Greenspan Says LIBOR OIS Rates ‘Normal’

The Libor-OIS spread fell to a level that former Fed Chairman Alan Greenspan called ‘normal, indicating a thaw in credit markets. The Libor-OIS spread which is a gauge of banks reluctance to lend fell to 25 basis points, the least since January 2008. The Libor-OIS spread also affects interbank forex markets. David Keeble of Calyon stated, “It certainly is good news and indicates that some normality is returning, at least in prices. It backs up what the Fed said last night. Everything seems to be going well at the moment.”

ECB Cuts Rates to Record Low

This is good news for both interbank and retail forex markets. Also affecting currency exchange rates was the news that the Eurozone economy contracted by a less- than-forecast 0.1 percent pushing the euro upward in both interbank and retail forex markets. The ECB cut its rate to a record low of 1% and started purchasing 60 billion euros ($86 billion USD) of bonds and provided unlimited amounts of euros to financial institutions. The ECB said in its bank lending survey that banks were less aggressive about credit standards for both companies and households.

Further Euro Gains ‘Not Likely’

The euro to dollar exchange rate rose to a one week high on Thursday as the good news from the Eurozone put downward pressure on the dollar. Demand for higher yielding assets and currencies put further pressure on the dollar. Some analysts say that further euro gains are not likely.  Adam Cole of RBC Capital Markets in London stated, “What we really need to see for the euro to run any further is some evidence from leading indicators that growth is actually turning positive at the moment. So there is a limit to how far it can run until we get some convincing evidence that Q3 is likely to be positive.”

The euro to dollar exchange rate was up 0.5% on Thursday and traded at $1.4270 and against the yen traded at 137.49. Both interbank and retail forex traders are waiting for US retail sales data due late Thursday.

European Stocks Fall, Dollar Holds Gains

High yielding currencies such as the Aussie and New Zealand dollars fell on Tuesday after European stocks and oil prices fell. The US dollar held onto gains made last week after US employment figures and manufacturing showed signs the recession is easing in the world’s largest economy. Forex traders and investors are now awaiting the release of the results of the FOMC meeting which are due Wednesday. Some analysts saw signs of risk aversion which has also helped the dollar and the yen.

Trading Thin

Currency experts saw few market moving events in European markets and noted that trading is thin because of the summer holiday season. Peter Frank of Societe Generale stated, ‘Oil has dropped back from the day’s high, that could be a driver. In very thin volumes, it looks like there’s a certain amount of risk aversion going on.” The Aussie dollar fell 0.2% to $0.8355 and the Kiwi dollar fell 0.7%. The Japanese yen gained against the Aussie dollar by 0.9% to 80.63 yen while the Kiwi dollar slipped 1.5% against the yen to 64.72.

Some Have Cautious View of Dollar’s Gains

Many forex traders are starting to believe that the correlation of the US dollar to risk sentiment is fading and some remain cautious saying that the same thing happened in early June when the dollar rose on better than expected employment data. Chris Turner of ING said, “The dollar is holding onto Friday’s payroll-inspired gains, but it needs some fresh support to avoid sinking back as it did in June. The Fed is likely to keep current rates at 0-0.25% and many expect the Fed to end its $300 billion Treasury purchases program.

Treasury Auction This Week

Many experts expect currency exchange rates to be affected by the US Treasury auction of $37 billion dollars of 3-year notes on Tuesday and will auction off a total of $75 billion T notes this week. In the recent past Treasury auctions have been well received.

US Data Improving

A deceleration of US job losses and improved housing and manufacturing data lifted stocks and surprisingly the US dollar. Typically when risk sentiment rises the dollar declines against higher yielding currencies. Negative data usually caused investors to seek the safe haven of the dollar causing it to rise on global Forex markets. During the last year currency exchange rates were largely affected by stock markets. When stocks rose the dollar declined against other currencies and when stocks fell the dollar rose on safe haven demand.

