WHAT THE FED GIVETH, the banks taketh away.
Just days after the U.S. central bank completed its unprecedented 125-basis point easing in its key policy rates, its quarterly survey of bank lending officers showed they had become much more stringent in their extension of credit.
That's key because people and businesses don't borrow from the Federal Reserve, so how much credit the central bank provides, and at what price, affects the private economy only indirectly. It takes a banker or other lender to make that loan to pay for a house or a piece of capital equipment. Indeed, the Fed acknowledged as much when it slashed rates last week, noting that financial conditions had tightenened.
Even as the Fed has made the raw material for those loans cheaper, bank lending officers indicate a far warier attitude toward making new loans, especially -- surprise! -- "nontraditional mortgages." Some 85% of loan officers responding to the quarterly survey they tightened lending standards for this category, which includes subprime.
Read the Rest
FMM Comment: My post yesterday, The Big Credit Squeeze, also refers
Tuesday, February 5, 2008
Financial Setbacks
By Bill Bonner
"There is no magic to Free Enterprise. It is the best way to create wealth, but it does not prevent people from making mistakes. Capitalism offers people a chance to make money. But it also offers them a chance to make fools of themselves."
Read the Rest
"There is no magic to Free Enterprise. It is the best way to create wealth, but it does not prevent people from making mistakes. Capitalism offers people a chance to make money. But it also offers them a chance to make fools of themselves."
Read the Rest
Commodity Conundrum
by David Petch
The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.
Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").
Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).
Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.
Read the Rest
The following article was presented on Saturday, December 15th, 2007 for the benefit of subscribers.
Inflationary cycles are always manifested towards the end with rises in commodity prices that become equivalent to a black hole where money gravitates. Increasing the supply of money is the very definition of inflation, with rising prices being a symptom. Interest rate cycles tend to last 20-30 years starting from a decline to a base, followed by peak. Central banks use interest rates as the brakes of an economy and is the primary tool used under fiat currencies. Central Banks could stop printing money, but that would lead to a deflationary collapse, which is not a desirable outcome...so inflation it is. After interest rates rise to cool things on a Cycle Degree, periods of declining interest rates occur which will often see a decline in prices. Money is still being printed in the background, so the general overall theme is inflation, albeit maybe 1-2% instead of 15-20% near the end of the cycle. As economies begin growing with lower interest rates a credit economy emerges where companies and people essentially leverage their ability to purchase goods and pay it back later (a totally different concept than "Pay if Forward").
Towards the end of the credit cycle, inflation begins to grow due to expansion of the money supply and credit (due in part to the fractional reserve system used by banks). Rising interest rates eventually makes borrowing expensive, thereby quashing demand for things and causes scaling back in consumption sectors of the economy. During this phase, there is an increase in the amount of money circling the globe to try and find somewhere to park into something "tangible". Gold and silver and are often viewed as "tangible" items once the economy shifts from a credit economy to a "necessity economy" (paying only for the essentials such as heat, food, fuel for transportation etc.).
Supply and demand dynamics generally see commodity prices rise during the terminal portions of inflation cycles and decline during subsequent periods of disinflation. Once disinflation kicks in, commodity prices historically decline to near or below operational costs, which cause many companies to collapse. Once demand begins to outstrip supply, commodity prices begin to turn around.
Read the Rest
Ron Paul Beats McCain in Maine Caucus, Primed to Win Over 1/3 of State Delegates
From www.ronpaul2008.com
In the race for delegates, Ron Paul appears to closely trail Romney for first place
FOR IMMEDIATE RELEASE
February 4, 2008
ARLINGTON, VIRGINIA – While most reports about this past weekend’s Maine Caucus focused on the purely symbolic presidential preference poll, in the meaningful race to secure delegates to the state convention Ron Paul is primed to finish second with likely 35 percent of the total delegates.
Delegates to the Republican National Convention in Minneapolis are elected by the state delegates. Internal results from 10 of 16 counties, including the largest cities of Portland, South Portland, Lewiston, Auburn, Augusta, Waterville, Bangor, and Brewer, show Ron Paul picking up 215 of 608 State Convention delegates so far reported, or 35%.
“Ron Paul’s strong second place finish in Maine, in which he beat John McCain, is proof that this race is far from over,” said Ron Paul campaign manager Lew Moore. “We’ll continue to battle for every delegate in this wide-open race for the Republican nomination.”
In the presidential preference poll, with 70 percent reporting, Ron Paul is in third place just two percentage points behind John McCain. However, the Maine preference poll is purely a beauty contest, and in the actual election of state delegates the so-called “frontrunner” McCain is far behind Ron Paul.
