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Low Retail Sales And Falling Manufacturing Behind Dollar Decline

The dollar’s drop from a five week high against the euro is being blamed mainly on speculative reports that show that American retail sales and manufacturing falling as the global economy continues to deepen. The dollar also fell for the first time in days against the British pound, and Federal Reserve Chairman Ben S. Bernanke finally stated that a changed government fiscal policy is not going to lead to economic recovery. The Fed feels that the American government is going to have to find some way of stimulating more growth.

“The dollar is giving back some gains after a recent rally,” said Ian Stannard, currency strategist in London at BNP Paribas SA, the largest lender in France. “Comments from Fed policy makers and bearish views on the data this week may have triggered the selling. I see the correction as short-lived. Longer term, the steps taken by the U.S. will help the dollar.”

How bad did the dollar fall? It fell to $1.3236 euro from $1.3182, 89.43 yen from 89.38, and to $1.4501 against the pound. Stannard feels that the dollar could fall further against the euro on Wednesday, January 14, 2009, possibly closing at $1.3350.

Bernanke stated in a London speech that ‘strong measures’ are what is needed to stabilize and strengthen the weakened financial system. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.” American retail sales fell for sixth months straight in December, the longest decline since 1992 when this type of information started to track.

“We expect U.S. retail sales to worsen significantly,” said Masafumi Yamamoto, the head of foreign-exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. “There’s a high chance that the dollar will face renewed selling pressure versus the yen.”

Analysts are forecasting that the ECB will lower its 2.5% main rate by at least a half a percent point as early as Thursday, possibly deeper. The ECB has only cut rates 1.5% since the beginning of 2008 while the Fed cut theirs by 4 percentage points. Even the Bank of England has only lowered theirs to 1.5%. “There are a lot of orders to sell the euro,” said Akio Shimizu, who is the chief manager of foreign-exchange trading in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly listed bank. “Interest-rate cuts are likely and that is weighing on the euro. There’s not much good economic news coming out of Europe.” He went to add that the euro could decline to $1.3100 before the end of trading today.

Dollar Lending Continues To Decline

The dollar’s lending rate is not fairing well and it declined to its lowest number in more than 4-1/2 years in Asia on Monday, even though it continued to trade with a wide enough margin over the official lending rates to suggest that maybe cash was not being circulated as freely as it should’ve been during stable financial times. Additionally, the swap spreads on the dollar continued to tighten bringing them to their narrowest since the middle of 2007. Analysts say that tightening was due to the grim job data that showed unemployment at a close to 16 year high on Friday. This data has investors and traders expecting the Federal Reserve to keep their rates near the zero margin for a long time.

The interbank American dollar rates in Singapore hit their lowest number since April of 2004 and the 3-month SIBOR was still around 108 basis points higher than the usual effective overnight federal funds rate. Amy Auster, the head of international economics research at ANZ, said about the rates, “Conditions are normalising somewhat though LIBOR is still at a hefty premium to the fed funds rate.” Auster feels that the rates probably would not return to normal until closer to the end of 2009 and that narrow and broad money indicators are pointing towards cash that is being hoarded by banks on a global scale instead of being circulated through the economy. The rates on the 3-month dollar funds in Singapore fell to 1.195% from 1.29714% on Friday, January 9. The 3-month LIBOR was traded at a spread of 1.08% points over the overnight indexed swap.

With the dollar swap spreads tightening, the two year dollar swap spread is currently at 54.75 basis points, the tightest it has been since August of 2007. This was when the effects of the subprime mortgage collapse were just starting to be felt. This spread is over 100 basis points from its widest in October 2008.

The central bank in Australia is still waiting to receive bids on a $10 billion repurchase tender as of Monday, 12 January 2009. Analysts feel that this suggests the demand for the American currency’s liquidity is ebbing from the high and intense levels of 2008. Katie Dean, a strategist at ANZ, feels that banks simply may not be interested in borrowing the 28-day dollar from Australia’s Reserve Bank at the 0.65% rate it is offering. Interbank rates are considerably lower with the 1-month LIBOR weighing in at 0.3% on Friday, January 9. “Because LIBOR rates have come in quite a bit, it now means it effectively is cheaper for banks to access the money market than to access the RBA. There is clearly better functioning of U.S. dollars through the markets,” Dean said.

Investors are starting to bet on an even steeper fall in interbank rates with the LIBOR rates declining regardless of the optimism being felt over the new stimulus measures the incoming Congress is getting set to announce in the United States after President-elect Barack Obama’s inauguration at the end of January.

Global Equities Fall As Dollar And Yen Make Gains

The 2008 trend of the dollar and the yen rising has continued as both currencies made gains early in trading on Tuesday, January 13, 2009 while global equity markets plunged yet again. The dollar index traded at 83.536 from its closing number of 8.105 in North America on Monday against a basket of six major currency counterparts.

