Forex Forum Archive for 12/02/2007

nj jf 23:45 GMT December 2, 2007 Reply   
south- i dont trade eurusd so there's probably other traders more in tune with it than myself.

Morristown GG 23:40 GMT December 2, 2007 Reply   
The carry just dropped a bit on news that Moodys is planning to downgrade some of Citigroup's SIVs.

StL SAJ 23:28 GMT December 2, 2007 Reply   
Morristown, many thanks for the informative post.

''What happens?'' you ask. Easy Q. The same thing that happened the last two times Citi shot itself in the foot by playing too large in a dubious market -- they'll get bailed out, one way or another. (Well, if they survive and the pirhanas don't feel like lunching on them, at least).

This debacle is of a piece with Walter Wriston's goofball overextension into ''sovereign loans'' in the 1970s, except this time there is no dingbat rationale such as his celebrated comment, ''Countries don't go broke.'' No, Walter, they don't -- but they sure as the devil can simply decide not to pay down or pay off the loan, right, old boy?

Best wishes, and good trading to you!

Morristown GG 23:21 GMT December 2, 2007 Reply   
Sorry If that was censored automatically. Its just a blog of articles on the economy. Here is an excerpt:

This past week Citigroup gave up close to 5% of its equity in a panic move to shore up capital in return for a $7.5 billion in cash. I talked about this in Petrodollars Return Home.

But what happens when they need another $26 billion as Credit Suisse analyst Susan Katzke is suggesting? What happens if those level 2 assets were marked to market? What happens if Citigroup has to bring those SIVs back on to its balance sheet? What happens when Moody's, Fitch, and the S&P continue downgrading CDOs? What happens now that credit card losses are rising and commercial real estate is tanking?

To reduce further leverage by selling assets, Citigroup will have to mark any assets its sells to reality at a time when nearly all asset classes are under attack. Good luck reducing leverage.

Citigroup had $127 billion in equity "on paper" as of September 30th 2007 . The closer one looks at this the more suspect that equity is.

Mike "Mish" Shedlock
http://globaleconomicanalysis.censored-copy and paste into browser

Morristown GG 23:08 GMT December 2, 2007 Reply   
DC, Thats an interesting story. Here is one from a blog I follow. Citibank is barely surviving, almost insolvent.
http://www.globaleconomicanalysis.censored/

dc CB 23:00 GMT December 2, 2007 Reply   
http://seekingalpha.com/article/55982-the-41b-bomb-citi-doesn-t-want-you-to-know-about?

Morristown GG 22:25 GMT December 2, 2007 Reply   
Hello all, I'm thinking Financial stocks will fall again this week. Most major countries have already adopted Basil II standards for banking accounts. The US banks had to adopt the new rules Dec 1, so this is the first week under the new rules. They don't allow off balance sheet transactions any more - SIVs. They have to be moved onto Balance sheet. Marked to market - sim to the recent sale of ETrade's portfolio at 11 cents on the dollar.

Do you think this could spark a drop in equities and hense carry unwind?

'BASLE II' ON-THE-BOOKS BANKING SYSTEM IS NOW IN EFFECT
The other key point to take on board, before we elaborate, is that the Basle II standard took effect from 1st December 2007, and that no further off-balance sheet financial operations are allowed, and every transaction must take place on-balance sheet. The Europeans, Japanese, Australians etc have implemented Basle II and the United States has no choice but to follow suit. It could not procure its delayed application.

The Federal Reserve duly sent the Editor of this service a copy of its 404-page book entitled 'Basle II Final Rules: Federal Reserve Board Open Board Meeting: November 2, 2007, 10.1.m. EDT', which summarises the on-balance sheet rules to which all US banks must now conform. The final official document stated, as previously noted, that 'This final rule is effective [INSERT DATE]', implying that the date of implementation had been uncertain. However, Basle II TOOK EFFECT FROM 10.00 A.M. EDT ON SATURDAY 1st DECEMBER 2007. Period.

saopaulo cg 22:06 GMT December 2, 2007 Reply   
my question: if cable and euro falls hard in european session, that won´t bring another carry unwind ????

