UK Unemployment Claims Fall

The pound rose on Wednesday after better than expected UK jobs data. The UK government reported that unemployment claims fell by 32,000 in February the largest decline since 1997. The pound has been hammered by recent housing data and fears that upcoming elections could produce political gridlock crippling the nation’s ability to deal with economic problems. Commenting on the new employment figures Bank of Nova Scotia currency strategists Camilla Sutton and Sacha Tihanyi stated, “This is the fastest pace of decline in jobless claims since 1997. The pound has definitively broken to the topside and is challenging resistance.” The euro surrendered recent gains after a German government official said that EU finance ministers had made “no decisions” regarding aid to Greece. Ulrich Wilhelm said in Berlin that no decisions about aid to Greece are likely to be made at the upcoming EU summit. Opposition to aid for Greece is widespread in Germany. Boris Schlossberg of GFT Forex said, “The Germans have been the primary sticking point in creating a pan-European solution. Any resistance casts doubt on solving the Greece problem and helps push the euro lower.”

Dollar and Yen Pressured by BOJ, Fed Decisions

The US dollar and the yen fell after decisions by the Bank of Japan and the US Federal Reserve. The BOJ doubled its loan program designed to fight deflation and the US Federal Reserve said it would leave interest rates at historic lows.  Rising oil and commodity prices combined with a rise in risk sentiment lifted commodity linked currencies such as the Canadian dollar, the Aussie dollar, Kiwi dollar and the S African rand.  Andrew Wilkinson of Interactive Brokers Group stated, “Everything is doing OK against the dollar and the yen except the euro. Greece just won’t go away, and that doesn’t sit well with the market.” Twenty years ago Harvard University Professor Martin Feldstein called the newly created euro an “economic liability” and now warns that Greece’s austerity measures will fail and that Greece may have to exit the European Monetary Union to fix its massive debt problems. Feldstein said, “The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy.” Feldstein has been an adviser to several US Presidents starting with Ronald Reagan.

Weak Euro Causing Problems

The weak euro has caused problems for European manufacturers. Since most raw materials such as oil are priced in dollars imported goods are more expensive and could lead to a rise in consumer prices. Until the EU comes up with a concrete solution for the Greek debt crisis downward pressure on the euro is expected to continue.

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Yen Falls Against Most Majors

The Japanese yen fall against most major currencies on speculation that the bank of Japan will implement further monetary easing measures. Recently the yen has benefited from repatriation flows as Japanese corporations seek to repatriate funds before the end of the fiscal year. Most experts believe the BOJ leans towards monetary easing but disagreement among board members on how to justify such a move remains. A report that showed that Chinese exports gained the most in three years lifted investor risk appetite putting further pressure on the yen. Chinese sales gained 46% in February. Commodity linked currencies gained on the Chinese export data. Greg Anderson of Societe Generale SA stated, “There is a firm underpinning to the global economic recovery. The yen normally weakens when stocks go up and has been reluctant to do so the last few weeks. Now it’s playing catch-up.” The yen fell 1% against the euro to 123.60 and fell 0.7% vs. the US dollar to $1.3646.

Risk Sentiment to Improve say Experts

Better than expected data prompted carry trades where investors use currencies borrowed in nations with low rates to finance the purchase of higher yielding currencies such as the Australian dollar and Brazilian Real. The Chinese data helped the Aussie dollar since Australia is one of the chief suppliers of raw materials to China. Currency experts expect high yielding currencies to continue to perform well. Lee Hardman of Bank of Tokyo Mitsubishi UFJ Ltd stated, “Conditions will continue to improve on the risk-sentiment front, and the emerging-market currencies and commodity-linked currencies are likely to outperform over the coming weeks.”  The Aussie dollar gained 0.6% hitting a seven week high vs. the US dollar and traded at 0.9186,. Analysts at Commerzbank said, “They (Australian and New Zealand dollars) are benefiting from good Chinese data which suggest that the economy there is expanding strongly.” The Kiwi dollar rose to a five week high gaining 0.9% and traded at 0.7087.