In the race for delegates, Ron Paul appears to closely trail Romney for first place
FOR IMMEDIATE RELEASE
February 4, 2008
ARLINGTON, VIRGINIA – While most reports about this past weekend’s Maine Caucus focused on the purely symbolic presidential preference poll, in the meaningful race to secure delegates to the state convention Ron Paul is primed to finish second with likely 35 percent of the total delegates.
Delegates to the Republican National Convention in Minneapolis are elected by the state delegates. Internal results from 10 of 16 counties, including the largest cities of Portland, South Portland, Lewiston, Auburn, Augusta, Waterville, Bangor, and Brewer, show Ron Paul picking up 215 of 608 State Convention delegates so far reported, or 35%.
“Ron Paul’s strong second place finish in Maine, in which he beat John McCain, is proof that this race is far from over,” said Ron Paul campaign manager Lew Moore. “We’ll continue to battle for every delegate in this wide-open race for the Republican nomination.”
In the presidential preference poll, with 70 percent reporting, Ron Paul is in third place just two percentage points behind John McCain. However, the Maine preference poll is purely a beauty contest, and in the actual election of state delegates the so-called “frontrunner” McCain is far behind Ron Paul.
Ron Paul's Greatest Speech?
Before the US House of Representatives, September 19, 1984
Mr. Speaker, I shall be soon leaving the House and have asked for this special order to make a few comments regarding the problems our nation faces and the actions needed to correct them. Having been honored by the 22nd District of Texas to represent them for four terms, I have grown to appreciate the greatness of this institution. I only wish the actions performed by the Congress in recent years could match the historic importance of this body.
Thousands of men and women have come and gone here in our country's history, and except for the few, most go unnoticed and remain nameless in the pages of history, as I am sure I will be. The few who are remembered are those who were able to grab the reins of power and, for the most part, use that power to the detriment of the nation. We must remember that achieving power is never the goal sought by a truly free society. Dissipation of power is the objective of those who love liberty. Others, tragically, will be remembered in a negative way for personal scandals. Yet those individuals whose shortcomings prompted the taking of bribes or involvement in illicit sexual activities, have caused no more harm to society than those who used "legitimate" power to infringe upon individual liberty and expand the size of government. Morally the two are closely related. The acceptance of a bribe is a horrible act indeed for a public servant, but reducing liberty is an outrageous act that causes suffering for generations to come.
Read the Rest
Mr. Speaker, I shall be soon leaving the House and have asked for this special order to make a few comments regarding the problems our nation faces and the actions needed to correct them. Having been honored by the 22nd District of Texas to represent them for four terms, I have grown to appreciate the greatness of this institution. I only wish the actions performed by the Congress in recent years could match the historic importance of this body.
Thousands of men and women have come and gone here in our country's history, and except for the few, most go unnoticed and remain nameless in the pages of history, as I am sure I will be. The few who are remembered are those who were able to grab the reins of power and, for the most part, use that power to the detriment of the nation. We must remember that achieving power is never the goal sought by a truly free society. Dissipation of power is the objective of those who love liberty. Others, tragically, will be remembered in a negative way for personal scandals. Yet those individuals whose shortcomings prompted the taking of bribes or involvement in illicit sexual activities, have caused no more harm to society than those who used "legitimate" power to infringe upon individual liberty and expand the size of government. Morally the two are closely related. The acceptance of a bribe is a horrible act indeed for a public servant, but reducing liberty is an outrageous act that causes suffering for generations to come.
Read the Rest
Hear No Evil, Speak No Evil, See no Evil - Just Cut the Cable
Something weird is going on here. First, two communication cables were cut which got me thinking that Something Smells Fishy Here.
Now, a total of four cables have been cut, IN A WEEK!!!
Is somebody, with a pre-emptive motive, trying to cut off the Middle-East from the rest of the world???
Now, a total of four cables have been cut, IN A WEEK!!!
Is somebody, with a pre-emptive motive, trying to cut off the Middle-East from the rest of the world???
FX Insights Trade Team Update
By FX Insights Moderator,
Sorry for the delay in getting today's update posted... was a crazy day with meetings and such.
As far as the EUR/USD is conerned, we had an extremely boring day... tight ranges, no decent price action... once again the Dow stumbled, which didn't help matters.
So I'm going to use today's update to cover a few things that are on my mind in regards to the market and the EUR/USD... some food for thought stuff...
One question that is on many trader's mind is why we're not seeing a lot of volatility or decent price action the past week... there are a few factors contributing to the market being seduced into a lull...
Lets start with risk aversion... banks, hedge funds, institutions, wealth managers, and traders are simply not taking on risk under current market conditions. With all the uncertainties of a U.S. recession, global recession, slow growth coupled with rising inflation, central bank fears, tightened credit markets, shaky equities, an unstable employment sector, and a cautious consumer sector, those big money players are playing things ultra tight and conservative.
