Tag Archive | "Federal Reserve"

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About Trading Forex Pairs

If you are an individual Forex investor, your success will depend upon your ability to read how giant Forex traders will interpret a host of factors that affect the demand for a specific currency compared to the demand for another currency. Forex investors can profit by being on either side of the bet. If the investor senses the currency value will appreciate or deprecate against another currency in a specific time frame, there is money to be made.

Experienced traders deploy strategies to hedge their bets, but for today we will consider the key economic, financial and political indicators that traders use to evaluate the relative strength or weakness of a currency opposed to a paired partner.

Understanding the Forex Marketplace

The Forex marketplace is active and volatile The market is open 24 hours a day for five days every week. The market has no central exchange and currency values can change round the clock as events unfold around the world.

In terms of daily trading volume, the Forex market is the largest and busiest market in the world. The market is global. Currency values are subject to a range of compelling factors that influence traders and therefore the value of a given currency. Like all markets, currency values are measures of supply versus demand.

When the demand exceeds the available supply of a specific currency, the value of the currency rises. Likewise, when supply outweighs demand, the value will lower. When you invest in a pair, you are betting that the value of one currency will rise or decline against a paired partner because demand for that currency will increases or subside compared to demand for the paired partner.

Factors Influencing Demand For Currencies

In an era where central bankers have been needed to keep credit markets open and cash flowing, the relationship between a currency’s central bank and the currency value cannot be overlooked. As the Federal Reserve extends its tapering initiative, the value of the dollar should appreciate.

But, central banks have other concerns than quantitative easing (stimulus). The primary function of central banks is to control inflation. When deflation fears run rampant through Europe, the European Central Bank may be forced to take action and increase interest rates, which would affect the euro.

If the central bank feels the value of the currency is putting its export trade at risk, it may be inclined to flood the market with its domestic currency as Japan has done for the past year. Pouring money into the economy (quantitative easing) has a chilling effect on the currency’s value.

Market Sentiment

Although many Forex traders closely monitor global equity markets, it is usually easier to gauge market sentiment for equities than it is for Forex pairs. We wake up in the morning to national coverage about equity markets, which are covered throughout the day and night.

There is no denying the existence and brute force of market sentiment. Sometimes, it can seem that market sentiment defies logic but there can be a host of unforeseen events at work that drive market sentiment. At best, market sentiment is fickle and can change at a moment’s notice.

Political Events

Forex traders cannot afford to be in the dark about political events. Civil wars, terrorist attacks, election results, budget impasses, debt ceiling controversies, government shutdowns, credit rating activity, Congressional stalemates and new government policies all affect a currency’s value. The ability to stay ahead of political events can positively impact the trader’s experience.

Macroeconomics and Forex Trading

Macroeconomics remain the guiding force in currency trades. Gauging and understanding a country’s economic position is the principle that most influences Forex traders, large and small. Macroeconomic reports are strong indicators of a nation’s economic and fiscal well-being.

For example, when true unemployment in the US improves, this is a positive dynamic. However, when the US had two sour non-farm payroll reports in succession, market sentiment attributed the downtrend as weather related and not a reflection of the economy.

In Canada there is concern about household debt and the world’s most overpriced housing market. We have all seen the affect that can have! Economists are watching these troubling trends that have already tuned the CAD lower.

Britain recovery has been partially fueled by the Help to Buy program, an aggressive accommodation for new and existing homebuyers. There are already concerns that this is creating an inflationary force in the UK. Hence, one of the key drivers in the UK’s recovery may well take a toll before long.

At the same time, many national economies are sector driven. Canada relies heavily on its strong energy export trade. When oil prices rally, the CAD adds value. Understanding the factors that drive the economy and are key contributors to GDP is important for Forex traders.

Another key driver of the Forex market is bond markets. The bond market and the Forex market are closely related. Understanding the effect of bond rates upon currency values offers good insight into pairs trading.

