Tag Archive | "Trillion"

Tags: , , , , , , , , , , , , , , , , , , ,

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.

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on Tapering No, Obamacare Yes

Tags: , , , , , , , , , , , , , , , , , , ,

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.

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on Summers Out, Wall Street Up

Tags: , , , , , , , , , , , , , , , , , , ,

China And US Data Boosts Markets

China started the new year with a surge in exports, imports and available credit. The results are welcomed by an anxious international community. The news comes with a warning that inflation may be looming in the world’s second biggest economy.

Exports – Registered 25 percent higher than in January 2012 surpassing analyst’s projections by a whopping 8 percent.

Imports – Spiked up 23.8 percent, 5.5 percent above projections.

Trade Surplus – The trade surplus in January came in at $29.2 billion, 7.2 percent above projections.

New Loans – January’s new loans came in at $172 billion, twice the volume of loans issued in December.

Social Financing – Social lending is a measure of liquidity and the January figure of 2.54 trillion yuan cruised past the December figure of 1.63 trillion yuan.

Economists approached these figure with caution suggesting that the impact of the Lunar New year may be partially responsible for the gains in year-over-year comparisons. Last year the Lunar New Year was celebrated in January. This year the holiday was in February.

China’s growth had suffered of late. After seven quarters of an economic slowdown, the pace began to pick up in the fourth quarter. While economists are cautious, the consensus is that China is in a solid recovery mode.

The rise in exports is especially gratifying. The majority of shipped products were sent to the US and to the European Union. Exports to the US increased by 14.5 percent over January 2012. EU exports rose by 5.2 percent, the highest rate in the last 13 months.

The January inflation rate shed 0.5 percent settling at 2.0 percent after moving to a seven-month high of 2.5 percent in December. Economists have predicted a 3.5 percent rise in inflation in China during 2013.

The People’s Bank of China explained its posture;”As the economy transits into another stage of growth, economic controls need to always emphasize containing inflation risks.” Food prices in January increased 2.9 percent.

China continues to provide many goods to the South East Asian Nations (ASEAN). In 2012, exports to these nations rose 48.6 percent to $20.1 billion.

US Revisions   

New data suggests that the US economy did not recede in the fourth quarter 2012. Original figures showed a contraction of 0.1 percent.

The US trade deficit closed the gap to the best level since 2009. In December, the export-import gap lowered to $38.5 billion, well below projections. In 2012, the US trade deficit fell by 3.5 percent to $540.4 billion.

Barclays reported that with changes to existing inventories and the new trade figures GDP expanded about 0.3 percent in the fourth quarter.

The US still imports more goods than it exports but areas where the country reduced imports are in the important petroleum sector. In 2012, the imports of petroleum fell to the lowest rate since 1997. In December, increased output of oil and gas and petroleum products increased by $1 billion establishing a new high standard.

The US also closed the gap between import and exports to China in December. As the US imported less, the gap closed by $4.5 billion. The Commerce Department reported that unsold wholesale products fell to 0.1 percent. Projections indicated a 0.4 percent rise.

On the news, the USD moved up against the euro to 1.3360.






Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on China And US Data Boosts Markets

Tags: , , , , , , , , , , , , , , , , , , ,

Politics and Money Dominate Historic Week

US Politics, The Fiscal Cliff and Euro Debt

In a week that will not be soon forgotten, the United States will elect its President for the next four years. Voters will also fill Senate seats for the next six years and fill House seats for the next two years. The 2012 elections will not only shape the US but also shape  the globe. Regardless who the next President of the US is, the need for a functional Congress may be off greater import.

Last year, Congress achieved the dubious distinction of officially achieving a 10 percent job satisfaction report from US citizens. Even more than the Presidential race, it is the composition and mindset of Congress that will determine how the US and the global economy trends in the next two years. After the past two years, most Americans would just as soon throw out the entire Congress and start anew. If the same gridlock exists after the election, the US and the world could soon be in an insurmountable fiscal position.

Speculation is that there is not the political will in Washington to seriously address the impending Fiscal Cliff, that convergence of events on December 31st that will see the Bush Tax Cuts expire, the payroll tax reduction expire and a series of heavy budget cuts paralyze the US and the globe biggest consumer. If no action is taken, the US will lose about 6,000,000 jobs early next year.