London NYAM 20:13 GMT December 2, 2007 Reply   
jj/yes and the move from the major top 124.12 to the low retrace 23.6 is 111.20 which indicates wto me this may be a move related to the entire move rather than just the last leg. My feeling is that this will need a test lower now to see just how much support there is for a stronger dollar yen. Similarly we will probably get a pause from the exhuberant rebound in equities last week to test a similar fear. I beleieve both tests will succeed and launch us into a december rally but thats two steps ahead and better just to start with phase 1. glgt

lkwd jj 19:58 GMT December 2, 2007 Reply   
london nyam usdjpy high friday was near 38% retrace of last move down. after down move in aug it also had trouble after it reached same level retrace. bottom line is interest rate diff will be getting narrower as hinted to by uncle ben.

Philadelphia Caba 19:30 GMT December 2, 2007 Reply   
..also 5 cb's rate decisions this week...

London NYAM 19:25 GMT December 2, 2007 Reply   
Some interesting setups going into the start of this week. I suspect dollar yen is due a pull back soon and i further suspect that its depth will be a surprise (since this whole move is to me a large scale correction from 124 to the recent lows). So im taking some small shorts between here and 111.70 and looking for 109.50 area again. Some additional milage is probably possible from the crosses given this scenario and, once again i prefer gbpjpy selling here up to 229.80 looking for a few hundred pips on the downside. Eurgbp looks like it will continu this final impulse move towards sub .7100 where i will t/p on my short and start to look for reversal positions for .7200+. Sometime midweek or late in the week the yen should start to weaken again along with anything challenging the dollar rebound. The best short still seems like cable.

Philadelphia Caba 18:51 GMT December 2, 2007 Reply   
Va Raven 17:36 GMT
thanks, very helpfull!

hk ab 17:49 GMT December 2, 2007 Reply   
Ahe,

Thanks and will watch those levels carefully.

Va Raven 17:36 GMT December 2, 2007 Reply   
I remember someone on the forum once asked how the carry trade work, this might help a little to understand;

"Hedging the carry trade

How can an investor make the most of the carry trade? Lee Ferridge, head of trading strategy at Rabobank in London takes a look

BACKGROUND

Despite credit market turmoil, recent weeks have seen the Australian and New Zealand currencies reach multi-year highs against the US dollar, while cable also reached a 26-year peak. At the same time, a range of emerging market currencies (as diverse as the Brazilian real, Indian rupee and Hungarian forint) have been notable performers. What is the common thread? High domestic interest rates, also known as 'yield'.

The carry trade has become the predominant focus of markets in general, and the FX market in particular. The borrowing of 'cheap' currencies to fund long positions in higher-yielding assets is nothing new, but it has become much more prevalent in recent years as high global growth, Japan's low rate policy and the sharp increase in hedge fund assets have coincided.

Although the value of outstanding carry trades remains a matter of considerable debate, most accept that it is a question of hundreds of billions of dollars, rather than tens of billions.

PROBLEM

With New Zealand official rates now at 8.25% (against 0.50% in Japan) and the New Zealand dollar having gained more than 34% against the yen in the past 12 months, potential carry trade rewards are too significant to be ignored. However, there are growing concerns that the global liquidity bubble has reached dangerous proportions and is due a major correction. Credit market turmoil has clearly added to these fears.

The problem is that the doomsayers have been concerned about such a turnaround for some time. If investors had stood on the carry trade sidelines during this period, their relative performance would look particularly poor. Just as those who called the top during the dotcom boom were ultimately proven correct, they suffered significantly in the interim.

The solution is, of course, to hedge. Almost by definition, however, a carry trade is practically impossible to hedge as any structure will be priced (either directly or indirectly) off the interest rate differential one is hoping to exploit. In addition, when dealing with many emerging market currencies, a lack of liquidity could mean the standard derivatives hedging instruments are either not available or are prohibitively expensive.