The Forex trader need not know about all currencies and countries in order to succeed.  Many successful traders concentrate on a few currencies and the economies affecting those currencies.

When trading currency pairs, the trader’s ability to gauge a nation’s economic strength is the most important determination. Forex traders read and study macroeconomic reports and draw unemotional opinions as to the future of a nation and its currency. That is when the Forex trader is ready to trade.   

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Markets Non-Plussed By Sour Employment Report

A sour US Labor Department non-farm payroll for December vibrated through global equity markets and gave the dollar reason to pause but the longer-term implications appeared tempered. Analysts had expected 196,000 new jobs created in the month but were rudely snapped to attention by the worst employment report in nearly three years. The economy only added 74,000 jobs in the month. November’s excellent report was revised upwards but ripples of uneasiness persisted.

By all accounts, this was a setback to the economy. Several analysts had gone as far to suggest 300,000 new jobs could be added. Blame was placed on the brutal weather that crossed the country, especially affecting the mid-West and Northeast.

Number of hours worked, a key component of the report, also shifted lower.  Again, blame was placed on the inclement weather. Investors immediately wondered what impact the report would have on the Federal Reserve.

Ironically, the unemployment rate dropped to 6.7 percent, a solid 0.3 points on the data. More than 380,000 left the workforce either through retirement or because they stopped receiving unemployment benefits. This is not the type reduction in unemployment the Federal Reserve had anticipated when it set its 6.5 percent target on halting the stimulus.  

The response to the disappointing news was muted, both in Washington and in equity and Forex markets. Investors seemed puzzled. Several disputed the figures and suggested an upward revision would be forthcoming in the February report. Earlier in the week, the ADP private sector payroll report had indicated significant job increase of more than 175,000.

Equity Markets

As investor debated the upcoming action by the Fed, markets seemed to take the new in stride. After their December announcement of a $10 billion monthly reduction in bond buying, the Fed will meet again on January 28-29 presumably to discuss another tapering addition.

On Wall Street, the Dow lost 7.71 points to 16,437.05 but the S&P and Nasdaq both posted small gains. The S&P 500 gained 4.24 points to 1,842.37, a 0.6 percent gain for the week, while the Nasdaq Composite gained 18.471 to 4,174.665.

The MSCI world index also posted a 0.6 percent gain for the day, marking a 0.4 percent gain for the week.

Mixed trade data from China sent Asian markets mildly lower. China’s December exports increased 4.3 percent, less than expected while exports grew by 8.3 percent, higher than expected.

In the UK, there was concern about a possible oil field accident. British markets were flat and the pound posted gains against the dollar as oil elevated slightly.

Forex Shifts

The dollar lost ground to the GBP, yen and euro but held firm against the Canadian dollar. The dollar index fell to 80.533 (0.46 percent), marking a one-week low.

Against the yen, the dollar fell to 103.83 yen before rebounding to 104.07, off Thursday 105 level.

Mario Draghi again repeated that the ECB would accommodate the banks with lower interest rates but said no action was forthcoming to resist the deflation possibility. The euro closed at 1.3667, up 0.44 percent. The consensus is that Europe’s banks are healthier than six months ago and that the troubled southern tier is recovering. Unemployment figures would seem to dispute that but there are signs that housing and manufacturing are improving.

British sterling closed the week at $1.6480, up 0.1 percent on Friday. The fate of the UK housing market is drawing political debate about the fate of the Help to Buy Programme.

While the dollar showed some weakness on Friday, investors increased their bets on the USD last week by the largest amount in four months. The Commodity Futures Trading Commission announced that $21.1 billion was invested in the currency last week.   

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Tapering No, Obamacare Yes

Federal Reserve Chairman Ben Bernanke surprised analysts on Wednesday by announcing there would be no tapering at this time. The announcement sent waves around the planet as global equities turned up sharply. US equities surged off the news and continued their upwards movement Thursday. It had been expected the Federal Reserve would announce initial tapering of between $10 and $20 billion per month.