Prime example -- the carrytrade... the carrytrade is off the table for now. Once this extreme risk aversion set in, that opened the door for pairs like the EUR/JPY, USD/JPY, and GBP/JPY to drop hundreds, if not thousands of pips... the yen has strengthened tremendously while the market is in extreme risk management mode and fear mode... it won't be this way forever, but for now, expect those once brave risk takers to play it safe.
So how does this season of risk aversion effect the EUR/USD? Quite simple... for the big money players it's not an attractive buy while at the same time it's not an attractive short... with the banks being on lockdown and the institutions dealthy afraid of taking more losses, buying the euro at 1.4800-1.4900 is not going to happen... the alternative would be to buy the dollar, and with the dollar remaining fundamentally weak and the prospect of the Fed cutting rates further, who seriously would buy the dollar right now?
The market is in desperate need of not just a good, but a safe reason to either buy the EUR/USD or short the EUR/USD. The central banks are not helping matters either... both the Fed and the ECB is keeping the heavy EUR/USD bears in hibernation for now... with the Fed in a rate cut cycle and with the ECB remaining hawkish on rates and price stability, euro bears are not going to push the EUR/USD down, they really can't at this point.
Fundamentally, the U.S. economy has shown little signs of life. In the Eurozone the coming economic slowdown has yet to begin, which is another factor why we're just floating in a tight range...
Hopefully this sheds some light on why the market is behaving the way it's been behaving the past week or so...
EUR/USD trading:
I believe the market is also in a holding-pattern as we wait for Thursday's ECB rate decision, and more importantly, Trichet's press conference...
Early tomorrow morning we have key PMI and retail sales data out of Germany and the Eurozone... PMI may come in above forecasts while retail sales could possibly dissapoint, regardless, I don't expect this to have any major market moving effects...
Later in the morning we get very important ISM Non Manufacturing data, which I believe we should see come in USD+... whether or not the market decides to make any big moves is not something I'm looking at, but I'll certainly be prepared for...
As far as trading goes, I remain euro long -- cautiously long -- this means unless we get a signal I and I feel comfortable, I am in no way, shape, or form adding any euro longs at these levels... all of my longs are below the 4750 level and I'll keep it that way for now... any moves above the 1.4900 level would be an area I'd like to add a euro short, should price allow...
I do have some key downside/updside levels:
Downside key levels --
4801
4783
4752
4738
4708
Upside key levels --
4852
4878
4893
4920
4954
Lastly, in today's Q and A session we talked about the Team doing more live trade calls in the chat... I'm going to do a post on exactly what and how this will work...
Posted below is a chart from two calls we made last night and early this morning, just to give you an idea:
Click on Image
-FX Insights
Monday, February 4, 2008
Paving Paradise
By Ron Paul,
The Constitution guarantees Americans the right to be secure against all unreasonable seizures. My home state of Texas is unfortunately planning on some very unreasonable seizures of land with the monstrous Trans Texas Corridor highway project. The TTC plans call for a highway to cut through about 4,000 Texas miles, and with separate rail lines for passenger and freight, a multi-lane highway with separate truck lanes, utility and cable easements, this highway could be as wide as 1200 feet across. In the end this project would consume something like half a million acres of land in Texas . However, since the exact path of the road has not been determined, it is putting much more acreage in jeopardy, and in limbo.
Taking land is destructive enough. But the perpetual threat of taking an undetermined amount of land is hanging over the heads of millions of Texans and putting their lives at a standstill. Land is a store of wealth and a source of stability. This highway project is tragically threatening that for so many Texans.
The principle of private property is the cornerstone to a free and prosperous society. In situations where a colossal government land grab is a distinct possibility, investment or improvement becomes more risky with an uncertain future and tends not to happen. How do you sell land that may or may not be taken by the government at some point in the not too distant future? Who would buy it? How do you cultivate or build on, or even near, land that may or may not be paved over and turned into a massive, noisy thoroughfare in a few years?
Even more insulting is the distinct possibility that, while the road will collect tolls and fees, making a private foreign firm billions of dollars in revenue, the costs of building it could be heavily borne by taxpayers. So the costs will be socialized and the profits privatized. Public-private partnership indeed!
From Washington I have voiced my staunch disapproval of taking these hard-working taxpayers’ land for a private toll road, by introducing legislation (HR 5191) that simply states, “No Federal funds appropriated or made available before, on, or after the date of enactment of this Act may be used by a unit of Federal, State, or local government to carry out the highway project known as the 'Trans-Texas Corridor'.” I am working hard in Congress to make sure that no Federal funding is used to undermine property rights in this way.
