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Monday, 13 December 2010 06:14

Guest Commentary: Wall Street Gives Uncle Sam Too Much Credit

Contributed By: DailyFx

 Despite the fact that the S&P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S&P 500 and GDP targets for 2011. JPMorgan's chief US equities strategist, Thomas Lee, came out on December 3rd with a target of 1425 on the S&P for 2011, which would be a 15 percent gain. Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO's idea of a "new normal" has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to "massive" government stimulus.

In the midst of this collective 'hurrah,' very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy.

In reality, growth doesn't cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the 'robust growth' reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November.

A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month... ever, and was the 26th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude?

I think it's pretty clear that 'robust growth' is going the way of 'green shoots' and knickers - right into the dustbin of history.

So, what will the increase in interest rates - ignored by all of Wall Street - actually mean for the economy in 2011?

For starters, the National Home Price Index already fell 2% in the third quarter of 2010. On a national basis, home prices are 1.5% lower year-over-year, and 15 out of the 20 cities measured were down over the last 12 months. On a month-over-month basis, 18 cities posted a price decline in September, compared to 15 MoM drops in August, and just 8 cities experiencing price reductions in the July report. Therefore, home prices, which were already headed lower before this recent spike in mortgage rates, are set to take another tumble downward. According to Freddie Mac's weekly survey of conforming mortgages, the average rate on the 30-year fixed is at its highest level in six months. 30-year rates averaged 4.61% for the week ending Dec. 9, up from 4.46% last week. It's the fourth week in a row that the mortgage rate has increased. The ramifications for the real estate market and bank lending are clear. Lower home prices will send more mortgages under water and force many more homes into foreclosure. Higher borrowing costs will lower the demand for borrowing and place more strain on the capital of lending institutions.

On top of that, household debt as a percentage of GDP still stands at a lofty 91%. It should be clear that with near double-digit unemployment, the last thing consumers can now tolerate is a significant increase in debt-service payments.

The rising cost of money is even worse news for the federal government and its chronically ballooning debt problem. According to the Federal Reserve's Flow of Funds Report, total non-financial debt reached an all-time high of $35.8 trillion in the third quarter of 2010. In fact, household debt, business debt, and government debt increased at a 4.2% annual rate last quarter.

To put that record level of nominal debt into perspective: in 1980, the total non-financial debt-to-GDP ratio was 144%. In the height of the credit boom, at the end of 2007, that figure was 226%. Today, the figure stands at a mind-blowing 243%! So you can forget about all that deleveraging talk. The US is in fact still leveraging up, both in nominal terms and as a percentage of GDP.

I think the rising cost of money will become the story of 2011. Its effect on consumers, the real estate market, and government borrowing costs will be profound. Apparently, most major brokerage firms have no fear of soaring interest rates causing our economy to implode. However, it's clear to me that the bond market has already started to crack due to inflation and massive oversupply from the Treasury. Prudent investors should think twice before overlooking what could be the initial holes in the biggest bubble in world history - the full faith and credit of the United States.

Published in Forex News
Tuesday, 14 December 2010 06:14

Crude Rises as OPEC Leaves Quota Unchanged, Gold Moves Over $1400 Despite Elevated Yields

Contributed By: DailyFx

 Commodities – Energy

Crude Rises as OPEC Leaves Quota Unchanged

Crude Oil (WTI) - $88.24 // $0.37 // 0.42%

Commentary: Crude oil rose $0.82, or 0.93%, to settle at $88.61 on Monday. U.S. equity markets advanced to yet another 2-year high and copper hit a record high, as investors and traders become increasingly bullish on the global economy. In this context, it is only a matter of time before WTI moves well into the $90’s, in our view.

As we said yesterday, China refrained from raising interest rates this past weekend despite a higher-than-expected reading on consumer prices, which rose 5.1% year-over-year. We also saw OPEC leave its production quote unchanged as expected. Meanwhile, Goldman Sachs anticipates that global oil demand will grow 2 million barrels per day in both 2011 and 2012, far outstripping estimated non-OPEC supply growth of 800,000 barrels per day.

