Dollar Falls as Investors Close Out Year End Positions
The US dollar fell broadly in thin year end trading as investors closed out year end positions. Traders said Thursday’s volatile currency movements had little meaning and are uncertain whether the dollar can maintain its recent rally. The dollar rallied in December as better than expected US economic data prompted speculation that the Federal Reserve will raise rates in early 2010. Lee Hardman of Bank of Tokyo-Mitsubishi UFJ stated, “We could some a partial retracement of December’s sharp dollar rally early in 2010, but ultimately further improved U.S. economic data will fuel Fed tightening expectations and support the dollar.” Trade was extremely light in advance of year end holidays in Asia and Europe. Japanese markets reopen January 4th.
Better Than Expected UK Housing Data
The pound rose against the dollar and euro as recent data showed that better then expected home prices in the UK. The pound posted the first yearly gains against both currencies since 2006. The pound is on track for its first weekly gain vs. the dollar since November 13th as the UK based Nationwide Building Society said that home prices increased 0.4% better than the 0.3% that had been forecast. Jeremy Stretch of Rabobank International in London stated, “The fact that the housing market performed better than expected is certainly providing some degree of support.” The pound last traded at $1.6206, an 11% gain against the dollar for the year.
Dollar at 3 1/2 Month High vs. Yen
The greenback hit a three and a half month high vs. the Japanese yen on year end buying and positive US economic and employment data. Recent data showing U.S. Midwest business activity grew more than expected helped the dollar in currency markets despite very thin trading. Amelia Bourdeau of UBS said, “The trading ranges have been quite large today. It’s end-of-the-year positioning and fund managers are closing their portfolios. There’s also the view that the U.S. is recovering and this month we’ve seen strong U.S. data support the dollar.” The December US jobs report is due January 8th and the data is expected to further support the perception that the US economy is recovering.
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Improved US Data
The US dollar rose to a three month high against the yen as investors speculate that the Federal Reserve will raise rates sooner than expected and will withdraw emergency measures. The dollar gained on the euro and is close to its first monthly gain since June. Joseph McAlindenv of Catalpa Capital stated, “The massive monetary easing is beginning to show up in terms of an improved economy. The foreign-exchange market should begin to look ahead to a better return on dollar assets. The dollar is a strong currency for 2010.” The greenback has gained 4.9% on the euro in December for a yearly decline of 2.3% against the euro. During the past decade the dollar has fallen about 30% vs. the euro.
Japan’s AA Rating Threatened
Demand for the yen declined after Standard and Poor’s said that Japan’s AA rating could be threatened if Japan fails to stabilize and reduce massive deficits. The dollar has benefited from the perception that the US economy is strengthening and that the Fed will tighten loose monetary policies. The dollar was also supported by year end buying by Japanese investors. Geoffrey Yu of UBS in London said, “The dollar has been helped by year-end buying, plus we have seen some yield hunting by Asian names which has helped dollar/yen.”
BOJ to Keep Rates Low
The Bank of Japan is widely expected to keep rates low and investors say that when markets get a sense of when the Fed will raise rates the yen will become the currency of choice for carry trades. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company in Tokyo stated, “If the U.S. heads towards the exit, the dollar-funded carry trade is expected to wane as Japan is seen as more likely to ease further.” When the Fed will raise rates remains a key question for currency traders who have been watching US data for clues that may lead to the Fed hiking rates.
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Euro and Aussie Gain on Dollar
The euro and high yielding Aussie dollar gained against the US dollar on Tuesday as risk appetite returned despite thin trading. Trading volumes were thin as investors closed out year end positions. The greenback remained close to a two month high vs. the yen boosted by recent data showing that the US economy is recovering. Later in the day investors will be watching for U.S. consumer confidence data and the Standard & Poor’s/Case-Shiller home price index for October for clues on the health of the US economy. Most traders believe that Monday’s strong U.S. retail sales figures will have a positive effect on Tuesday’s consumer confidence data.
Fed Rate Speculation
Despite repeated statements by the Fed that rates will remain low for an ‘extended period’ investors are still speculating that the Fed may raise rates sooner than expected. Johan Javeus of SEB currency stated, “Anything that points in the direction of the Federal Reserve raising interest rates earlier than previously thought will support the dollar — there has been no indication of this from the Fed but U.S. data recently has been coming in on the strong side. Trade is very, very quiet, but for now risk appetite is back on, stock markets are higher and the commodity rally has regained some strength which is positive for currencies such as the Australian dollar.”
