FX News Trading For The Week Of April 2-And Beyond

What Happened To The $ After the Feb '02 Tariffs Were Imposed?

Very interesting to say the least. First of all, this was a few months after 9/11 and during the time the Bush administration was fighting in Afghanistan and building it's case against Iraq. Certainly, there was a lot of geo-political turmoil then and you might say there's more now. We're still fighting in Afghanistan and the Bush administration has just gotten finished building it's case for more troops in Iraq. We're also that much closer to a confrontation with Iran.

Second-the Fed was on hold from Jan 02 thru Oct @ 1.75%. It cut rates in Nov by 50 basis points to 1.25%. The Fed's been on hold since August (the last increase was in June) and looks to be on hold for the foreseeable future or at least into Q3.

Third-and this is the part you're waiting for-the $ had huge slides against the 4 majors (Eur, GBP,JPY and CHF). How huge?

From Feb 02 thru July, in pips, the $ fell over 1100 vs. the Eur, almost 1600 vs. the GBP, almost 1400 vs. the Yen and over 2200 vs. CHF.

From BB:

The change of policy by the Bush administration, which debated the action for months, applies initially to imports of coated paper from China. It also opens the way for steel companies, textile producers and other manufacturers facing competition from China to apply for the same protection.

``This decision is the most significant step toward a stronger trade policy with China than we have experienced in this decade,'' Republican Representative Phil English of Pennsylvania said in a statement today.

You can throw this from BB into the mix as well:

The dollar's share of global foreign-exchange reserves fell to the lowest level in at least eight years as central banks accelerated their purchases of euros, the International Monetary Fund said.
Dollars accounted for 64.7 percent of reserves last quarter, down from 65.8 percent in the prior three months, the IMF said today in Washington. The share of euros climbed to 25.8 percent from 25.1 percent, reaching its highest proportion since the single currency was introduced in 1999.

http://bloomberg.com/apps/news?pid=2...&refer=economy

Certainly another case for overall $ weakness. Maybe the trend is being set.

Newstraderfx,

Reading your posts is always a pleasure, sir!

We live during exciting times. There seems, however, to be much pernicious noise in the market. Please comment on my analyses.

In an attempt to make this post as short as possible, I am making plain and simple arguments that I hope drive points straight home. If you need me to further explain any of my positions, support them with more evidence or extrapolate on a thought, I beg you to point it out.

The yen repatriation is over, since today is the end of the Japanese fiscal year. Out of fear of seeing their economy flushed down the deflation hole again, the Japanese cannot afford to raise interest rates so soon. Raising them too hastily could prove deleterious to the change of direction the Japanese economy is taking. Anything concerning possible interest rate hikes in the near-future should be discarded; such appreciations in yen should be used as trading opportunities.

Both groups responsible for determining interest rates in Europe and England see the dangers of inflation as real and have expressed their satisfaction with their respective currencies' strengths vis-a-vis other currencies. Several a European finance ministers declared that the appreciation of the EUR is indicative of the strength of their joint economy.

Since inflation levels remain high in GBP and EUR, the JPY carry trades resume, in addition to the expected disappointment of market participants when the BoJ fails to raise interest rates in the future, do you think it is foolish to anticipate a substantial rise in GBPJPY and EURJPY through the second quarter of next year?

Also, what is your take on EURUSD?

You make some excellent points and thanks for the post.

As far as the Yen is concerned, it is very important for the long term Japanese economy to have the BoJ raise interest rates. There are 2 main reasons:

1. When a CB cannot lower interest rates, it cannot (without great difficulty) stimulate an economy when it's needed. Look how long the Japanese economy has been flat. The main reason why Japanese deflation has been such a long standing, difficult problem to solve is that the BOJ has not been able to lower interest rates. There are other means it can use like lowering bank reserve requirments (eases credit) or working to force the Yen lower to increase exports, but devaluation is hard to do and currency manipulation makes them unpopular in other countries.

2. Raising interest rates during a time of strong economic expansion will go a long way towards preventing "bubbles" in the economy. We know that in the long run economic bubbles burst and cause painful downturns (see tech and housing bubbles). When the Japanese bubble burst-it basically put them into a very long standing recession and deflationary period that they only just now are starting to get out of.