We should be focusing on guarding and securing our borders for the protection of the American people. Instead we are paving the way for more and more people to cross the border as comfortably as possible. And taking the family farm to do it. It is an absolute outrage.
Capitalism and the American Way
By Bill Bonner,
"Capitalism we define as merely a state of nature…where people are free to go about their business based on customary, consensual rules in an evolved, vernacular market system. The more you tamper with it, the less well it works."
Read the Rest
"Capitalism we define as merely a state of nature…where people are free to go about their business based on customary, consensual rules in an evolved, vernacular market system. The more you tamper with it, the less well it works."
Read the Rest
The Big Credit Squeeze
WASHINGTON (MarketWatch) - Banks are putting a stranglehold on credit, the Federal Reserve reported Monday.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said.
Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
The survey backs up the Federal Open Market Committee's comments last week that credit conditions had tightened considerably, a factor that led to the FOMC to slash interest rates by an unprecedented 125 basis points in two weeks.
Read The Rest
FMM Comment: Three things are happening here.
Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers, the Fed said.
Plain-vanilla business loans were also much harder to obtain, the Fed said.
Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.
The survey backs up the Federal Open Market Committee's comments last week that credit conditions had tightened considerably, a factor that led to the FOMC to slash interest rates by an unprecedented 125 basis points in two weeks.
Read The Rest
FMM Comment: Three things are happening here.
- Banks are hoarding cash because Bank Reserves Go Negative
- People can't or don't want to borrow
- Banks can't or don't want to lend
Something the Fed can NOT do is force people to borrow. It can only sweeten the deal with low rates. So, if you are struggling to either inhale or exhale, you are suffocating, like the credit markets are doing now. It is just a matter of time, unless some "miracle" happens, before the credit market will turn blue in the face and collapse. And that, is called Deflation.
Sci-Fi Toys for War-Mongering Boys
Today, Bush-Whacked amBushed the USA with his new $3.1 Trillion Gazzillion budget.
Included in this Magnus Opus of Keynesian-Tomorrow-is-Another-Day-Defecit-Spending Budget, is a proposed increase in Defense Spending of 7%, to $515 Billion (16.5% of the fricken budget!!!).
Now, to me, that sounds like preperation for a pre-meditated war against someone. (And the further devaluation of the Dollar and an increase in Gold/Oil prices)
And don't forget, that waiting in the wings are the two warmongers, Osama Obama and John McCainiac, who I'm sure are wringing their grubby little paws to fill the seat of the Master and Commander.
Part of their anticipation, I'm sure, is to gain control of the game console, War-Station 2, with the $515 Billion being spent to create Sci-Fi WMDs. For instance, the Navy is Testing an Incredible new Sci-Fi Weapon, using electromagnetic energy instead of explosive chemical propellants to fire a projectile farther and faster. (apparently electromagnetic energy will prevent "blowback")
I suggest they change the term of "railgun" to that of the "Psycho-Kinetic WMD"
Included in this Magnus Opus of Keynesian-Tomorrow-is-Another-Day-Defecit-Spending Budget, is a proposed increase in Defense Spending of 7%, to $515 Billion (16.5% of the fricken budget!!!).
Now, to me, that sounds like preperation for a pre-meditated war against someone. (And the further devaluation of the Dollar and an increase in Gold/Oil prices)
And don't forget, that waiting in the wings are the two warmongers, Osama Obama and John McCainiac, who I'm sure are wringing their grubby little paws to fill the seat of the Master and Commander.
Part of their anticipation, I'm sure, is to gain control of the game console, War-Station 2, with the $515 Billion being spent to create Sci-Fi WMDs. For instance, the Navy is Testing an Incredible new Sci-Fi Weapon, using electromagnetic energy instead of explosive chemical propellants to fire a projectile farther and faster. (apparently electromagnetic energy will prevent "blowback")
The railgun, as it is called, will ultimately fire a projectile more than 230 miles (370 kilometers) with a muzzle velocity seven times the speed of sound (Mach 7) and a velocity of Mach 5 at impact. The railgun has been a featured weapon in many science fiction universes, such as the new "Battlestar Galactic" series.
The Navy's motivation? Simple destruction.
The railgun's high-velocity projectile will destroy targets with sheer kinetic energy rather than with conventional explosives.
I suggest they change the term of "railgun" to that of the "Psycho-Kinetic WMD"
Entangling Alliances
Revealed: British plan to build training camp for Taliban fighters in Afghanistan
Britain planned to build a Taliban training camp for 2,000 fighters in southern Afghanistan, as part of a top-secret deal to make them swap sides, intelligence sources in Kabul have revealed. The plans were discovered on a memory stick seized by Afghan secret police in December.
