Tag Archive | "Frustration"

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BoE, ECB and The People’s Bank Act

In response to data suggesting a global slowdown, the Bank of England, the People’s Bank of China and the European Central Bank made conventional moves to attempt to breathe life into staggering markets.  The People’s Bank lowered its interest rate by 31 basis points to 6 percent.  The ECB trimmed rates to 0.75 percent, a historic low. The Bank of England left its interest rate at 0.50 percent but announced, the bank would begin another round of quantitative easing.

Britain is expected to print 50 billion pounds and use the funds to purchase distressed assets.  Previously, the Bank of England used quantitative easing to flood the market with 325 billion pounds.  Flooded with negative economic data, the ECB vowed to maintain their interest rate but stopped short of investing in upcoming bond markets or putting any cohesive remedies on the table.

ECB president Mario Draghi has continually stressed the need for a comprehensive overhaul of the euro zone debt crisis. Draghi appeared to be delivering a call to unified action to euro zone members. At this time, the ECB has no plans to revisit national bond markets.

Draghi’s frustration with the euro zone’s unwillingness to put a long-term program in place has come to a head.  On Thursday, Draghi told the media that new information pointed to deepening financial difficulties in the region. “We see now a weakening basically of growth in the whole of the euro zone including the country or the countries that had not experienced that before.”

Draghi emphasized that it is not just the southern tier of the euro zone that has economies fighting recession. The euro zone economies are no longer growing.  Most of the countries are either in recession or are headed there. Draghi appears to favor a combination of growth and more reasonable terms for floundering euro zone members.

The central banks of England and Europe were expected to act but China’s rate-cut surprised analysts.  The People’s Bank lowered rates last month, but in anticipation of next week’s data, the bank acted. It has been projected that China will suffer a six consecutive month of sliding growth.  It is believed that China’s second quarter will show the lowest growth since the collapse of Lehman Brothers.

Bank lending in China has experienced very little demand.  The interest rate decrease is intended to inspire businesses to grow.  The central bank previously lowered the reserve requirement ratio (RRR) to 20 percent.  This move freed more than 1.2 trillion yuan for new lending.  The bank is expected to lower the RRR to 19 percent before year’s end. However, analysts were quick to say that the central bank’s willingness to cut deposit and lending rates is more incentive than the RRR changes.

The People’s Bank launched a massive 4 trillion yuan spending bill in late 2009.  The spending policy has caused large volumes of bad debt that the country’s banks are struggling to retire.  However, it is believed that a continuation of poor economic data will spark some form of quantitative easing, which China has the resources to manage.

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Euro Recovery: Paradigm Shift Confirmed

In early July, when the Euro rally was (in hindsight) just getting under way, I reported on the apparent paradigm shift in forex markets, whereby risk-driven trades that benefited the Dollar were giving way to trades driven by fundamentals, which could conceivably favor the Euro. Since then, the Euro has continued to rally (bringing the total to 12% since the beginning of June), confirming the paradigm shift. Or so it would seem.

Euro fundamentals are indeed improving, with an improvement in the German IFO Index, which measures business sentiment, seen as a harbinger for recovery in the entire Eurozone economy. To be sure, Spain and Italy, two of the weakest members, registered positive growth in the most recent quarter. Contrast that with the situation across the Atlantic, where a growing body of analysts is calling for a double-dip recession with a side of deflation. The Fed has certainly embraced this possibility, and seems set to further entrench – if not expand – its quantitative easing program at its meeting next week.

eur USD 1 year chartAs a result, investors are rushing to reverse their short EUR/USD bets. What started as a minor correction – and inevitable backlash to the record short positions that had built up in April/May – has since turned into a flood. As a result, shorting the Dollar as part of a carry trade strategy is back in vogue. According to Pi Economics, “The dollar carry trade may now be worth more than $750bn, approaching the size of the yen carry trade at its peak in 2004-07.”

Naturally, all of the big banks were completely caught off guard, and are rushing to revise their forecasts, with UBS calling the Euro “exasperating” and HSBC comparing the USD/EUR to a “lunatic asylum.” An analyst at the Bank of New York summarized the frustration of Wall Street: ” ‘I’ll put my hands up on this—I have had a difficult time trying to call the market. The last time I remember it being this hard was in 2001 to 2002.’ ”

In this case, hindsight is 20/20, and if it wasn’t the stress tests that buoyed the Euro, it must be the acceptance that an outright sovereign default is unlikely. Personally, I’m not really sure what to think. There isn’t anyone who has come out to say I told you So, in the context of the Euro rally, which means it’s ultimately not clear who/what is driving it, and who is profting from it. In fact, you can recall that many hedge fund managers referred to shorting the Euro as the trade of the decade. It’s certainly possible that some of these investors took their profits from the Euro’s 20% depreciation in ran. It’s equally possible that investors are once again behaving irrationally.

