Tag Archive | "Single Currency"

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Greece Government Receives Threats

The leader of New Democracy, Greece’s conservative party, won Sunday’s election and was immediately charged to align a functional parliament that would support the party’s pro-bailout stance. The vote was interpreted as support from the populace for Greece remaining in the euro zone and operating under the single currency.

All the euro zone nations offered plenty of support prior to the election. The tone was conciliatory and suggested that the 17-member euro zone would work with Greece to ease the tight austerity and extend the terms of the bailout that has fueled Greece’s 5th recession and 22.5 percent unemployment.

Germany went as far as taking out a full page add in the nation’s most well read newspaper.  The ad was a plea to voters to support the New Democracy.  The voters were not pleased with the tone of the article but pushed New Democracy over the top.  The party expects to announce a controlling alliance with the Socialist Party, PASOK.  This is the same coalition that has controlled Greece for decades.

On Tuesday, New Democracy’s top gun, Antonis Samaras, is expected to announce the creation of a government that will be able to carry necessary parliamentary rule to support the bailout. World markets opened on the up and the euro had a short rally before the nations that had seemed amenable to modifying terms of the bailout began to renege on their pre-election overtures.  Germany’s Chancellor, Angela Merkel was quick to stress the need for Greece to strictly follow the terms of the original agreement. Jean-Claude Juncker, former head of the European Central Bank and current leader of Eurogroup, backed Merkel’s puzzling policy reversal.  Juncker said that some conditions might be eased but that there could be no major changes to the bailout package.

The euro zone and Germany in particular has been criticized for austerity cuts that make it impossible for Greece’s 219 billion GDP to grow. Unemployment for young workers exceeds 30 percent.  Pensions and wages have been trimmed significantly.  If the euro zone and Germany do no offer some easing, Greece is doomed.

Combining this bitter reality to the crisis in Spain turned global markets into a late day tailspin. The euro touched briefly at $1.2601, fell to $1.2580 before closing at $1.2591. US analysts were quick to note that Spanish 10-year bonds crossed the 7.00 percent yield mark. There is a lack of confidence in the economies of Spain, Greece and Italy and investors are finally sensing the dysfunctional theater of operations. At the G20 in Mexico City, President Obama is pressing Germany to develop a long-term solution for the region. Whatever appetite international investors may have had for euro zone investment is stalled. Several forex experts have predicted the euro will fall to par against the USD before the end of 2013. Most of these investors also believe the euro zone will continue to shed members very quickly if Spain does not stabilize. This is bad news for the USA whose biggest importer is Europe.

In addition to PASOK’s cooperation, a smaller, left wing party known as Democratic Left has thrown its support behind New Democracy. It appears that the euro zone is prepared to let Greece kick the can down the road until the economic powers in the region set a course that benefits them. This is not the long-term arrangement international investors hoped to see. Once again, the political instability in the region is playing against the welfare of the troubled economies. Without pressure from the international community, Disaster looms.

In a race that went down to the wire, the conservative New Democracy party finished just ahead of SYRIZA and has begun talks on a new government. It is expected to form a coalition with the Socialist PASOK party, meaning that Greece would continue to be governed by the two parties that have ruled for decades and led the country to economic disaster.

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Think Spain, Forget Greece

Greece is dangerous, but Spain is the toxic poison that could end the single currency. On Tuesday, the euro gave more ground settling at $1.2487USD, down 0.41 percent. Investors are jittery about Greece, but are in fear of a collapse of Spain’s fragile banking system.

Financial leaders and politicians are scrambling to create a long-term solution. The 17-member euro zone seems resigned to the failure of Greece. While some nations have suggested that Greece be given more time to get their political and financial houses in order,  Germany and Chancellor Angela Merkel appear to have drawn a line in the sand believing that Greece will default at some time, sooner or later.

Greece’s four largest banks received 18 billion euros from the country’s bailout fund last week. Along with Spain, Greece is in jeopardy of the depositor panic, already manifested in Ireland.  As the likelihood of a euro failure, Greeks and Spaniards are withdrawing more than is being deposited.  In Spain, the crisis is so bad that banks will not lend between themselves unless the proceeds have collateral.

