As is usually the case, much adieu will be made of this upcoming G-7 meeting in Tokyo especially at a time when it seems that just about everyone in all parts of the world are clinging to every economic news event as if their life depends on it. Simply put, this is what happens when ordinary people worry about losing their homes and that is precisely what the subprime crisis has done.
In years past, the rhetoric (both pre and post meeting) has predominantly focused on two major issues: (1) inevitable USD weakness (due to the gaping Trade Deficit) and (2) gradual CNY and JPY strength (most of this talk came from US and European exporters to level the playing field). We happen to think that this year's focus may be vastly different than in years past, and are on the lookout for some big market movements, most notably in the currency markets.
Where to begin? Let's start right here in the United States.
When it comes to the dramatic plight of the USD these past 5 years, you don't hear much complaining from either US officials or your average "man in the street". The weakening USD has gotten plenty of attention from the international media and the local business networks but, two key factors have quieted the western front: (1) most US companies have benefited from the swooning buck and (2) 90% of US travel remains domestic.
What about our European counterparts?
The exploding EUR/USD and EUR/JPY exchange rates have driven the European exporting sector (i.e Daimler, BMW) up the proverbial wall. But given the ECB's (European Central Bank) reluctance to ease interest rates (even in the subprime environment) as well as the repatriation aspect of the subprime fallout, the EUR/USD still seems poised to take out the key psychological 1.50 barrier no matter how much their exporting community bellyaches.
Finally, what about the pseudo members of the G7: China, Russia, and the Middle East? These countries own several trillion USDs worth of US assets and debt (especially China and ME) and historically have benefited greatly from their investment. But that was before the housing and credit bubbles burst. Now, US creditors need not only contend with a USD that has depreciated close to 40% in the past few years (and currently sits right near its all time lows) but also with some stinky real estate and bond investments that must look anemic at best in the current environment. Not good.
What do we expect will happen?
We believe this G7 meeting could get the ball rolling for a USD comeback. There are a multitude of fundamental reasons to support a stronger dollar including - recoupling, repatriation and a new US President in 2008. We speculate that these foreign creditors of the US must be up in arms with their "double whammy" predicament and therefore will implore US officials to do something about the weak USD. Keep in mind, the subprime crisis is still very much in its infantile stages and the actual losses may take years to figure out so there isn't much anyone can do about the sinking US housing and equity markets. But the USD problem can be fixed. Or, at least the forces that can actually "try" to do something about it instead of continuing their pattern of benign neglect.
Are we suggesting a coordinated intervention? Not yet (maybe if EUR/USD hits 1.60). But we do expect the "jawboning" to sway in the favor of the USD instead of against it - which would bring about a significant change in 2008. As a final note, keep in mind that in years past the USD traded down as the DJIA went up, but this year the reverse has occurred. If the G7 expresses concern of the USD weakness, we may be in for a significant reversal - as much as 20-25% is not out of the question.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Sunday, April 13, 2008
RESEARCH NOTE: G7 Preview - Status quo, or has the USD become too weak?
Tomorrow (Friday Apr. 11) at 1400 NY time, the finance ministers and central bank heads of the G7 nations (US, UK, Canada, Japan, Germany, France and Italy) will convene in a regular quarterly meeting that will overlap with the spring meetings of the International Monetary Fund (IMF) and World Bank over the weekend. US Treasury Sec. Paulson is scheduled to deliver a press briefing later Friday at 1845 NY time on the outcome of the G7 talks. The following is our outlook for the results of the G7 meeting and the likely impact on Forex market developments:
Going into the G7 meeting, FX markets are not expecting major changes to the currency section of the official communique. But it would not be a normal G7 meeting if there were not speculation of shifts affecting currencies. As to the timing of the release of the communique itself, based on past experience, a draft version of the final communique is likely to be in circulation before the G7 talks actually convene, perhaps as early as the NY opening or sooner. Such drafts have frequently proven to be the final version.
The primary basis for expecting no significant changes to the G7 statement on currencies is the absence of any public shift by US officials over the plight of the USD. That said, USD weakness is clearly an issue for other members of the G7, but without US agreement, there is likely no consensus to adjust the language. The other basis for expecting no changes to the currency statement is that the G7 is most concerned with stabilizing global financial market confidence and addressing liquidity issues to prevent an even larger impact on the global economy. Stirring up the currency pot at this juncture might produce heightened FX volatility, aggravating financial market stability in the short-term. Should the G7 maintain the prior language on currencies, I expect markets to return to prior existing themes, namely 1) selling USD, and other 'slowing' currencies like GBP and CAD, on deteriorating economic outlooks and 2) risk aversion/seeking trades (selling JPY-crosses/buying JPY-crosses) as stock markets undulate.
