FOREXYARD: Forex News Blog

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• The Bar for QE3 Remains High
• Gold Bubble Pops before Jackson Hole Speech
• Russian Ruble Advances from Gains in Crude Oil
• BOJ Intervention Expected, Yen Trading Higher in Interim
• Low Liquidity Helps EUR Gain
• Growing US Inflation Suggests QE3 Disappointment
• Russian Ruble Undergoing Trend Reversal?
• SNB Weighs Swiss Franc Peg or Price Target
• Living with a Strong Japanese Yen

The Bar for QE3 Remains High Posted: 29 Aug 2011 06:38 AM PDT As anticipated Ben Bernanke did not offer up any new policy moves during his Jackson Hole speech. Instead he called on Congress and the President to do more for the US economy by supporting responsible fiscal policy and additional measures to stimulate economic growth. By extending the next FOMC meeting by two days the Fed chief put even more for a policy response though the bar for QE3 remains high. The lack of new policy measures was largely expected as Ben Bernanke emphasized his past statements of a slowing US economy and the Fed's ability to act if needed. Bernanke chose to highlight steps the Federal government could take to support the economy. This may now set the stage for a potential stimulus program from President Obama in his September economic speech, one factor that may ultimately help the US economy rise up from the almost 4-year downturn. Key data events this week will likely help to formulate market expectations for additional policy easing measures with the release of Thursday's ISM PMI survey and Friday's jobs report. Forecasts are steadily bearish with expectations declining by 9k between Monday morning and last Friday. In his speech Ben Bernanke did announce that the Fed's next FOMC meeting in September will be extended to a two day meeting. This hints at additional Fed action at the September meeting. But those looking for another round of quantitative easing may be getting ahead of themselves. While the Fed has reduced its expectations for US economic growth, increased inflationary pressures will likely keep any QE3 in the tool chest of the Fed until the risks of US growth expectations are affirmed to the downside or another dramatic swing lower in US equity prices. Until then the bar for QE3 remains high and the Fed will likely limit its policy moves to less controversial methods such as increasing the size of its balance sheet or extending the maturities of the US Treasuries the Fed holds. Read more forex trading news on our forex blog.

Gold Bubble Pops before Jackson Hole Speech Posted: 25 Aug 2011 03:55 AM PDT The price action from yesterday's early New York trading session was particularly dramatic when gold prices collapsed. The 5.6% drop in the price of the NYMEX gold futures contract sends a signal from the commodities market that additional stress is apparent the financial markets. Since the beginning of July the price of gold has accelerated rapidly, rising from $1,500 to over $1,900 as of Tuesday morning. However, that all changed following the announcement that the Shanghai Gold Exchange would raise the margin requirements for gold forward contracts for the second time this month. This led to a decline to $1,823, a price below Monday's closing price. Technical analysts would note this as an outside day down candlestick, a powerful reversal signal. Wednesday's price action followed with a continuation of the move lower and the selling was intensified as the price dipped to a low of $1,741. Most of these losses came in the opening minutes of the New York trading session. As of Thursday morning the price of spot gold is testing the $1,700 level. I will not dive into the argument if the price of gold is fairly valued or currently an asset bubble, but as FT Alphaville pointed out the GLD gold trust overtook the SPY (S&P 500) as the largest ETF by market value. Market positioning was also stretched to say the least with the CFTC Commitment of Traders report showed in early August the number of net long gold futures and options contracts in managed money reached 250,000. Interestingly enough the dramatic drop in the price of gold occurred only days before what could be considered the most important event in financial markets this year, Ben Bernanke's Jackson Hole speech. The price action may be sending a signal that the financial markets expect further volatility to come in the near term. Read more forex trading news on our forex blog.

Russian Ruble Advances from Gains in Crude Oil Posted: 24 Aug 2011 06:11 AM PDT A sudden surge in crude oil values yesterday brought about resurgence in a recently-weakened Russian ruble (RUS). The value of the RUS was brought down by strong dips in global stocks last week as traders sought the safety of more stable currencies. The US dollar (USD) was making strides against the RUS, but this week has seen the pair turning back in favor of the ruble. Crude oil is the leading export earner for Russia, which makes its rise in price help lift the value of the ruble. The RUS, in turn, helps return investment interest to the Russian economy at a time when it needs to prove it can weather the financial storm of another global downturn. With the price of oil holding steady above $86 a barrel, the RUS also climbed significantly against its primary basket of currencies. The RUS moved up over 0.2% against the USD and EUR towards 29.03 per dollar and 41.76 per euro. Talk of another round of quantitative easing by the US Federal Reserve has also caused many investors to bet on a sudden spike in oil values should the greenback become weakened. That predicted spike is also feeding into the ruble's recent ascent. Read more forex trading news on our forex blog.