Of equal importance is that the US credit rating will be lowered and the nation’s debt will not adequately be addressed. The country’s top CEOs have united in a call for a significant and far-reaching deficit reduction initiative along the lines of the $4.6 trillion Simpson Bowles Deficit Reduction Plan. If the Democrats do not give on reforms to social programs and the Republicans do not get away from the Norquist Pledge, which Romney signed and which his Vice Presidential running mate endorses wholeheartedly, the best outcome will be a short-term fix to the Fiscal Cliff.

Whether Americans realize it or not, such an outcome is not acceptable. The deficit and budget need to be addressed with serious people with serious, non-partisan solutions. The country must be prepared to pay the price for two unfunded wars, a crisis on Wall Street, two poorly administered governments and the worst Congress in US history.

Americans have been swamped with more than $2 billion of marketing spent by just the Presidential candidates, not to speak of untold billions spent on local and Congressional races. The US is sick and the doctor is out to lunch.

The Presidential election is billed as a battle between a financial wizard (Romney) and the champion of the middle class (Obama). Romney has changed positions so many times during the course of the campaign that nobody really knows his intentions, except that he has signed the Norquist Pledge which he will need to disavow if the country is to move forward. Obama has been battered for four years of a struggling economy that has been further hampered by Congressional Republicans that cast the interests of constituents aside in favor of opposing the President at every turn.

The campaign has been exhausting for candidates and the American public. A lackluster turnout at the polls will favor Romney. In all likelihood, Republicans will remain the majority in the House and Democrats will hold a narrow edge in the Senate. Unfortunately, the US may have reached a point where one party must control the three wings of government to get anything done. Half the country will be disappointed by the outcome of the Presidential election.

The G20

This has been a contentious and frustrated G20 summit this weekend in Mexico City. The world is losing patience with both the euro zone debt crisis and the US Fiscal Cliff. If there is one thing that all G20 nations agree with, it is that the time for action has come and gone. Both the euro zone and the US have acted irresponsibly in addressing their debt. The December 31st cliff is the immediate concern but new requests by Greece and a fragile Spanish economy and others could lead to the dissolution of the euro zone.

The US Congress will soon have to add more debt. Euro zone finance ministers are in gridlock, much like the US with Germany steering the region its way while weaker economies resist. The gridlock in the US and in Europe have unmistakable similarities; the chief one being that politics prevent progress. This is a critical week across the globe. The results of this election will either take the US consumer out of the game or add hope to a world that needs a strong US economy.

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on Politics and Money Dominate Historic Week

Tags: , , , , , , , , , , , , , , , , , , ,

The Fiscal Cliff Draws Near

In the upcoming G-7 meeting, Europe will deflect the angst over its euro zone and European Union debt woes with a unified show of concern about the condition of state of the US economy and the weakness of the USD. There will also be concerns voiced about the status of China’s economy. Indeed, Europe will build its case that the world’s two biggest economies are dragging the global economy down more than the status of the debt-ridden, recessionary euro zone and EU states.

The G-7 was founded in 1975 as the G-6 and consisted of France, West Germany, Italy Japan, the UK and the US. In 1976, Canada was admitted to membership and the entity was re-named the G-7. The G-7 nations once controlled 50.4 percent of global nominal GDP and 39.3 percent of global GDP. The group meets several times a year with the intent of defining the key issues of the day and identifying strategies to correct those issues.

The emphasis of the G-7 debate may shift from the influence and possible solutions of the debt that plagues Europe to the US “fiscal cliff,” a pending crisis in the world’s largest economy that could paralyze global growth.

The fiscal cliff is the direct result of the US Congress’s inability to reach agreement over a tangible plan to trim $1.2 trillion from the national debt. As a result of this impasse, the country’s most ineffective Congress on record, the 112th Congress, agreed to a compromise that would allow the Bush tax cuts to expire, terminate the personal withholding tax reduction and allow a number of billions of dollars of budget cuts to be implemented. The total amount of deficit reduction would be about $1.2 trillion which will take effect on January 1, 2013.