If Greece and/or Spain fails, the money on deposit will be converted to the national currency, which will be severely devalued.  The populations are realizing this is a strong possibility and are clearing out savings and deposit account leaving the banks in terrible shape.  Most are unable to meet daily expenses.

Investors believe a default by Greece would be bad but manageable.  Not so for Spain.  If Spain defaults the euro zone will be all in.

Mario Draghi, the President of the European Central Bank (ECB), has stepped up his message. The ECB has infused more than 1 trillion euros into 3-year, low interest loans or Long Term Repayment Operations (LTRO) since December. The perception is that euro zone members will do everything possible to cover the possibility of a run on Greece’s banks. But, the euro zone paymaster is Germany and Chancellor Merkel is in the most delicate of political situations.  Germans do not support further funding to Greece, who is unable to commit to a repayment plan.

Euro zone members are not optimistic about Greece, who has gone one bridge too far with its repayment commitments.  Draghi has kept the pressure up on the euro zone members to construct a serious failure protection mechanism. Recently, Ireland’s banks came under pressure as depositors started withdrawing as much as they could.  When the government stepped in to meet the bank’s obligations, the government was insolvent. The IMF and the European Union came to the rescue but the scenario is likely to happen.

ECB policymaker, Joerg Asmussen explained the region’s biggest fear. “The recapitalization of a troubled bank by its government may lead to a deterioration of the government’s fiscal position.” Draghi has said the regional countries must come up with a failsafe in the event a run on the bank in one country spreads to others.

One strategy which Draghi supports is increasing the euro zone’s guarantee for depositors, which is now.  The US has said that increasing the insurance on deposits could generate as much as $2 trillion in liquidity. This may be a regulatory change the euro zone can accept. Failure to enact some policy change will end the single currency.


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Greece Decision Looms

In an interview with CNBC on Wednesday morning, Jim O’Neill, Goldman’s head of its Asset Management Division, painted a bleak picture of the euro zone.  O’Neill is clearly making provisions for an exit by Greece from the euro zone and quite possibly the end of the single currency used in the 17-member euro zone.  O’Neill’s comments preceded what may be the most telling summit of euro zone leaders later today.

In today’s summit, German Chancellor Angel Merkel, the most powerful advocate of austerity, will faceoff with newly elected French President Francois Hollande who won on a platform of growth.  Merkel has come under intense pressure of late.  The Chancellor’s conservative party Christian Democrats (CDU) suffered another setback last week when the centrist-left Social Democrats (SPD) logged a decisive win in North Rhine-Westphalia (NRW), the country’s largest population center.  The CDU popular support dropped 4 points to 31 percent whole the SDP support rose 1 percent to 27 percent.

O’Neill reported that Germany recently increased the country’s pay rates by 4.3 percent.  This indicates that Germany is preparing to boost its GDP with this additional internal spending power.

O’Neill suggested that the loss of Greece to the euro zone would shake markets in the near-term but would not have the impact that a collapse of the euro zone would have.  O’Neill suggested that a failure in Greece might have a bullish effect on the investment community that is unenthusiastic about the euro zone and the contagion that is plaguing the region. The Goldman strategist repeated that it was time for a serious resolution about Greece, Ireland, Portugal, Spain and Italy.  There has been too much dialogue and not enough action.  The euro zone needs to set policies that cross geographic boundaries.

O’Neill emphasized that Greece is just one of many issues.  The EMS has the clout to save Greece and Portugal but not Spain and Italy.  In his opinion. France and Germany need to represent their region.  However, France represents France and Germany represents Germany. This is the formula that could topple the euro.

Realistically, Greece can ill afford a default and a withdrawal from the single currency alliance. In the immediate-term, Greece banks will run out of money, pensions will be raided and the GDP will drop significantly lower than the negative GDP the county experiences now.

At today’s summit in Brussels, the main item will be a discussion of the creation of euro zone bonds and whether these bonds could alleviate two-years of massive debt.  Today’s summit arks the first time in the past three years that Germany and France have not met prior to the summit.  These last minute meetings have enabled Merkel and former President Sarkozy to provide a united front.  The German Parliament issued a verdict yesterday that if Greece fails to commit to honor the terms of their bailout, the country should receive no further financial funding.