Stephen Gallo, the head of market analysis at Schneider Foreign Exchange commented on the move, “The greenback will tend to do better in an environment where global growth worries are increasing.” He went on to cite that the Federal Reserve’s “extremely proactive approach has jam-packed the global financial system full of dollar liquidity.” He also feels that 2009 will be a volatile year as markets continue to assess the approaches of the central banks in response to the continuing global crisis, noting that they are all taking different approaches.

With the dollar and the yen gaining once again, Asian stock markets saw a broad based sell off Tuesday morning with European stocks sustaining some extended losses as well. Oil and mining companies are getting worried that the slowdown in the overall global markets and equity trading is going to add pressure on the already fragile commodity prices. The weakness in the equities has caused investors to shift from higher-yielding currencies and repatriate both the dollar and the yen.

Standard & Poor’s issued a warning on Monday that they may have to downgrade Spain’s sovereign credit rating from AAA status and the warning cast a bit of a pall over the euro. The financial markets are waiting for information on the euro-zone interest rates that will be determined at a European Central Bank meeting on Thursday, January 15, 2009. Standard & Poor’s already downgraded Greece’s credit rating last week and changed Ireland’s outlook from stable to negative.

The euro entered 2009 with the currency markets looking at is as ‘sceptical’ and strategists at KBC Bank in Brussels commented that ‘credit headlines on the European governments only reinforces this euro-sceptic market attitude. We continue to have serious doubts on the chances of a protracted dollar rebound,” they added when asked about long-tem movement, and strategists believe that short-term movement is not good for the euro/dollar trading combination. The euro slipped against the dollar during Monday’s trading, going from $1.3373 to $1.3310. The euro also fell against the yen from 119.09 yen to 118.55.

The yen itself traded against the dollar with very little movement, closing at 89.04 yen for every dollar. The pound fell 1.2% against the dollar and was down 0.8% on the day against the euro. December was the worst retail month the United Kingdom has seen in over 14 years.

Euro And Pound Up Against The Dollar

Friday January 16, 2009 saw the dollar fall against the euro and the pound as the American government stepped up its work to help out troubled banks and help boost the failing economy. The euro rose 1.4% to close at $1.3294 and the pound rose to $1.4742 against the dollar. The dollar also declined against the yen by 1% to 90.57 yen, but the yen also fell more than 2.2% against the euro, trading at 120.47 yen.

“Government backstops, stimulus packages and presidential inauguration optimism are helping offset the gloom emerging from the raw data,” said Ashraf Laidi, who is the chief market strategist at CMC Markets. The dollar is being viewed by investors as a safe alternative to ‘more economically sensitive assets’, namely stocks and high yielding currencies. The dollar tends to fall when investors are optimistic about the economy and are willing to take risks. The euro and the pound are traditionally high-yielding currencies and they have been under pressure thanks to the turmoil in the banking sector undermining investor’s risk appetite. Friday saw the sentiment change as the government expanded their efforts to help the struggling banks.

“Risk appetite remains propped by another U.S. government back stop to a U.S. bank, this time to Bank of America’s efforts in absorbing Merrill Lynch,” Laidi said. The American Treasury Department is extending $0 billion more to Bank of America so that the banking chain can absorb any losses that are associated with the purchase of ailing brokerage firm Merrill Lynch. An additional $118 billion in assets has been guaranteed as well.

The second half of the $700 billion Troubled Asset Relief Program has also been released to the incoming Obama government in an effort to help boost the economy. House Democrats released an expansive economy recovery plan in an attempt to stem what has become the ‘worst economic crisis in decades’. The plan, known as the American Recovery and Reinvestment bill, is calling for $275 billion in tax cuts and $550 billion in spending and aid to states. This advance came with a mixed bag of economic reports.

The Consumer Price Index which measures inflation has declined to a seasonally adjusted 0.7% in December, showing the third consecutive monthly drop that was led by a sharp drop in energy prices. The CPI edged up 0.1% in 2008, which is the weakest annual increase since 1954. When food and energy costs are removed to the index, it shows a relatively unchanged number.

UK Bailout Could Be Flawed

Using a program similar to the ones that regulators in the United States are using to help Citigroup and Bank of America, the government of the United Kingdom is looking to offer the same type of help to many of their big institutions with suffering loan portfolios. The program is aimed to “reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy,” claims the U.K. Treasury in a statement.

Loan guarantees to a wide range of banks and financial institutions is one of the options President Barack Obama is looking into as a way to restore economic growth in the United States. Unfortunately the plan has some key flaws in it according to skeptics, and these flaws are similar to ones found in the plans enacted by the Bush administration when they attempted to use the Troubled Asset Relief Program (TARP) to bailout the financial institutions. TARP promised banks and other financial institutions around $350 billion in help since October 2008.