Regarding the expiration of the Bush Tax Cuts, the Tax Policy Center estimates the net affect will be to increase taxes by an average of $3,500 per US household. This tax increase will come into play if Congress does not act. The G-7 is rightfully concerned about the fiscal cliff’s impact on the US economy. Most economists suggest this tax policy will plunge the country into recession in 2013.

In the area of the budget cuts, the biggest loser will be the Department of Defense, which will have to shed about $600 billion is expenditures. This figure will put the nation’s security at risk and could limit our ability to respond to crisis in other areas of the globe.

In any case, the payroll tax holiday appears to be at an end. Both parties have expressed concern over the future of the Social Security system if the cut is extended. Both House and Senate members, including members of the Tea Party appear ready to allow this tax increase to take effect.

On the day of the first debate between the two presidential candidates, Barack Obama and Mitt Romney, it is expected that questions about the fiscal cliff will be asked. The significance of resolving the financial cliff issue must be resolved before December 31st or the budget cuts and tax increases will be enacted.

The Bush Tax Cuts include lowered income taxes, lower capital gains taxes, lower dividend taxes and other tax decreases. These tax cuts were originally proposed and passed in 2001 and were extended in 2003. The income tax cut was proposed by Obama and has resulted in about a $1,000 savings per year for the average American.

Europe is expected to declare that it is working on a number of initiatives to stabilize their debt challenges but that the US appears to have its hands tied and is unwilling to address the fiscal cliff. Failure to solve the fiscal cliff will not only throw the US economy into recession but also will push the global economy into recession.

The theory is that the fiscal cliff will not be addressed before the election and that only an extension of the current programs will be agreed upon until the presidential and congress elections take place. Kicking it down the road is the status quo of the 112th Congress.

On another issue, Japan is expected to call for unified actions to get the cost of oil under control. European members and Japan are expected to push for an increase in global use of oil in order to stabilize prices.

At the current rate, the Federal Reserve is now estimating growth in GDP to rise 2.5 to 3.0 percent next year. If the fiscal cliff takes hold, the country will enter recession in mid-2013. Europe rightfully sees this possible outcome as sealing the fate of troubled European economies.

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on The Fiscal Cliff Draws Near

Tags: , , , , , , , , , , , , , , , , , , ,

The Worst Congress Ever?

On Thursday the House of Representatives followed the Senate’s lead and passed what will be called the Obama Tax Cut program.  The mixed messages from Democrats in the House quietly dissipated as the bill passed by a 277 – 148 vote, silencing critics from inside the President’s own party.

In what has boiled down to class warfare, high income Americans with strong backing from Senate Republicans won the day.  Republicans dictated an all or nothing position with the fate of 2 million unemployed Americans and another 5 million, whose benefits will expire in 2011, in jeopardy. 

The tax cut program will add another $858 billion to the federal deficit, which now has closed in on $14 trillion. When Bill Clinton left office ten years ago, President George Bush was handed a national surplus. Polls show that the majority of Americans supported passage of the new tax cuts but with the fate of so many unemployed in the balance, polling is slanted.

In any case, the highest earning Americans will continue to prosper and create an even greater divide between the classes.  The tax cut was approved reluctantly by President Obama and represents a high stakes gamble to boost the sagging economy.

In theory, high income Americans will continue to fuel the economy by investing in the country’s economy while Americans with restored unemployment benefits will spend their survival money on American made goods and services.

Riding a wave of success in November elections, the Republicans used effective bullying tactics to win the day.  However, the November elections should not be taken as an endorsement of the Republican Party but more as a signal that Americans are bitter and angry about the way the nation’s business is being handled in Washington.

At a time when Republicans are dancing in the street, the population is wondering if the current Congress is the worst in the history of the country. For two years, Republicans created gridlock, blocking any number of initiatives and offering no solutions until they had their hands squarely on the unemployed and could dictate legislation.

As the classes continue to divide by wider margins, voters are left to either take to the streets or leave their fate in the hands of egotistical, divisive politicians who have little contact with the real world.  The stakes are high as the U.S. wavers on the brink of becoming a second-class economy.

Sink or Swim Tax Cuts

In efforts to make a bad situation better, Treasury Secretary Timothy Geithner said, “This legislation is good for growth, good for jobs, good for working and middle class families and good for businesses looking to invest and expand their workforce.”  Geithner was part of the President’s team to resolve the tax cut dilemma.