Dollar Little Affected by Fed Proposal
The Aussie gained 0.8% trading at $0.8950 and many traders expect the Aussie to rise to $0.90. The dollar index, which measures the dollar’s performance against six major currencies, fell 0.3% to 77.427 DXY. Despite the decline the DXY is still within range of a 3-1/2-month high of 78.449. The dollar was little affected by Monday’s Fed proposal to create a “term deposit facility” which would help the Fed to withdraw money from the US banking system when they decide to tighten monetary policy.
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Dollar Gains on Fed Data
Last week the US dollar hit a three month high against the troubled euro and other major currencies despite the Fed statement indicating it would keep borrowing rates at record lows for an ‘extended period.’ Last week the Fed gave an upbeat assessment of the US economy and indicated it would withdraw emergency measures such as quantitative easing in February 2010. The euro has been pressured by Fitch’s and Standard and Poor’s rating downgrade of Greek sovereign debt and Austrian banking troubles. Investors remain concerned about the fiscal health of EU nations. The ECB raised its estimates for writedowns in the Euro Zone by 13%. Emma Lawson of Morgan Stanley stated, “This positive outlook from the U.S., from the Fed and much better data we have been recently seeing are giving you the impetus to get the euro-dollar lower.”
Euro Zone Banks Pressured
The ECB stated in its Financial Stability Review that Euro Zone banks may be forced to write down an additional 187 billion euros due to the “further deterioration in commercial property-market conditions.” The ECB also said that “the surge in government indebtedness” and the reliance of European banks on emergency funding measures threaten the financial and economic stability in the Euro Zone. The British pound made little headway against the greenback and the yen despite positive UK economic data. Total business investment in the UK declined by 0.6% in the third quarter compared with a fall of 10.3% in the second quarter. Next week’s UK GDP revisions are expected to show similar improvements.
Aussie Tumbles
The Aussie dollar which has been a recent big winner in currency markets fell a full 2.5% against the US dollar last trading at 89.02 U.S. cents. Australian Reserve Bank Deputy Governor Ric Battellino dampened speculation of further rate hikes by the central bank saying that monetary policy is in “the normal range.”
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Fed’s Outlook Optimistic
The US dollar hit a 3 ½ month high on Thursday (Dec 17) against the beleaguered euro which has been pressured by EU banking concerns and the downgrades of two member nations. The dollar was also helped by a more optimistic assessment of the US economy by the Federal Reserve. The FOMC left rates at record lows but said that it will allow several emergency measures to expire in February 2010. The euro was also stung by another Greek downgrade. On Wednesday Standard & Poor’s downgraded Greece’s rating from A- to BBB+ and said that measures announced by Prime Minister George Papandreou would not produce a sustainable reduction of sovereign debt. Roberto Mialich of Unicredit stated, “The problem for the euro is the mix of the (Fed) statement and the very strong concerns over Greece…. All the euro crosses have suffered.”
Greek Concerns Pressure Euro
The euro fell below $1.44 for the first time since September, struggling after the second Greek downgrade in a week. US data showing that job losses increased unexpectedly last week pared dollar gains. Many investors believe recovery in the euro zone will be prolonged and rocky. Hidetoshi Yanagihara of Mizuho Corporate Bank said, “The U.S. economy is picking up, and the Fed acknowledged this by saying it will stop most of its quantitative easing by Feb. 1, while the Greece issue might create a bad cloud over the euro zone economy.” The US dollar also gained more than 1% against the Australian dollar.
Dollar to Extend Gains
The greenback gained for the third straight day against the yen trading at 90.15 yen. The Aussie which has been helped by three rate hikes fell to a 10 week low trading at $0.8853. The ICE futures exchange’s Dollar Index gained the most in two weeks as investors closed bets against the dollar after the Fed statement. Some currency analysts look for the dollar to sustain recent gains. Steven Englander of Barclay’s stated, “It’s the first time in a year we look at the dollar with the potential to rise over an extended period. The same safe haven characteristics that helped the dollar in 2008, and hurt it from March through November, are helping it again. The gap in U.S. growth relative to Europe is beginning to widen.”
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Fed Will Allow Emergency Measures to Expire
Traders reported heavy sales of EUR/USD after the release of the Federal Open Market Committee on Wednesday. As expected rates will remain low and the Fed said it will allow many liquidity programs to expire on February 1st 2010. The Fed said that in light of improvements in the functioning of financial markets it will allow the Federal Reserve’s special liquidity facilities to expire on Feb 1st 2010. The programs affected are, Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Fed also said it would work with central bank counterparts to end temporary liquidity swap arrangements by February 1st. The Fed will maintain rates at 0 to ¼% and said that economic conditions warrant keeping rates at record lows. The Fed statement also said that “To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.”