It's very clear from what they've said that the BoJ is determined to raise rates to more normal levels, but it likely will take several years to do so and it can only happen if their economy keeps expanding. Perhaps something on the order of 1-2 rate increases/yr if they're lucky. Many feel that 1 more increase will happen before the end of 2007 and if their economy keeps expanding it's highly likely that they will.

In the short term-let's see how Tokyo markets digest the new US tariffs, but I would think for now the 3-400 pip swings in GBP/JPY will continue. It finished the week looking pretty bullish to me...

"Both groups responsible for determining interest rates in Europe and England see the dangers of inflation as real and have expressed their satisfaction with their respective currencies' strengths vis-a-vis other currencies. Several a European finance ministers declared that the appreciation of the EUR is indicative of the strength of their joint economy".

If you're talking about the Yen i'm not sure this is correct. Think back around the time of the G7 when European Finance ministers expressed their unhappiness with the Euro's strength against the Yen. Trichet specifically talked about the danger of too much risk and one-way bets (carry trades). The UK was quiet on this and the US was happy about it. Can u quote where you got your info?

As far as the BoE is concerned-they definately see inflation turning down-King mentioned the possibilty of inflation decreasing "quite sharply" in the 2nd half of the year in his January speech. That tells me that the bank does not want to raise rates. Of course, the data may force their hand, but from what they've said it seems they would prefer not to.

The ECB absolutely wants to raise rates and they seem to be focusing the M3 supply of money for their justification. Their inflation numbers have been pretty good lately, but they are still likely to raise, given their view on M3 and it's elevated level.

As for the $, history tends to repeat itself and we know what the charts say. I'm sure a lot of people have checked the charts and could be thinking the same thing. There's no doubt in my mind that the US wants to see the $ weaker-it wouldn't have imposed tariffs if it didn't-and the main reason is the current account deficit. There's no better way to improve that then by devaluing, especially if you can get the market to do the work for you.

A second possible benefit of devaluing the currency is that it lowers bond prices and raises short term interest rates. That will help to hold down inflation, which is what the Fed wants. Again, they're getting the market to do something that they don't really want to do.

EUR/USD-bullish. GBP,CHF and JPY bullish too. I think it's very possible to see a $ bear market for the next few months.

It Didn't Take China Long To Respond:

China has already spoken out against the tariff-

http://bloomberg.com/apps/news?pid=2...Zz0&refer=home

No big surprise there-who expected them to be happy?

And where's Hank Paulson in all of this? Treasury saying nothing? He likely isn't too happy with the decision and his silence so far speaks volumes. As a Bush appointee-he isn't likely to publically criticize the administration, but he's gone on the record as being against tariffs. I don't think the Bushies will be able to coerce him into giving an approval the way they coerced Colon Powell into giving approval for the invasion of Iraq, unless they come up with some more phony "intelligence" info. Bush has spent all his political currency anyway...

Anyone with an idea how this Tankan Large Manufacturers Index will play out on the USD/JPY?
I have not seen any previous data on the pairs past moves when this comes out.
Anyone that has past data could you please post.
Thanks...

http://www.fxwords.com/t/tankan-survey---japan-.html

NewstraderFX,

thank you for your valuable insight. Sir, you clarified a lot of what seemed grey in my reasoning!


As I was trading last week, I read that many finance ministers were satisfied with the Euro's strength. Much of their newfound growth can be ascribed to a growth in their domestic businesses (within the european union). It is unfortunate that I cannot find the specific news report I had read supporting my argument; I did look for it extensively. For that, I am sorry.

Below is the only article I seem to be able to find about the matter. I do not believe the German minister when he says that he doesn't mind a strong euro specifically, since much of the German economy is tied one way or another to exporting. Although many other players in Europe reported their satisfaction with the Euro's strength last week; off the top of my head, I remember the French finance minister and Sarkozy, the minister of the interior, the Italian Finance minister, the Spanish Finance minister, etc.

http://www.forbes.com/feeds/ap/2007/...ap3551628.html

Thank you.

Thanks for the info DD-u do seem to be correct! Very interesting what u said about not trusting the German finance minister...perhaps a better gauge would be Trichet himself.

Keep those posts comin...

Well here's my 2 cents worth this week. Hahaha hope its not too lousy.

My views on the yen still remains the same. What I express is a simplified version, getting too complicated will result in losses in the market. But I believe that my views though shallow, are sufficient.