Tomorrow brings the release of November U.S. retail sales figures, as well as the latest Federal Reserve policy decision. None of these events are likely to have any significant impact on the medium-term outlook for crude or the equity markets for that matter, but they could always influence trading action for the day.

Technical Outlook: Prices have corrected higher to retest support-turned resistance at a rising trend line set from late October having broken below it yesterday. Broadly speaking, the bias remains bearish, with a resumption of the down move initially targeting the 23.6% Fibonacci retracement of the 8/25-12/7 rally at $86.04.

Commodities – Metals

Gold Moves Over $1400 Despite Elevated Yields

Gold - $1403.85 // $9.67 // 0.69%

Commentary: Gold rose $8.18, or 0.59%, to settle at $1394.18 despite the fact that U.S. Treasury yields remained at elevated levels. The 10-year yield remains just below 3.3%, which is up 50 basis points from two weeks ago and up 80 basis points from last month. This could be a case of the tail wagging the dog again, for gold’s advance was relatively modest compared to silver’s 3% move on the session. Moreover, gold’s rally was somewhat unimpressive considering the 1% decline in the U.S. Dollar on the day.

The question on our mind continues to be whether gold has finally put in a lasting top now that yields have moved so aggressively higher. We’ll be watching to see if the metal’s $1431 record high holds.

For those forex trading seeking proxy gold exposure, continue looking at AUD/USD. As we said in our latest Gold – FOREX correlations report:

“…[AUD/USD]continues to look like the best pair for proxy gold exposure in the forex markets. With the release of an extremely strong employment yesterday, expectations for future interest rate hikes from the RBA have begun to move higher. All else equal, higher interest rates translate into tighter monetary conditions. As gold is seen as a hedge against loose monetary conditions, the Aussie should be more inclined to maintain its purchasing power versus gold relative to other currencies. In other words, its correlation with gold should be high.”

Technical Outlook:Prices have bounced higher from support at a rising trend line set from mid-November to test resistance at $1407.28, the 23.6% Fibonacci retracement of the 11/16-12/7 rally. A break above this juncture exposes the record high at $1431.25. Near-term support lines up at $1392.46, the 38.2% Fib level.

Silver - $29.80 // $0.27 // 0.92%

Commentary: Silver rose almost 3% to settle at $29.53. Silver ETF holdings hit a new record high above 485 million troy ounces.

The gold/silver ratio fell to 47.1, near the lowest levels since February 2007. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).

Technical Outlook: Prices have once again bounced higher from support at a rising trend line set from late October to overcome resistance at $29.36, the 11/9 wick high. The door now looks open to challenge the $30.00 figure, although negative RSI divergence hints gains may be short-lived. Confirmation of a larger bearish reversal requires a daily close below trend line support, now at $28.22.

Published in Forex News

Contributed By: DailyFx

 Talking Points

* British Pound: Housing Troubles Weighing
* Japanese Yen: Weighed By Risk Appetite
* Euro: Finding Bid on Broader Optimism, German Support
* U.S. Dollar: At Mercy of Broader Trends as Traders Eye FOMC Meeting

The People’s Bank of China refraining from tightening rates and the expected approval of U.S. tax cuts have fostered a return of risk appetite and helped the Euro looking to erase Friday’s losses. An empty economic docket will likely leave currency markets in the hands of broader trends which is shaping up to be a positive start to the week as easing concerns over Europe and a brighter outlook for growth is fueling optimism. The French current account deficit shrinking to 2.5 billion from 4.4 billion and French wages growing 0.3% were the only releases to cross the wires and had very little impact of direction

Comments from German Finance Minister Wolfgang Schäuble that it was unlikely that any country would be ejected from the E.U. are helping ease concerns over the region. The Economic Union’s largest economy continues to show its willingness to stand with its fellow members and weather the current crisis in order to maintain their single currency. It is a stark contrast from the lack of solidarity that we saw at the onset of the debt issues when Greece first came under fire. Therefore, markets have more confidence that the region can persevere if its unquestioned leader is willing to do whatever it takes to maintain the union. The EUR/USD has broken above a four day descending trend line which has exposes the 20-Day SMA at 1.3335. However, upside potential remains limited as the issues in Europe rare far from being solved and any signs that risk appetite is waning could increases downside risks.