Euro Trading Volatile

Euro trading was volatile with gains and losses throughout trading sessions. On Tuesday the euro took a hit after Fitch’s ratings agency said it has a negative outlook for Portugal’s debt rating. A highly successful Portuguese bond sale lifted euro sentiment slightly. The euro was lifted after Greek Prime Minister George Papandreou met with US President Obama and said that Obama expressed support for Greece’s austerity measures. Papandreou told reporters, “We’re not asking for a bailout, we’re not asking for financial help from anyone. What we are doing is first of all revamping our own economy. We are taking measures to put our economy on the right path.”

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UK Recovery Slowing

Greece’s debt crisis has taken center stage for months and has dominated currency and financial market news. Many economists believe that the integrity of the multi nation currency is threatened by debt problems in Greece, Italy, Portugal and Spain. One former International Monetary Fund economist believes several defaults will take place this year in the euro zone. The euro zone is not the only economy facing slow and painful recovery. Last week the British pound fell against most major currencies on investor concerns that the UK economic recovery is faltering and the nation may have to struggle to deal with rising debt. The pound is on track for its biggest monthly decline against the US dollar since October 2008. A recent report showed that UK government spending grew 1.2% in the fourth quarter well above predictions of 0.2%. GDP reports showed that the UK economy shrank by an astounding 6.2% since the first quarter of 2008. Stephen Gallo of Schneider Foreign Exchange in London stated, “The market is going to be concerned about the state of public finances in the U.K. The risks are already high of a double-dip recession.”

UK Faces Serious Debt Crisis

On February 26th the pound fell 1% to 89.62 per euro and against the dollar the pound fell 0.7% trading at $1.5153, the lowest since May 2009. Prime Minister Gordon Brown is under intense political pressure to show that he can deal with the UK’s record deficits. The UK budget shortfall is now more than 12% of the nation’s GDP putting the UK on a par with Greece. Recent data shows that the UK’s recovery from the global recession is faltering. House prices fell for the first time in ten months and Bank of England Governor Mervyn King said that the central bank is prepared to do “whatever seems appropriate” to stimulate and preserve growth. Richard McGuire of RBC Capital Markets warned, “A severe consolidation of government finances is both imminent and unavoidable.”

Bad News For the Euro

Several economists are warning of further declines for the already troubled euro. Adam Boyton, a senior foreign-exchange strategist at Deutsche Bank in New York wrote in a client note on February 25th that the euro could fall as much as 6% vs. the US dollar “over coming months” on speculation that the US Federal Reserve will raise rates before the European Central Bank. Boyton wrote, “Looking at past price action would suggest a lower bound for euro-dollar over coming months of $1.2750 to $1.3000. Ahead of that, the next leg down in euro-dollar is more likely to come from pricing a Fed rate-hike cycle than a further re-pricing of fiscal risk in the euro zone.”

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Greek Austerity Measures Cause Strikes, Unrest

The first decade of the multi nation currency the euro was marked by relative economic stability allowing most EU member states to enjoy low interest rates making the EU economy competitive. The recent Greek deficit crisis is now threatening the stability of the euro zone and its currency. Austerity moves by the Athens government of Prime Minister George Papandreou have caused widespread social unrest in the country. Communist protestors tried to blockade the Greek stock exchange and strikers attempted to shut down air, rail and shipping networks to protest cuts in pension and welfare benefits. Bank of England Governor Mervyn King expressed concerns that Europe’s economic recovery has “stalled.”  Delegations from the IMF and the EU arrived in Athens to begin talks with the Greek government on how to rein in excessive spending.

