FX News Trading For The Week Of July 15-And Beyond | Forex Factory

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FX News Trading For The Week Of July 15-And Beyond

  • #1
  • First Post: Edited 10:03pm Jul 13, 2007 9:20pm | Edited 10:03pm
You likely will be seeing a lot more about this subject in coming days and weeks, because it indicates that a bottom for the dollar could be much farther off then previously thought.

The subject is current account surpluses-who has them and what could happen as their use becomes more influencial in global financial and FX markets.

According to the latest data from the IMF, global FX reserves increased by 5.2% in the first quarter of 2007 to $5.3T, with the vast majority of these FX reserves being accumulated in dollars. China is accumulating $44B/month, more then twice the $20B/month growth seen in 2006. India’s FX reserves are increasing by around $5.1B/month (compared to $3.33B/month last year) while Russia’s are growing by $14.7B/month (compared to $10.7B last year).

Central Banks keep a specific balance in their portfolio of reserves so if one currency is accumulationg faster, the portfolio has to be "re-balanced". Not all CB's report their balance to the IMF, but making an estimation based on those that do indicates that in order for China to keep its portfolio in balance, they need to sell around $690M/trading day into other currencies such as the GBP, EUR etc.

I'll be posting more about this subject tomorrow morning, NY time. For now-just know that there is alot of dollar selling that needs to go on in order for Central Banks with current account surpluses to maintain their "balance".
  • #2
  • Jul 14, 2007 12:33am Jul 14, 2007 12:33am
I never thought/understand of this USD weakness in the form of excess FX Reserve. But when you stated it "they need to sell around $690M/trading day" it came clearly now. Thanks for this very simple explanation.

Seems like Long EURUSD is the better long term position to hold.
  • #3
  • Edited 9:21am Jul 14, 2007 8:41am | Edited 9:21am
The need that China has to sell some of its dollars is mirrored by other economies who also are growing their current account surpluses.

If you use the latest data from the IMF, which that showed global FX reserves increased by 5.2% in the first quarter of this year to $5.3T and make the rough assumption that the FX split of these overall reserves follows that of those central banks that actually report the composition of their reserves to the IMF, then this would imply that around $85B was diversified into other currencies in Q1 (around $1.23B/day).

Because there have been no signs of any slowdown in reported reserve growth in Q2, it's reasonable to extrapolate out these numbers to cover the first half of the year. This would mean that sales of around $170B into currencies such as the EUR, GBP etc occured ($2.4B/day).

What's also interesting is that these figures take Japan out of the equation because according to the IMF, Japan does not diversify its current account reserves.

There are several things to look for in order to gain an idea of where the US dollar could depreciate to.

1. Selling pressure will remain on the dollar due to the ever-growing surpluses of the exporting nations.

2. If exporting nations decide to change their reserve proportions to reflect less dollar exposure, the pressure on the dollar will increase as more are sold.

3. If Japan begins to diversify, that will only add to the overall amount of dollars that need to be sold, placing addition pressure on the dollar.

4. In the absence of concerns expressed by foreign finance ministers or central bankers, there really is no bottom to how low the dollar could go.

While this doesn't mean to go out and short the dollar against everything, what it does indicate is that when you take all this into consideration and combine it with U.S. inflation and growth data along with other Central Banks that are in tightening modes, you should get rid of any notions regarding the limitation of how low the dollar could go vs. the other currencies at least until you start hearing serious concerns from these other economies.
  • #4
  • Jul 14, 2007 9:27am Jul 14, 2007 9:27am
Nice to have you back NewTrader,
How does this, if at all, affect the Yen carry trade?
  • #5
  • Jul 14, 2007 10:14am Jul 14, 2007 10:14am
At least 7-8 analysts of this board has unanimously concluded that dollar sell off is going to continue in coming days.

When so many experts have decided this we can presume that is not going to happen at all.

So don't panic.....Dollar is going to recover very soon.
  • #6
  • Jul 14, 2007 11:27am Jul 14, 2007 11:27am
Quoting NewstraderFX
The need that China has to sell some of its dollars is mirrored by other economies who also are growing their current account surpluses.

If you use the latest data from the IMF, which that showed global FX reserves increased by 5.2% in the first quarter of this year to $5.3T and make the rough assumption that the FX split of these overall reserves follows that of those central banks that actually report the composition of their reserves to the IMF, then this would imply that around $85B was diversified into other currencies in Q1 (around $1.23B/day).