The British Pound is back under pressure after temporarily regaining its footing as disappointing housing data is fueling the outlook for additional asset purchases from the BoE. The Rightmove housing price index fell 3.0% in December following a 3.2% decline the month prior. The agency also revealed a dour forecast for another 5% drop in 2011 which could force policy makers to restart QE efforts despite high inflation. A strong producer price report and broader optimism provided brief support, but markets have resumed pricing in more additional measures from the central bank. Factory gate prices rose 0.9% beating estimates of 0.5% but slower than the month prior 2.2% pace. Most of the gains prices came from volatile fuels costs which is minimizing the impact from the report. We expect Cable to continue chop around today as broader optimism will be supportive which will leave the GBP/USD in its current range between 1.5700-1.5850.

The greenback was under pressure overnight on the broad based risk appetite which could lead to more losses throughout the day with a light North American economic docket. Canada’s capitalization reading for the third quarter is the only fundamental release on tap and holds very little market moving potential. Traders should take their cures from equity markets as the dollar continues to show a strong negative correlation to risk taking. Overall we may see a quiet day with the FOMC rate decision looming, as markets will look to see if Fed Chairman Ben Bernanke expands on recent comments that there is room for more QE beyond the initial $600 billion. However, signs politics is threatening the passing of the Obama-GOP accord on taxes could quickly dim optimism and fuel dollar support on safe haven flows.

Published in Forex News

Contributed By: DailyFx

 The US Dollar is tracking marginally higher in a relatively quiet start to the week, with market participants seemingly easing in to more of an end of year holiday trading style with every passing day. Rumors of a potential China rate hike over the weekend were not supported, and the only move seen by the government was a lift in the reserve requirement on Friday. This followed a strong round of weekend data out of China, and some much higher than expected inflation readings. While risk appetite should be comforted with the stronger data, it could equally be compromised with the higher inflation readings that continue to suggest that further rate hikes will be needed.

Looking ahead, The FOMC is scheduled for Tuesday and as always, investors will be paying close attention to what the Fed has to say. Any signs of downplaying the need for additional QE, while at the same time sounding more upbeat on the outlook for the economy, will likely open a fresh round of broad based USD buying. Meanwhile, the EU summit meeting is scheduled for December 16-17 and will bring up the possibility of an expansion of the bailout fund. Other important events and releases include US retail sales on Tuesday and the Irish budget vote and Japanese Tankan on Wednesday.

Elsewhere, Australia Treasurer Swan was on the wires over the weekend to introduce a package of new banking measures in an effort to reduce the dominance of the country’s four largest banks that have been uncomfortably raising rates well above the RBA’s level. Meanwhile, German FinMin Shaeuble attempted to lobby on behalf of his currency over the weekend after coming out with some rather strong comments saying that the Euro would not fail and those that bet against it would have no success. On the data front, Sterling has been weighed down a little more than some of the other currencies after Rightmove’s asking prices for homes in England and Wales fell for the second straight month.

The economic calendar for Monday is super light with Swiss producer and import prices (0.1% expected) due at 8:15GMT, followed by the delayed input component of UK producer prices (0.5% expected) at 9:30GMT. Into North America, Canada capacity utilization (75.8% expected) at 13:30GMT is the only scheduled release for that session. US equity futures are trading flat, while commodities are modestly bid.

Published in Forex News

Contributed By: DailyFx

 Markets are not bracing for any surprises when the Federal Reserve makes its next policy decision later today at 19:15GMT. The target benchmark Federal Funds rate is of course, expected to stay between 0.00% and 0.25%. Traders will instead be focused on the accompanying statement, but there too, we may see little change from the last meeting.