The yen will depreciate. Japan is coming out of deflation after such a long time, but the economy is still growing at a snail's pace even though the BOJ has held interest rates at a low rate of 0.5%. I do not see a rate hike any time soon. Other countries in the meanwhile have been increasing interest rates and the difference between for example AUD/JPY keeps growing, encouraging the growth of carry trades. The only reason why we saw an unwinding of carry trades recently is volatility. The huge volatility scares huge funds that carry trades as they stand to lose more money as the yen gets whipsawed. For all you know, the yen might just have appreciated as these funds bought the yen to hedge off their risk.

Moreover, a weaker yen is to the advantage of japan as it attracts more exports. A strong yen will definitely impede japan's growth. Japan's economy depends on its exports and a strong yen would curb these exports. The trend for carry trades has merely seen a slight disruption and will continue onwards. I foresee the euroyen and poundyen reaching their previous tops and might even breach it. Having said that, there's only one possible way to back that up, and like Jesse Livermore, I'll back it up with money. Of course, a buy at the market would be unwise, so i'll short the yen at a dip, and in the forex market, there will always be opportunities to enter.

As for the dollar, we have encountered many opposing opinions and news reports that shows us surprises after surprises. Sub-prime mortgage woes will spillover to consumers in my view, but the focus on the markets have changed. Now that the FED has spoken and said that it is still inflation-vigilant, I believe the dollar might just rise. The price of oil has just breached it's previous resistance (if i remember correctly from a chart I've seen). An uptrend is indeed a high probability move as the iran and britain conflicts grow bigger. Iran produces 4 million barrels of oil a day. Any conflict could just threaten the imports of iran's oil which according to the law of demand and supply could cause price of oil to skyrocket. This will cause a jump in the CPI and the ever vigilant fed would swoop in with a rate hike. However the FED is faced with 2 problems, 1 would be inflation, the other would be with the economy. A report came in stating a high consumer spending, what would that mean? As the market faces turmoil, americans are spending more. That'll be like a teenager spending more than he is able to, eventually going poorer and poorer.

Any comments on this would be appreciated!

Thank you for a very fine post, Jody. You make some excellent points that i'd like to discuss.

As far as a rate hike form the BoJ is concerned-actually their economy has continued to expand quite well thru the 2 increases that have already occurred. Now whether the economy will continue to expand at a rate that allows the bank to continue on the path towards normalization-that's a question I don't have an answer for. However, if this does happen the bank will continue to raise interest rates. Let's see how those Tanken numbers turn out later and we'll have a better idea of the short term direction of the Yen.

The failure of the BoJ to raise rates fast enough during the bubble economy of the 80's was the direct cause of the long recession and deflationary period that followed. They're not going to make the same mistake twice.

As far as the sub prime problem is concerned, whether or not the market is still focusing on it is beside the point. IMO-a lot depends on this spring's home buying season. Spring is when the majority of housing transactions take place so if it does turn out bad, it's unlikely that housing will have a chance to pick up before next year. However, it looks like the spring season has a good chance to be decent. People have jobs and incomes have risen, while housing prices and mortgage rates have decreased.

Remember the old NewstraderFX saying: "Houses are not mini skirts". What I mean by that is the demand for mini skirts waxes and wanes with the fashion trends. People will always want to by a house, it just a question of whether they can or not. There's a fancier economic term for this that I just made up: Constant and non-constant demand items. Clothes are a constant demand item while mini skirts are a non-constant demand item. Economics dictate how demand is adjusted for constant demand items while magazines, celebrities, rap videos etc adjust the demand for non-constant demand items.

Now i'm ready for a real prediction...lol. If the spring housing season turns out OK-there will be no rate cut from the Fed this year and the economy will grow at the pace the Fed has predicted. In that case the inflation bias will remain and that should be supportive for the $. If it turns out the other way-we'll be that much closer to a rate cut and you'll be sure to hear the markets screaming for one via an expanding inverse yeild curve.

That won't be determined for a while though and in the meantime-I see a bear market for the $ because of the tariffs. The quickness of the Chinese reponse speaks even louder to me then what they've said.

Well for spring, let's say the report shows an improvement, but it's hard to depend on it for a good analysis. Spring is as you said a buying season, so naturally the data will show an improvement. But it's after spring that counts, what will happen after that?