Dollar Returning to Fundamentals

It appears that the stock dollar correlation is starting to change. After Fridays US jobs data the dollar changed its traditional pattern and rose against other major currencies. Earlier in the year the correlation between the euro-dollar rate and the Standard and Poor’s 500 was about 50% meaning that the euro and S&P 500 rose and fell in tandem. Some currency experts expect the link between the two to weaken further. Joseph Trevisani of FX Solutions stated that the dollar’s gains on Friday are “a sign that the currency markets are weaning themselves from the ‘good-news-is-bad-news for the dollar’ syndrome and returning to fundamental measures of economic growth and interest rate cycles.”

Many traders and investors welcome the change. Alan Ruskin of RBS Securities stated, “The idea of selling the dollar on strong U.S. data because it is risk-positive is being appropriately challenged.”

Full Economic Calendar This Week

Currency exchange rates will undoubtedly be affected by this week’s economic calendar. On Tuesday the US Federal Reserve will meet for two days and investors will be closely scrutinizing statements due to be released on Wednesday. Also on Wednesday international trade data for June is due to be released. On Thursday retail sales for July will be released and on Friday industrial production and consumer sentiment for August will be released.

Fed to Auction $75 Billion of US Debt

This coming week the US Treasury will auction $75 billion of 3 year notes, 10 year notes and 30 year bonds. The auction is expected to show investor confidence in the US’s ability to finance its debts.

The London Interbank Offered Rate

The London Interbank Offered Rate (LIBOR) affects everyone in many ways. Simply put the LIBOR is a world wide guide banks use when lending to each other. Most adjustable rate mortgages (ARMs) and credit card interest rates are based on the LIBOR. The higher the rate the higher the payments on the mortgage or credit card. The British Bankers Association meets daily to compile the rate which is then released through the Reuters news agency. Unfortunately there is no way of forecasting the LIBOR beyond a year’s time. Lenders around the world monitor the LIBOR rate daily.

Record Lows Last Week

Last Friday the interbank rate for three month euro, dollar, and pound funds hit record lows. The LIBOR dropped to its lowest since the BBA introduced the Libor fixings in 1989. BBA data showed that the three month dollar LIBOR rate fell to 0.50375%. The three month spreads of LIBOR over Overnight Interbank Swap rates also narrowed. The spread is indicative of the three month premium paid over Overnight Interbank Swap rates and is widely held as an indicator of backs willingness to lend to each other. A narrow spread is seen as an indicator of more willingness to lend while a wider spread indicates reluctance to lend.

No Full Recovery Until 2010

The narrower spreads are seen as a positive development and with banks more willing to lend to each other risk sentiment is raised. Narrower spreads are good news for credit markets and have a positive effect on currency and equity markets. While the results of the current LIBOR are positive many experts believe that it will take well into 2010 for bank to bank lending to recover from the financial and credit crisis which began with the failure of Lehman Brothers in 2008.

Dollar at Two Month Low Against Majors

The US dollar is currently at a two month low against a basket of major currencies. Positive second quarter data from Intel and Goldman Sachs raised risk sentiment and raised investor sentiment about the economy and corporate earnings. A US report that showed a slowing in industrial production contraction also lifted investor’s spirits and damped demand for safe haven assets. Ian Stannard of BNP Paribas SA stated, “The recent data releases and earnings reports out of the U.S. have buoyed equity markets and seen the yen and the dollar both come under some pressure. Today’s U.S. industrial production data will be key as to whether this improvement in risk appetite continues.”

Optimism Driven Trading Emerging

US corporate earnings reports have had a major effect on currency exchange rates. The stellar second quarter performance of both Intel and Goldman Sachs exceeded the estimates of analysts. Daisuke Uno of Sumitomo Mitsui Banking Corp. said, “There is a sense that optimism-driven trading is re- emerging. The forecast-beating results from Goldman Sachs and Intel suggest the yen will weaken and stocks will advance.” Other second quarter reports are due from many of the companies in the standard and Poor’s 500 Index.

Developed Countries to Lose 30 Million Jobs

Although risk sentiment was up many forex investors and experts feel that recent signs of an economic upturn will be short lived supported only be the trillions of dollars governments around the world have poured into the global economy. The Organization for Economic Cooperation and Development said that developed countries could lose 30 million jobs during the period beginning at the end of 2007 and ending in 2010. German data showed investor pessimism and analysts believe this data shows that the German economy will not start growing until 2010. Carsten Brzeski of ING stated, “The German economy could be among the first to escape the recession. However, it is ‘if’ and not ‘when,”

Currency experts expect forex trading for the rest of the week to be volatile.