Greece Faces Further Downgrades

The Greek fiscal crisis has rippled through currency markets prompting a flight to safe haven assets and currencies. The Japanese Yen is now at a one year high vs. the euro as threats of a further Greek downgrade sent investors away from riskier assets. Standard & Poor’s and Moody’s Investors Service said that the Athens government faces a further downgrade as early as March. Omer Esiner of Travelex Global Business Payments stated, “There’s a rush to cover short positions in yen when there’s a spike in economic uncertainty. “Sovereign credit concerns are keeping the markets in check. Higher- yielders are trading sharply lower.” The yen gained 1.1% vs. the euro trading at 120.66 per euro while the US dollar traded at $1.3550 per euro. The euro has fallen 2.3% against the dollar in February. About the euro negative sentiment in currency markets Brian Kim of UBS AG stated, “Euro sentiment was weighing lower in the morning, but when you see disappointing data come out, it starts to bring up some questions and you get a bit of a pullback in the dollar. The dollar’s gained so much versus the euro that to get a strong move down up versus the euro we’ll need to see economic better data.”

Greek Crisis Threatens Euro Zone Stability

The head of Germany’s debt agency Carl Heinz Daube warned that a bankruptcy of an EU nation or a nations exit from the European Union would mean the end of the European Monetary Union. In a statement in London Daube warned, “If one member were to go bankrupt this would mean, after 10 years, the euro experiment is at its end.” Most economists expect the EU to eventually come to the aid of Greece especially if a default threatens the integrity of the multi nation currency.

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Opposition to Aid Fierce in Germany and the Netherlands

The ongoing Greek debt saga continues to be closely watched by currency traders and investors. The drama has prompted a lot of speculation about the fate of the European Union and its multi national currency the euro. A recent meeting of EU finance ministers failed to offer any concrete solutions to the Greek crisis. The ministers told Greece to be ready to implement even more austerity measures by the next meeting of EU finance ministers on March 16th. Opposition to aid is fierce in some quarters most notable Germany and the Netherlands. Although German Chancellor Angela Merkel has made blunt public statements opposing aid to Greece Merkel’s coalition government has admitted privately that contingency plans are in place should Greece be unable to service its sovereign debt.

Greek Aid Could Pose Legal Problems For EU

One German economics professor who also opposes the euro has threatened to take legal action if Germany and other EU nations provide aid to Greece. Article 125 of the EU treaty states that the EU and member nations “shall not be liable for or assume the commitments of central governments … without prejudice to mutual financial guarantees for the joint execution of a specific project.”  Article 122 of the same treaty states that, “where a member state is in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. Andrew Scott a member of Edinburgh University’s law faculty and an EU legal expert said, “The no-bailout clause does not stop the German government using taxpayers’ money to buy up Greek debt. But if you bail out Greece from within, the markets will never take seriously a risk premium for a debt-ridden member state again.” The EU faces a very serious dilemma.

Support For Aid

Many analysts familiar with Greece’s problem believe a bailout by the International Monetary Fund is the best solution. The European Investment Bank and the European Bank for Reconstruction and Development have also been cited as possible sources of aid for Greece. Despite popular opposition to aid for Greece in Germany most experts believe that if the integrity of the euro is threatened Germany would most likely act to save Greece and the euro. German Finance Minister Wolfgang Schaeuble favors aid to Greece if absolutely necessary. Any assistance for Greece is likely to include demands for additional and painful austerity measures on the part of the Athens government. In a statement Merkel stated, “The mistakes have to be dealt with at their roots. In the case of Greece, we need to do everything to support the Greek government, which of course has taken this path, in formulating a true consolidation program.” The Greek saga sounds like one big political and financial mess.

Quick Forex Tip: Interbank forex trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank forex trading, s/he must do so through the use of a broker.

New Forex Rules Could Damage Forex Industry

The US Commodity Futures Trading Commission (CFTC) has proposed some very restrictive rules that could adversely affect the thriving forex market. Thousands of traders have flocked to retail forex markets in search of profits greater than those offered by stocks and commodities. Although most of the new rules proposed by the CFTC are meant to reduce investor exposure to scams many forex brokers say the rules go too far and could damage the thriving forex market. Many brokers say that the rules may force them to cut back on US operations sending billions in trades abroad. They also point out that thousands of jobs may be lost due to the restrictive rules. Joseph Trevisani of FX Solutions based in New Jersey stated, “It’s a real issue here — we are talking of losses in jobs, tax revenues and competitiveness.”