In early morning Forex activity, the euro fluttered at a two-year low and nearly sunk below $1.26 USD.  The US continues to rise against a basket of currencies.  O’Neill was quick to point out that he believes the US is on the way out of its muddled financial meltdown.



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ECB Cuts Off Greek Banks

Exhausted by the political and financial theater that has been dominating world markets, the European Central Bank (ECB) made a decisive move on Wednesday.  The ECB cut off assistance to certain Greek banks that have remained undercapitalized.  The ECB offered no further comment.

According to its mandate, the ECB cannot help banks that are insolvent. This move will force the Greek banks needing assistance to apply with the Bank of Greece for Emergency Liquidity Assistance (ELA). An unconfirmed report indicated that four bans were affected.

Meanwhile, President Karolos Papoulias released a statement declaring that Greeks were withdrawing their funds due to the tenuous political and financial drama. The country is divided whether to stay in the euro zone and abide by the terms of their bailout funding or withdraw from the euro zone and euro currency and default on their stated obligations.

After Tuesday’s last ditch effort to form a coalition government failed, the President named Judge Panagiotis Pikrammenos to serve as interim Prime Minister.  Another national election will be held in mid-June.

On a broader scale, the fate of Greece may mark the end of the single currency for Europe.  The region is deeply divided on the value of austerity versus growth.

The euro zone and European Union members have said that if Greece does not honor its commitments the country will have to stand alone.  This is not what Greeks who have been there and experienced life without the euro favor.  However, Alexis Tsipras, the leader of the radical left’s SYRIZA party has promoted a position that calls for re-negotiations of the terms for existing bailout funding and for Greece staying in the euro zone. If you can believe what you hear, the EU and IMF have vowed this cannot happen.

There is some merit to Tsipras’s plan. He advocates growth.  He appeals to the young voters and older, disillusioned voters who have no work and who have seen the value of their pensions drained.  The strength of his case is the fact that the biggest investors in Greece are France and Germany, the top 2 economies in the region.

The IMF’s Christine Lagarde warned the European Union to choose between giving Greece more time to sort through its political hodgepodge or prepare for the exit of Greece.  This would be a significant loss for struggling France and fragile Germany.

Spain’s Prime Minister Mariano Rajoy said that he wanted to keep Greece in the euro zone. He said that if Greece fell, Spain would be next.  In early Wednesday trading, Spanish and Italian bonds climbed above the treacherous 6 percent yield barrier. The world has heard too much about this region.  Investors are nervous and moving to US equity and bond markets.

Can there be any surprise here? In one of Greece’s most unnerving statements, the former President had to admit that Greece had cooked the books to gain membership into the euro zone.  Their original application was declined.  Greece does not see the world through the same lenses that Germans wear.

Hollande Meets Merkel

France’s new President, Francois Hollande, met German Chancellor Angela Merkel in what promised to be an interesting dialogue about austerity vs. growth.  Merkel was supportive of Nicolas Sarkozy’s run for another term.  That was one area of tension.

But the real tension should have been over their differing opinions about austerity cuts and growth as a means to an end of the euro zone crisis.  Hollande had run on a platform of growth, not austerity.  He had also said he would review France’s trade alliances, which the French feel are not to their advantage.

Hollande said on Wednesday that he wanted to re-negotiate previously agreed upon terms. Hollande said he drew confidence because Germany and France have overcome long odds before.

After their initial meeting, Merkel seemed to soften her rigid posture.  Growth has to feed through the people. That’s why I am happy that we will discuss different ideas on how to achieve growth,” said Merkel.

For more than a year, the euro zone leaders have mnaged to spin their plight.  Chalk Merkel-Hollande up as one more positive spin on what is already a frosty relationship that cou

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Euro Choosing Growth Over Austerity

In a long past due scenario, the euro zone members are weighing the German policy of austerity against GDP growth.  The controversy jeopardizes the euro as a single currency and even the survival of the euro zone.  The weekend did not produce the results that the IMF’s leader, Christine Lagarde, had hoped to accomplish in her fund raising initiative.  Compounded with weekend activities in the region, the euro zone looks to be on tenuous footing.