Swayed to affirm the tax cut proposal, Democratic Representative Jane Harman explained, “If it works well, our economic growth rate should go up at least a full point next year.  That is worth taking this bet.”

Favoring tighter fiscal constraints, many economists and fiscal conservatives disagree.  IMF Managing Director Dominique Strauss-Kahn agreed that growth for the U.S. was critical but tempered his support saying, “But, having in mind always that there is no free lunch.  And, so what you do today has to be repaid later on.  And, you cannot just do it now without saying “How are you going to repay it?”

Strauss-Kahn speaks for a majority of Americans but a minority of Washington politicians.  The next obstacle promises to be the President’s budget and the increase of the nation’s debt ceiling.

As Republicans will control the House and Democrats the Senate, the promise of gridlock continues.  The new Congress will have to deal with the budget as early as February.  The incoming politicians are committed to fiscal conservatism and addressing the hard reality ahead.

In the wake of the tax cut debate, the Simpson-Bowles plan to trim the deficit has gained stronger than expected support.  Certain aspects of the stalwart report, which will impact every aspect of American life, may well be included in the new budget.

Heritage Foundation fellow Brian Riedl said, “Republicans have made clear they are going to push for significant spending reductions next year,” That sounds well and good but actions speak louder than words.  This year’s Congressional Republicans have hung America’s hat on tax cuts that have done little to improve the economy over the past ten years.

Bowles – Simpson Path to Success

The bi-partisan commission to trim the deficit was co-chaired by former Senator Republican Alan Simpson and Clinton Chief of Staff Erskine Bowles.  The report required ratification by 14 of the 18 members on the panel before it could be submitted to Congress.  In other words, it was doomed to never reach the floor.

However, few can question the 39 broad point recommendations from the committee whose co-chairs have no political ambitions.  Quite simply, the committee leadership provided an unbiased report that begins to eliminate federal spending immediately and which addresses Medicare and Social Security changes down the road.

The Simpson-Bowles Report would cut the deficit by nearly $4 trillion over the next decade and keep the deficit at 2.3 percent of gross domestic product (GDP) by 2.3 percent.  In 2009, the deficit was 8.9 percent of GDP and heading higher.

The report outlines cuts necessary to stabilize growth in the national debt by 2014 and reducing net debt, excluding Medicare and Social Security, to 60 percent of GDP by 2023 and 40 percent by 2035.  National debt is projected to rise to 68.9 percent by 2011.

The Simpson – Bowles Report does what no politicians have done and squarely faces the mounting deficit issue.  The report takes Washington’s political will out of the picture and provides a blueprint for fiscal redemption. 

There is a lot of pain in Simpson – Bowles.  Deep cuts would take place across the board and some defense spending is targeted immediately.  Simpson and Bowles have served the nation well and have pleaded their case publicly.  The question is, “Are the lights on in Washington?  Is anybody listening?”

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Forex Trading NewsComments Off on The Worst Congress Ever?

Tags: , , , , , , , , , , , , , , , , , , ,

Japanese Yen Down on Risk Aversion

It seems the gods of the forex market read my previous post on the Japanese Yen, in which I puzzled over the currency’s appreciation in the face of contradictory economic and financial factors. Since then, the Yen’s 6-month, 15% appreciation (against the US Dollar) has arrested. It has retreated from the brink of record highs, and undergone the most significant correction since March of this year. Have investors come to their senses, or what?!

You certainly can’t give the Bank of Japan (BOJ) any credit. Aside from its single-day $25 Billion intervention in September, it hasn’t entered the forex markets. In fact, it has already repaid the funds lent to it by the Ministry of Finance, which suggests that it doesn’t have any intention to replicate its earlier intervention in the immediate future, regardless of where the Yen moves.

Perhaps the BOJ foresaw the current correction in the Yen, which was probably inevitable in some ways. After all, Japanese interest rates – while gradually rising – still remain at levels that are unattractive to investors. While US short-term rates are low, long-term rates are more than 1.5% higher than their Japanese counterparts. When you factor in that Japan’s fiscal condition is worse than the US, there is really very little reason, in this aspect, to prefer Japan. As one analyst summarized, “The whole interest-rate differential argument is turning out to be dollar supportive, at least in the near term.”