The Afghan government claims they prove British agents were talking to the Taliban without permission from the Afghan President, Hamid Karzai, despite Gordon Brown's pledge that Britain will not negotiate. The Prime Minister told Parliament on 12 December: "Our objective is to defeat the insurgency by isolating and eliminating their leaders. We will not enter into any negotiations with these people."
Read the Rest
Britain planned to build a Taliban training camp for 2,000 fighters in southern Afghanistan, as part of a top-secret deal to make them swap sides, intelligence sources in Kabul have revealed. The plans were discovered on a memory stick seized by Afghan secret police in December.
The Afghan government claims they prove British agents were talking to the Taliban without permission from the Afghan President, Hamid Karzai, despite Gordon Brown's pledge that Britain will not negotiate. The Prime Minister told Parliament on 12 December: "Our objective is to defeat the insurgency by isolating and eliminating their leaders. We will not enter into any negotiations with these people."
Read the Rest
Axa axes withdrawels
Life and pension firm Axa has barred redemptions from its Life Property and Pension Property funds for up to six months in a bid stop panic selling.
AXA has written to all its customers who are invested in these funds and their advisers. The decision will impact upon some 100,000 private investors.
Certain transactions will not be affected by the deferral, including regular withdrawals, death claims and payment of pension benefits on retirement.
Axa is the latest in a growing list of firms to take such action to restrict access to their assets to prevent a Northern Rock-style run on their resources. There is now around £8bn of investor cash locked up in property funds.
Read the rest
AXA has written to all its customers who are invested in these funds and their advisers. The decision will impact upon some 100,000 private investors.
Certain transactions will not be affected by the deferral, including regular withdrawals, death claims and payment of pension benefits on retirement.
Axa is the latest in a growing list of firms to take such action to restrict access to their assets to prevent a Northern Rock-style run on their resources. There is now around £8bn of investor cash locked up in property funds.
Read the rest
Beating the Boiled Egg
First they court you, then they marry you (for all the wrong reasons), and now they want a divorce. A boiled Egg is hard to beat .
But it appears that they forgot to check the prenup.
But it appears that they forgot to check the prenup.
The ECB Rate Rebels
By Nico Isaac
On January 28, the annual International Monetary Fund meeting was held in Davos, Switzerland. There, the world’s economic leaders came together to address the central concerns facing the global marketplace.
Result: the European Central Bank was put under more fire than a spit-roasting pig.
The short version is that the ECB has opted not to join the U.S. Federal Reserve’s rate-cutting crusade; instead, holding rates firmly to a six-year high of 4% since June 2007. Lofty rates, so say the "experts," keep the euro at record-high levels, which further compounds the setbacks currently facing Eurozone economic growth.
Read the Rest
On January 28, the annual International Monetary Fund meeting was held in Davos, Switzerland. There, the world’s economic leaders came together to address the central concerns facing the global marketplace.
Result: the European Central Bank was put under more fire than a spit-roasting pig.
The short version is that the ECB has opted not to join the U.S. Federal Reserve’s rate-cutting crusade; instead, holding rates firmly to a six-year high of 4% since June 2007. Lofty rates, so say the "experts," keep the euro at record-high levels, which further compounds the setbacks currently facing Eurozone economic growth.
Read the Rest
Sunday, February 3, 2008
FXI EUR/USD Calendar 2/3 thru 2/8 2008 (with commentary)
By FX Insights Moderator,
Before we dig into this week's fundamentals and market outlook, I want to talk about last Friday's NFP...
As we indicated in Friday's update, last month's NFP data was revised up, the unemployment rate, however, was knocked back below 5.0%, which was opposite of my forecast... with new and continuing jobless claims and vastly diminished new hiring, it's very difficult to understand why the unemployment rate dropped to 4.9%...
We also indicated, we'd see downward pressure on the EUR/USD, which certainly played out Friday, but to a slightly greater degree than I had anticipated... as we stated in the update, though, I still believe the EUR/USD has the potential to re-test the top of the range...
NFP showed a net loss of 17K jobs, which is certainly dismal, but lets keep one fact in mind -- of all the months in the year, January typically shows the biggest decline in new jobs and this is because of the BLS's birth/death model... so, I'm sure we can expect another upward revision next month...
Friday was a great example of why most NFP's are not 100% cut and dry like many traders expect it to be... and although the EUR/USD made an initial push towards all-time highs, in the chat we strongly cautioned against taking any longs on Friday and to simply let the market play out as it wished...
Moving on...
Fundamentally, we have an interesting week ahead of us... not quite as challenging as previous weeks, but there are some key events we need to focus on.
Monday -- The only real key data piece is U.S. factory orders. We'll also get a speech by the Fed's Kroszner... although data is light on Monday, don't necessarily expect the market to be quiet... Monday holds the potential to give us some decent moves and volatility...