Bernanke’s move was a pullback from his original tapering announcement in May, when he indicated a tapering in the $85 billion bond buying measure was likely in three months and that the program would end when US unemployment hit 7 percent, around the middle of 2014. Unemployment dipped to 7.3 percent last month but the progress is due to more people leaving the labor force and is not reflective of new job growth.

The Federal Reserve’s balance sheet is now at $3.6 trillion and growing every month. Bernanke’s decision not to taper will give the incoming Chairman, presumably Janet Yellen, a dove, greater flexibility to start and end QE3 according to her own standards. Further policy statements could be made at the October meeting but at this point it appears no trimming will take place before December.

Yellen will face major decision as soon as she takes the reins in February.

  • When to begin asset purchase tapering
  • When to halt the buying program
  • How much to taper
  • Whether to trim purchase of Treasuries or mortgage-backed securities first.

The announcement boosted equities and weakened the dollar. Yellen is due to make a high-profile speech in New York on October 1. Investors may get insight into future Federal Reserve policy at that time. President Obama may propose Yellen for confirmation as early as next week.

Canada And Mexico

Canada had one eye on the Federal Reserve decision and another on its weakening employment sector. However, August inflation fell to 1.1 percent from 1.3 percent in July. The Bank of Canada is expected to hold its interest rate at 1.0 percent, where the rate has been since September 2010.

On Friday, the Canadian dollar was trading at $1.0289 USD or at $0.9719, down from Thursday. The loonie had posted  significant gains immediately after Bernanke’s startling announcement. The benchmark 10-year Canadian bond held with a yield of 2.713 percent.

Board minutes from Mexico’s Central Bank showed the Board was divided over the lowering of interest rates earlier in the month. Mexico has reduced the interest rate to 3.75 percent, down 25 basis points. This marks the lowest  Mexican rates have been since before the recession in 2008.

Euro Watches German Elections

The USD moved up against a basket of currencies in early Friday morning trading. Immediately after Bernanke’s announcement on Wednesday, the dollar had slumped to 80.060. Friday morning, a slight comeback bumped the dollar to 80.37. Nervousness about an undefined Federal Reserve policy was weighing on the greenback.

All eyes in Europe are on the elections in Germany where Chancellor Angela Merkel is expected to win a third term. However, Merkel may lose control of Parliament as her centre-right coalition looks to be losing seats.

The euro was up 0.01 percent against the yen to 134.60. Against the USD, the euro was trading at $1.3545 Friday morning after striking a 7-month high on Thursday.

The dollar was flat at 99.39 yen. The yen endured a broad selloff on Thursday. The yen hit a 3-month low against the Australian dollar on Thursday and touched a 4-year low against the euro.

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Summers Out, Wall Street Up

Faced with a grueling confirmation process that appeared likely to come up short, Lawrence Summers bowed out of the race for the Chairmanship of the Federal Reserve. With Chairman Ben Bernanke’s tenure set to expire in January, the new frontrunner for the post is Janet Yellen, considered a stimulus tapering dove by most observers.

Wall Street greeted the Summers withdrawal with enthusiasm pushing early morning markets to robust highs before settling in the wake of the Navy Yard shootings in Washington. Markets were lukewarm to Summers, thought to be a hawk or more aggressive about tapering.

In the wake of the announcement, equities climbed and the dollar slumped as CME Group’s Fed Watch projected A 55 percent probability rating that the first rate hike would be in December 2014. January 2015 had a 68 percent probability rating. Before Summers’ withdrawal, traders indicated that the first tapering would take place in October of this year.

Summers was most likely guided by an announcement after trading hours on Friday that four Democratic Senators on the Senate Banking Committee would be voting against his confirmation. When Montana Senator Jon Tester stated his opposition, the die was cast.

Obama Addresses Upcoming Debt Ceiling Talks

President Obama told the public that he will not negotiate with Congress regarding the upcoming debt ceiling increase that could expire as of October 15, 2103. Republicans in Congress have used the debt ceiling to extract a heavy price in the past but with an election year coming up, the President appeared unlikely to give in to Republican demands.