I'm thinking if the report shows an exceptionally good improvement, it could mean an upturn signalling that housing is still strong, but just a slight improvement would be bad already, considering that it IS the buying season.

And sure the market is expanding for Japan, but how fast can the BOJ raise rates? There's still plenty of time to get in for carry trades. I do not or have never thought that the economy of Japan will improve, it's just a matter of when! Heh, it could be a really long time. Moreover, if the US economy weakens, it would directly affect Japan's economy.

A bad spring sales? confirms that housing is dying..

A good number? as expected.

A very good number? housing is up up up..


BTW>

I wonder if this would send GBP down?
Then again, it also should move the USD down as well.

A decent number in the spring housing season will point towards GDP growing pretty much along the lines of how the Fed sees it (about at trend or "decent"). In that case, a rate cut will be ruled out at least into Q4, especially as inflation will still be above their target zone.

The protests should send oil up...

Oil would definitely go up, and I wonder if the dollar will go up as well. Higher oil prices would cause inflation, which will give reasons for the FED to increase rates.

Only if Oil goes so far as to affect core PCE-and it's influence there is less that what it was in years past.

I still see a bearish trend ahead for the $...of course price will swing back and forth but in 60 days, the $ has a good chance to be 2-300 pips weaker against the majors.

hey, lets not forget the us employment data this week ladies and gents. weak labor numbers could be the last piece in the recession puzzle. this is especially so if we find it coupled with a negative revision of last release. obviously the dollar has a few long and short term drags on it atm, inflation (oil, though that affects other oil consuming countries as well), housing, iraq war, twin deficits, need i go on. in this negative climate any decently good news for the dollar will probably spark a very short lived rally. usd/jpy has me slightly confused but as far as i can tell its ok to hold long for this week. if you got in below 116 youre just collecting swaps. but if we do see anything below that its still a buying opportunity i think. we'll see though.

Have you see how AUD strengthen vs other crosses?

Perhaps Aussies want to overtake the USD... ie, AUDUSD above 1.0000 once again..

M&A Keeps the GBP/JPY Supported:

Despite the weaker ISM number that included a higher prices paid component, the appetite for risk remained in the GBP/JPY due to the KKR buying of First Data for $25 B, the second largest LBO of the year.

We also saw the $ trade lower vs. the GDP prior to the ISM as traders bought into the weak ISM rumor. However, not much selling after the fact was seen which leads to a conclusion of further $ weakness ahead against the GBP, probably at least into the BOE interest statement. The GBP does seem to be headed towards the lower 1.99's...

The market is showing evidence that it may be starting to believe what Bernanke has been saying about the overall economy and the sub prime issue. From BB:

"New Century Financial Corp. became the biggest subprime mortgage company to go bankrupt after the lender, which specialized in loans to people with poor credit records, was overwhelmed by customer defaults".

News like this might really have set the market off 2 weeks ago, but now-no reaction. The market has forgotten about a rate cut for a while and has gotten back to risk and investment. The blips of one weak ISM and a sub prime lender going under just don't seem to have any impact; traders appear to be looking for economic growth to be at trend levels this year, as the Fed has repeatedly stressed. No recession, no hard landing, just continued sustainable growth.

From IFR:

Boston, April 2. Fed"s Poole is on the wires with some very hawkish comments, saying inflation levels could require several more rate hikes. He also weighs in to the USD debate, saying it remains the one global currency. After stalling just above 1.3380, EUR/USD has edged back into the mid- 1.3360s. bids are seen at 1.3360/65 and again at 1.3345.

Here's something that's worth noting-the G7 is scheduled to meet in Washington again on April 13. DD and I have been talking about the Euro finance ministers and how the feel about Yen weakness vs. the Euro.

The last meeting produced a lot of talk against Yen weakness and market risk. It was soon after that, that the markets and Yen crosses tanked. Traders forgot about it though and the crosses have been in an up trend since, albeit with a few re-traces.

I think it's definately worth paying close attention to what they might say now. DD pointed out a few of their recent statements which indicated they didn't seem to mind Yen weakness, although it was lower at that point then when they originally complained prior to the last meeting. I would consider a lack of comment regarding the Yen as a pretty significant indication that higher levels will be seen

Something to bear watching-although they may edit their statements a bit.