The speculation that the G7 may 'tweak' its FX statement stems from the extreme weakness of the USD and the potential for a catastrophic collapse in USD assets and a 'run on the USD.' If there has been a behind-the-scenes shift by US officials, the G7 language on currencies could be altered to express such displeasure. While there is no way of knowing exactly what form the language change might take, the more specific they are about the USD, or any currency for that matter, the greater the perceived market impact. An explicit reference might look like "Recent exchange rate movements have been excessive in light of long-term fundamentals, particularly in the value of the USD." A more oblique indication of G7 displeasure might be confined to strengthening the language in the "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth" sentence. If they do alter such language, the G7 is implicitly referring to USD weakness, even if they do not mention a currency specifically. This sensitivity to potential shifts supporting the USD is partly responsible for the sharp rebound in the USD on Thursday-in general traders do not want to go into the G7 excessively short USD due to the risks of a shift in the G7 statement.
Should the G7 alter its language to indicate USD weakness has become excessive or otherwise undesirable, I would look for a substantial recovery in the USD on the order of 3-5% initially. Such a USD rebound would likely embolden risk appetites, so I would also look for gains in USD/JPY to outpace declines in EUR/USD, leading to overall higher JPY-crosses in the process. But make no mistake, if the G7 addresses USD weakness, I believe the impact will be substantial.
The other change that may be made would involve toning down, or removing completely, the explicit mention of China as needing to allow faster appreciation of its currency, in recognition of recent Yuan gains.
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Going into the G7 meeting, FX markets are not expecting major changes to the currency section of the official communique. But it would not be a normal G7 meeting if there were not speculation of shifts affecting currencies. As to the timing of the release of the communique itself, based on past experience, a draft version of the final communique is likely to be in circulation before the G7 talks actually convene, perhaps as early as the NY opening or sooner. Such drafts have frequently proven to be the final version.
The primary basis for expecting no significant changes to the G7 statement on currencies is the absence of any public shift by US officials over the plight of the USD. That said, USD weakness is clearly an issue for other members of the G7, but without US agreement, there is likely no consensus to adjust the language. The other basis for expecting no changes to the currency statement is that the G7 is most concerned with stabilizing global financial market confidence and addressing liquidity issues to prevent an even larger impact on the global economy. Stirring up the currency pot at this juncture might produce heightened FX volatility, aggravating financial market stability in the short-term. Should the G7 maintain the prior language on currencies, I expect markets to return to prior existing themes, namely 1) selling USD, and other 'slowing' currencies like GBP and CAD, on deteriorating economic outlooks and 2) risk aversion/seeking trades (selling JPY-crosses/buying JPY-crosses) as stock markets undulate.
The speculation that the G7 may 'tweak' its FX statement stems from the extreme weakness of the USD and the potential for a catastrophic collapse in USD assets and a 'run on the USD.' If there has been a behind-the-scenes shift by US officials, the G7 language on currencies could be altered to express such displeasure. While there is no way of knowing exactly what form the language change might take, the more specific they are about the USD, or any currency for that matter, the greater the perceived market impact. An explicit reference might look like "Recent exchange rate movements have been excessive in light of long-term fundamentals, particularly in the value of the USD." A more oblique indication of G7 displeasure might be confined to strengthening the language in the "Excess volatility and disorderly movements in exchange rates are undesirable for economic growth" sentence. If they do alter such language, the G7 is implicitly referring to USD weakness, even if they do not mention a currency specifically. This sensitivity to potential shifts supporting the USD is partly responsible for the sharp rebound in the USD on Thursday-in general traders do not want to go into the G7 excessively short USD due to the risks of a shift in the G7 statement.
Should the G7 alter its language to indicate USD weakness has become excessive or otherwise undesirable, I would look for a substantial recovery in the USD on the order of 3-5% initially. Such a USD rebound would likely embolden risk appetites, so I would also look for gains in USD/JPY to outpace declines in EUR/USD, leading to overall higher JPY-crosses in the process. But make no mistake, if the G7 addresses USD weakness, I believe the impact will be substantial.
The other change that may be made would involve toning down, or removing completely, the explicit mention of China as needing to allow faster appreciation of its currency, in recognition of recent Yuan gains.
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Saturday, April 12, 2008
Weighed Ahead of ECB, BoE
The greenback was weaker across the board on Wednesday, falling to 1.5863 against the euro and 1.9790 versus the sterling. Commodities and energy rebounded with spot gold firming to $933 per ounce and crude oil rallying to a new high above $111 per barrel at $111.83.
