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Month: April 2012

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Sterling Digest, April 18 2012: when fundies turn hawkish

£20,bank of England
Is sterling strength here to stay?

Sterling comes alive this week after core UK CPI ticked higher-than-expected yesterday and a known BoE dove turns hawkish today. While economic data is important and moves the currency, the 2 most important fundamental pieces to watch concerning sterling are inflation and the Bank of England’s reaction to it. This week, both turned hawkish. If this becomes a trend, we could see sterling strength remain with a $GBPUSD that is above 1.60 and a $EURGBP at 0.80.

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Sterling Digest, April 13, 2012: the China effect

China and the paradox of prosperity, The Economist
What effect will China have on sterling?

If there were any doubts to China’s ability to move the markets now, there shouldn’t be. China’s soft data release very early in the Friday session has plagued risk currencies like the commodity currencies and the euro. And $GBPUSD and $GBPJPY remain weak as risk aversion flows strengthen the USD and JPY across the board.

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Enter The Chaos Index

the Chaos Index
Is this for real?!

Apparently, there are more riots and protests against the goverment in countries with poor or declining economies. In fact,

The strong link between unrest and austerity suggests that cutting expenditures in times of crisis may be even harder than previously thought…To avoid the spectre of default and a downward spiral of collapsing output, lower tax revenue, and a rising wave of unrest – an austerity trap – governments have to act more cautiously in good times. They need to borrow less and keep taxes high even if public debt is falling in a period of expansion.

This is hardly news. As long as credit rating agencies rule the world, governments are more interested in pleasing them as opposed to its own citizens. Expect more Arab Springs and Occupys as food and energy prices rise with unemployment in countries with strict austerity measures. And the markets won’t be forgiving. Look no further than Europe.

 

Source: This Chart Predicts Rising Violence And Unrest Around The World (Business Insider)

 

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What Do You Do With 18 Billion Euros?

You sell them for other appreciating currencies.

It’s no secret that the SNB has been in the markets buying euros to maintain its 1.20 EUR/CHF currency peg. The euro, however, is a loosing currency to hold as it looses value in the face of its sovereign debt and political crises. To hedge against this loss of  euro value and diversify its foreign reserves as it accumulates euros, a pattern, first noted by Credit Writedowns and included in yesterday’s digest, has emerged that the SNB sells its intervention euros for other, more valued currencies. And it looks like one currency of choice may be sterling.

EURCHF DAILY CHART
Euro has drifted higher in the face of intervention
EURGBP DAILY CHART
However, euro sells off versus the sterling post-intervention

Sterling strength has been mysterious to many traders because UK fundamentals are so poor (poor economy and tons of QE). Perhaps the SNB has been big buyer of sterling as it looks to quietly get rid of a devaluing euro that it is forced to buy. Now as $EURCHF is hovering around the 1.20 peg, I have to wonder if we’ll see a drop in $EURGBP when the SNB enters the forex market again. Some argue the SNB is already in the market.

OK, I step off my conspiracy theorist soapbox.

 

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Sterling Digest, April 11, 2012: central bank fodder

Central bank balance sheets versus the SP500
Central banks at work

The 2 most active central banks last year are still drawing lots of attention from market participants. Both the BoJ and SNB are major threats of more intervention in the forex markets in 2012. Personally, I am not a fan of trading directly with or against central banks so I stay away from CHF or JPY pairs. However, as so aptly put in Credit Writedowns (below), even investors without CHF exposure should still follow this story. With so much central bank rhetoric, when will the market finally take notice?

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Sterling Digest, April 10, 2012: accommodating growth

A new twist in Myanmar
Arm twisting has also forced the UK to forge new international relationships

Sterling has been mixed bag as European traders came back to the markets today after a long Easter weekend. Currency pairs should trade very technically during this relatively quiet news week out of the UK.

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Sterling Digest, April 6, 2012: the big miss

Lightning
Holiday markets

The one flash of life was NFP as the markets hardly ticked beyond that this Good Friday. While most traders deservedly enjoyed a much longer weekend, today’s thin markets set the perfect stage for a US NFP miss. Very unexpected given the string of positive US data this week but also very much aligned with what Bernanke & Co. having been saying long after those minutes were recorded. The big miss leaves markets gobsmacked for  traders’ return after Easter not far from their NFP-induced peaks.

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Sterling Digest, April 5 2012: the herd shows itself

coins in water
Sterling down the drain...for the moment

Last week, the economic data built the case for a possible double-dip recession. This week, the PMI trifecta (industrial, construction, & services) came out quite strong. However, the bulls never rallied $GBPUSD back above 1.60. Then today we get dismal manufacturing and industrial production numbers and $GBPUSD takes a real hit in sentiment as price breaks to new lows for the week. $GBPCAD, $GBPAUD, and $GBPNZD are all lower on the week as well. Anytime the market shows its true bias, both technically and in reaction to fundamentals, you have to go with the herd. And sterling bears are keen on taking it lower short-term.

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Sterling Digest: April 4, 2012

A Bank of England Old One Pound Banknote
Looking ahead to the BoE

UK PMI numbers continue to surprise to the upside this week. While this string of positive data is not enough to declare a robust recovery in the UK, it certainly can be enough to keep the Bank of England from moving on monetary policy tomorrow and allow them to wait-and-see. With ECB out of the way today, traders look ahead to tomorrow’s BoE interest rate announcement.

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Sterling Digest: April 3, 2012

US Dollars
Today was all about the greenback baby

The $FED completely changed the game. While Bernanke had been on the circuit implying more QE was on deck, the minutes revealed a much more hawkish Federal Reserve. And as a result, the USD rallied across the board. Now the question going forward is whether the USD is really gaining strength or are traders being given a USD-selling opportunity?

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