 Dutch Prime Minister, Mark Rutte, resigned as the Dutch Coalition submitted their collective resignations to Queen Beatrix.  The resignations are the result of a split with the populist Freedom Party, which had supported the coalition until the recent austerity legislation.  Queen Beatrix has requested that the coalition continue to serve until such time as new elections can be held.  That may not be occluded until late Summer.

The Dutch crisis preceded the results of the first round of French presidential voting.  The biggest winner in the surprising elections was not the winner, Socialist Francois Holland, or incumbent Nicolas Sarkozy, but Maine Le Pen, the far right activist who succeeded her father as head of the National Front. Le Pen capture a sunning 19 percent of the popular vote.  Although the margin was not enough to qualify for the two-way runoff in the next round, it assured the Front Line of a significant voice in the upcoming second round.

It is projected that Sarkosy, the first incumbent to not win the first round of elections, would be the more significant benefactor of the Le Pen followers.  However, Le Pen has repeatedly attacked Sarkosy for enabling the euro zone crisis to affect the country’s economic stability. 

Both Le Pen and Holland have been critical of Sarkosy’s willingness to implement severe austerity cuts to meet the euro zone’s budget restrictions.  LE Pen is well positioned to increase her coalition’s influence.  Her platform stresses returning a national currency and terminating France’s subscription to the euro zone.

The magnitude of the Le Pen, Holland vote is emblematic of the anti-establishment posture that is sweeping across the euro zone.  This sentiment clearly jeopardizes the investors in the Greece bailout.  With Greek elections scheduled for May 6th, there is real concern that the new government will not comply with the terms of the bailout.

As other euro zone countries have discovered, the austerity cuts are too large and too quick.  Most nations implementing these restraints will be unable to grow economically.  Although not strictly a quantitative easing mechanism, the participation of the ECB comes about as close as possible to quantitative easing. 

To further underscore the euro zone crisis, Spain has rejected further austerity cuts.  Instead, the government has sided with its populace that is opposed to further constraints.

The news does not get any better.  In addition to all the negativism about the euro zone austerity and lack of growth, Germany reported its lowest manufacturing data in three years.  The euro zone paymaster looks to be a big loser if the Dutch, Greece, Spain and France reject austerity programs.

The biggest political loser could well be Germen Chancellor Angela Merkel, the driving force behind the euro zone negotiates to date.  The Dutch are a favored trading partner with Germany.  As one of the few euro zone members with a triple A credit rating, the economic differences ion the Netherlands could well result in a lowering of The country’s credit rating.

In early trading, the euro gave away some ground to the dollar, settling at $1.3129, down 7 percent over the weekend.  ING projects that the euro will fall to $1.20 by the end of the second quarter. That marks some serious volatility.

To cut to the chase, the continuation of the euro zone is going to boil down to which nations are willing to comply with the budget cuts necessary to contain spending to 3 percent of GDP.  It is growth versus austerity and while the politicians may talk the talk, the people have the power and they seem poised to act at the polls.

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Euro Zone Woes Continue

Compared to a few weeks ago, the euro zone debt crisis has taken on an eerie quiet.  Don’t be misled.  At least one and possibly as many as five euro zone nations are on the brink of financial ruin.  Despite the relative calm, investors are particularly wary of Portugal, Spain, Ireland and Italy.  Combined with Greece, the five nations comprise an entity commonly called the PIIGS.

And, there is not a lot of positive spin coming from any of these  entities.  In other words, stay tuned because the fate of the single currency will certainly come under question in the months to come.

As the politicians and economic brain trust take their leave, the numbers from the PIIGS depict a grizzly picture.  Greece may have been fortunate because it was not too big to fail and in dire enough straits that their plight could well have caused massive turbulence in global markets.  The truth is that the country’s investors are not enthusiastic about Greece’s future.

Unfortunately, austerity good girl, Portugal, has done everything asked of her.  Yet, it becomes increasingly clear that Portugal needs more than a hatchet to fix its mounting debt crisis.  Germany has connected to Portugal and set ambitious austerity programs in motion.  The real issue with all the PIIGS is a lack of economic growth or even the unrealistic projections of growth.  Growth is not going to happen in the PIIGS.