The dollar continues to trade lower amid heightened expectations that the FOMC will cut by 50-basis points at the end of the month to 1.75%. Interest rate differentials will largely dictate currency movements in the coming session, with policy announcements by the ECB and BoE due out early Thursday.
The dollar continues to trade lower amid heightened expectations that the FOMC will cut by 50-basis points at the end of the month to 1.75%. Interest rate differentials will largely dictate currency movements in the coming session, with policy announcements by the ECB and BoE due out early Thursday.
Dollar Rebounds Amid BoE Cut
The dollar recovered against the euro and sterling following central bank policy announcements from both the Bank of England and European Central Bank in the morning. The US economic reports released today saw the February trade deficit expand to $62.32 billion, up from $58.20 billion and worst than expectations for the deficit to shrink to $57.5 billion. Meanwhile, weekly jobless claims improved to 357k, down from 407k a week earlier.
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GBP Mixed on BoE Cut
The Bank of England, as expected, cut rates by 25-basis points to 5.0% when it announced its decision earlier in the session. In the accompanying statement, the BoE acknowledged that credit conditions have tightened and the availability of credit have deteriorated. It said that despite the declines in the sterling providing support for net exports, “the prospects for output growth abroad have deteriorated”. The Bank stated that “in the UK, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year.” The BoE expects this moderation to temper inflationary pressures in the medium term.
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GBP Mixed on BoE Cut
The Bank of England, as expected, cut rates by 25-basis points to 5.0% when it announced its decision earlier in the session. In the accompanying statement, the BoE acknowledged that credit conditions have tightened and the availability of credit have deteriorated. It said that despite the declines in the sterling providing support for net exports, “the prospects for output growth abroad have deteriorated”. The Bank stated that “in the UK, business surveys suggest that growth has begun to moderate and that a margin of spare capacity will emerge during this year.” The BoE expects this moderation to temper inflationary pressures in the medium term.
Friday, April 11, 2008
Markets Set For A Quiet Move Into G7 Weekend
Wakeup Call: Markets Set For A Quiet Move Into G7 Weekend
G7 meeting starting today. All talk and no action as usual? They are usually not able to coordinate anything, but a call for 'greater flexibility'.
Overnight News Bullets- SW Ind. Prod. MoM/YoY (Feb) out at 0.3%/1.9% vs. 0.4%/3.3% expected.
- SW Ind. Orders MoM/YoY (Feb) out at -3.5%/1.6% vs. -8.4%/-0.7% prior.
- SW AMV Unemployment Rate (Mar) out at 3.2% as expected.
- NO PPI MoM/YoY (Mar) out at 0.4%/18.5% vs. 1.8%/20.1% expected.
- NO CPI MoM/YoY (Mar) out at 0.1%/3.2% vs. 0.3%/3.5% expected.
- NO CPI Underlying MoM/YoY (Mar) out at 0.6%/2.1% as expected.
- UK Total Trade Balance (Feb) out at -£4439 vs. -£4200 expected.
- UK BoE Rate Announcement out at 5.00% (-25 bps) as expected.
- E-Z ECB Rate Announcement out at 4.00% (unchanged) as expected.
- US Trade Balance (Feb) out at -$62.3B vs. -$57.5B expected.
- US Initial Jobless Claims out at 357K vs. 383K expected.
- US Contiuing Claims out at 2940K vs. 2935K expected.
- US EIA Natural Gas Storage Change out at -14 vs. -15 expected.
- US ICSC Chain Store Sales YoY (Mar) out at -0.5% vs. 0.9% expected.
- US Monthly Budget Statement (Mar) out at -$48.1B vs. -$70B expected.
- JN Domestic CGPI MoM/YoY (Mar) out at 0.5%/3.9% vs. 0.3%/3.5% expected.
- FX: USD got rejected at new lows. EURUSD at a crossroads. USDJPY likely testing 102.95.
- EQ: European session moderately lower. US higher, especially Tech Stocks. Nikkei up by 2.69%.
- FI: Edging lower, especially JGB's. STIR Futures expectations: 42% chance of 50 bps. cut at the 30th of April.
- FUT: Gold & Silver following the stronger USD, closing lower and losing additionally overnight. Crude May contract testing highs y'day at $112.20, but unable to go higher. Now below $110.
G7 Talks In Focus
Measures to ease the credit crunch at the weekend G7 meetings would help strengthen risk appetite early next week.
