FOREX AM: US Banks To Receive $250 Billion Investment, FX Carry Returns

In a long awaited decision, the US government will infuse cash into the nation’s nine largest financial institutions in attempts to finally break deadlocked credit markets and boost liquidity. The announcement comes a day after European officials pledged the same, allowing for some appreciation in the Euro and British pound over the course of the session. Incidentally, it is also in line with the advice of other industry notables that previously proposed the strategic solution, one that Warren Buffett has implemented himself in recent months. Details of the plan are scheduled to be released when US Treasury Secretary holds a press conference this morning. In general, however, it seems that $125 billion is earmarked for nine of the industry’s largest shops with $250 billion set aside for firms to be decided on by US Treasury official Neel Kashkari, who now oversees the rescue panel. The infusion will also allow the US government to own stakes in the aforementioned institutions, through instruments that will be designed not to dilute current stock holdings. This will allow equity holders in expecting no real damage to currently estimated earnings. Ultimately, the plan should break the recent string of bearishness in the market, creating a bit of confidence in the economy and shift the dynamics of currency pairs back to previous beliefs.

FX Market: Market Turns to US Dollar, British Pound in Weekly Play

Scheduled on the same day, both the UK inflation report and FOMC rate decision are expected to jolt the FX market this week, at least a tad. Set for Wednesday, the UK report is anticipated to show a further slowdown in consumer and producer prices with additional central bank statements alluding to a continued slowdown in the UK economy. Recent reports show nothing but support for the near term decline in prices. For the month of June consumer prices rose a paltry 1.8 percent from the year before as producer prices rose at the lowest level in eight years. What pound bulls will most likely be attuned to will be the probable downgrade in overall growth by the Bank of England. Following the expansion in quantitative easing of an extra 50 GBP billion last week, traders are expecting the worse for the subsequent statements. If the same fears are proven right, the underlying currency will come under pressure as further accommodative policies are likely to emerge in the coming quarters. Even worse has been speculation of a deflationary trap in the country, where prices continue to move low enough to choke off spending by both consumer and producer sectors, leading GDP further lower. Adding fuel to the fire has been Governor King’s refusal to completely rule out further expansion of cash injections into the financial system.

Forex Trading Fundamental Forecast for February 2009

Risk aversion is likely to extend through February in the forex markets, with fundamental trends suggesting to buy the Japanese Yen and sell the Australian Dollar.

02-04-09-score

Although the Yen is highly overvalued, it is not burdened with substantial rate cut expectations and was the best performing currency against USD last month. Further, continued deleveraging across financial markets will bring yet more unwinding of Yen-funded carry trades. This means it will be some time before the dire state of the Japanese economy meaningfully weighs on the low-yielding currency. While the Canadian Dollar scores equally well, the Loonie is now marginally undervalued against its implied “fair” exchange rate and still faces meaningful downward pressure from adjustments in the yield spread.

Looking at the other end of the spectrum, the Australian Dollar is the weakest of the bunch. Although the currency is undervalued, a bullish correction in the near to medium term seems very remote. The Aussie was the second-worst performing currency against the US Dollar in January and remains threatened by comparatively large interest rate cut expectations. Finally, a trade-weighted index of the Aussie’s value now shows a whopping 98% correlation with the MSCI World Stock Index, suggesting that any move away from risky assets will weigh heavily on the antipodean currency. If you are looking for more information about online trading, please check out this Online Trading Guide. It has some great free resources.
*** The basis for the concept of currency valuation using yield, value, and momentum was originally proposed by Bilal Hafiz of Deutsche Bank AG.

Commodity Declines Visible Through Canadian Dollar

US dollar hoarding, depressed monetary outlooks and lower commodity prices continued to weigh on the Canadian dollar as the loonie traded through to multi year lows during both London and New York. Compared to the 1.2136 New York close, the currency is now lower against the greenback at 1.2532, just a couple pips shy of 400 for the day. The surge against the Canadian currency was bolstered through the session, in particular by depressed commodity prices as several key base materials showed considerable weakness on the session. Notably, crude oil, which has an existing correlation with the currency, fell to a 15-month low during the session. Currently, front month contracts are trading lower by 6.18 percent down $4.46 to $67.72 a barrel. The two day slide will now all but insure that OPEC leaders are likely to cut production by a market consensus of 1 million barrels a day when they meet this week. Additional cuts will likely be pushed back further in 2009, with estimates surrounding the 500,000 barrel a day mark. Gold and copper futures were also lower as both contracts were trading lower by 3 percent or more heading in the New York afternoon.

US Dollar: Fundamental Reasons Why Another Greenback Bullish Run is Coming

Everything in the economy for the last couple of months has become optimistic. Stock markets are higher, manufacturing declines have stabilized and last week’s employment numbers give some hope that the US economy is on the recovery road. However, all may not be well in the world’s largest economy.

Taking a look at the finer print, the economic turnaround so many have been supporting may actually be hitting a plateau. This nascent macro pessimism may be what the bullish dollar trader is calling for as fundamental factors may help boost the US dollar’s fortunes in the second half of the year.

Euro is Correcting against Dollar as Fundamentals Show Recession

EUR/USD stopped growing today and the dollar gained slightly bisst the euro for the first double in three days after the fundamental reports from the United States showed that the world’s biggest economy is still in recession. Currently EUR/USD is trading near 1.2767 after reaching as low as 1.2731 today.
Initial jobless claims were at 654k last week — up from 645k reported for a previous week (revised up from 639k). They were above the average estimate of 644k.
Retails sales went down by 0.1% in February in U.S. — better than 0.5% decline expected by the analysts. January result was revised from 1% growth to 1.8% growth.
line inventories decreased by 1.1% in February — worse than 1% forecasted drop and slightly better than 1.3% drop in January.

The U.S. is Printing Money too, but Right Now they are Saved Because they are the World’s Reserve Currency (and thus a “Safe Haven”).

Now, you may say but isn’t the U.S. doing the same thing? After all, their economy is slowing down. They are printing money too.

I would say, while I won’t deny that point, the U.S. dollar presently benefits from what is called the “safe haven bid”. What does that mean? It means that investors all over the globe are running to the safety of the U.S. dollar because it’s the world’s reserve currency right now.

In other words, if there’s one currency on the face of the earth that you are most likely to keep and continue to use, it’s the one that most of the goods are priced in all over the world. For example, gold, oil, wheat, soybeans, lumber, etc. are all priced in U.S. dollars.

Therefore in crazy times like this, it enjoys the benefit of being the world’s reserve currency. However, once the global economy finally does return to normal, then this “benefit” will suddenly go away and the dollar will just have to stand on its own fundamentals once again. We all know that once that happens, the buck doesn’t have that much to stand on. Therefore, the “dollar party” may come to an end ONCE the global economy normalizes.

In the mean time, Canada’s currency (and economy) will continue to suffer as the U.S. lays off more workers and continues to slow down. Remember, they derive about 79% of their exports from the U.S. That’s huge! In fact, it’s so huge…it’s the largest trading relationship between two countries according to Canada’s trade department.

This really is huge, because the U.S. hasn’t had three back to back months of layoffs this big since they started keeping records on it back in 1939. So from at least as far as our records go back, this has never happened on this scale before!