If the extension is not passed and if the President does not bend, the government will be shut down. If the public perceives Republicans are to blame, the precedent of the mid-90’s would favor Democrats in the 2014 elections.

The current debt ceiling limit is $16.7 trillion. Republicans continue to want to include revisions to Obamacare as part of an extension.

On Monday, Obama said; “Let’s stop the threats. Let’s stop the political posturing. Let’s keep our government open. Let’s pay our bills on time. Let’s pass a budget. I will not negotiate over whether or not America keeps its word and meets its obligations. I will not negotiate over the full faith and credit of the United States.”

Currency Markets Move

The dollar index slipped 0.2 percent against six major currencies to 81.273.

The dollar lost 0.2 percent against the yen to 99.12 after rallying from the low of the day 98.48. The dollar hit its lowest level against the yen since September 6, 2013.

The euro climbed to $1.3336 after reaching a three week high of $1.3385 earlier in the session.

The strongest currency against the USD was the South African rand which jumped 1.8 percent against the greenback.

Speculation prevailed that the first round of easing under a Yellen leadership would be $10 billion per month.

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Weak Housing Data Sends Dollar Reeling

A dollar already wavering under the lack of definition of the stimulus program by the Federal Reserve took another hit on Friday with disappointing housing data. Existing home sales plunged 13.4 percent in July as June and May sales data was also pared significantly. The Commerce Department’s monthly existing home sales report indicated a deeper than expected schism in the important housing sector and may point to a disappointing third quarter growth rate.

The slumping sales are attributed to rising interest rates and other factors. Surprisingly, sales in the Northeast were the only bright spot in a bleak national report. The higher interest rates climb, the bigger the toll on existing and new construction home sales. Analysts speculated that the upwards spike in June and May was the result of fear over rising rates.

Upon release of the Commerce Department report, yields on government debt lowered and the dollar weakened. Relative improvement in housing was one of the factors considered by the Fed in determining when and to what extent tapering will begin. The data suggests the Federal Reserve will not begin tapering in September, which was the expected date anticipated by analysts.

Mortgage rates have increased sharply since May. One of the benefits of the bond buying program has been the lowering of interest rates. The new data points out the flimsy nature of the recovery as well as the need for a policy statement by the Federal Reserve.

In July, the median sales price of an existing home in the US was $257,200, a healthy increase from July 2012 when the median selling price was $237,400. The number of homes sold in June marked a three-year high. In June, inventory would have been sold out within 4.3 months. After the disappointing sales in July, existing inventory would take 5.2 months to clear.

Euro Continues Rise

The ECB announced that rates would not change. Stronger-than- expected-growth in Germany has bolstered the euro and increased Chancellor Angela Merkel’s chance for re-election. Most of the growth in Germany was attributed to strong national spending.

The euro rose to $1.34. The dollar came back later in the day, settling at $1.33. Earlier in the week, the euro reached a six-month high at $1.3453. More troublesome were indications that investors were selling dollars to acquire the Swiss franc and the Australian dollar. Recent economic data from the euro zone is favorable as the region has climbed out of recession despite the weakness of the southern tier.

The dollar fell 0.2 percent against a basket of six major currencies upon the release of the housing data.

Against the yen, the USD retreated to 98.59 after reaching a three-week high at 99.15. The dollar has gained 13.7 percent against the yen in 2013. The difference between the 2-year treasury and the 2-year Japanese government bond still decidedly favors US investment. Indications are that Japanese investors are trending to US Treasuries.

Analysts have been speculating about the amount of the tapering when the Fed does initiate the slowing of the bind purchase program. The consensus is that the initial tapering level will be about $10 billion per month less than the current level. This does not appear to be a reduction that should be holding global markets at bay.