Risk Aversion Benefits Yen

The Japanese yen is at a five month high against the US dollar fueled by investor concern about US Q2 corporate earnings. Many investors believe that recovery this year will be minimal. The yen was also helped by an upgrade in Japan’s economic forecast. The dollar rose against commodity based currencies due to lower oil prices. Earlier in the year commodity based currencies such as the Aussie and New Zealand dollars had been big winners.

Geithner’s Remarks

The dollar was helped by remarks be Treasury Secretary Timothy Geithner who said that there was a good chance that the US and other major economies would see growth over the next two quarters. Trading has been thin due to summer holidays but some currency experts said that forex investors and traders are cautious despite expectations that some major firms will show signs of recovery. Lauren Rosborough of Westpac in London stated, “All the big banks, save Citi, are seen having positive earnings in the second quarter … but at the same time, the market wants to sell risk this week.”

Banks to Post Q 2 Earnings

Risk aversion has been dominant and has affected global currency exchange rates. The US dollar and the Japanese traditionally benefit from risk aversion and are seen as safe havens. Expectations of a change in the Japanese government have also contributed to risk aversion. This week several large banks will post second quarter earnings. Among these are Goldman Sachs Group, JPMorgan Chase & Co, and Citigroup Inc. James Hughes a market analyst at CMC in London stated, “This week there is heavy focus on the U.S. earnings season, and investors will want to see that any recovery for major companies is revenue-based and not cost-cutting based.”

Also due this week and sure to affect currency exchange rates are minutes of the last Federal Reserve policy meeting and a Bank of Japan meeting.

Chinese State Councillor Calls for Diversification of Global Reserve Currency System

China has renewed its push for an alternative reserve currency at the G 8 Summit taking place in Italy. Chinese State Councillor Dai Bingguo did not mention the dollar specifically but called for global diversification of the global reserve currency system. In a statement read by foreign ministry spokesman Ma Zhaoxu Dai stated, “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system.” Dai is attending the G8 summit in place of Chinese President Hu Jintao who returned to China to deal with political instability in the Xinjiang region.

British Prime Minister Brown Skeptical

British Prime Minister Gordon Brown was skeptical saying that any discussion of alternative reserve currencies would have to wait until global markets recover from the current recession. Brown also voiced concerns that changing reserve currencies at the present time could destabilize markets and that the focus should be on recovery from the recession. Brown stated, “In this present situation as we’re trying to get out of a deep recession, I don’t want to give the impression that there is some major change about to happen around the corner that suggests that the present arrangements are destabilized.”

China Leery of Undermining the Dollar

Currency exchange rates were largely unaffected by Dai’s statements and investors focused on positive US data and signals that Germany’s Bundesbank may purchase corporate bonds. In the past China has been leery of making any moves that could undermine the dollar. 70% of China’s foreign exchange reserves are dollar denominated making the dollar a very sensitive topic for China. In the past Chinese officials have suggested that the Special Drawing Right, which is an account unit used by the International Monetary Fund, is a viable alternative to the dollar as a reserve currency.

Dollar’s Status Secure For Now

For now the dollar’s status as a global reserve currency seems secure. There was no mention of the issue in a statement from the G8 and G5 nations.

Recovery Doubts Raise Risk Aversion

Doubts about the speed of recovery from the lingering recession have dampened risk appetite as investors sell higher yielding assets and seek the safe havens of the US dollar and the yen. Both the dollar and yen gained broadly on Wednesday. The dollar was helped by comments by a Japanese official who said the leaders at the G 8 summit did not discuss the US dollar’s status as the world’s reserve currency during Wednesday’s talks on the global economy.

Investors Concerned About Chinese Political Instability

Chinese President Hu Jintao, who was to attend the conference returned home to deal with political unrest in Xinjiang region. Hu Jintao’s absence diminished speculation that any comments about reserve currencies would be added to communiqués from the G 8 summit. China has been in the forefront of nations calling for an alternative reserve currency. The political turbulence in China has some investors concerned. Boris Schlossberg of GFT Forex stated, “Part of the optimism earlier about a worldwide recovery was based on the assumption that China would be this locomotive of growth and keep the rebound going. As the political situation in China becomes problematic, it provides another reason for investors to sell any high-yielding currencies, benefiting the dollar and the yen.”