BOJ Intervention Expected, Yen Trading Higher in Interim Posted: 22 Aug 2011 06:58 AM PDT Investors are beginning to anticipate another round of market intervention by the Bank of Japan (BOJ) this week due to the unyielding rise in the value of the yen (JPY) these past few weeks. The move will need to be significant if it is to deter further yen buying in this depressed market, however. Whether this intervention materializes has become a main point of debate for market analysts who have been expecting an intervention for over a week now. As the USD/JPY falls to new lows near 75.00 and beyond, speculators have begun to attempt a forecast at the impact it will have on Japan's exports, thus increasing the pressure for another round of intervention.

Low Liquidity Helps EUR Gain Posted: 22 Aug 2011 06:54 AM PDT With today's early trading sessions lacking in liquidity, the safe-haven assets and their riskier counterparts were seen trading with little direction. The euro (EUR) so far has managed to capitalize on these maneuvers, with mild gains seen against its primary rival, the US dollar (USD). The riskier assets of Europe and the South Pacific have been seen losing ground substantially these past few weeks as market pessimism leads to flights to safety; often found in the dollar and gold. With days like today, where market news is almost non-existent, a natural floating movement almost seems to favor riskier assets. Some might say this phenomenon is due to the free-floating value of assets in a market devoid of pessimistic data.

Growing US Inflation Suggests QE3 Disappointment Posted: 18 Aug 2011 03:16 AM PDT Markets are slowly pricing in additional quantitative easing from the Fed but rising inflationary pressures suggest the central bank may be constrained to implement further measures. Today's CPI data is all the more important for equity markets expecting a 'Bernanke Put'. In line with the current ultra-loose monetary policy US inflation has seen an uptick in recent months. While never officially called 'Quantitative Easing' the Fed's policy of asset purchases to lower interest rates was designed to provide a burst of inflation to stave off potentially damaging deflationary forces. In light of QE1 and QE2 the Fed looks to have succeeded in its mission. In May consumer prices rose 3.6% y/y, up sharply from the previous three months. The headline June CPI number actually declined by 0.2% but the drop is largely due to a decline in gasoline prices. In contrast core CPI increased 0.3%. Yesterday's rise in June PPI report suggests that producers are succeeding in passing on their increased costs to the US consumer who in turn is willing to pay higher prices. While Fed Chairman Bernanke maintains the position that US inflation is transitory, the data suggests the risk of deflation is slowly disappearing. As shown by last week's FOMC vote which had three dissenters against the pre-committed interest rate targeting Bernanke will face a difficult task convincing the FOMC another round of asset purchases is necessary given the rising prices in the US economy and the risk of inflation spiraling out of control. Yesterday Philadelphia Fed President Charles Plosser said the Fed may need to raise rates before mid-2013, in stark opposition to last week's FOMC statement. Those equity traders who are looking for the 'Bernanke Put' may also be disappointed. Comments yesterday by Dallas Fed President Richard Fisher describe the Fed is not the protectors of stock market traders and investors. This suggests the real economy will need to show slowing growth rates and equity markets will have further room for declines before the Fed would step in to support the markets. However, a repeat of Monday's 6.6% decline in the S&P 500 could initiate QE3 regardless of the inflationary risks the Fed faces as Bernanke has said higher equity prices are one way the Fed measures the success of its QE efforts. Today's July CPI data carries all the more importance. Looking out towards the medium term, reduced expectations of additional US monetary policy may be a catalyst for the USD. While increasing interest rate expectations might be asking for too much given the Fed’s recent commitment to low rates until mid-2013, only the expectation of future monetary policy tightening would be needed to prove USD supportive. A similar view has been taken in the market regarding US fiscal credibility following the compromise between the President and Republicans to raise the debt ceiling, putting the US on a path to fiscal austerity. The prospects of a credible fiscal policy combined with an end to quantitative easing measures could be viewed as a turning point in the 13-month bearish USD trend versus the EUR. Read more forex trading news on our forex blog.

Russian Ruble Undergoing Trend Reversal? Posted: 17 Aug 2011 06:37 AM PDT We have seen reports over the last year which painted the Russian ruble (RUS) as one of the better performing currencies. The value of the RUS even gained as much as 15% against the US dollar (USD) earlier in the year. But these days, as investors appear to be fleeing towards traditional safe-haven assets, the ruble is beginning to experience broad declines. Are we seeing a trend reversal in the global economy, or is it something specific to Russia? As one of the largest emerging market economies, Russia was benefiting from the speculative growth shifts over the last 3-5 years. Technologists and innovative organizations have even written on the growing need to focus new endeavors on the high growth economies of BRIC (Brazil, Russia, India, and China). What today's uncertainty is now doing is pulling these speculative growth shifts away from those nations. What appears to be happening is not so much an intrinsic decline in the value of Russia's economy, but rather a move away from the more speculative, and therefore riskier, assets by international investors. This is supported by the very recent downturn in Russia's stock market. To underscore this point, consider that the RTSI Index has lost over 22% of its value over the last two weeks. The RUS is obviously affected by these investment shifts. Without something to address global uncertainty, it doesn't seem likely that the RUS will recover its former uptrend in the near future. Read more forex trading news on our forex blog.