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US Equities Stalled, European Shares Brighter

US markets absorbed more negative data on Friday and the DOW JONES recorded a second consecutive week of losses as European markets trembled but looked for a brighter future. European shares slid for the second straight day but investors continued to take money for US markets and invest in European markets. Flows into European equities from US funds reached a two-month high in the week ending August 14, 2013. Trading has been light for most of August.

Federal Reserve policy is dictating market stability and speculation that tapering will commence next month weighs heavily on investors. Markets anxiously await the Federal Reserve policy meeting on September 17-18. US equities still show significant gains for the year but European markets are mounting a rally while th FTSEurofirst 300 and Euro STOXX 50 have gained about 8 percent year-to-date and posted gains for the second consecutive day.

By noon, the DOW was down 32.33 points, off 0.21 percent to 15,079.86. The S&P 500 Index was off 5.61 points or 0.34 percent at 1,655.71. The Nasdaq showed a gain of 1.67 points to 3,609.79, a 0.05 percent gain. The FTSAE Eurofirst 300 index jumped 0.03 percent. On Thursday, equities suffered the largest one-day drop since late June. On Friday, the MSCI’s road emerging equities lost 0.5 percent.

Friday’s economic data from the US was less than  encouraging.

On Thursday, a report indicated rising confidence among American single family property owners. The confidence level struck an eight-year high. However, the rapidly rising long-term interest rates has taken a tool on the resale marketplace.

New start for single family homes dipped 2.2 percent in July. However, starts for two-family home spiked 26 percent, completely reversing a downturn in June. July permits for multi-family homes increased by 12. 6 percent while approvals for single family construction slumped 1.9 percent. Overall, July permits climbed to 943,000 units, slightly below projections of 945,000. Housing starts reached an adjusted rate of 896,000 units.

The residential marketplace and new construction is one large factor in projections by JPMorgan and others that growth in the third quarter will reach 2.7 percent.

The overall consumer index reading from the Thomson/Reuters/University of Michigan survey slipped to 80.0, slight underneath July’s six-year high of 85.1. The August reading was the lowest in four months.

Currency Markets

US Treasuries have been volatile. Sparked by surges in British sterling and in the German bund, US notes have been erratic. The benchmark 10-year bond has risen by 1.6 percent since May. On Friday, the 10-year Tresaury was down 25/32 with a yield of 2.8564 per.

The climb in yields drove the dollar up against major currencies. Emerging currencies continued to slide. India’s rupee touched a record low a 62 per dollar. Year-to-date losses are 11 percent. The dollar rose to 97.62 yen. The euro slipped 0.1 percent to $1.3328.      

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US Equities, USD Sagging

US Equity markets looked to post solid losses on Friday as the USD gave ground to a stronger yen and a stronger euro. Trading is typically light in August and Friday was no exception but an emerging trend is that as the yen gains strength, US equities pay the price by sinking values.

The US economy, which has been projected to grow by a better-than-expected 1.7 percent in the second quarter will come under scrutiny after new data from the US Commerce Department. On Friday, the agency reported that US inventories fell for the second consecutive month. After a sharp decline of 0.6 percent in May, wholesale inventories were expected to bounce back at 4 percent but instead shed another 2 percent. This is likely to give economists concerns about their second quarter projections.

However, trade data released on Thursday revealed a much narrower deficit than was expected. This data suggested that GDP might be stronger than anticipated. Some experts had projected second quarter growth of 2.5 percent.

A breakdown of inventories, excluding automobiles, was flat. In June, sales would have cleared the shelves in 1.17 months compared to 1.18 months in May. June sales increased a modest 0.4 percent after a nice 1.5 percent gain in May.

The Federal Reserve

Mixed statements from Federal Reserve Presidents have unnerved investors and weakened the dollar. At question is when  the Federal Reserve will begin its tapering of the $85 billion monthly bond buying initiative. At the core of the dilemma about slowing the bond purchases, is the true strength of the US economy. The bond buying has created an economy reliant upon this initiative and has strengthened US businesses without creating significant growth.