SOLUTION

While global currencies have become increasingly correlated in recent years, it may still be surprising to learn that the correlation co-efficient (calculated from daily data since the start of 2002) between NZD/USD and EUR/CHF is as high as 0.814. Between AUD/USD and EUR/CHF it is even higher, at 0.893, whereas between EUR/CHF and GBP/USD it is 0.849.

As for emerging markets, the correlations between EUR/CHF and BRL/USD, HUF/USD and INR/USD are 0.669, 0.752 and 0.851 respectively. These are significant relationships.

High correlation co-efficients are all very well, but do the relationships hold during periods of high volatility? There is little point in identifying markets with close relationships in stable times but where the relationship breaks down at crucial times.

Fortunately, the EUR/CHF high-yield relationship holds during periods of both high and low volatility. To illustrate, using a 7.50% decline in any four-week period as a proxy for the 'disaster' scenario, we find that only twice in the last three years has the New Zealand dollar declined to this extent (in May 2004 and March 2006), while the Australian dollar has done so just once (in May 2004).

EUR/CHF is clearly much less volatile than the high-yield currencies, and over the past three years it has fallen by more than 1.75% only twice. However, the two occasions were in June 2004 and May 2006, that is, just a few weeks after the high-yield currency declines.

This consistent relationship means we can use EUR/CHF as a potential low-cost hedge for carry trades. As this is an 'insurance policy play', a EUR/CHF one-touch digital put is the recommended solution. A three-month one-touch CHF 1.635 strike (ie, 1.75% from spot of 1.664) can be bought for 36%, a 3–1 potential payout.

However, this is not our preferred solution. It can be argued that a 7.50% decline in the Australian and New Zealand dollar is not the 'big blow-out' that keeps investors awake at night. Therefore, for those who require only true disaster insurance, placing the EUR/CHF strike at 1.614 (ie, 3% away from spot) for a three-month expiry would cost a much more attractive 12%, an 8–1 payout.

CONCLUSIONS

A perfect hedge for the carry trade does not exist, but EUR/CHF enjoys the advantages of a close correlation with the high-yield currencies, deep pools of option market liquidity and extremely low relative implied options volatility levels (three-month at-the-money EUR/CHF vols are 3.55%, compared with Australian dollar rates of 8.00%, and New Zealand dollar rates of 9.80%).

Given these factors, for those currently enjoying buoyant carry trade returns but becoming increasingly concerned over the 'disaster' scenario, a EUR/CHF one-touch option could provide a much-needed and cost-effective degree of comfort."

Hasselt Red 17:23 GMT December 2, 2007 Reply   
GVI Jay 17:14 GMT December 2

It is, probably the cleanest city in belgium :-)

GVI Jay 17:14 GMT December 2, 2007 Reply   
Hasselt (is that a location?) : From GVI:

GVI Jay 13:40 GMT December 2, 2007 Edit Delete
UAE state news agency retracts forex reform story

LINK

Hasselt Red 16:18 GMT December 2, 2007 Reply   
does anybody know what the middle east council discussed on the USD?

saopaulo cg 15:08 GMT December 2, 2007 Reply   
HK RF,
any view on the usdyen? Thank you in advance.

saopaolo cg 15:04 GMT December 2, 2007 Reply   
thank you AHE, appreciated.

Hong Kong Ahe 13:12 GMT December 2, 2007 Reply   
hk ab 01:21 GMT December 2, 2007 Ahe, any new views on yen and yen crosses? Is a/j going above 100 soon? // Monday, AUD and NZD may start at stronger tune but watch carefully after Asian session which may form the week high and AUDYEN, NZDYEN may go south from 4, 5 and especially on 7th Friday, YEN crosses may create new low as USDJPY may create new low too. Gold also may correct back to 750 or lower to 200DMA or 260DMA level. Friday Dec07 is "Full of water" in my term and China Stock CNY and YEN forms new high. My forcast may go wrong as any normal human beings. Watch the market carefully as Yenosans do 24x7 and adjust your strategy accordingly, if any violation. GLGT. Me too. ;)

hk RF@ 04:40 GMT December 2, 2007 Reply   
http://www.thebusiness.co.uk/news-and-analysis/382996/the-credit-crunch-could-crush-the-euro.thtml

>>>>>>>>The credit crunch could crush the euro>>>>>>>
Sunday, 2nd December 2007

The credit crunch is hammering the US, which now faces a likely recession. Things don?t look great for the UK either; here growth could plunge to 1 per cent next year.

