Euro May Cash in on its Anti-Dollar Role Before the ECB Decision
The dollar is near collapse; and its liquid counterparts stand to reap the benefits of the potential cross-currency winds. However, from a fundamental standpoint who stands to benefit the most? Those pairs that have pressed all the way to the edge of their recent historical highs against the ailing reserve currency (the British pound or Aussie dollar) are heavily dependent upon unpredictable risk appetite. The stalwart among the group is the euro. Liquidity, a steady yield, bullish growth forecasts and a policy authority that is confident financial conditions are sound make for an appealing alternative for the most actively traded currency in the market. However, is the outlook truly as bright as the market is pricing in? More importantly; do speculators even care?
In trying to approach the first question, it is important to remember that valuing a currency is always done on a relative basis. For example, the euro could still rise against one of its major counterparts even when the economy is sinking as long as the Euro Zone is contracting at a slower pace. That being said, the objective answer is that the economy is not as stable as the strength of the currency would suggest. We will not see the first round of the German and Euro Zone second quarter GDP figures until August 13th. Nonetheless, expectations will readily discount each indicator that crosses the wires until then. This past week’s data further exposed a significant discrepancy between expectations and actual data. Surveys for consumer, business and economic sentiment all reported improvements in their July readings (though they were mostly still below the net expansion/contraction line). In contrast, the German unemployment rate has held at its highest level since December of 2007. Consumers are the foundation for economic health and will determine whether the Euro Zone will struggle to recovery or truly return to growth. Retail sales, factory orders and industrial production will all factor in to this outlook.
Each of these indicators will feed into the market’s unobserved and dynamic growth forecasting model; but the true benchmarks for economic activity will come from the ECB. The central bank is scheduled to announce rates on Thursday and both the market and economists suspect the benchmark will be left unchanged at 1.00 percent. The real value from the event comes from the statement that accompanies the announcement and President Jean Claude Trichet’s forum with the press shortly after the official release. Political pressure has intensified from some of the region’s largest economies to reign in stimulus to avoid stoking inflation. What’s more, the RBA has set a precedence in suggesting it was taking a cautious, hawkish turn; and the ECB no longer carries the burden to be the first. These factors aside though, the economy is certainly not stable enough to take such a passive (much less hawkish) approach. There are still economies suffering severe recessions; and even those that are considered relatively strong are still contraction. Should the group remove the safety net too soon, they run the risk of exacerbating a pull back that develops later.
Another generally accepted truism that has worked in the euro’s favor is that the region has remained otherwise financial sound while the UK and US were nearing structural collapse. However, many of the biggest risks to the broader markets going forward come from the Euro Zone. A premature draining of financial aid threatens to choke the economy, regional banks have yet to write off their losses (they will) and Eastern Europe threatens to default on its loans to the EZ in masse. All of these are considerations to keep in mind. – JK
US Dollar Reversal and Breakout a Matter of Time – But When?
The US Dollar finished the week lower against foreign counterparts, but it failed to break below key range-lows despite sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the second quarter of the year, but noteworthy downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower rate of contraction in Q2 may have calmed some nerves, but truly dismal Personal Consumption figures underlined that consumers—the engine of earlier economic growth—remains heavily subdued. The upcoming week brings infamous Non Farm Payrolls data to the fore, and it will be critical to watch for any signs that the US Dollar could finally break its range versus major forex counterparts.
Week in and week out we have discussed potential scenarios for a US Dollar breakout, but FX markets have shown little willingness to push the USD beyond its trading channel through directionless summer trade. Of course, forex market volatility tends to be mean-reverting over the medium-to-long run. Lengthy periods of consolidation most often lead to sharp breakouts, but the timing of said shift remains anything but clear. Forex options markets volatility expectations are near their lowest levels since August, 2008. Anecdotal evidence tells us that trading volumes have fallen sharply through the summer—theoretically making it easier for a big traders to force volatility. Yet few have shown the appetite for moving markets, and we anxiously await signs that the US dollar may finally break out of its consolidative range.
Can the US Non Farm Payrolls report and other key data releases finally break us from our recent range? We will certainly know the answer to this question once the coming week is through, but it is worthwhile to discuss possible scenarios in which the US Dollar could finally move sustainably higher or lower against the Euro and other key counterparts. Consensus forecasts imply that markets expect broad improvements in key NFP and similarly market-moving ISM Manufacturing and Services results. Given the general uptrend in equity markets and general economic mood, such predictions come of little surprise. Yet lofty expectations leave significant room for disappointment, and the very fact that the S&P 500 has rallied so substantially through recent weeks leaves it at risk for a noteworthy correction.
