvements in the trade balance. Imports rose to a record value of $128.1 billion, limiting the surplus to the smallest in five months. Also, despite reporting stronger than expected loan growth, China also indicated that it would not raise interest rate for the remainder of the year. This has helped fuel the risk trade today with equities up in almost all countries. In Canada, the CAD is knocking on the parity door as it rose to its highest point against the USD since late April as global equities gained along with commodities, and as new home prices unexpectedly rose 0.1% in August. Finance Minister Jim Flaherty said yesterday Canada will be the first Group of Seven country to balance its budget by 2015.

The Monetary Breakdown of the West

The Ludwig von Mises Institute, which could never be mistaken as Keynesians because they come from the Austrian school of economics, has just published a timely portrayal of what, they consider, the downfall of the global currency system. It all starts with the world straying from the gold standard, and ends in the currency war we're experiencing today. You can read the very lengthy article here or you can have a look at the businessinsiders.com's easy to read slide presentation here.

Odds Favor Trade War

With U.S. impatience growing over China's reluctance to allow its currency to appreciate, U.S.-imposed trade barriers seem likely, Alen Mattich says. If China allowed inflation to run fast enough to improve U.S.'s terms of trade, that might improve the situation. But this might take too long.

Currency Snapshot for Tuesday October 12, 2010

Here are this morning's opening  interbank mid-market rates:

USD/CAD  1.0133                 EUR/CAD    1.4053                     USD/JPY       81.78

GBP/USD  1.5858                 EUR/USD    1.3849                     USD/CHF      0.9597

Commentary:

 

Risk off - the long awaited correction in the USD as arrived. After four consecutive weekly losses against the Euro, the longest winning streak since early August, the USD moved higher ahead of minutes from the U.S. Federal Reserve's meeting.  The USD had been sold off sharply as market players factored in the prospect of more quantitative easing after the Fed's rate-setting meeting on Sep. 21, when the central bank said it stood ready to provide more support for the economy and expressed concern about low inflation. I don't think any insight is to be found in the minutes considering how vocal different FOMC members have been over the last month over the size and effectiveness of any QE. The short covering in the USD pick up speed as losses in global equity markets and commodities added fuel to the USD's bounce. In Asia, the USD dipped against the Yen, however, heading back towards a 15-year low struck on Monday. Japanese Finance Minister Yoshihiko Noda said he had explained to a weekend meeting of the Group of Seven industrial countries in Washington that Tokyo had intervened on September 15 to prevent destabilizing lurches in exchange rates. Elsewhere, Thailand slapped a 15% withholding tax on capital gains and interest income from foreign investment in government debt in a bid to curb the baht, which is at its highest since the 1997 Asian financial crisis. Meanwhile, the AUD was down after China's central bank ordered six lenders to temporarily increase the amount of money they must keep in reserve to rein in lending and combat rising inflation. Reserve requirement ratio for the six lenders was raised by 50 basis points to 17.5% for two months. As you can see from the Asian news that since no currency deal was hatched at last weekend's IMF meeting that different countries are imposing their own restrictions in order to fight currency appreciation. In Canada, the CAD was able to pair earlier loss, by is still off Friday's closing rates, as global stocks and crude oil, the nation’s largest export, rebounded from early losses.

Disclaimer: Please note that any currency rates/prices contained in this document are indicative, and subject to change without notice. Prices quoted may vary substantially based upon the size of transaction and market volatility.

Map of global imbalances

Der Spiegel has created the above infographic that illustrates the global imbalances at the heart of the global currency war. Notice how the imbalances are driving the accumulation of foreign currency reserves by China.

Everything you always wanted to know about QE and then some

Morgan Stanley's Jim Caron has put together a 100+ page report on everything you need to know about QE. Please spare yourself the economist mumbo jumbo and just read the summary by ZeroHedge here.

Traders to test Japan's will

Source: forex.tradingcharts.com

It didn't take long for traders to test the Bank of Japan’s willingness to again intervene in the currency markets after the IMF was unable to forge a deal with G20 countries on a currency pact. As you can see from the chart, they quickly drove it to 81.40 before backing off.

Just another photo op - no deal

What did you think was going to happen. Did you really think that 20 or more countries can up with a solution. Back in the G3 or G5 days there would have been a chance, but with 20, not a chance. Also I don't think China was in a mood to strike a deal after Chinese dissident Liu Xiaobo was awarded the Nobel Peace Prize; and President Obama called on China to release him from prison. A deal will only happen when the major players have their backs against the wall. 

The Week Ahead by MarketWatch Videos

Asia's Week Ahead: China Trade in Focus
Oct. 8, 2010
Investors in Asia will be digesting some key data next week, including a trade report from China and the corporate-goods price index from the Bank of Japan. MarketWatch's Lisa Twaronite reports.



Europe's Week Ahead: Luxury Goods, Supermarkets
Oct. 8, 2010
Luxury-goods makers Burberry and LVMH as well as supermarket giant Carrefour unveil quarterly sales. In the tech sector, ASML reports results. On the economic front, U.K. inflation data are due Tuesday.



U.S. Week Ahead: MIA

Currency Wars - Sound Bites and Rhetoric

David Blanchflower, former member of the monetary policy committee, and Fred Bergsten, director of the Peterson Institute for International Economics joined CNBC to discuss currencies at the end of the first day of the IMF/G7 meeting.

Change is afoot - away from the hegemony of the USD

In this story from Robert Fisk of the UK Independent, called "The Demise of the Dollar", we discover that a new world order is working to stop using the USD for oil trading. Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.High level sources have confirmed that current deadline for the currency transition is 2018. The transitional currency in the move away from the USD, according to Chinese banking sources, may well be gold, which may help to explain the sudden rise in gold prices.

In related story, China and Turkey have agreed to conduct trade using their on currencies and not the USD. China continues to make plans to internalize its currency for world trade. Read the story here.