The latter is supported by volatility levels which are gradually falling. Still, something smells fishy. A rally in the Euro only a few months after analysts were predicting its breakup is hard to fathom, even in these uncertain times. A columnist from the WSJ may have unwittingly hit the nail on the head, when he mused, “So, unless a European bank goes belly up or some other stink bomb explodes in the region’s debt markets, the old-fashioned relationship between [economic] data and currencies looks set to persist.”

To borrow his terminology, a stink bomb is probably inevitable. That’s not to say that investors aren’t focused on fundamentals; on the contrary, any stink bomb would probably directly harm the currency with which it is associated, rather than radiate through forex markets based on some convoluted sorting of risk . The only question is where the stink bomb will explode: the EU or the US?

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The Grim Reality Behind the Unemployment Numbers

Since December 2007, 8,400,000 U.S. jobs have been lost.  The national unemployment rate has moved from a very manageable 4.9 percent to a risky 10 percent.  Not everyone is convinced we have seen the worst.  And, our lofty 9.7 percent national unemployment rate is not close to the whole or true status of the nation’s workforce or frustration. 

Add to the equation that the nation’s labor pool is expected to expand as the overall population continues to mount.  Workers not currently receiving benefits will also join in the search for new work and with the armed services looking to pare down, major factors can sway the employment rate lower yet. 

So, here we stand at 9.7 percent clear unemployment and millions more outside the system.  How do we bridge the gap?  How does the United States emerge from the Great Recession and begin to add workers? To simply maintain the current 9.7 percent rate, we need to generate about 85,000 new jobs per month.  This is after a February where the country actually lost 35,000 more jobs.

This is no time for recalculation.  This is a global crisis.  The world very much needs the American consumer back on his or her feet and none too soon.  It will take 292,000 new jobs per month to return unemployment to 5 percent.  Even then, it will take until 2015 to attain the 5 percent goal.

In the happy hiring days of 1998-2000, the U.S. could only produce 150,000 new jobs per month.  The United States has its work cut out for it and the road will not be easy.  It will necessitate plenty of government incentives new-age tax breaks and a new air of political cooperation that the current legislature seems incapable of rendering.

A Local View in The Sunshine State

A look at the State of Florida shows the weakness of the current job market.  Don’t be fooled by the new hires, 63,700 of which are temporary census jobs, and some easing in the construction sector.  These are government based or stimulus based efforts.  Simply put, the Florida economy is not moving.  Once heavily reliant upon real estate and construction activity, Florida’s real estate market and development market has been devastated.  More than 50 percent of homeowners are either underwater or getting there quickly.

As the stimulus funds begin to dwindle between 2010 and 2011, more out-of-work Floridians will have no choice but to return to the unemployment lines.  Adding to the woes of the local economies is the sudden rise in oil prices, the perception of a tighter grip from the Federal Reserve and the uneasiness over the health care turmoil.  The state is mired in political unrest, as virtually every political office is up for grabs.

Florida suffers a bloated 12.2 percent unemployment rate and without current stimulus offerings that rate would most likely exceed 14 percent.  True unemployment is believed to be in the 19-20 percent range.

Floridians are looking elsewhere for work.  With their homes underwater and job prospects bleak, a house here today can easily be empty and gone tomorrow.  Residents simply pack and leave, onto the next job opportunity.

Health Care on Rise

In a senior-oriented environment and boasting a year round climate edge, the world of health care is one pillar of light for the Florida economy.  BayCare Health System, which manages 11 area hospitals in Clearwater and employs about 18,000 workers projects adding close to 900 jobs in the near future. 

The hope is that the increased health care activity will lead to new Florida markets in research and development, technology and pharmaceuticals.  As hospitals convert from the outdated paper to electronic medical tracking, even more jobs will be necessitated. 

The Tampa H. Lee Moffitt Cancer Center & Research Institute expects to add 562 new workers to its existing 4,000 plus staff in 2010.  Converting to a service economy from such a vibrant construction based-economy will be challenging for the state and for other areas seeking to invent new niches. 

Florida expects change.  There is a huge volume of unsold residences needing to be allocated before any new housing boom could be expected. That turnaround could well be five or six years away.  Meanwhile, construction families pack their bags, and search for the next stimulus lift.

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