Limits on Leverage

What worries traders most are the new rules that would limit the amount of leverage traders could use. Currently leverages of 100:1 are common and the CFTC has proposed limiting leverage to 10:1. Should the new leverage rules be imposed traders would have to invest larger amounts to make trades of the same size limiting both profits and losses. Brokers are adamantly opposed to the new leverage rules. Trevisani at FX Solutions said, “Efforts to promote transparency and prevent fraud are more than welcome, but I can’t really see the connection between fraud and customers’ leverage.” One of the most attractive features of forex trading is the large amount of leverage available to investors. Although a 10:1 margin is much larger than the 2:1 average leverage for stocks a reduction in leverage allowed will send many investors overseas where larger amounts of leverage are allowed. Currently the UK allows leverage of as much as 500:1. Most brokers say that the new leverage rules are out of step with international industry averages.

The Industry Fights Back

A group of currency dealers have formed a Foreign Exchange Dealers Coalition (FEDC) to fight the proposed rules. In a letter the group said that the new hedging rules would be a “crippling blow” to the thriving forex industry. The letter also stated, “Should the 10 to 1 leverage rule be adopted the vast majority of those accounts can be expected to go offshore.” They say the new rules would force investors to go offshore in search looser leverage rules. They also point out that investors who are forced to go offshore will be at the mercy of dealers with no capital requirements or regulations designed to protect investors. The FEDC stated, “These unregulated forex dealers don’t have to worry about capital requirements, risk management models, marketing ethics, dealing practices or even returning a customer’s funds.” Hopefully the FEDC will be heard in Washington and leave the leverage rules alone.

Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.

US Dollar Close to Seven Month High

The US dollar is now close to a seven month high against a basket of major currencies after released minutes of the FOMC meeting showed that Fed officials discussed exit strategies from stimulus programs. The euro fell against the dollar and is now near a nine month low hit earlier this week. Released Fed minutes revealed that many Fed policymakers want to begin selling securities as the US economy improves. The greenback was also lifted by data that showed U.S. housing starts rose to a six-month high in January and industrial production increased. Johan Javeus of SEB in Stockholm stated, “It hasn’t been a huge move but the Fed minutes have helped the dollar as they were perceived as hawkish. Whereas before there was a sense that the ECB would be ahead of the Fed in raising rates it now looks increasingly likely that the Fed will move before the ECB.”

Gold Prices Drop

Commodity linked currencies were pressured after the International Monetary Fund said it planned to sell gold on the open market. The IMF plans to sell 191.3 tons of gold to raise funds for lending. Spot gold prices fell dragging down the Aussie dollar. The Aussie fell 0.4% to $0.8957 and the Kiwi dollar fell 0.5% to $0.7000. Commodity prices were affected by a stronger dollar and the IMF announcement. Gold fell to $1,100 an ounce. Jonathan Cavenagh of Westpac stated, “The gold sale news is weighing on the Aussie especially against the U.S. dollar which is seeing a biddish tone.

Greek Crisis Threatens Euro Zone Assets

The pound fell 0.5% vs. the dollar to $1.5587 after data showed public sector borrowing at 4.339 billion pounds last month causing the first January deficit since 1993. Tom Levinson, currency strategist at ING stated, “Everyone is very focused on the euro zone fiscal situation at the moment, but the UK is in every bit as bad a shape.” Greek budget deficits and the lack of a coherent plan by EU officials have hammered the euro in currency markets. Last week EU ministers issued vague statements that left investors worried about the integrity of euro zone assets. German opposition to any kind of aid to Greece remains fierce in Germany but should Greek problems threaten the euro Germany may have no choice but to help Greece. This year Greece’s debt will reach 120% of GDP and must try to sell 53 billion euros in debt this year. The euro is likely to remain under immense pressure until the Greek crisis is resolved.

Quick Forex Tip: Interbank forex dealers have access to better spreads than the average investor because of the size of the transactions. Small investors who want to trade interbank fx now have access through the use of forex brokers who are able to put together large transactions. Additionally, many very wealthy individuals trade interbank fx hoping to profit from currency fluctuations. Whether you have a lot or a little money to invest, interbank forex trading is a great option because forex markets are almost recession proof.

