20:00 GMT- July 12 (global-view.com) As expected. Forex Trading showed signs of gradually starting to come back. recent weeks had seen summer vacations and the World Cup. Upper House elections Japan ended as expected with the ruling DPJ party of PM Kan losing control of this body. They still control the more powerful lower House. The election outcome could have implications beyond Japan, as voters have increasingly been reacting negatively to the prospect of higher taxes to address the budget deficit. It would seem pretty obvious to us that voters who are already hurting are unhappy with the prospect of a greater tax burden to pay for increased government spending.
The outcome of the Japanese vote was not a major surprise. Prime Minister Kan faces a leadership vote within his party in September. One rating agency has threatened to downgrade Japan's sovereign debt if the budget deficit is not addressed. The JPY is taking developments in stride. This is the start of the quarterly corporate earnings season. The economic calendar will be fairly active for the balance of the week.
The EURUSD is now down on the day and the GBPUSD is lower. EURGBP is steady. Traders are maintaining a close watch on the European sovereign debt situation.
In the GBP, the U.K. new government is weak. A second election may not be far away. Our bias for the EURUSD and GBPUSD remains negative.
The EURCHF is steady. SNB intervention tactics are confusing. Periodically, the SNB has taken a strong stand in supporting the EUR against the CHF. Flows out of the EUR into the CHF remain an issue for the SNB. EURCHF is estimated to have resulted in EUR 8bln in forex losses for the SNB.
The USDJPY is steady and the EURJPY cross is lower. While Japanese public finances are a mess, analysts point out that most JGBs are owned by Japanese, so Japan is not dependent on foreign investment. The government has been pressed the BOJ to promote growth and favors a lower exchange rate.
Some traders focus intently on the Japan vs. U.S. 2-yr note spread (only the U.S. 2-yr moves much).
The risk trade continues to be turned on and off almost daily. As for the commodity currencies (CAD, AUD and NZD), they are lower vs. the USD. The Bank of Canada recently raised interest rates by 25bps but the BOC sent dovish signals afterwards. A strong CAD eases the pressure on the Bank of Canada to tighten. In Australia, RBA is setting up for an August tightening. The RBNZ is also currently in a tightening mode. Oil and gold are down. Gold is still favored as as refuge from paper money. We have favored AUD, CAD, gold and oil recently, but doubts are creeping in as deflationary pressures mount.
Equities and Bonds are also risk trades. Far East equities closed mostly higher. European bourses closed up. U.S. equities are mixed. The U.S. 10-yr was last 3.05%, -2 bps.
Bonds are a counter to risk trades because risk investments must be financed. When the cost of money moves up (higher interest rates), the return and allure of risk trades such as equities falls.
UPCOMING DATA HIGHLIGHTS: The Far East will see revised Japanese Industrial Output data. In Europe , U.K. CPI and the German ZEW survey are slated. In North America, U.S.AND Canadian trade figure are due. The U.S.will see a ten-year auction and the weekly API energy inventory estimates.
See ECONOMIC CALENDAR for a complete list of future forex market events and consensus data estimates. Go to the forex forum for up-to-date market developments and technical trading ideas.
John M. Bland is an author and co-founder and partner of Global-View.com. Prior to Global-View.com, he was a forex trader and a private-label forex analyst for a top Fed watching service in NYC. He has been a corporate forex advisor and also worked in international liability management for a major N.Y. money center bank. John holds an MBA from the University of California at Berkeley and a B.A. in International Economics from that school.
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