Investors Wait For Q2 Results

Investors are waiting for the second quarter corporate earnings report from the US. Poor results are expected to boost dollar and yen demand as investors seek safe haven investments. Investors will be paying particular attention to figures from financial institutions. Chris Turner of ING in London stated, “If bank earnings disappoint in any way or the S&P breaks crucial levels, traders will probably start reducing long positions in (high-risk currencies) and the dollar could be bid more.”

This week currency exchange rates will be affected by the G 8 summit taking place in Italy. The most recent communiqué from the group contained no mention of currencies.

Conflicting Statements

Conflicting statements by Russian officials regarding the US dollar’s status as a reserve currency have confused currency markets during the past week. In Monday the Russian finance minister had backed the dollar as a reserve currency but comments Tuesday by Russian President Dmitry Medvedev questioned the dollar’s reserve status. Tuesday’s comments affected currency exchange rates and put downward pressure on the dollar.

Investor Concerns About US Fiscal Stability

Data showing growing US housing starts and a small rise in producer prices erased safe haven demand putting further pressure on the dollar. Russia’s comments dominated markets Tuesday. Omer Esiner of Travelex Global Business Payments stated, “Clearly the largest holders of U.S. Treasuries are increasingly nervous about the fiscal stability of the U.S. going forward. That said, I don’t think it’s to anybody’s interest to see a run on the dollar.”

BRIC Summit Fails to Address Dollar’s Reserve Status

Forex traders and investors have been watching the BRIC (Brazil, Russia, India and China) summit with great interest. The group represents the biggest emerging economies and is expected to discuss ways to reduce the dollar’s dominance in the global economy. Russian President Dmitry Medvedev said in advance of the summit, “The existing set of reserve currencies, including the U.S. dollar, have failed to perform their functions. We will not do without additional reserve currencies.” A statement issued by the BRIC group expressed the desire for a “diversified, stable and predictable currency system”

Risk Appetite Dominates

The euro to dollar traded 0.6% higher at $1.3876 and the yen to dollar rate was 1.3% lower at 96.56. The euro to yen rate fell by 0.7% and the Pound, Kiwi and Aussie dollars all fell by 1% against the yen. Currency exchange rates have been affected by the perception that the global economy is showing clear signs of recovery. Investors remain uncertain whether the dollar’s fall is over or will continue into the near future.

Greenback Pressured

Recently the US dollar has been pressured by a variety of factors. Despite last Friday’s rally and the successful auction of $65 billion of US Treasuries investors remain concerned about the speed of US recovery and mounting US deficits. Russia’s challenge to the greenback as the world’s reserve currency and their announcement that Russia would not purchase more US debt put further pressure on the dollar.

Investors Remain Uncertain About US Recovery Speed

A week age the dollar got a boost from better than expected non farm payrolls data but the figures were not enough to sustain a long term rally for the dollar. Steven Englander of Barclays Capital stated, “The numbers that came in, while they were somewhat stronger than expected, weren’t really strong enough to be a game changer with respect to the U.S. economic outlook. It didn’t change the view on risks of where monetary and fiscal policy was headed.” Investors remain uncertain about the speed of US recovery efforts and some investors feel they are in uncharted territory where US fiscal and monetary policies are concerned. These factors are affecting the dollar exchange rate around the world in Forex markets.

Lots of Data Due This Week

Economic data due this week could have a drastic effect on currency exchange rates. On Monday the Treasury International Capital flows (TICS) for April will be released and on Tuesday the May Producer Price Index and May housing starts will be posted. Also due on Tuesday is the May industrial output and is expected to post a month to month decline of 0.9%. Wednesday the May Consumer Price Index will be released and is expected to show a month to month gain of 0.3%.

G 8 Meeting Watched by Investors

Investors are closely watching the G8 finance ministers meeting but currency exchange rates are not expected to be a topic of discussion. The slew of economic data expected this week should make it a very interesting week for Forex markets.