Meanwhile, a totally ineffective US Congress is on vacation but will soon return to debate a number of important economic issues, including the extension of the country’s debt ceiling. In recent years, this debate has been a political football and there is so little harmony in Washington that the outcome of these debates is sure to cause another media fiasco that drains the consumer and discourages business.

China Bounces Back

China is in the midst of trying to reverse an economy that has slowed in nine of the last ten quarters. Factory output, in China in July, increased by 9.7 percent, well ahead of projections. Retail sales grew a strong 13.2 percent while inflation remained flat.

Equally important, China’s exports, released Thursday, pointed to solid gains in the country’s export trade. This reverses weak numbers from each of the past five quarters.

The improved data from China helped to push oil prices to $107 per barrel. On Thursday, prices touched their lowest levels since July.

The USD, The Euro and Canadian Dollar

The surprising euro continues to rise in the wake of the Federal Reserve’s unclear position. Investors have been buoyed by improved data from Germany and from other Eastern European partners. The euro hit a seven week high against the dollar at $1.3380. The dollar fell to its lowest level in two months against a basket of currencies.

The 10-year Treasury was yielding 2.58 percent on Friday. That marks the lowest yield this month.

In Canada, the domestic employment data indicated high unemployment and few job opportunities during what is usually a strong employment period. The economy shed 39,400 net jobs in July.

The Canadian dollar fell to 96.91 cents against the greenback. The Canadian two-year bond was yielding 1.129 percent while the ten-year rose to yield 2.490 percent. However, investors feel Canada faces a myriad of challenges including the determination by the Federal Reserve. The strength of the tourist industry appears to be disappointing this year and plays an important part of the Canadian Gross Domestic Product.

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Employment Disappointment Shakes Markets

Disappointing numbers from the US labor Department’s non-farm payroll report unnerved investors and shook currency markets around the globe. The disappointment came along with some very positive data from June regarding consumer spending and US factory goods.

The payroll data reflects the economy’s inability to sustain growth on its own merits and will surely be viewed with concern by the Federal Reserve. Non-farm payrolls added 162,000 jobs in July, a solid number but well below projected increases of 184,000. However, the unemployment rate fell two-tenths to 7.4 percent, the lowest rate since December 2008. Over the past three months, non-farm payroll growth has averaged about 175,000 new jobs per month.

The Federal Reserve concluded two days of talks on Wednesday without announcing any policy change. Markets received this status with enthusiasm.

Markets reacted quickly to the disappointment. After closing at record highs on Thursday, equities endured modest losses on Friday. The disappointment was apparently negated by the probability that the Federal Reserve will remain committed to its $86 billion per month stimulus through the rest of the year. The S&P 500 index, which crossed the 1700 threshold on Thursday, the DOW and Nasdaq all were down by midday.

Earnings Strong

Another offset to the employment data is the strong performance of US corporations. Of the 375 companies that have reported second quarter earnings, 67.5 percent have surpassed expectations. On Friday, AIG, the giant insurance carrier beleaguered during the recession, announced its first capital return since the 2008 bailout. The company is offering a dividend and stock buyback. Shares jumped 3.4 percent to $48.67.

Linkedin also surpassed expectations, reporting heavier than expected sales. The stock jumped 9.8 percent to $233.88. Over the last four quarters, 55 percent of reporting companies have posted bigger gains than expected.

Other Data On Friday

The Commerce Department’s gauge of core inflation rose 1.2 percent in June. May inflation showed a 1.1 percent rise.

The average work week tuned down to 34.4 hours. Earnings slipped 0.1 percent.  5.7 percent of Americans with jobs could not log enough hours to qualify as full-time jobs. In July, 4.25 million Americans had been unemployed for six months or longer.

Politicians have rejected the President’s infrastructure worm programs and thus have forced the Federal Reserve to be more active than most Americans would like. Additionally, government layoffs continue to hurt the economy as the sequestration passed by Congress will play out during the rest of 2013. As Congress prepares for their August vacation, taxpayers should be asking what Congress will do to get Americans back to work.