Tuesday -- We get some key Eurozone inflation data with German and E-zone PMI and Italian CPI... we may see a bit of contraction in those PMI numbers... another key piece of data is E-zone retail sales. Forecasts show a decent rise from the previous decline... I'm not quite as confident on hot retail numbers. Should we see a downside surprise in retail, this will certainly put some pressure on the EUR and renew talk of possible ECB rate cuts...
Key U.S. data on Tuesday is ISM Non Manufacturing... I believe the market will pay close attention to this release as it will give us a current look at what's happening within the service sector. The service sector is one that has remained resilient while other sectors have stumbled the past 6 months... I don't expect a downside surprise with this data, however, should we see anything below 51, the market could certainly react very negatively against the USD...
Wednesday -- Nothing but USD data today... we start out with Non Farm Productivity... I normally wouldn't pay a whole of attention to this particular piece of data, but I think the market and the Fed will be watching, so I'll be watching too... basically, NFP Productivity is a combo growth-related and inflation-related report, but there's a few weird aspects to this report... in a nutshell, basically the FX market wants to see lower NFP Productivity because that correlates into higher wages being paid for less output, which is inflationary, and inflation is good for a currency as it could lead to rate hikes or less rate cuts... make sense?
OK, we also get three Fed speeches -- Lacker, Kroszner, and Plosser... of course, the market will be looking for any clues on future monetary policy, specifically what the Fed's next move on rates will be in March.
Thursday -- Our biggest fundamental day of the week... early in the morning we get key German factory orders data which I believe will be weak... however, our biggest events of the day is the ECB's decision on interest rates followed by Trichet's press conference...
I absolutely, positively, cannot see the ECB cutting rates on Thursday... I do not believe this option is on the table. In fact, there's a higher probability of the ECB raising rates than there is of them cutting rates... I firmly believe Trichet will keep rates on hold at 4.00%... the biggest factor is that CPI rose from 3.1% to 3.2% which is keeping intense inflation pressure on the Eurozone and is keeping inflation well above the ECB's target rate of 2%.
We also get key Initial Claims data on Thursday... last week jobless claims rose to a staggering 375K... we could certainly see that number revised down this week, which would be USD supportive... keep an eye on this week's headline number... if it stays above 340K and we don't get a downward revision to last week's data, the USD could face renewed sell-offs...
At 10:00 we get Pending Home Sales which the market is expecting to "not be as bad as last month." I'm not really buying it... we've not seen the bottom yet, banks are not lending, consumers aren't qualifying for mortgages, there's a 9-month backlog in home inventories, prices paid are way down... it's still a disasterous mess, so I don't expect any mega upside surprises here...
Friday -- Two key pieces of data out of Germany: German Trade Balance and German Industrial Production... trade balance should back down from last month's number as the euro has remained very strong and global economies are starting to slow... as far as industrial production, I'm not very bullish on this one either...
As far as the Fed goes, we get a speech from Yellen very early in the morning, followed by Lockhart and Pianalto speaking later in the afternoon... don't expect anything groundbreaking from that braintrust...
EUR/USD:
If the market wants to keep correcting down, to me, this is not a sign of the dollar gaining strength... nobody is buying dollars at this point... those corrections we've seen and could see are attributed to profit-taking, loss-taking, fluctuations with gold, oil, and equities... basically all the market correlated variables...
There was very little liquidity in the market on Friday, which also puts downward pressure on the EUR/USD... as far as trading goes, I'm still euro long -- cautiously long, of course... and I will likely look at any further downside correcting as another buying opportunity...
In case you missed it, I did a post on the gold-EUR/USD correlation... please take a moment to check it out as gold is one of the most important market correlated variable... As always, take care to manage your risk and money very closely... do not overleverage your account under these current market conditions of uncertainty and risk aversion...
Lastly, I'll do a live audio Q & A in the chat tomorrow at 1100 EST...
Gold, the Euro and the US Dollar
By FX Insights Moderator,If you’ve spent even just a brief amount of time at FX Insights, surely you’ve noticed how close we watch and track the EUR/USD’s market correlated variables… and just to give the term a proper definition, my definition of what a market correlated variable is:
"A non-Forex factor that has direct connection to the EUR/USD and to the EUR/USD’s price fluctuations."
To put it another way, market correlated variables are factors happening outside of the Forex world, yet have major direct impact on whether the EUR/USD goes up, goes down, and to what degree these moves may occur.
Trading: Primarily, gold is traded on the NYMEX. For gold, there is a spot market, a futures market, and an options market. Gold is traded by everyone from the small potatoes retail investor all the way up the ladder to large banks, hedge funds, institutions, and further on up to the central banks of the world.
