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Forex Blog - Pinning Hopes on China

Pinning Hopes on China Last Updated 11/10/2008 4:33:33 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

NZD/JPY ( -137 pips or -2.36%)

EUR/NZD ( +498 pips or +2.32%)

NZD/USD ( -128 pips or -2.17%)

THE STORIES IN THE CURRENCY MARKET

  • USD: Pinning Hopes on China
  • EUR: Weak Bank Earnings Could Serve as Another Destabilizing Force
  • GBP: Sharp Drop in Inflation Raises Fear of More Rate Cuts
  • CAD: Stronger Housing Market Data
  • AUD: Bailout Package Could Postpone Recession
  • NZD: New Prime Minister Was a Currency Trader
  • JPY: Regains Strength as Risk Appetite Proves to be Short-Lived

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

US DOLLAR: PINNING HOPES ON CHINA

US equity traders realize that everyone is pinning too much hope on China. The big story in the financial markets today is the 4 trillion Yuan or $586 billion stimulus plan announced by China on Sunday. Equities in Asia rallied strongly overnight, taking risky assets like carry trades up with it. The US dollar started the NY session weaker but has recovered all of its losses. The Japanese Yen and the US dollar, which are the two lowest yielding G7 currencies continue to hold onto their gains as investors come to grips with the reality that the stimulus plan announced by China will not save the global financial and economic crisis. Instead, the only thing that is assured is that at one fifth of 2007 GDP, China will have less money to spend on financing the US’ current account deficit.

China: Not the Answer to Everyone’s Problems

Every country is doing their best at stimulating domestic growth and that is exactly what China is focused on right now. Their priorities are at home and not abroad and their plans to invest in low-rent housing, infrastructure, rebuilding programs and tax breaks on capital spending are aimed at helping their economy cool at a more manageable pace. However it is not a bailout for the financial market and will not be enough to stimulate global growth. Some foreign manufacturing and construction companies will benefit from China’s investment in infrastructure, but the bottom line is that like the rest of the plans announced by developed governments, it shifts and not creates wealth. We also don’t think that it is a coincidence that China made its announcement ahead of a busy data week that will surely confirm the continued weakness in the Chinese economy. With a need to focus domestically, Chinese demand for dollar denominated investments will decrease, especially after some particularly nasty losses incurred at the Sovereign Wealth Fund.

Will there be Fireworks at the November 15 Meeting?

World leaders will be headed to Washington for the Economic Summit on November 14 and 15. The hope is that we will see more detailed proposals on dealing with the economic crisis. Unfortunately as the date nears, investors are starting to realize that no substantial changes may come out of the meeting. With a little more than 2 months before the leadership changes in the US, the current administration may not want to commit to any major policy changes. But if they do, that is exactly what can turn the financial markets around (US President-elect Barack Obama has announced that he will not be attending the financial Summit). Although G20 finance ministers and central bankers pledged to jointly tackle the global financial crisis at this weekend’s G20 meeting, the disagreement between more or less state controls are becoming increasingly clear. It remains to be seen whether there will be fireworks at this weekend’s emergency summit.

Recession Trades Still On

As long as US economic data continues to head towards multi-decade lows and concerns about earnings plague the financial markets, recession trades are still on. Earnings forecasts have been cut for the 3 Gs - Google, Goldman Sachs and General Motors. With some analysts issuing a price forecast of zero for GM, the US economy and the financial markets are in for more trouble. Coming back to haunt us is AIG - the US government has been forced to hike its bailout of the insurance giant from the $85 billion in September to $150 billion. We wonder who else will be asking the US government for more money. With no meaningful US economic data on the calendar tomorrow and banks closed for Veterans Day, risk aversion could continue to send currency traders into the safety of the US dollar and Japanese Yen.

EUR/USD: WEAK BANK EARNINGS COULD SERVE AS THE ANOTHER DESTABILIZING FORCE

Having rallied to a high of 1.2930 intraday, the Euro has given back nearly all of its gains against the US dollar. Economic data continues to be weak with industrial production in France and Italy declining more than the market expected. The Sentix Investor Confidence report also dropped 8 points, suggesting that tomorrow’s ZEW survey from Germany could decline as well. With the European Central Bank acting less aggressively than the Federal Reserve or the Bank of England, investors may be worried we could see a longer downturn in Eurozone growth. Economic data has been weak and there are many reasons to believe that the data will worsen before it improves. This week also marks the start of the earnings season for European banks. In the wake of a global slowdown in the banking industry, along with major losses among those in the US, European banks have little reason to outperform. Allianz SE, a European insurance company, has already reported a quarterly loss. Deutsche Postbank AG, Germany’s largest commercial bank, is expected to report earnings within the next 24 hours. Weak results could be followed by a string of write downs from Europe’s largest financial institution, serving as another destabilizing factor in the currency markets.