There is a near-consensus among economists, in fact, that the Anglo-Saxon world created this credit crunch and will likely bear the most pain.

The eurozone, it is widely assumed, has been less affected by sub-prime. Most investment banks predict the 13-country region will out-perform the UK in 2008.

A slew of recent data tells me we should now question that assumption. If I?m right, and the eurozone does a face serious drop, us Brits would be foolish to grin. We like to revel in Continental misfortunes, but the single currency area matters hugely ? accounting for three-fifths of UK trade, more than four times as much as the States.

The reason the eurozone now worries me is the emerging picture of sharply rising consumer prices on the one hand, and falling output on the other. Just like the Bank of England, the European Central Bank will on Thursday try to set monetary policy not only to deal with inflation, but also bolster growth.

Eurozone base rates are likely to be held at 4 per cent ? for the sixth month in a row. Most observers think if they do shift this week, the only possible move is up.

That?s because, despite the credit crunch, the ECB?s rhetoric has remained very hawkish. But, in reality, eurozone policy makers now face a classic growth-inflation dilemma ? one they share with other Western central banks.

The ECB?s predicament is made worse, though, by the euro/dollar exchange rate, and the single currency?s structural flaws. These two unique aspects of the region?s quandary are why its prospects are more gloomy than assumed.

Evidence that eurozone growth is souring is now coming thick and fast. In Germany, the region?s powerhouse, retail sales fell 3.3 per cent between September and October we learnt last week ? with consumer spending frail in many other member states too. Europe?s bellwether Economic Sentiment Indicator also fell for the sixth consecutive month.

With weakening global demand slowing industrial growth, the eurozone?s crucial manufacturing sector is starting to suffer as well. The closely-watched IFO index of German business sentiment is well below its December peak. Europe?s PMI industrial index has also dropped close to 50 ? a value which, in previous years, has provoked interest rate cuts.

But the ECB will have a big problem lowering rates this Thursday ? or anytime soon ? because eurozone inflation jumped to 3 per cent in November, up from 2.6 per cent the month before. Inflation has almost doubled since the summer ? with rising oil and food costs causing consumer prices to balloon.

Germany?s CPI grew 3.3 per cent last month ? a 13-year high. And price pressures elsewhere mean eurozone inflation will stay above the ECB?s 2 per cent target for months to come.

Then, of course, there?s the US currency ? that is, the impact of the feeble greenback on the euro. Over the last year, the single currency has risen more than 15 per cent against the dollar, which has seen investors dump US assets. This makes European leaders see red, of course, as a rising currency undermines exports and jobs.

Some say such protests are overdone. After all, a stronger euro dulls the impact of more expensive oil. Dollar oil prices have risen 90 per cent since January, compared with 60 per cent in euros.

The eurozone also sends less than a tenth of its exports to the US. So, on a trade-weighted basis, the euro is up only 7 per cent against the dollar since January ? less than half the straight euro-dollar rise.

These valid arguments suggest the eurozone?s problems have more to do with moribund labour markets and a lack of dynamism than with the cheap dollar.

But the region?s currency problem shouldn?t be played-down ? precisely because it coincides with the ECB?s particularly tricky growth-inflation dilemma.

When inflation surfaces, as it did last week, the markets think the ECB will hike rates ? so the euro goes up even more. That then further undermines exports and growth ? making it even harder for the bank to raise rates to deal with inflation.