Because there have been no signs of any slowdown in reported reserve growth in Q2, it's reasonable to extrapolate out these numbers to cover the first half of the year. This would mean that sales of around $170B into currencies such as the EUR, GBP etc occured ($2.4B/day).

What's also interesting is that these figures take Japan out of the equation because according to the IMF, Japan does not diversify its current account reserves.

There are several things to look for in order to gain an idea of where the US dollar could depreciate to.

1. Selling pressure will remain on the dollar due to the ever-growing surpluses of the exporting nations.

2. If exporting nations decide to change their reserve proportions to reflect less dollar exposure, the pressure on the dollar will increase as more are sold.

3. If Japan begins to diversify, that will only add to the overall amount of dollars that need to be sold, placing addition pressure on the dollar.

4. In the absence of concerns expressed by foreign finance ministers or central bankers, there really is no bottom to how low the dollar could go.

While this doesn't mean to go out and short the dollar against everything, what it does indicate is that when you take all this into consideration and combine it with U.S. inflation and growth data along with other Central Banks that are in tightening modes, you should get rid of any notions regarding the limitation of how low the dollar could go vs. the other currencies at least until you start hearing serious concerns from these other economies.

Never thought of it that way, makes me think about how Iran just told Japan to pay for oil in yen not dollars?????
  • #7
  • Jul 14, 2007 11:29am Jul 14, 2007 11:29am
Quoting antariks
At least 7-8 analysts of this board has unanimously concluded that dollar sell off is going to continue in coming days.

When so many experts have decided this we can presume that is not going to happen at all.

So don't panic.....Dollar is going to recover very soon.

The dollar might recover, but looking at that strong upwards trend I don't see it happening right now.
  • #8
  • Jul 14, 2007 11:52am Jul 14, 2007 11:52am
Quoting antariks
At least 7-8 analysts of this board has unanimously concluded that dollar sell off is going to continue in coming days.

When so many experts have decided this we can presume that is not going to happen at all.

So don't panic.....Dollar is going to recover very soon.
You're misunderstanding what I said. I'm not predicting that the dollar will continue to fall, but what I am saying is that if U.S.data keeps showing that inflation is weakening while other CB's are tightening, the potential weakness for the dollar might be much lower then you think.

If you're going to trade, you can't look at technicals or previous S/R and just assume it can't get to certain levels. $2.08-$2.1 for the pound is certainly possible, given the right set of circumstances.

Certainly, if the U.S. CPI looks inflationary this week the dollar will rebound and even more so if U.K. inflation looks tame.
  • #9
  • Jul 14, 2007 11:54am Jul 14, 2007 11:54am
Never thought of it that way, makes me think about how Iran just told Japan to pay for oil in yen not dollars?????

This is really not going to amount to much, as Japan has been importing much less Iranian oil. Iran used to provide about 10% of Japan's oil imports but that's even less now.
  • #10
  • Jul 14, 2007 12:03pm Jul 14, 2007 12:03pm
Quoting NewstraderFX
Never thought of it that way, makes me think about how Iran just told Japan to pay for oil in yen not dollars?????

This is really not going to amount to much, as Japan has been importing much less Iranian oil. Iran used to provide about 10% of Japan's oil imports but that's even less now.
Thanks for the insight...didn't know about Japan's oil imports.
  • #11
  • Jul 14, 2007 10:51pm Jul 14, 2007 10:51pm
Quoting NewstraderFX
Never thought of it that way, makes me think about how Iran just told Japan to pay for oil in yen not dollars?????

This is really not going to amount to much, as Japan has been importing much less Iranian oil. Iran used to provide about 10% of Japan's oil imports but that's even less now.
I heard of the news that Iran asked Japanese oil import company(Japanese oil wholesale company) for yen-denominated trade on Saturday morning. I simply guessed that Iran would attempt to perform a service for Japanese buyer. Previously, the sellers used to overcharge buyers. The days when Japan couldn't import oil from abroad in wartime and the oil crises of the 1970s seem to belong to a different age. Of course, all over Japan had to promote energy conservation technology from that time.

Iran originally sets limits to US dollar-based transaction for Iran's heavy-handed diplomacy. In May 2007, 70% of Iran's crude oil profits is in currency other than US dollars, according to Reuters news agency.
In my opinion, I can hardly imagine that the US will permit Japan to trade deals with Iran on a yen basis instead of USD at diplomatic advantage, as far as we Japanese take example by the past Prime Minister Mr.Kakuei Tanaka's failure who was embroiled in Lockhead scandal. In the oil shocks of the 1970s, our beloved Prime Minister Mr.Tanaka fought a lonely battle and tried to find a means of survival in Japan-Mideast diplomacy. (Basically, Japan must stand for pro-US policy.) Oh, I almost forgot about the collapse of the Hussein Government.