The same is true for risk-averse capital. For reasons of liquidity and psychology, the Japanese Yen will continue to be a safe-haven destination in times of distress. Still, it’s hardly superior to the Dollar, in this sense. Inflation is slowly emerging (or at least, the risk of deflation is slowly abating) in Japan, and it could conceivably reach 1% this year if the Bank of Japan has its way. Its proposed 35 trillion yen ($419 billion) of asset purchases dwarfs the comparable Federal Reserve Bank’s QE2 program (in relative terms) and contradicts the notion that the Yen is the best store of value.

Japan Economic Structure - Dependence on Exports
Finally, the Japanese economy remains weak, and vulnerable to a double-dip recession. On the one hand, “Japan’s economy expanded at an annual 4.5 percent rate in the three months ended Sept. 30.” On the other hand, its economy remains heavily reliant on exports (see chart above, courtesy of Bloomberg News) to drive growth, which is complicated by the expensive Yen and concerns over a drop-off in demand from China and the rest of the world. In fact, “Exports rose 7.8 percent in October, the slowest pace this year, while industrial production fell for a fifth month and the unemployment rate climbed to 5.1 percent.” In addition, the closely watched Tankan survey registered a drop in September, “the first fall in seven quarters.” While Japanese companies are still net optimistic, analysts expect that this to change in the beginning of 2011.

For the rest of the year, how the Yen performs will depend largely on investor risk-appetite. If risk aversion predominates, then the Yen should hold its value. In addition, it’s worth pointing out that even as the Yen has fallen against the Dollar, it has appreciated against the Euro, and remained flat against a handful of other currencies. Against the US Dollar, however, I still don’t see any reason for why the Yen should trade below 85, and I expect the correction will continue to unfold.

JPY comparison chart 2010

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Japanese Yen Down on Risk Aversion

Tags: , , , , , , , , , , , , , , , , , , ,

Chinese Yuan Will Not Be Reserve Currency?

In a recent editorial reprinted in The Business Insider (Here’s Why The Yuan Will Never Be The World’s Reserve Currency), China expert Michael Pettis argued forcefully against the notion that the Chinese Yuan will be ever be a global reserve currency on par with the US Dollar. By his own admission, Pettis seeks to counter the claim that China’s rise is inevitable.

The core of Pettis’s argument is that it is arithmetically unlikely – if not impossible – that the Chinese Yuan will become a reserve currency in the next few decades. He explains that in order for this to happen, China would have to either run a large and continuous current account deficit, or foreign capital inflows into China would have to be matched by Chinese capital outflows.” Why is this the case? Simply, a reserve currency must necessarily offer (foreign) institutions ample opportunity to accumulate it.

China Trade Surplus 2009 - 2010
However, as Pettis points out, the structure of China’s economy is such that foreigners don’t have such an opportunity. Basically, China has run a current account/trade surplus, which has grown continuously over the last decade. During that time, its Central Bank has accumulated more than $2.5 Trillion in foreign exchange reserves in order to prevent the RMB from appreciating. Foreign Direct Investment, on the other hand, averages 2% of GDP and is declining, not to mention that “a significant share of those inflows may actually be mainland money round-tripped to take advantage of capital and tax regulations.”

For this to change, foreigners would need to have both a reason and the opportunity to hold RMB assets. The reason would come from a reversal in China’s balance of trade, and the use of RMB to pay for the excess of imports over exports, which would naturally imply a willingness of foreign entities to accept RMB. The opportunity would come in the form of deeper capital markets, a complete liberalization of the exchange rate regime (full-convertibility of the RMB), and the elimination of laws which dictate how foreigners can invest/lend in China. This would likewise an imply a Chinese government desire for greater foreign ownership.

China FDI 2009-2010

How likely is this to happen? According to Pettis, not very. China’s financial/economic policy are designed both to favor the export sector and to promote access to cheap capital. In practice, this means that interest rates must remain low, and that there is little impetus behind the expansion of domestic consumption. Given that this has been the case for almost 30 years now, this could prove almost impossible to change. For the sake of comparison, consider that despite two “lost decades,” Japan nonetheless continues to promote its export sector and maintains interest rates near 0%.