According to the Greek model, the action plan is to impose super tough austerity cuts, then find investors and eventually to find buyers for the country’s assets.  The structured default strategy is a very real possibility with all the PIIGS. 

The euro zone could rescue Portugal and Ireland, both of who received substantial aid packages earlier in the recession.  For Spain and Italy, the scale of the crisis eliminates bailout funding.  With the European Central Bank, the IMF and the EU refraining from entering the bond market, the PIIGS are flying solo.  Banks inside the failing nations are attempting to throw a life rope but investors are guarded because of the 75 percent hit private investors took with Greece.

There now exists a war weary mentality about the troubled euro zone economies.  This resistance is well founded but does increase the need for liquidating assets, especially public utilities.  However, the demand for these assets is not inspired.  This causes a trickle down effect whereby the assets are purchased below market value and thus create a deeper strain on the economy.

Compared to Greece, the populations in Portugal and Spain have shown determination.  These countries seem to acknowledge their reckless spending and for the most part have accepted the price to pay will be steep. Yet, Portugal’s unemployment rate is closing in on Greece’s record unemployment.

The relatively calm protests have been directed at the Troika of financial institutions, the IMF, the ECB and the EU.  These institutions have been devising a plan to expand the region’s Emergency Stability Fund.  But, facts are facts.  Portugal is Western Europe’s poorest nation.  Portugal’s socialist faction is represented by the country’s second largest labor union, UGT.  Amenio Carlos is the head of the country’s largest union, CGTP, a communist labor union.

Under Germany’s guidance, a course of action has been suggested to increase the nation’s GDP, which in prosperous times did not exceed .07 percent growth.  Laboring under deflated prices, Portugal has taken a dreadful toll on the economy.  Goldman Sachs recently released a report indicating that Portugal needed to increase prices by 35 percent.  Of course, such an increase could well be disastrous in terms of exports.

Portugal does have some successful export enterprises, including Volkswagen and other car manufacturers.  Successful entrepreneurs credit the country’s resilient labor force.  And, Germany has publicly commended Portugal for its approach to resolving the heavy debt load.  The harsh reality is that the clock is ticking on Portugal, which must enter the bond market in the middle of 2013.  A failure in the bonds will spell doom for private investors.

The German-Portugal strategy projects the debt burden peaking at about the same time.  If projections are correct, Portugal would reach its goal of debt at 3 percent of GDP by the end of 2013.  Investors are privately preparing for the worst outcome, another big dent in investor equity.  On the bright side, Portugal was able to cut its deficit by a crisp 35 percent during 2011. This has led euro zone nations to applaud the country’s commitment to constructive resolution.

The Spain debt experience is drawing comparisons the Japan’s plight in the 1990’s.  Unsustainable and rising bond yields are not being received with optimism by the investment community.  Other euro zone nations are pointing the finger at Spain saying that it will be Spain that could sink the single currency standard.

Spain is increasing taxes and reducing services to the taxpaying population.  Tax collection enforcement must also improve.  Even then, pay cuts and lay-offs run rampant throughout the country.  Credit is reduced to a mere dribble.  Growth is non-existent and banks are investing outside the country.

In other words, the PIIGS are a mess. The possibility that the euro is stabilizing is an illusion and investment here is not for the feint of heart.

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Euro Rises On Greece, Yen Remains Under Pressure

FX markets were looking a bit more optimistic to start the week out.  This was especially true for the Euro.  The single currency rose to as high as 1.3281 in the overnight session, following the passage of new Greek austerity measures shortly before the Asian market open.

Under enormous pressure by European leaders, interim Greek Prime Minister Lucas Papademos pushed through new and harsher austerity measures as tens of thousands of Greek citizens took to the streets of Athens to demonstrate.  According to the new measures, pension cuts of up to 300 million euros are set to be instituted along with a 22% cut in the minimum wage rate.  Additional job cuts are expected on budget reduction benchmarks – resulting in over 100,000 new layoffs in the next year.