Incidentally, I usually remit money overseas on a yen basis simply because I feel certain Japanese banks' TTS(telegraphic transfer selling rate) is expensive. The attachment is Bank of Tokyo-Mitsubishi UFJ(Japan's biggest bank) TTS Exchange Rates. This bank's rates which are announced on weekday morning(at tenish) seem to be Japan standard median rate at trade settlement.
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Peace and Happiness through Prosperity (by Konosuke Matsushita)
  • #12
  • Jul 15, 2007 1:29am Jul 15, 2007 1:29am
Quoting NewstraderFX
3. If Japan begins to diversify, that will only add to the overall amount of dollars that need to be sold, placing addition pressure on the dollar.
Here is foreign currency reserves of Asian countries at the end of June, 2007.
(Source: Gaitame.Com Co.,Ltd.(Japan's largest forex broker)
US Treasury seems to occupy 84%("Securities" totaled $768.4 billion) of Japan's foreign reserves. However, Mr.NewstraderFX, it sounds unlikely.....Currently, sad to say, Japanese politicians are poor at diplomacy and have more to learn. I'm not sure they can use the powerful card against US.
Attached Image
Peace and Happiness through Prosperity (by Konosuke Matsushita)
  • #13
  • Jul 15, 2007 6:37am Jul 15, 2007 6:37am
I'm not sure that Japan wants to use any kind of card against the U.S. since it depends on the U.S. for exports. As for the CA imbalances-there isn't really anything that a government can do except to use those reserves in a way that maintains the status quo, which is to everyone's advantage.

By the way-I am making a prediction that the Japanese economy is going to expand for many years to come at a sustainable pace that will not dangerously stoke inflation, without the dangerous asset bubbles that it experienced in the past.
  • #14
  • Jul 16, 2007 9:29pm Jul 16, 2007 9:29pm
Today was a very mixed day in the markets, with currencies basically range-bound ahead of the CPI and Bernanke testimony.

The DOW gained, but the S&P lost and bonds advanced, signalling that some nervousness abounds. The sub-prime issues are causing a certain level of concern, but I don't see the issue causing a major problem because it's basically a story of people who never should have gotten loans to begin with and institutions that didn't properly price the risk.

There are a lot of earnings being reported this week. Analysts expect to see lower profits from here, so surprises to the upside will get things going while surprises to the downside could cause a summer swoon.

Here are some headlines and videos I found important:

Stocks in U.S. Poised for 10 Percent Drop, Options Bets Show
http://bloomberg.com/apps/news?pid=2...x_k&refer=news


Browne, Strategist, Says Currency Markets Focused on High Yeilds
http://www.bloomberg.com/avp/avp.htm...Fnce7vveh8.asf

KPMG's Global M&A Predictor calls the top of the Global M&A market
http://www.kpmg.com/Press/07.11.2007.htm

Wall Street Cautious, Awaits Earnings
http://news.yahoo.com/s/ft/20070716/...20071113254766
  • #15
  • Jul 17, 2007 8:29pm Jul 17, 2007 8:29pm
Quoting Fumafuma
Here is foreign currency reserves of Asian countries at the end of June, 2007.
(Source: Gaitame.Com Co.,Ltd.(Japan's largest forex broker)
US Treasury seems to occupy 84%("Securities" totaled $768.4 billion) of Japan's foreign reserves. However, Mr.NewstraderFX, it sounds unlikely.....Currently, sad to say, Japanese politicians are poor at diplomacy and have more to learn. I'm not sure they can use the powerful card against US.
Thanks for the post. An announcement-should it come-that Japan would be diversifying some of it's reserves out of dollars would push it down to a degree.

Not all banks report their porfolio of reserves to the IMF-so we don't know exactly what the make-ups are, although estimates can be made. But as their reserves grow-in order to keep their desired balance-they have to sell dome of the excess dollars being accumulated. So as EM's grow their reserves of dollars-the dollar will tend to weaken.
  • #16
  • Last Post: Jul 18, 2007 3:37pm Jul 18, 2007 3:37pm
I watched a segment at CBNC earlier and some economists debated that FED should increase the inflation comfort zone from 1.0~2.5% to 1.5~3%
The inflation level of <1.5% has never existed for many decades - last time was in the 50s. It is thus not practical to impose an inflation target that does not exists/apply anymore...
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