Forex futures and options data shows that traders remain extremely net-short the US Dollar, and our bias remains bullish as a result. The key difficulty remains the timing of any such correction, as market sentiment can remain at extremes for extended stretches. In other words, we know it’s all a matter of time. Given enough of it, we may expect the Greenback to finally break above the Euro 1.4350 mark or below 1.3800. Given enough time, traders will unwind extremely one-sided US Dollar short positions and bring a noteworthy correction. Whether that may be in the week ahead is anyone’s guess, however, and it will be critical to watch for signs of a sustained reversal. Said signal could come from the S&P 500 and other key financial market risk barometers. - DR
The US Dollar finished the week lower against foreign counterparts, but it failed to break below key range-lows despite sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the second quarter of the year, but noteworthy downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower rate of contraction in Q2 may have calmed some nerves, but truly dismal Personal Consumption figures underlined that consumers—the engine of earlier economic growth—remains heavily subdued. The upcoming week brings infamous Non Farm Payrolls data to the fore, and it will be critical to watch for any signs that the US Dollar could finally break its range versus major forex counterparts.
Week in and week out we have discussed potential scenarios for a US Dollar breakout, but FX markets have shown little willingness to push the USD beyond its trading channel through directionless summer trade. Of course, forex market volatility tends to be mean-reverting over the medium-to-long run. Lengthy periods of consolidation most often lead to sharp breakouts, but the timing of said shift remains anything but clear. Forex options markets volatility expectations are near their lowest levels since August, 2008. Anecdotal evidence tells us that trading volumes have fallen sharply through the summer—theoretically making it easier for a big traders to force volatility. Yet few have shown the appetite for moving markets, and we anxiously await signs that the US dollar may finally break out of its consolidative range.
Can the US Non Farm Payrolls report and other key data releases finally break us from our recent range? We will certainly know the answer to this question once the coming week is through, but it is worthwhile to discuss possible scenarios in which the US Dollar could finally move sustainably higher or lower against the Euro and other key counterparts. Consensus forecasts imply that markets expect broad improvements in key NFP and similarly market-moving ISM Manufacturing and Services results. Given the general uptrend in equity markets and general economic mood, such predictions come of little surprise. Yet lofty expectations leave significant room for disappointment, and the very fact that the S&P 500 has rallied so substantially through recent weeks leaves it at risk for a noteworthy correction.
Forex futures and options data shows that traders remain extremely net-short the US Dollar, and our bias remains bullish as a result. The key difficulty remains the timing of any such correction, as market sentiment can remain at extremes for extended stretches. In other words, we know it’s all a matter of time. Given enough of it, we may expect the Greenback to finally break above the Euro 1.4350 mark or below 1.3800. Given enough time, traders will unwind extremely one-sided US Dollar short positions and bring a noteworthy correction. Whether that may be in the week ahead is anyone’s guess, however, and it will be critical to watch for signs of a sustained reversal. Said signal could come from the S&P 500 and other key financial market risk barometers. - DR
Life insurance industry hit by slowdown - min
NEW DELHI (Reuters) - Slowdown in the economy has trimmed growth in premium income of Indian insurers in FY09, a junior finance minister said in a written reply to Parliament on Friday.
Namo Narain Meena said the total premium income of market leader Life Insurance Corp grew 4.45 percent to 1.56 trillion rupees in FY09, lower than the 17.19 percent expansion seen in 2007/08.
The overall premium income of all the life insurers stood at 2.24 trillion rupees at the end of FY09, compared with 2.01 trillion rupees in the previous year.
"In the year 2008/09, the pace of growth in the insurance sector has slowed down which may be a result of the economic slowdown during the period," Meena said.
NEW DELHI (Reuters) - Slowdown in the economy has trimmed growth in premium income of Indian insurers in FY09, a junior finance minister said in a written reply to Parliament on Friday.
Namo Narain Meena said the total premium income of market leader Life Insurance Corp grew 4.45 percent to 1.56 trillion rupees in FY09, lower than the 17.19 percent expansion seen in 2007/08.
The overall premium income of all the life insurers stood at 2.24 trillion rupees at the end of FY09, compared with 2.01 trillion rupees in the previous year.
"In the year 2008/09, the pace of growth in the insurance sector has slowed down which may be a result of the economic slowdown during the period," Meena said.
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