Although drastic, the measures are expected to help Greece reduce its current deficit ratio of 160% to 120% of GDP in the next 10 years – with the cuts expected to represent about 1.5% of gross domestic product.  The weekend passage sets up the Greek economy for approval of a second bailout in the amount of 130 billion euros – but not before Eurozone finance ministers’ meeting, scheduled for the 15th of February.  Speculators elated over the passing of the bill are now focusing on their concern ahead of the meeting – where policymakers are expected to evaluate the new adjustments.

Nonetheless, the euro remains technically supported above 1.3200, currently.

Going across the continent, the Japanese yen continued to suffer following the release of less than anticipated gross domestic product figures.  For the fourth quarter, the world’s third largest economy shrank by an annualized 2.3%.

The decline was attributed to lower than expected manufacturing and export volume as companies continually struggled to get their operations back on line following the March tsunami disaster.  Companies additionally seemed to be hurt by an appreciated yen – which helped to erode competition of Japanese made goods overseas.  Although low, the actual figure is expected to improve in the medium term with many of the government’s expansive policies still yet to surface in the private and public sectors.  An additional $150 billion in aid was recently approved by the Japanese parliament – which will add to already existing funding expected to improve upon tsunami stricken areas.

For more on the Euro – http://forexalliance.com/2012/02/nikkei-kospi-limited-gains-euro-rise/

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Euro Bank Stress Tests Shaky

While the world has one eye on the extension of the U.S. debt ceiling, the euro zone has its own problems and they could well signal the exodus from a single currency system.  Eight of 90 banks that submitted to the stress tests failed to pass.  Participants are forced to reveal their profit forecasts, a listing of their sovereign bonds and their continuous funding costs.  While 8 banks absolutely failed the tests, another 7 are in need of capital.

The stress test utilized a 5 percent core capital level as the standard.  Banks were subjected to a theoretical dip in stocks, bonds and property prices during the recession.  The eight banks that failed must submit a plan to raise the needed capital by September of this year.  All these institutions will need to raise 2.5 billion euros to pass the test.

Five banks in Spain, 2 banks in Greece and one bank in Austria comprise the list of failing banks.  An additional 16 banks passed the test but by less than 1 percent.  Bank examiners wrestled with what to do about the sovereign debt held by all Euro zone banks.  These 16 on-the-edge banks have been advised to boost their pure capital.  If Greece, Ireland Portugal, Spain or Italy fails, there will be immense pain throughout the region.   Examiners requested that each bank list the volume and location of their euro zone bonds.

The European Banking Authority (EBA) estimates that if Greece fails the banks would have a 15 percent exposure to worthless bonds.  Germany attacked the EBA’s standards as one bank failed to participate in the stress test but all other 15 banks passed.  Germany and France hold most of the Greek debt.

Unrest In Germany

As was observed by a CNBC commentator, the euro zone is in dire straights.  There is not a sense of a one-for-all or all-for-one in the mix.  German taxpayers are especially vehement in their protests and they are disgruntled with their Chancellor, Angela Merkel.

German Banks expressed disagreement with the regulators from the EBA.  The bank’s complaint with the EBA is that the tests only instruct banks to mitigate cash shortfalls and implement either a mandatory restructuring or raise pure equity.

Germany’s financial institutions are regarded as the most solid in the region.  47 percent of Germans want Greece expelled from the euro zone.  However, Italy’s request for bailout funding has also met bitter resentment in Germany.  68 percent of the German taxpayers view Italy as a much bigger threat to the concept of a single currency.  Germany’s Finance Minister, Wolfgang Schaeuble reiterated his feeling that Greece was endangering the euro.

If Spain needs a bailout, the EU does not have the funding to avoid default.  Italy may have the same effect.  The Germans are tired of loaning their funds to Greece, Portugal and Ireland.  Early in the recession, the fear of contagion has never really been addressed.  It was always suspected that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) would be unable to implement enough austerity cuts to deal with their debt. 

The euro has fallen sharply to $1.41 this week.  At one point, the value was a slow as $1.38.  The conditions in the PIIGS may well cause the return to national currencies.

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Interview with Action Forex: “The New Zealand Kiwi is the Most Undervalued Currency”

Today, we bring you an interview with Ben Wong (Head of Trading Strategies) and Yan Tse (Head of Research) at Action Forex, a forex information portal. I chatted with them about upcoming Central Bank rate hikes, economic indicators, and their intriguing Trading Ideas.