Even if the Chinese economy continues to expand and re-balances itself in the process (a dubious possibility), Pettis estimates that it would still need to increase the rate of foreign capital inflows to almost 10% of GDP. If economic growth slows to a more sustainable level and/or it continues to run a sizable trade surplus, this figure would rise to perhaps 20%. In this case, Pettis concedes, “we are also positing…a radical change in the nature of ownership and governance in China, as well as a radical redrawing of the role of the central and local governments in the local economy.”

So there you have it. The political/economic/financial structure of China is such that it would be arithmetically very difficult to increase foreign accumulation of RMB assets to the extent that the RMB would be a contender for THE global reserve currency. For this to change, China would have to embrace the kind of reforms that go way beyond allowing the RMB to fluctuate, and strike at the very core of the CCP’s stranglehold on power in China.

If that’s what it will take for the RMB to become a fully international currency, well, then it’s probably too early to be having this conversation. Perhaps that’s why the Asian Development Bank, in a recent paper, argued in favor of modest RMB growth: “sharing from about 3% to 12% of international reserves by 2035.” This is certainly a far cry from the “10 years” declared by Russia’s finance minister and tacitly supported by Chinese economic policymakers.

The implications for the US Dollar are clear. While it’s possible that a handful of emerging currencies (Brazilian Real, Indian Rupee, Russian Ruble, etc.) will join the ranks of the international currencies, none will have enough force to significantly disrupt the status quo. When you also take into account the economic stagnation in Japan and the UK, as well as the political/fiscal problems in the EU, it’s more clear than ever that the Dollar’s share of global reserves in one (or two or three) decades will probably be only slightly diminished from its current share.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Chinese Yuan Will Not Be Reserve Currency?

Tags: , , , , , , , , , , , , , , , , , , ,

QE2 Weighs on Dollar

In a few weeks, the US could overtake China as the world’s biggest currency manipulator. Don’t get me wrong: I’m not predicting that the US will officially enter the global currency war. However, I think that the expansion of the Federal Reserve Bank’s quantitative easing program (dubbed QE2 by investors) will exert the same negative impact on the Dollar as if the US had followed China and intervened directly in the forex markets.

For the last month or so, markets have been bracing for QE2. At this point it is seen as a near certainty, with a Reuters poll showing that all 52 analysts that were surveyed believe that is inevitable. On Friday, Ben Bernanke eliminated any remaining doubts, when he declared that, “There would appear — all else being equal — to be a case for further action.” At this point, it is only a question of scope, with markets estimates ranging from $500 Billion to $2 Trillion. That would bring the total Quantitative Easing to perhaps $3 Trillion, exceeding China’s $2.65 Trillion foreign exchange reserves, and earning the distinction of being the largest, sustained currency intervention in the world.

The Fed is faced with the quandary that its initial Quantitative Easing Program did not significantly stimulate the economy. It brought liquidity to the credit and financial markets – spurring higher asset prices – but this didn’t translate into business and consumer spending. Thus, the Fed is planning to double down on its bet, comforted by low inflation (currently at a 50 year low) and a stable balance sheet. In other words, it feels it has nothing to lose.

Unfortunately, it’s hard to find anyone who seriously believes that QE2 will have a positive impact on the economy. Most expect that it will buoy the financial markets (commodities and stocks), but will achieve little if anything else: “The actual problem with the economy is a lack of consumer demand, not the availability of bank loans, mortgage interest rates, or large amounts of cash held by corporations. Providing more liquidity for the financial system through QE2 won’t fix consumer balance sheets or unemployment.” The Fed is hoping that higher expectations for inflation (already reflected in lower bond prices) and low yields will spur consumers and corporations into action. Of course, it is also hopeful that a cheaper Dollar will drive GDP by narrowing the trade imbalance.

QE2- US Dollar Trade-Weighted Index 2008-2010
At the very least, we can almost guarantee that QE2 will continue to push the Dollar down. For comparison’s sake, consider that after the Fed announced its first Quantitative Easing plan, the Dollar fell 14% against the Euro in only a couple months. This time around, it has fallen for five weeks in a row, and the Fed hasn’t even formally unveiled QE2! It has fallen 13% on a trade-weighted basis, 14% against the Euro, to parity against the Australian and Canadian Dollars, and recently touched a 15-year low against the Yen, in spite of Japan’s equally loose monetary policy.