The aforementioned problem is that a loan guaranteed plan will not force the banks to completely recognize the losses they suffered or the souring positions that they took on during the credit boom that ended during the summer of 2007. According to Joseph Mason, a finance professor at Louisiana State University, banks have to write off bad loans and work to raise new capital. If they don’t, any taxpayer funds that are used to support the weak economic system are only going to help existing institutions at a greater expense to the American people who are already suffering with their own stressed finances. “Until we start recognizing the losses, we’re just engaging in crony capitalism,” said Mason, who also works as a banking industry consultant. “Executives of banks that get federal support without being forced to take adequate writedowns,” he adds, “are using Congress as a piggybank.”

The first half of TARP was used to buy preferred shares in banks under the impression that banks’ capital shortfalls had to be filled before they could extend loans to boost the economy. Banks like Citigroup, JPMorganChase, and Goldman Sachs received funds that came with few strings attached that supposedly resulted in a more stable financial system and were adopted from a plan launched by regulators in the United Kingdom. However, the sharp economic decline at the end of 2008 and additional crisis that popped up forced the government to give $400 billion more in aid to CitiGroup and Bank of America, showing that TARP was inadequate to help. And, of course, the United States was not the only one to suffer.

Under the Obama administration banks may be expected to continue their outflow of money to help bolster the economy and credit growth. David Axelrod, Obama’s senior advisor, stated, “I think he is going to have a strong message for the bankers. We don’t want them to sit on any money that they get from taxpayers.”

Ed Gainor, a structured finance lawyer at McKee Nelson in Washington, feels that this type of dictation to the lenders could be counterproductive since lenders are conserving their capital due to the slumping economy and the raised odds that good borrowers could still default if they lose jobs. “Demanding that they make loans is somewhat silly on a grand scale,” says Gainor. “If the lenders can lend and make a profit, that’s what they will do.” Mason said the strong message the government needs to send is that existing losses must be recognized, and failing institutions allowed to fail.

The forex: The largest market in the world

The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex is not done at one central location but is conducted between participants through electronic communication networks (ECNs) and phone networks in various markets around the world. The FX market is considered an Over The Counter (OTC) or ‘interbank/interdealer’ market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.
Currency is also needed around the world for international trade, as well as by central banks and global businesses. Central banks have relied on foreign-exchange markets since 1971 - when fixed-currency markets ceased to exist because the gold standard was dropped. Since that time, most international currencies have been “floated”, rather than pegged to the value of gold.

Forex Simplified

Forex Simplified By Marilyn McDonald Published by Marketplace Books, Inc. 131 pages, $29.95

REVIEWED BY CHRISTINE BIRKNER

A market expert doesn't often illustrate the possible pitfalls of forex trading with analogies about shoe shopping as Marilyn McDonald does in "Forex Simplified," but that is part of this book's charm. It is both entertaining and educational, with a conversational tone and genuine enthusiasm for forex trading not always found in similar tomes.

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The book is geared towards beginning forex traders, offering basic definitions and outlining common traps for novice traders. She advises avoiding companies that promise little or no risk and firms that pressure you into trading immediately. She explains the importance of researching a company's track record before trading, and the book emphasizes throughout that forex trading involves risk and requires discipline.

The book includes a chapter on the benefits and components of both fundamental and technical analysis as they apply to forex. She explains macroeconomic indicators, asset markets and politics as well as the finer points of technical analysis including trends and types of indicators.

Another chapter offers advice on economic news and how it affects the market. McDonald says that beginning traders especially shouldn't trade the news, because, just like in the movie Fight Club, there are two rules in Trade Club: 1 ) The market doesn't make any sense, and 2) Even when it seems like it is making sense, the market doesn't make any sense.

There is a section on automated trading and how to write and test automated strategies, as well as a chapter on the role that emotions can play in trading. McDonald encourages traders to stay focused and set goals and stick to them. She says you will get emotional when you trade, but don't let your emotions get in the way of making rational decisions. The book also offers steps for developing a trading plan that includes strategies for buying, selling and holding, and advice on the best times to trade. McDonald notes that while a lot of forex traders say the best time to trade is at 2 a.m., the best time to trade is really any time there's more than one market open (i.e., when there's higher volume and higher liquidity). The book is breezy in tone, but by no means short on valuable information. Its appendices offer further research and graphs on common indicators, chart patterns and a guide to reading candlestick patterns, as well as more information on specific economic reports and a glossary of common forex terms. "Forex Simplified" is a great resource for the beginning forex trader and an interesting read.

Copyright Futures Magazine Group Sep 2008

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