Currency Changes

The euro rose 0.4 percent against the USD to $1.3265. The dollar posted gains against the yen to 99.11. The dollar index fell 0.4 percent to 81.994 against a basket of currencies.

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Fed Governor Hawkish Talk Spills Equities

Comments by a hawkish Federal Reserve Governor tamed US equity markets and pushed the dollar higher on Friday, wrapping up a week of high volatility and leaving some investors cautious about the future. The comments also give insight into the tension from his peers that Chairman Ben Bernanke may be feeling. Bernanke is set to retire in the early part of 2014.

However, equity investors have enjoyed a remarkable run in 2013. The S&P 500 ended Friday on a  down note but still managed to record the strongest six months of any year since 1998. The S&P 500 fell 6.92 points after three days of gains. The Dow Jones fell 114.89 while the Nasdaq gained 1.38 points, closing at 3,403.25. The S&P 500 closed at 1,606.28, down for the month of June but still recording the first second quarter gain in four years.

Equity markets around the world have been volatile since May 22nd when Chairman Bernanke hinted that the Fed’s bond buying spree might be tapering down. His confirmation of that in June sent markets into a three day tailspin that has been marked by volatile shifts ever since.

Fed Governor Speaks Out  

Federal Reserve Governor Jeremy Stein and Richmond Federal Reserve President Jeffrey Lacker said on Thursday that the Federal Reserve’s historic accommodation policy could be reduced significantly sooner rather than later. Stein indicated that September may well be the month when Bernanke’s tapering begins.

The speeches unnerved equity investors. Steven Baffico, the CEO of New York’s Four Wood Capital Partners, explained the reaction; “The mixed signals from both the economic data and the Fed’s direction have caused a lot of anxiety and some opportunistic buying and selling, and it’s just created a much less predictive environment going forward.”

Friday volume was the second highest day of the year. 10 billion shares changes hands across the three major US exchanges. For the month, The Dow lost 1.4 percent. The S&P 500 shed 1.5 percent. Nasdaq also lost 1.5 percent.

Consumer Sentiment Running High

Defying the volatility, consumer sentiment improved in late June after Bernanke’s comments. Sentiment was extremely strong among high income earners but weaker in low income families. The Thomson Reuters/University of Michigan consumer confidence index registered 84.1, slightly below May’s 84.5 mark but higher than expectations.

The survey’s director said; “Consumers believe the (economic) recovery has achieved an upward momentum that will not be easily reversed. To be sure, few high or low income consumers expect the economy to post robust gains or think the unemployment rate will drastically shrink during the year ahead.”

Consumer sentiment is a key indicator because consumer spending accounts for 70 percent of the nation’s GDP. However, despite the optimistic view, household expenditures only grew 2.6 percent in the first quarter, well below government estimates of 3.4 percent.

The Institute of Supply Management – Chicago reported that Midwest business activity dropped to 51.6, a dangerous figure. 50 points indicates a contraction. These contradictory indicators typify the economy and add to the sluggishness of the recovery.

The Dollar Post Gains  

Equity market volatility is translating to solid gains for the USD. The dollar continued its upward march against the yen and the euro. The dollar befitted from Governor Stein’s comments.

Michael Feroli of JP Morgan said; “Stein’s remarks cannot be lightly dismissed and raise risks that some on the Committee may have already essentially decided on September. More generally, compared to remarks from Fed officials earlier this week, Stein’s speech was less geared toward calming market perceptions of Fed policy and did less to question market pricing of the first rate hike.”

The euro hit a session low of $1.2990 before closing at $1.3015. Against the yen the dollar rose again closing at 99.2, a gain of 0.9 percent. Dollar/yen activity surged to $4.0 billion. Euro/dollar trade reached $4.3 billion.

Markets are anxiously awaiting this week’s policy release from the European Central Bank. ECB president Draghi is expected to be more dovish than in the past.