If the Dollar continues to fall, we could see a coordinated intervention by the rest of the world. Already, many countries’ Central Banks have entered the markets to try to achieve such an outcome. Individually, their efforts will prove fruitless, since the Fed has much deeper pockets. As one commentator summarized, It’s now becoming “awfully hypocritical for American officials to label the Chinese as currency manipulators? They are, but they’re not alone.”

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on QE2 Weighs on Dollar

Tags: , , , , , , , , , , , , , , , , , , ,

Hungarian Forint Touches Record Low

Anyone who had bought emerging market currency(s) at the peak of the credit crisis in 2008 would have earned double digit annualized returns in the two years that have passed since then. There are only a handful of exceptions to this rule, and the most prominent one that I can think of is the Hungarian Forint. If you had bought the Hungarian Forint against the Swiss Franc (the base currency that most traders in the Forint look at, for reasons that I will explain below) in the fall of 2008, you would incur a loss of a 63% if you sold today. The Forint is down 11% in the last month alone. These are the kinds of numbers one might associates with mortgage-backed securities and credit default swaps, not currencies!

Swiss Franc CHF Hungarian Forint HUF 2010

So why is the Forint in the doghouse? Ironically, the answer is connected to mortgages. During the inflation of the housing bubble, Hungarians preferred to borrow in Swiss Francs, because interest rates were significantly lower than domestic Hungarian rates. This was not a mere trend; it was a full-blown phenomenon: “About 5.4 trillion forint($24.1 billion), or two-thirds of Hungary’s overall household credit, is denominated in foreign currencies. Of that, 82 percent is in Swiss francs, according to central bank data.” When the housing and credit markets were stable, noone bothered to examine currency risk. Given how much the Forint has fallen against the Franc, you can bet they are now.

As if the decline in housing prices wasn’t bad enough, consider that Hungarians that borrowed in Swiss Francs have now seen their mortgage payments/balances increase by more than 50%, depending on when they took out their loans. It goes without saying that even under the best of circumstances, it would be difficult to find the wherewithal – let alone the motivation – to repay such a loan. When you throw an economic recession into the mix, the prospects for repayment become even more bleak. As the Hungarian Forint has depreciated, loan defaults have risen, further stoking the Forint’s depreciation and loan defaults.

Alas, the Hungarian government’s program for solving this crisis is to punish the banks, both by allowing borrowers to delay repayment and by levying a massive tax – the highest on the EU – on all banks. While this might be helpful for bringing down the country’s budget deficit to the 3% mandated by the EU, it probably won’t do much for the economy. Speaking of the budget deficit, it has prompted S&P to warn of a possible cut in Hungary’s sovereign credit rating to junk-status.

Hungary’s cause hasn’t been helped by the breakdown of talks with the EU and IMF that would have supplied it with emergency funding. As if it wasn’t obvious from the Forint’s decline, investors are beginning to fear the worst and are slowly turning away from Hungary. The country’s benchmark stock market index has fallen 4% over the last six months. Meanwhile, foreign lenders are starting to balk at buying Hungarian debt without some kind of EU/IMF backstop, much like the one that was afforded to Greece: “Auction saleshave been a barometer of investor confidence in the country. On Sept. 2, Hungary sold 35 billion forint of 12-month Treasury bills, 15 billion forint less than planned, after receiving bids for 63.4 billion forint of the bills. Five days later, it sold 60 billion forint of three-month Treasury bills, 10 billion forint more than planned.”

At this point, all eyes are on the Hungarian government to simultaneously boost the economy and repair its budget deficit: “The rating agenciesare taking the same line as the markets and giving the government until local elections in October the benefit of the doubt, but if they don’t see then either a recommitment to the IMF program, or real concrete measures I think they move to cut the rating to junk.” If that were to happen, the self-fulfilling downward spiral in the Forint would probably continue unabated.

It makes you wonder: if the Greek Drachma were still around, how closely would it resemble the Forint?

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Hungarian Forint Touches Record Low