Traders will be watching to see, however, if the central bank has any comments on the recent surge in Treasury yields. The interest rate on 10-year U.S. government bonds has surged nearly 80 basis points since the last Fed policy decision on November 3rd, when the central bank unveiled its $600 billion ‘QE2’ program. Explanations for the move have been attributed to a stronger outlook for the U.S. economy, a wider forecast for the budget deficit following a recent tax cut deal struck by the President and Congress, or a combination of the two.

Most likely, the Fed will take a cautious approach, repeating its pledge to provide as much support as it necessary to stimulate the U.S. economy, while maintaining its $600 billion quantitative easing program with the flexibility to adjust purchases based on the evolution of the economic outlook.

Published in Forex News

Contributed By: DailyFx

The New Zealand Dollar fell close to 0.75 versus the U.S. Dollar after the government reported that retail sales fell the most in 13 years in October. Prior to the report the Kiwi was trading near 0.7550 versus the greenback.

N.Z. Retail sales for October fell 2.5% month-over-month, worse than the 0.8% decline that was expected and comes after a 1.7% advance in September. Excluding the volatile automotive sector, retail sales fell 1.6%, still below expectations for a 1% decline and the 1.7% increase in September. While these numbers are rather dismal, retail sales are coming off record high levels, thus October’s figures are not suggestive of a steep downturn in the economy. Rather, New Zealand continues to be mired in a slow growth period, with the government separately revising lower its forecast for GDP growth in the year ending March 2011 to 2.2%.

AUD/NZD hit the highest level in 10 years as traders currently foresee a much brighter outlook for neighbor Australia

Published in Forex News
Monday, 13 December 2010 06:05

UK House Prices Fall 6% over Two Months

Contributed By: DailyFx

UK House Prices fell 3% month-over-month in December according to Rightmove. This was on top of the 3.2% decline in November, making it the largest two month drop since Rightmove records began in 2001. On a year-over-year basis, house prices are now barely positive, up 0.4% from the same time last year. This release had no impact on currency markets as is typically the case.

Published in Forex News

Contributed By: DailyFx


Daily Update: How fast perceptions can change. Only weeks ago market observers were speculating about more easing from the major central banks, with the potential for additional rounds of quantitative easing. But as economic data becomes increasingly constructive, interest rate expectations are actually rising.

A 50 basis point spike in U.S. 10-year Treasury yields over two weeks has begun to put pressure on the front of the curve. In fact, at 30bps, we see one year interest rate expectations from the Federal Reserve at the highest levels in five months. We see similar moves in expectations for the ECB and BOE. Interestingly, at 47bps, markets are expecting more in the way of tightening from the ECB than they are from the Australian central bank.

Published in Forex News

USD Dollar (USD) – The U.S. currency rose against most of its major counterparts after benchmark Treasury yields reached a six-month high last week on speculation that an extension of tax cuts will boost U.S. growth. The NASDAQ increased by 0.80% and the Dow Jones rose   by 0.35%. Crude oil fell by 0.7% and closed at $87.79 a barrel. Gold (XAU) fell by 0.6% and closed at $1384.90 an ounce. Today, no economic data is expected.

Euro (EUR) – The euro fell against the Dollar on Friday, closing a week of daily drops in Forex trading. European Union leaders will discuss, this week, the creation of a permanent mechanism to shore up over-indebted countries as the European Central Bank tries to hammer out plans to aid the region’s weakest lenders. As long as the pair is trading below 1.3250 levels, a short position is still preferred according to the 1 Hr chart. Overall, EUR/USD traded with a low of 1.3178 and with a high of 1.3283. Today, the ECB president will speak.