Forex Blog: I would like to begin by asking you to briefly explain your team’s approach to analyzing the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

Ben: Undoubtedly fundamental factors are the driving force behind long and medium term trends, therefore whenever we are making long term forecasts, fundamental analysis is clearly our core approach. Having said that, as I have been analyzing the FX market and providing real time trading recommendations for over 15 years, I must say that when it comes to short-term especially intra-day trading, technical analysis is definitely the key to success. Only by applying various technical analysis techniques, one can identify objectively the entry and exit (both profit and stop-loss) levels which fundamental analysis is not able to provide.

Forex Blog: Which Central Bank do you think will be the first to raise interest rates? Do you think that forex markets have already priced this in? What will be the ultimate impact on exchange rates?

Ben: I tend to think the ECB will raise interest rates sooner than other major Central Banks, like the Fed and BOE.  It may come as early as 7 April by 25 basis points. Actually, many large financial institutions and investors already priced in this potential hike in view of the release of recent CPI data which reached a 29-month high of 2.6%. This rate hike cycle may last until the rate reaching ECB target rate of 1.75-2% by end of 2011. While this hike may give the euro an initial boost, when other major economies follow suit and raise rates, the single currency may come under pressure by end of the year.

Yan: ECB will be the next to raise interest rates, and yes, they have already priced this in. A series of rate hikes will widen yield differentials and may send the euro higher against the US dollar. However, Trichet said a rate hike in April does not imply the tightening cycle has begun. Therefore, the ultimate impact in uncertain.

Forex Blog: What is your short-term forecast for the Japanese Yen? Do you think it will rise further, like it did after the 1995 earthquake? Do you think that any additional intervention is likely/necessary?

Ben: Technically, after forming a ‘hammer’ candlestick reversal pattern on the monthly chart, the greenback should continue to edge higher against the Japanese yen, above first obstacle at 85.00, price may head north towards 89-90 yen where next resistance is likely to locate. I do believe the currency pair may react similarly as it did back in 1995, surged initially after the quake, then tumbled on joint intervention, however, it will definitely need additional intervention to show the G7 commitment for not letting the yen to rise above 80 against the dollar.

Forex Blog: In your opinion, what is the single most important factor affecting the Dollar right now?

Ben: QE policy.

Yan: Fed rate hike.

Forex Blog: Is their a particular currency that you think is especially undervalued/under-appreciated? If so, what do you think is holding it back?

Ben: Kiwi, mainly due to the 50 basis points rate cut after the Christchurch earthquake.

Forex Blog: Can you explain the thought process / philosophy behind your “Trade Ideas?” How frequently do you update these ideas, and how long are they valid for?

Ben: Mainly technical analysis approaches, including Candlestick charting techniques, Ichimoku Kinko Hyo and Elliott Wave Theory. We categorize our trade ideas section with different time frames and different analysis approaches.

As we believe there are no one single technical analysis approach is good enough to cope with current volatile market condition, we tend to combine several charting techniques in our day to day market analysis. Since we consider Ichimoku Kinko Hyo a very effective short-term analytical tool, we use it together with Candlestick chart which is very power in identifying market turning points. At the same time, in our approach we also include some traditional use of technical indicators and oscillators such as MACD, slow stochastic, DMI and RSI in order to assess market momentum.

We have different time frames on our “Trade Ideas” updates, from the shortest intra-day time frames, daily trade ideas and finally weekly trade ideas. For intra-day trade ideas on the 4 majors, we make 4 rounds of updates starting from European opening (06:00GMT) to European closing 15:00GMT) with the interval of around 3 hours between each update. Clear entry level, profit target and stop-loss levels are provided, the updates are valid until the next update is published

We also have daily Elliott wave trade ideas updates on AUD, CAD, EURJPY and EURGBP, each currency pair has one update within the European trading session, the updates also come with clear entry, target and stop-loss levels, plus commentaries of Elliott wave analysis.