Better Than Expected US Data

The US dollar hit a two week high on February 17th as better than expected housing and industrial output data pushed the greenback higher in currency markets. The euro remains pressured by the fiscal problems in Greece, Portugal and Spain. Jessica Hoversen of MF Global Ltd., in Chicago stated, “When it comes to economic fundamentals, the U.S. is ahead of most other regions. If you combine that with the fact that the situation in Greece is still very far from being reconciled, what you get is support for the dollar.” On Tuesday European finance ministers gave Greece one month to show that the nation’s deficit reducing measures are being implemented. Greek fiscal problems have pressured the euro since late last year and currency traders raised euro short positions to a record high last week.

FOMC Minutes Due

Investors are waiting for the release of January’s FOMC meeting and will be searching for any sign of the Fed’s exit strategies. Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank should get rid of some of the assets the Fed bought to stabilize the economy.  Kathy Lien, of GFT stated, “When you have one FOMC member voting in favor of more hawkish language in the monetary policy statement, additional members are likely to follow suit and traders will be looking to see if this sentiment is reflected in the minutes. If the minutes reveal optimism, it could fuel further gains in the dollar.”

EU Ministers Offer No Solution to Greek Fiscal Crisis

German opposition to any kind of aid to Greece remains fierce. A recent poll showed that a majority of Germans are opposed to aid to Greece and a recent Dutch poll revealed similar sentiments. Germany’s Chancellor Angela Merkel stated that “not a single euro” should be used for aid to Greece. European finance ministers said after a two day meeting that they want assurances that Greece will be able to cut spending before they make any decision on aid. The finance ministers did not offer specifics on the Greek issue much to the chagrin of traders and investors. Michael Hart of Citigroup stated, “European leaders are missing an opportunity to clarify their stance vis-à-vis Greece and to provide markets with an explicit roadmap. The relief rally in euro-dollar could be short-lived.” On Tuesday the euro gained as much as 1.3% after Greek Prime Minister George Papaconstantinou said that his government does not need a bailout. European finance ministers will meet in early March to determine what actions need to be taken in regard to Greece.

Quick Forex Tip: Interbank FX traders are at the top tier of the global forex market. A majority of all daily transactions in forex markets are conducted by traders from ten large banks. Despite market manipulation by central banks many economists have cited forex markets as closest to the ideal of perfect competition - meaning that no market participant is large enough to set currency prices. As a result, forex trading has become popular with smaller investors because forex markets offer investors the opportunity to profit during troubled times , allowing them to offset losses in other markets.

EU Summit on Thursday

The euro gained slightly against the US dollar but remained near an eight month low pressured by concerns about the fiscal health of some EU nations. Persistent worries about Greece’s debt crisis have pressured the euro in currency markets. Investors are waiting for the results of a special European Union summit on Thursday. Many investors are concerned that the EU summit will not address the ongoing Greek crisis. After EU President Herman Van Rompuy said that the summit will focus on long term economic strategy for the EU the euro fell to an 11 month low against the yen. Van Rompuy made no direct references to Greece in his statements. Masahide Tanaka of Mizuho Trust & Banking Co. stated, “Investors won’t be willing to take the risk to buy higher-yielding currencies unless organizations such as the European Central Bank and EU speak up to rescue Greece. If investors switch their attention to the fragility of Europe’s economy, euro weakness may accelerate.”

European Governments to Help Greece German Source Says

Greek Finance Minister George Papaconstantinou told Bloomberg television, “We are trying to implement a very difficult stability and growth program to which we are fully committed. The worst possible signal which we could be sending out is one calling for outside help.” A German source said that European governments have agreed to help Greece address its debt crisis. The unnamed source stated, “The decision on help for Greece has been taken in principle within the euro zone.” The comments prompted speculation that Germany may be preparing to step in to boost confidence in the EU and the euro. Outgoing EU Monetary Affairs Commissioner Joaquin Almunia urged EU leaders to help Greece in exchange for severe reforms. Almunia told the European Parliament, “I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us. You don’t get support for free. That would simply lay the foundations for further imbalances and crisis. We have got instruments to provide that in exchange for clear commitments that they will meet their responsibilities.”