Major reasons why gold is purchased: Gold is purchased as a hedge against inflation. Gold is also purchased in “response” to a weakening currency, which in the case of the EUR/USD, gold is and would be purchased as the value of the dollar falls against the euro. Gold can be bought and gold can be shorted, just like a currency can in the spot FX market.
Gold and central banks: Although both the dollar and the euro are fiat currencies, the Fed and ECB have vast gold holdings within their reserves. One way the Fed and ECB control and manipulate the value of their respective currencies is by trading their vast gold reserves. The ECB is especially notorious for dumping many tonnes of their gold on the market at certain times of the year to “cool down” the value of the euro against the dollar. Gold is a powerful market manipulation tool at the hands of the central banks, and the market usually only learns of a central bank’s gold operations after the fact…
Key gold facts: The main reason why the commodity of gold is highly correlated to the EUR/USD is because gold is denominated in U.S. dollars. Gold and the USD share an inverse correlation… think of it this way, when gold is purchased, the USD is sold… the selling of any currency will naturally devalue that currency, so as gold is purchased and the price of gold rises, the value and “price” of the USD must fall because of the inverse correlation that exists between gold and dollar.
It’s my understanding that in 2001 gold began making a very strong resurgence which has ultimately led to this commodity making all-time highs in the $940’s…
This past week the USD/CHF went to post-World War II lows while gold was making all-time highs. Going back to 2001, look at the EUR’s climb to dominance over the USD… looking at the big picture, the EUR/USD has moved up in tandem with gold, while the USD Index has moved against gold and the EUR/USD…
Other key facts about gold and the USD: As we mentioned earlier, gold is denominated in U.S. dollars. So lets think about it… if the dollar is strong, you could buy more gold, literally getting more bang for your buck… a weak dollar buys less gold… here we have yet another reason why the weak dollar will only keep upward momentum going for gold – as long as the USD stays weak, the market stays bearish on the USD, gold naturally has to stay strong and has to rise, which then naturally correlates into the EUR staying bullish against the USD.
Gold and inflation: Back in the late 1970’s and early 1980’s U.S. inflation was absolutely out of control, and this runaway inflation issue took gold up to almost the $900 level, which must have been a staggering price back in those days… the Fed had to raise interest rates several hundred basis points very rapidly to slow inflation and this eventual mega rise in interest rates caused gold to loose half of it’s value and by 1983 gold was in the $400’s.
So as you can see, inflation is another key factor in the value of gold… when inflation rises, gold rises, but when a central bank steps in with interest-rate-raising tactics to slow inflation, gold will fall in value accordingly… and following this natural progression… higher rates = less inflation = weaker gold. Higher rates = a stronger dollar and a stronger dollar = weaker gold…
In many ways inflation is reflected in the price of gold which is then reflected in the price of the EUR/USD as more times than not gold leads the EUR/USD…
Practical exercise: I’d like to pause and take you through a practical exercise… this is how I think things through and how I attempt to forecast the market and formulate a predictive view of the EUR/USD… this is the kind of stuff that goes on in my head, so I’m going to do my best to communicate it as simply and clearly as possible…
First, I always start with interest rates… interest rates, as you’ve heard me say a katrillion times are paramount in the spot FX market…
For now I see the Fed in a rate cut cycle and the ECB in a rate hold cycle, at least through the spring of this year… I think the Fed can cut rates another 50bps or more before it’s all said and done. So going forward starting with interest rate cuts, here’s how I think it through:
1. Fed rates stay at 3.00% and possibly get cut further
2. Low rates and rate cuts weaken and devalue the USD
3. The weak USD correlates into higher gold prices
4. Higher gold prices correlate into the EUR/USD continuing to make bullish gains
5. Rate cuts and weak USD lead to rising U.S. inflation
6. Rising inflation leads to buying of gold, driving gold prices higher, driving EUR/USD higher
7. Rising inflation causes the consumer to slow spending, which further weakens the USD
So, that’s my logical way of thinking through what’s happening within the market under current conditions. The Fed seems reluctant to combat inflation and hell-bent on trying to stimulate growth and appease global markets with heavy rate cuts, so I believe this will naturally lead to more gold gains which should keep the euro supported against the dollar, at least until the Eurozone fundamentals really start turning south and the ECB begins following the Fed with rate cuts of their own, at which time we should see some rapid declines in the value of the EUR vs. the USD.
Gold and recessions: Currently, the hot debate is whether or not the U.S. is in a full-blown recession, the start of a recession, or a few negative GDP reports away from a recession… I’m not a college-degreed economist, so I can’t give you the textbook answer… personally, I look at two key things to help me determine a U.S. recession situation, and those two factors are gold and the employment situation (which then trickles down to the death of the consumer).