This, in turn, forces the ECB to at least maintain its hawkish rhetoric ? certainly compared with the Bank of the England and America?s Federal Reserve ? which pushes the euro up anew.

This is a conundrum the eurozone can?t seem to escape. And as inflation rises, and the dollar keeps falling, the ECB becomes more and more boxed in.

Something has to give. And it may be that desperate measures are needed. After all, sceptics like me have always said the operational viability of the single currency won?t be known until the system is tested by a serious downturn. That moment may now come soon.

Interest rate spreads between government bonds in France, Spain, Germany and Italy have lately got wider and wider. In other words, believe it or not, the markets are increasingly betting on the eurozone breaking up ? as political tensions rise, and the needs of inflation-averse nations like Germany can?t be reconciled with much weaker debt-driven members like Ireland and Spain.

Could it happen? Why not? Every other currency union in the history of man has broken up ? unless, like the US and UK, it has been preceded by generations of political union, and held together with a federal tax system.

It sounds far-fetched, I know. But the ultimate victim of this sub-prime crisis could be nothing less than the single currency?s existence.

Next cut may prove deepest for King

Along with the European Central Bank, the Bank of England will decide on interest rates this Thursday. The "Old Lady", like the ECB, is expected to hold. But, again, there is an outside chance of a December cut. And that chance is steadily growing.

In the latest Reuters survey, 15 out of 56 economists said UK base rates will come down this week from 5.75 per cent - a six-year high. In a survey a fortnight ago, only 6 of the 56 predicted a reduction when the Monetary Policy Committee convenes.

A cut has become more likely due to renewed financial market turmoil. As more "sub-prime" woes came to the surface last week, UK inter-bank lending rates soared.

In a telling phrase, Bank of England Governor Mervyn King told MPs on Thursday that a sense of "on-going fragility" now pervades our financial markets. The months ahead, he said ominously, will be "rather uncomfortable".

For many, discomfort is already here - not least because of fears that the housing market is finally turning. Prices dropped 0.8 per cent in November, says the Nationwide, the steepest monthly fall for more than 12 years. Yes - on an annualised basis, property values still grew by almost 7 per cent. But separate Bank of England data also showed that mortgage approvals during October slumped to a 32-month low - with lenders struggling to fund, and reluctant to extend, new loans.

When buyers' access to credit is hobbled, it is right to ask just where the demand will come from to keep property prices firm. No wonder the latest Telegraph/YouGov poll reports two-thirds of voters now worry about a serious downturn. As the economic outlook worsens, of course, the case for a rate cut grows. The trouble is, as King points out, that with oil and food prices surging, inflation remains a "serious threat".

In October, CPI inflation jumped from 1.8 to 2.1 per cent - much higher than expected and above the Bank's 2 per cent target. And last week, early evidence emerged that price rises during November hit a 10-year high.

Retailers are now aggressively passing-on input cost rises, according to an authoritative CBI survey. And yet consumers are continuing to spend.

"There is certainly a risk," King told MPs, responding to that survey, "that the MPC won't be able to keep inflation close to target in the wake of further commodity and energy price rises." That doesn't sound like the prelude to an interest rate cut.

King is right to worry. I applaud his hawkish stance. To cut rates when inflation is above target, and rising, smacks of panic. But I have a sneaking suspicion the MPC just might vote for a rate cut this Thursday - even if that means, once again, King himself is outvoted.

Of the nine MPC members, two - David Blanchflower and Sir John Gieve - are firm rate-cutters. Deputy Governor Rachel Lomax is on the brink - as, in my view, is the Bank's chief economist, Charlie Bean. Only five votes are needed to cut.

And as inter-bank rates tighten further this week, and the money markets squeal, more MPC members will jump.

hk ab 01:21 GMT December 2, 2007 Reply   
Ahe, any new views on yen and yen crosses? Is a/j going above 100 soon?

bc, thanks very very much on the metals sharing. Do u see silver going to lag gold/even drop a bit due to the coming recession reducing the industrial demand of silver? THANKS.