Market Reaction Muted
As of this writing markets have not had time to react to the Fed statement but prior to the release of the statement the dollar was holding steady against most major currencies. The statement contained little that was not expected so market reaction is likely to be muted. The dollar remained near a 2 ½ month high against the euro. The euro has been pressured by concerns about the health of the EU banking sector.
Aussie Declines on GDP Figures
The big news was the decline of the Australian dollar which fell after dismal GDP figures were released. Australian GDP grew by only 0.2% during the third quarter and expectations of the nation tightening monetary policies were dashed by dovish comments from Australia’s central bank. Tsutomu Soma of Okasan Securities stated, “Weaker-than-expected growth data as well as comments from a top central banker have curbed bullish views towards the Australian dollar a little. Players, including Japanese institutional and individual investors, sold the Aussie to trim long positions in Australian assets.”
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Austrian Banking Woes
The steadily declining euro hit a 2 ½ month low against the US dollar. Global stocks fell on European banking concerns and the fiscal condition of Greece which is widely viewed as the EU’s weakest member. To add to the Euro’s woes the Austrian press reported that the Austrian central bank and the country’s financial market regulator have put the country’s largest cooperative bank, Oesterreichische Volksbanken, on a watchlist. A spokesman for the bank said that the bank is not at risk of nationalization and that the watchlist reports were inaccurate. The report prompted concerns about the financial health of Europe’s banking system. Persistent concerns about Greece’s fiscal health have been pressuring the euro in currency markets. On Monday Greek Prime Minister George Papandreou announced spending cuts but investors remain unconvinced. Tomohiro Nishida of Chuo Mitsui Trust and Banking Company stated, “Persistent concerns about sovereign risk in Europe such as those in Greece and softer stock markets are lending support to the dollar.”
Dollar Gains on Yen
On Tuesday the US dollar rallied broadly, especially against the yen, as strong inflation data prompted speculation that the Federal Reserve may end emergency support and stimulus programs sooner than expected. Such a move would likely lead to rate increases making the dollar more attractive to investors. On Monday better than expected data showed U.S. producer prices rose 1.8 percent. Michael Woolfolk of BNY Mellon said, “We’ve had a string of very good U.S. data releases compared to Europe, and today’s data suggests inflation is picking up again, so the whisper out there is that the Fed will hike rates sooner than expected.” A separate report on New York industrial production fell unexpectedly suggesting economic troubles remain.
Low Fed Rates Pressure Dollar
In 2009 the Fed policy of low rates has pressured the dollar throughout the year. Despite the fact that the dollar is now at a ten week high against other major currencies the dollar index has declined 5% during the year. Although the Fed has said rates would remain low markets are speculating that the withdrawal of emergency measures could signal tighter monetary policies and a possible rate hike.
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Abu Dhabi Provides Dubai With $10 Billion
On Monday the euro rose on news that Abu Dhabi would provide Dubai with a $10 billion dollar bailout easing investor concerns about a possible debt default by Dubai. Although the euro benefited from the bailout currency experts predict that the Euro’s gains will be capped by year end decreases in market liquidity in advance of years end. Kasper Kirkegaard of Danske Markets stated, “The Abu Dhabi news helped risk sentiment, boosting the euro. The yen suffered from a squeeze (in long yen positions). But we should be careful; the markets are thinning out so we could see some volatile moves.” In morning trading the euro rose 0.2% to $1.4656. Last week the euro fell to a two month low of $1.4586 after strong US retail sales data prompted a rise in risk sentiment. Against the Japanese yen the euro was at 129.64 yen.
Yen Falls, Euro Zone Recovery Fragile
The yen fell sharply as investors sought high yielding assets putting downward pressure on the yen. The low yielding yen is widely used in carry trades to fund the purchase of riskier assets and tends to rise when carry trades unwind. Euro Zone industrial production figures released today show a falling output of consumer goods pulling down October’s industrial production figures. Rising unemployment point to a prolonged and weak recovery. Martin van Vliet of ING said, “The marked relapse in industrial production in October is a sobering reminder of the fragility of the economic recovery in the euro zone. But it is premature to conclude that the industrial recovery is seriously losing momentum, let alone that it has run its course.”
Waiting for the Fed
Eurostat said euro zone employment shrank 0.5% quarter on quarter for a year on year decline of 2.1%. The euro zone shed 0.5 in the third quarter. Economists say that without labor market improvements wage growth and household demand will be limited. Markets are anticipating the results of the upcoming Fed meeting which takes place on Tuesday and Wednesday.