EUR/USD – Last: 1.3192








British Pound (GBP) – The Pound rose against the Dollar after the PPI Output came out at 0.30% as expected. The next resistance of GBP/USD according to the daily chart is located at 1.5900, and if the rate breaks above this rate, a long position is preferred, if the rate breaks below the 1.5700 levels, the pair could decline to 1.5600 levels. Overall, GBP/USD traded with a low of 1.5747 and with a high of 1.5862. Today, PPI Input is expected at 0.50% vs. 2.10% previously.

GBP/USD - Last: 1.5782









Japanese Yen (JPY) –The Yen fell against the Dollar last Friday. The Bank of Japan’s forecast for an end to deflation in 2011, and 35 trillion yen ($417.8 billion) of spending, have done little to change the thinking in the bond market, where investors see eight more years of falling prices. As long as the USD/JPY is trading above 83.00 levels, a long position is preferred and the next resistance level is located at 84.40. Overall, USD/JPY traded with a low of 83.45 and with a high of 84.01. No economic data is expected today.

USD/JPY-Last: 84.11







Canadian Dollar (CAD) The Looney rose for a third day, trimming gains as stocks pared an advance. The Bank of Canada said in a report, that the risks to the nation’s financial system have increased in the past six months because of Europe’s debt crisis, global trade imbalances, and rising debt of local households. The trade balance came out at -1.70B, better than the expected -2.00B. The resistance level of the USD/CAD on the 1 hour chart is located at 1.0150, and if the price breaks above this level, the momentum will become a positive for the US Dollar. Overall, USD/CAD traded with a low of 1.0083 and with a high of 1.0116. Today, the BoC Gov Carney speaks.

USD/CAD - Last: 1.0094










Published in Forex Articles

USD Dollar (USD) – The Dollar traded mixed against the major currencies of Forex trading as Treasury yields surged on speculation an agreement to extend tax cuts will boost the economy, increasing demand for U.S. assets. The initial jobless claim came out 421.00K better than expected 430.00K. NASDAQ increased by 0.29% and Dow Jones fell   by 0.02%, Crude oil rose by 0.1% closed at 88.37$ a barrel ,  Gold (XAU) increased  by 0.7% and closed at 1392.8$ an ounce. Today, the trade balance is expected at -44.40B vs. -44.00B last time.

Euro (EUR) – The euro traded near the lowest in more than a week against the dollar as concerns Europe’s debt crisis will linger damped demand for the region’s assets, as long as the pair trading below 1.3470 levels still a short position is preferred according  the daily chart. Overall, EUR/USD traded with a low of 1.3164 and with a high of 1.3322. We are not expecting a major data for the euro today.

EUR/USD – Last: 1.3252







British Pound (GBP) – The Pound fell against the Dollar after the trade balance came out -8.50B worse than expected -8.10B and the interest rate still the same 0.50%. The next resistance of GBP/USD according the daily chart is located at 1.5900, if the rate breakup this rate a long position is preferred, if the rate breakdown the 1.5700 levels the pair could decline to 1.5600 levels. Overall, GBP/USD traded with a low of 1.5711 and with a high of 1.5841. Today, no major data is expected.

GBP/USD - Last: 1.5781








Japanese Yen (JPY) –The Yen rose against the Dollar and captured again at the support level of 83.40.  As long the USD/JPY is trading above 83.00 levels a long position is preferred, the next resistance level is located at 84.40. Overall, USD/JPY traded with a low of 83.51 and with a high of 84.11. No economic data expected today.

USD/JPY-Last: 83.68








Canadian dollar (CAD) the loonie rose for a second day, trimming gains as stocks pared an advance. The Bank of Canada said in a report the risks to the nation’s financial system have increased in the past six months because of Europe’s debt crisis, global trade imbalances and rising debt of local households. The resistance level of the USD/CAD on the 1 hour chart is located at 1.0150, if the price breakup this level the momentum will become a positive for the US Dollar .Overall, USD/CAD traded with a low of 1.0066 and with a high of 1.0126. Today, the trade balance is expected at -2.00B vs. -2.50B previously.

USD/CAD - Last: 1.0098












Published in Forex Articles
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