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Global Markets Await Federal Reserve Report

The two-day Federal Reserve meeting will conclude on Wednesday with Chairman Ben Bernanke scheduled to conduct a press conference following release of the much-awaited report. Global markets have experienced great volatility since Bernanke’s mixed message released on May 22, 2013.

Ever since, Bernanke has been in the news. On Sunday, President Obama suggested that Bernanke would be stepping down in 2014 after serving 8 years as Chairman. Bernanke’s handling of his press release in May, stirred concerns in global equity and currency markets. It is expected a more carefully worded explanation of current monetary policy will be put forth on Wednesday.

Economic data released today would support a continuation of the existing $85 billion per month bond buying policy. New home construction signaled a stronger recovery in housing that was indicated with strong starts in April. Housing starts are up 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April’s report was also raised from 853,000 to 856,000 new starts.

New permits dipped below April’s strong performance but still reflect the largest number of permits for single family construction in five years. The construction industry has been hit hard by unemployment and contractors report difficulty finding qualified workers and a shortage of building supplies.

May’s 12-mointh core inflation rate remains below the Federal Reserve’s stated goal of 2 percent but does suggest stabilization. The overall CPI jumped 1.4 percent easing concerns about prolonged deflation. This data should not negatively affect the Fed’s decision to scale down its stimulus.

However, the “tapering” of the extraordinary support from the Federal Reserve will be forthcoming but with disappointing growth data from China, high volatility in Japan and unstable conditions in Europe, the dollar is expected to continue today’s improvements against international currencies.

Asian Currencies Decline    

In India and Indonesia, the strengthening dollar or the prospects of a stronger dollar have led to massive withdrawals by international investors. The Indian rupee closed in on another record low to 58.98 per USD compared to the record low of 58.69 set last week. India had attracted more than $12 billion in foreign investment since 2012. The fall could be more severe if markets get what they expect from the Fed’s two-day meeting.

In the last 17 trading session, foreign investors have been net sellers of more than $4.5 billion in Indian bonds.

Indonesia, another Asian entity that relies heavily upon a growing China, saw its rupiah fall 0.7 percent on Tuesday. The fall came on the heels of government action to reduce fuel costs. The central bank was forced to intervene.  The finance ministry was only able to raise 2.65 trillion rupiah of an 8 trillion rupiah offering.

Meanwhile, in the Philippines, the peso fell 0.8 percent to 43.22 USD. The Malaysian ringgit fell 0.8 percent to 3.1580 USD, its lowest rate since July 30, 2012.

If the Federal Reserve announces tapering of its stimulus, the outflows from these nations could be devastating. In Indonesia, foreign investors sold about $1 billion in bonds from May 31 through June 13, 2013. Foreign holdings decreased to 32.4 percent.

Dollar Rallies Against Yen  

Tuesday marked the second consecutive day that the dollar has made headway against the yen. Traders anticipate that Bernanke will extend the current buying initiative but add definition to the inevitable tapering. Tomorrow’s announcement should stabilize equity markets but also give strength to the USD.

Joe Manimbo, a senior market analyst at Western Union Business Solutions in Washington, echoed market sentiment; “The yen’s fresh leg lower today could be a sign that many investors think the Fed will signal a reasonable chance of a taper as later in the third quarter. The yen is seen vulnerable to less policy accommodation from the Fed, a move that would tend to put upward pressure on U.S. Treasury yields, burnishing the greenback’s allure.”

The USD rose 1.1 percent to 95.96 yen after falling to a two-month low of 93.78 yen on Thursday last week. The dollar has touched record highs against the yen since Prime Minister Shinzo Abe radicalized the nation’s currency policy by extreme monetary easing. The liquidity has given rise to Japan’s equities but has greatly weakened the currency.

The Euro Climbs

Despite disappointing data from Germany and the lowest demand for new autos, the euro rose to $1.3385. The climb was based on surprising report from ZEW data, a German analyst firm that showed investor sentiment was improved in June. The FTEU3 shares climbed 0.1 percent on Tuesday.

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