SNB Weighs Swiss Franc Peg or Price Target Posted: 16 Aug 2011 02:09 AM PDT The Swiss franc has come off of its lows versus the euro and the US dollar as Swiss interest rates have turned negative and the Swiss National Bank threatens a potential currency peg to the euro or a specific price target. This will be another attempt to stem the tide of a strengthening Swiss franc and potentially an opportunity to enter back into the EUR/CHF downtrend at better levels. Two weeks ago the SNB unveiled a program to weaken the surging Swiss franc which it considers "massively overvalued". The SNB is targeting a three-month Libor of 0.00-0.25% from 0.00-0.75%, effectively implementing a negative interest rate. The measures are designed to stem the flow of real money inflows and speculators betting on a rise in the value CHF. Negative interest rates are used to deter money managers seeking safe haven assets and short term deposits as a refuge. However, given the US credit rating downgrade and uncertainty in the euro zone, a negative interest rate may not be enough to deter real money inflows. The SNB is now contemplating additional measures, including a temporary peg of the Swiss franc to the euro or a target exchange rate level as another attempt to stave off CHF appreciation. But a targeted exchange rate would require intervention by the SNB, something that the bank will want to shy away from after racking up $21 bn in paper losses from the intervention. Should the SNB fail to implement further programs to weaken the CHF, a currency the OECD says is now 41% overvalued; the SNB could lose credibility in the market and be looked upon as a paper tiger. If the SNB implements a currency peg or a specific price (i.e. EUR/CHF 1.20), the initial market reaction may be for the CHF to sell-off, allowing speculators better levels at which to enter the long term trend. Following any appreciation in the pair there will likely be an attempt by the market and speculators to test the resolve of the SNB to hold the line in the sand. This will give traders a backstop as they know the most their position can go against them is the SNB price target. Read more forex trading news on our forex blog.

Living with a Strong Japanese Yen Posted: 15 Aug 2011 04:48 AM PDT The Japanese economy continues to improve following better than expected Q2 GDP. The data had little impact on the yen but Asian equities finished broadly higher in a quiet much less volatile European trading session. Japan will likely continue to struggle with JPY strength given the actions taken by the SNB to weaken the Swiss franc and the commitment by the Fed to keep US interest rates at ultra-low levels. This will either require further intervention from the Ministry of Finance or a compromise by Japanese Industry to thrive in an environment of a strong JPY. Q2 Japanese GDP fell -0.3% but the outcome was rosier than the headline portrays. Consensus expectations were for a decline of -0.6%. On an annualized basis GDP dropped -1.3% on expectations of -2.5%. Exports accounted for a majority of the weak GDP numbers but stronger than expected consumption, higher business inventories, and a bump up in construction spending after the earthquake/tsunami were enough to close the gap with markets' expectations. The data is encouraging given last week's better Tertiary Industry Activity (1.9% on expectations of 1.1%) and stronger core machinery orders (7.7% on expectations of 1.9%). The better than expected GDP data comes at a time when the Japanese government could use the increased tax revenues that follow higher growth. The current administration is teetering on the edge of losing its AAA rating. Analysts from Rating & Investment Information, one of Japan's two major rating agencies says the nation could lose its top rating unless the government reigns in its budget deficit and addresses the political instability of a revolving door at the Prime Minister's office. External forces are currently in favor of an appreciating Japanese yen. The Swiss National Bank looks to be taking further action to stem the tide of a strengthening Swiss franc. The SNB is in discussions to set a lower limit for the EUR/CHF above 1.10. This follows previous attempts to weaken the CHF via increased swap agreements with other European central banks, additional sight deposits, and negative interest rates. The moves by the SNB make the JPY the most likely candidate for real money safe haven flows. Although Fed Funds futures showed the market's expectations for a US rate hike were in not until winter of 2012, last week's announcement by the Fed to keep interest rates near zero until mid-2013 might offer further USD weakness in the near term. Given the additional easing of US monetary policy put in place by Bernanke and the Fed, it will be a long uphill battle to book any gains in the USD/JPY. The question is now how will Japan respond? After embarking on an estimated $50bn FX market intervention to stem the tide of a rising yen the MoF has only responded with tough talk and no follow up action. Japanese finance minister Yoshihiko Noda was quoted as saying, "As foreign exchange market matters are my prerogative, I will continue to closely watch the markets and take bold action if it becomes necessary." This lends to the idea that further intervention in the forex market may be on the way. Read more forex trading news on our forex blog.

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