The rapid rise in gold prices and the rapid decline in new job creations, the loss of construction and manufacturing jobs, the rise in new and continuing jobless claims and the almost 100bps rise in the unemployment rate signal a real recession… and I think these signals were obvious many months ago when gold really started taking off…
But here’s where it gets a little weird with gold and recessions – believe it or not, history has shown us that when the U.S. is in a full-blown, established, and recognized recession, the price of gold has stabilized and or declined! So this means if all the world’s economists put their heads together and officially declare that the U.S. is in a recession, we could see the price of gold level off or drop, which could push the value of the USD up against the EUR…doesn’t make much sense that the USD could strengthen during a recession, but it’s certainly possible…
Gold and trading the EUR/USD: Here’s where we get practical when it comes to using gold as an indicator to trade the EUR/USD…
Quite simply, I am watching the spot gold market just as much as I’m watching the EUR/USD price action… moves in the price of gold more often than not will lead moves in the EUR/USD… gold is a tremendous leading indicator… if I’m trading the market intraday, I’m watching every little uptick and downtick with gold… I watch the NY spot gold market like a hawk…
If you’re one of our many tech traders trying to wean off the techs and learn how the EUR/USD really moves and why it really moves, you’d be well served watching the spot gold market as a key indicator… do yourself a favor and compare a 1-week gold chart to a 1-week EUR/USD chart, pick any week really, and you’ll see what I’m talking about…
There’s really no way I can glamorize the gold-EUR/USD correlation… it’s fairly simple and fairly cut and dry… it’s not a magic bullet indicator, and as I always say, there’s no such thing as “always” in the FX market, but gold is a highly probable and fairly consistent market correlated variable.
If you don’t track it or use it as a trading indicator, I encourage you to begin doing so… it’s only going to enhance your trading and give you more wins vs. losses as it will paint a clearer picture of market direction.
When the spot gold market is volatile you can expect the EUR/USD to be volatile… when gold decides to find its next top and correct, you can likely expect the EUR/USD to correct with it… the overall euro fundamentals do not warrant the value of the EUR/USD to be north of 1.4200, however, because of market correlated variables like gold being on such a bullish run, the euro naturally has to come up with it…
Again, of all the market correlated variables like oil, bonds, and equities, I believe the tightest overall correlation exists between gold and the EUR/USD.
Lastly, based on past experiences, I know there’s somebody or several somebodies out there who’ve read this and are thinking, “So if gold goes up, what does the EUR/USD do?” If you’re not sure, find me in the chat and ask, I can always use the amusement…
The International Muggers Fund
This is the new boss at the IMF, Dominique Strauss-Kahn.
He is affiliated to the Socialist Party in France. The political ideology of the Socialist Party is Social democracy. So what is socialism? The wolf disguised in sheeps clothing, namely communism.
From the Fabian Socialists, our dear friends John Maynard Keynes and Harry Dexter White were delegates at 1944's United Nations Monetary and Financial Conference, where of course the IMF was found. Brilliant!
No wonder the financial system is a mess. Socialists managing capitalism! Hah! I however believe it is the other way around. It is the Socialists working towards the destruction of capitalism through the use of inflation.
And that, ladies and gentleman, is what the Fed is busy doing to the dollar. Inflating, deflating, inflating, deflating until such time the US Dollar as the World Reserve Currency implodes, which will herald the day of whatever new or other currency they have up their sleeves.
The UN is part of this Global Hegemony of Socialists/Communists, and this is what one lone individual, namely Ron Paul, is up against.
A vote against Ron Paul is a vote in favour of this abomination that is devouring our freedom. Essentially, Ron Paul is fighting for the freedom of every individual on this planet.
Wake Up !!!
He is affiliated to the Socialist Party in France. The political ideology of the Socialist Party is Social democracy. So what is socialism? The wolf disguised in sheeps clothing, namely communism.
From the Fabian Socialists, our dear friends John Maynard Keynes and Harry Dexter White were delegates at 1944's United Nations Monetary and Financial Conference, where of course the IMF was found. Brilliant!
No wonder the financial system is a mess. Socialists managing capitalism! Hah! I however believe it is the other way around. It is the Socialists working towards the destruction of capitalism through the use of inflation.
And that, ladies and gentleman, is what the Fed is busy doing to the dollar. Inflating, deflating, inflating, deflating until such time the US Dollar as the World Reserve Currency implodes, which will herald the day of whatever new or other currency they have up their sleeves.
The UN is part of this Global Hegemony of Socialists/Communists, and this is what one lone individual, namely Ron Paul, is up against.
A vote against Ron Paul is a vote in favour of this abomination that is devouring our freedom. Essentially, Ron Paul is fighting for the freedom of every individual on this planet.
Wake Up !!!
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