Weekly trade ideas updates are also provided, covering major currency pairs including JPY, EUR, CHF, GBP, AUD, NZD, CAD, EURJPY, EURGBP, EURCHF, EURCAD, AUDJPY, GBPJPY and GBPCHF. Each update comes with a weekly forecast plus a medium term outlook, again clear entry, target and stop-loss levels are offered.

Forex Blog: Which economic indicators do you think are most worth paying attention to? In the same vein, which “endpoint” (i.e. inflation, interest rates, GDP growth, etc.) are you trying to predict when analyzing such indicators?

Yan: Inflation, GDP, US payrolls and employment rate. These indicators affect monetary policies and increase near-term volatility of currencies.

Forex Blog: What is your advice for forex traders that want to beat the market during these uncertain times?

Ben: Discipline is the key especially in current volatile market conditions. Be extra careful when setting your stop-loss level and stick to it, though one should be brave enough to let your profit runs. Be aware of any important market event, speech from key officials, important economic releases and try not to hold any position ahead of such kind of events. Try to gather market flow information, such as the order board where large size bids, offers or stops are placed, locations of option barriers are also very important information one must not neglect.

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Euro: Which Investors Know Best?

As the WSJ recently pointed out, there is a bizarre disconnect between equities and currency markets regarding the Euro. On the one hand, the Euro was the world’s worst performing major currency in 2010, and some analysts insist that its breakup is inevitable. On the other hand, stock market investors are increasingly bullish about Europe: “We remain positive on the outlook for [European] stocks in 2011, with a favorable macro backdrop, solid earnings and attractive valuations.” Who’s right?

In fact, both sets of investors are justified. As you would expect, stock market investors are focusing on corporate earnings and the macroeconomic environment. In this regard, the fact that the EU economy expanded in 2010 – buoyed by a cheap currency and loose monetary policy – should certainly be reflected in a stronger stock prices. On the other hand, the sovereign debt crisis in EU has not yet abated, and accordingly, it is still being priced into EUR/ exchange rates.

In the immediate short-term, it’s possible that stock market investors will prevail and that that their collective view will be adopted by currency markets. According to Deutsche Bank, “The euro may rise to $1.45 by the end of the first quarter of next year, as concerns about the single-currency area’s indebted periphery diminish.” Meanwhile, China recently pledged its support for the Euro via a promise to purchase up to €5 Billion in Portuguese Sovereign debt. Over the short-term, then, it’s possible that (currency) investors can be persuaded to temporarily forget about the prospect of default, and focus instead on the Eurozone’s nascent economic recovery.

Over the medium-term, however, the markets will have no choice but to  return their attention to the possibility of default, which is why the same team of analysts from Deutsche Bank “forecasts the euro will fall back to $1.40 by the end of the second quarter and to $1.30 by the year-end.” For example, Eurozone members will need to issue more than €500bn in debt in 2011, including €400bn that needs to be refinanced by Spain and Italy. In this context, China’s purchases will fade to the point of becoming trivial.

Meanwhile, Moody’s has warned that it could follow up on its 5-notch downgrade of Ireland’s sovereign credit rating with further downgrades for Spain and Portugal. Fitch added that it might bump Greece’s rating to junk status, which would deal a significant blow to its solvency. Default is now rapidly on course to becoming a self-fulfilling prophecy, as fleeing investors cause yields to rise and credit ratings to fall, further scaring away more investors.

The EU response has been to “set up a permanent mechanism from mid-2013,” while investors continue to push for an expansion of the European Financial Stability Facility or the joint issuance of European sovereign bonds. As a result, the Center for Economics and Business Research has issued a striking forecast that there is an 80% probability that the European Monetary Union will dissolve over the next decade: “If the euro doesn’t break up, this could be the year when it weakens substantially towards parity with the dollar.” Already, spot market traders are once again increasing their short bets for the Euro, and options trading remains “skewed toward euro puts.”

To be fair, some analysts continue to insist that it is better to think of the sovereign debt problems as a crisis of credit, rather than of currency. In that sense, there is hope that a solution can be engineered (perhaps encompassing a default) that doesn’t endanger the existence of the Euro. In addition, the Euro finished 2010 on a high note, formally welcoming Estonia into the fold. It is 10% above its June trough, including a 2% rise in the month of December. Given all of the bad news in 2010, that might just be cause for optimism.

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