Fitch Ratings Warns Greece

Greece, Portugal and Spain are under pressure to address massive budget deficits which have been aggravated by the ongoing recession and billions in stimulus spending. Fitch Ratings warned that markets may not wait very long for Greece to address the sustainability of the nation’s finances. Fitch analyst Chris Price said, “They need to address those concerns now because ultimately the market won’t wait until it becomes blatantly obvious that the situation is unsustainable.” To add to Greece’s troubles Greek public sector workers say they will stage a one day strike on Wednesday. In Portugal the nation’s public administration workers union plan a one day strike on March 4th to protest a wage freeze. Some sources say austerity measures could prompt social unrest in Greece, Portugal and Spain.

Quick Forex Tip: The average investor usually participates in the interbank market through a broker who handles funds for a large group of investors. The large amount of money given to the broker gives him access to the favorable spreads available in the interbank market. For small investors there are a huge number of interbank FX reviews available online. These reviews give the average investor the ability to research the positives and negatives of the brokers reviewed. Most interbank FX reviews will detail customer service experiences, reliability and investment track records.

Bernanke Triumphs Over Opponents

Federal Reserve Chairman Ben Bernanke was confirmed by a senate vote of 70-30 last Thursday. United States President Obama and his allies in the Senate put pressure on several senators to get the 60 vote super majority necessary to defeat Bernanke’s opponents. Democrats supported Bernanke by 47-11 and the Republican vote was 22-18 in favor of confirmation. Many economists and experts have decried the politicization of the Fed which has traditionally been politically neutral and independent. Chris Krueger of Concept Capital stated; “The politically neutral and independent Fed has really been politicized this week, probably to its detriment.” Lawmakers who ultimately supported Bernanke said they were influenced by the original approaches taken by Bernanke to avoid a more serious financial meltdown. Michigan Democrat Carl Levin, said; “Chairman Bernanke’s performance in addressing the economic crisis and his current efforts to significantly enhance financial regulation to help prevent future crises outweigh his past mistakes.”

Exit Strategy Bernanke’s Biggest Task

Bernanke’s biggest task will be to decide when to dismantle the emergency measures used to address the financial crisis. For the past few months speculation has been rampant on when the Fed will raise interest rates. Every piece of positive US data has prompted speculation of a rate increase. Last Wednesday after a two day meeting the Fed announced that interest rates would remain “exceptionally low” for “an extended period.” Public anger over expensive bank bailouts has dominated the political landscape running up to the mid term 2010 elections. Public anger could lead to legislation which would strip the Federal Reserve of its supervisory role over banks and its consumer protection responsibilities.

Fed to Remain Independent

Investors, including foreign investors had worried that Bernanke’s confirmation difficulties could lead to increased congressional meddling in central bank decisions and monetary policy. Financial markets including currency markets were relieved by Bernanke’s confirmation believing that the confirmation limits congressional leverage over the Fed and its decisions. Dan Fuss of Loomis Sayles in Boston expressed the view of many when he said; “You trust the central bank or you don’t. This confirmation takes that uncertainty away for many.”

Congress May Curb Fed’s Power

Bernanke supporters and opponents voiced concerns. Senator Christopher Dodd, a Bernanke supported has criticized the Fed for lax oversight of banks. Dodd stated; “If I had been voting solely on the performance in ‘07, I would have voted against him.” Dodd and Senator Richard Shelby of Alabama and a Bernanke opponent want to strip the Fed of its supervisory power over banks. Shelby stated, “We should seriously consider, and we’re talking about, taking the regulatory power away from the Fed, let them concentrate on monetary policy. There’s a lot of unrest in the country, and a lot of people do not believe that the Fed should have been the central intervener in too-big-to-fail” financial firms.”

Quick Forex Tip: Interbank forex trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank forex trading, s/he must do so through the use of a broker.