GBP/USD: SHARP DROP IN INFLATION RAISES FEAR OF MORE RATE CUTS

Weak inflation numbers have accelerated the reversal in the British pound. Despite an initial rally following China’s bailout plan, the British pound has resumed its sell-off. The fact of the matter is the pound has little reason to appreciate. After a staggering BoE rate cut of 150bp, the UK is clearly struggling with a recession. Since expectations for an improved global economy are dwindling, it is likely that policy makers will have to force their rates lower especially as inflationary pressures ease. PPI inputs fell -5.6%, compared to -1.7% a month prior while PPI Output prices show similar month over month loses. This report will probably raise more concerns about deflation than inflation.. For tomorrow, the RICS House Price and Trade Balances are due for release – we expect more negative numbers.

NEW ZEALAND’S NEW PRIME MINISTER WAS A CURRENCY TRADER

All commodity currencies are facing pressure in the wake of renewed risk aversion. These losses are despite earlier gains amid the optimism expressed during the Asian sessions. Australia has been hit particularly hard in the wake of the global financial crisis. However, as Australia’s most important trading partner, China’s bail-out package may stave off a recession in the country for a bit longer. Australia reported that Investment lending has declined a less than expected 1.1%, compared to last month’s loss of 5.2%. NAB Business Confidence is due for release tomorrow; the risk is to the downside for the report. Canada on the other hand continues to report string of positive economic news with Housing Starts and New Home prices beating analysts’ expectations. The New Zealand dollar also slipped after the election of a new Prime Minister. Hopefully John Key who use to head up Merrill Lynch’s foreign exchange operations in Asia will have better luck stabilizing the economy and the financial markets than Helen Clark. The task will not be easy with the country in a recession – Key has already pledged sweeping tax cuts. Producer prices are due for release this evening. Like the rest of the world, we expect inflationary pressures to ease.

YEN REGAINS STRENGTH AS RISK APPETITE IS SHORT-LIVED

Both the Chinese bailout plan and the turn in US equities are bearish for USD/JPY. The Nikkei was up sharply last night as the market hopes that China’s investment in infrastructure will lead to contracts for Japanese corporations. Last year, China surpassed the US as Japan’s largest trading partner, illustrating the tight relationship between the 2 countries. As usual, the Yen is also trading off of US equities. The sharp reversal in the Dow led to large swings in the Japanese Yen crosses. Although machine orders were stronger than expected, they hardly spell recovery for Japan’s economy. We are anticipating the Trade Balance and Current Account reports along with the ECO Watcher’s Survey over the next 24 hours. We expect the average taxi driver and Japanese consumer to feel the pain of the slowing economy.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency in play for the next 24 hours. Tomorrow, we expect the influential ZEW Economic Survey at 5:00 am ET or 10:00 GMT. The report, a survey of analyst expectations and sentiment, has many implications as to the health of the Euro-Zone economies. The report is divided into the Current Assessment and Economic Sentiment.

Although the EUR/USD is falling, it is still within the Bollinger band range or neutral trading zone. The current consolidation phase has developed a triangle formation, indicating that a break is imminent. A rally outside of the formation could precede a serious move upwards while a break below the triangle will take the currency pair into the sell-zone. Upside resistance is capped at the 23.6% retracement from Sept. 22nd highs to October 28th lows, at 1.2927. This level has already served as an influential level in today’s trading; today’s high immediately fell off after touching the retracement. Support exists at 1.2525, or the low formed on November 4th. This would be followed by the lows at the end of October. It is likely that many of the areas will be tested since a break of the current consolidation zone may elicit a powerful move.

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Kathy Lien will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Kathy Lien do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.



 

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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Amazing Trader EVENT RISK Calendar:

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12:30 US- Housing Starts & Permits
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08:30 GB- Retail Sales
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Fri 20 Oct
12:30 CA- Retail Sales & CPI
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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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