The G7 meetings will be watched closely on Friday and over the weekend given the potential for a significant impact on market trends. Two key themes are likely to be under discussion over the next few days. The most important element will be discussions on the global credit crunch and risks to the financial system.
G7 member countries will look at proposals to help ease global credit difficulties by relaxing collateral conditions in order to boost market liquidity. Any increase in confidence that the authorities can improve credit conditions would tend to boost risk appetite. This in turn would also tend to weaken the yen.
Comments surrounding exchange rates will also be watched very closely and there are likely to be important discussions between Euro-zone and US officials. A more robust stance in support of the dollar would underpin the currency. In contrast, any evidence of serious policy disagreements would risk further selling pressure on the US currency early next week
Investica
http://www.investica.co.uk
Disclaimer: Investica's market analysis is not investment advice and must not be taken as recommending particular market positions. Investica can take no responsibility for any actions taken by investors.
Thursday, April 10, 2008
Dollar and Sterling edged lower ahead of ECB and BoE and this weekend G7 meetings.
The Dollar edged lower versus the Euro on Tuesday as Minutes of the last Federal Reserve meeting showed policy makers felt that a prolonged and severe economic downturn can't be ruled out. It remained steady against the Yen and a basket of currencies on growing views the economic downturn in the United States could spill over to other countries and prompt their central banks to cut interest rates.
Those concerns appeared to be backed by data showing a sharp drop in British home prices, raising the chances the Bank of England will cut interest rates by 50bp on next Thursday. Analysts said traders bought Euro aggressively in the absence of major economic data from both the United States and the Euro-zone, and ahead of central bank meetings on Thursday, also helped put a cap on any dollar drop. Traders also await Friday's meeting of Group of Seven finance ministers and central bankers, where a broad range of proposals aimed at restoring confidence in the battered banking system will likely be discussed.
Latest months aggressive monetary easing by the Fed in a try to support the economy following a severe downturn in the housing sector tilted the yield appeal in the Euro's favor and has been the main driver behind the Dollar's sell-off. Since mid-September, the Fed has lowered its benchmark overnight lending rate by 3% to 2.25%. The European Central Bank has kept its refinancing rate at 4%.
Yesterday, EurUsd was unchanged at 1.5696 after hitting 1.5799 intraday high. UsdJpy was up 0.19% at 102.73. UsdChf went up 0.24% at 1.0158. GbpUsd dropped 1.08% to 1.9670, the biggest dropped since March 19th. Sterling was the biggest loser of the major currencies on Tuesday. EurGbp jumped to a record high of 0.7990 before scaling back to 0.7979 +1.03%.
Members of Fed's policy-setting committee worried at their most recent meeting that the housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher. Analyst said the minutes are relatively dovish on interest rates and bearish on the US economy.
Halifax, Britain's biggest mortgage lender, said UK house prices fell 2.5% in March, the biggest drop since September 1992, and much steeper than the market's forecast of a 0.4% decline.
Those concerns appeared to be backed by data showing a sharp drop in British home prices, raising the chances the Bank of England will cut interest rates by 50bp on next Thursday. Analysts said traders bought Euro aggressively in the absence of major economic data from both the United States and the Euro-zone, and ahead of central bank meetings on Thursday, also helped put a cap on any dollar drop. Traders also await Friday's meeting of Group of Seven finance ministers and central bankers, where a broad range of proposals aimed at restoring confidence in the battered banking system will likely be discussed.
Latest months aggressive monetary easing by the Fed in a try to support the economy following a severe downturn in the housing sector tilted the yield appeal in the Euro's favor and has been the main driver behind the Dollar's sell-off. Since mid-September, the Fed has lowered its benchmark overnight lending rate by 3% to 2.25%. The European Central Bank has kept its refinancing rate at 4%.
Yesterday, EurUsd was unchanged at 1.5696 after hitting 1.5799 intraday high. UsdJpy was up 0.19% at 102.73. UsdChf went up 0.24% at 1.0158. GbpUsd dropped 1.08% to 1.9670, the biggest dropped since March 19th. Sterling was the biggest loser of the major currencies on Tuesday. EurGbp jumped to a record high of 0.7990 before scaling back to 0.7979 +1.03%.
Members of Fed's policy-setting committee worried at their most recent meeting that the housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher. Analyst said the minutes are relatively dovish on interest rates and bearish on the US economy.
Halifax, Britain's biggest mortgage lender, said UK house prices fell 2.5% in March, the biggest drop since September 1992, and much steeper than the market's forecast of a 0.4% decline.
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