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Fed Expected to Keep Rates Low
Once again positive US economic data has led to speculation among traders and investors about when the US Federal Reserve will raise rates. It is widely believed that raising rates would signal an exit from the current recession. The Fed will meet this week and is widely expected to end the year by keeping rates at historic lows for an extended period. The Fed policy meeting will take place on Monday and Tuesday and it has been about a year since the Federal Reserve benchmark interest rates to near zero to fight the worst economic crisis since the great depression of the 1930’s. Despite the desire of many to see rates raised the Fed has said that high unemployment and stalled credit markets point to a slow prolonged recovery. Julie Coronado of BNP Paribas said, “When the Fed looks at the economic backdrop, they’re looking at the level of economic activity, not just the most recent numbers and we’re still at 10 percent unemployment. We’re still a long, long way from normal.”
Some Fed Members Cautious
Financial markets are expected to monitor the Fed meeting closely looking for any mention of a possible rate increase. The better than expected jobs report led many to believe that the Fed may raise rates sooner than thought. About the expected Fed statement Mark Gentler professor at New York University said, “The statement will probably look like the previous one … I think the core of the committee is still more worried about the recovery solidifying,” Despite the raft of positive data many Fed members remain cautious. Philadelphia Federal Reserve Bank President Charles Plosser emphasized that one month of data does not equal a trend.
Fed May Extend Asset Purchase Program Past Deadline
The Fed committee may also discuss whether to extend its $1.25 trillion mortgage-backed securities purchase program past its March expiration date. Investment manager Bill Gross of Pacific Investment Management Co remains unconvinced that the Fed’s extraordinary measures will end according to schedule. Gross stated, “There are so many uncertainties and I think the Fed recognizes that, and not just from the standpoint of the policy rate but the standpoint of quantitative easing.”
Quick Forex Tip: A great deal of education is required for success in foreign currency trading. There are several excellent training programs available online. Many of these free courses are written by highly successful forex traders and can provide the novice with invaluable information. Additionally, many forex trading firms offer demo accounts where newbies can trade in real time and use varied amounts of leverage. Demo accounts can help new investors to get the ‘feel’ of foreign currency trading markets.
Carry Trades Explained
There have been many articles recently talking about carry trades and the possibility that the US dollar may become a preferred currency for carry trades. Essentially carry trades are when an investor sells a low yielding currency with a low interest rate and uses those funds to purchase a currency with a higher rate. The investor then attempts to capture the difference in interest rates. Depending on the amount of leverage used carry trades can net investors substantial profits—or losses. In a simple example an investor borrows 1,000 Japanese yen at a rate of 0%. The investor then converts the funds into euros and purchases a bond for that amount in euros. If the bond pays 5% and the yen rate is 0% then the investor will realize a profit of 5%. If the investor uses leverage of 10:1 the profit realized is 50%. It is not surprising to see why carry trades are popular with investors.
Asset Managers Predict US Dollar and Pound Will be Favored Carry Trade Currencies in 2010
At the Reuters Investment Summit in New York asset managers said that the strategy of using low yielding currencies to purchase high yielders will remain popular next year. Investors have taken advantage of record low US rates to fund carry trades yielding high returns. They predict that the British pound will join the US dollar as favored currencies for carry trades. The asset managers also said that the pound is their least favorite currency due to low rates, spending cuts and high taxes. Jonathan Xiong of Mellon Capital Management stated, “As long as the U.S. continues to remain in a negative real interest rate environment and the interest rate hikes are not aggressive enough, the dollar carry-trade could go on.” Xiong who manages $18 billion in assets also said that the pound will be the carry currency in the future “as long as (its) monetary policy is not pulled back.”
Aussie and Kiwi Chief Beneficiaries of Carry Trades
The chief beneficiaries of the carry trade have been the high yielding Aussie and Kiwi dollars. This year Australia was the first G 7 nation to raise rates. Aussie rates are now at 3.75% and are the highest in the industrialized world. New Zealand’s rates stand at 2.5% but New Zealand’s central bank has indicated it may raise rates sooner than previously thought. Mellon’s Xiong said that while the US, Japan, Europe and Britain are lagging behind the economies of Australia and New Zealand may recover enough to approach “trend growth” soon..
Quick Forex Tip: Forex trading offers investors a profitable investment option and can be one of the most rewarding opportunities available to the average investor. Major attractions are the 24 hour a day availability of forex markets, low dealing costs, high leverage margin and high liquidity. Currency trading forex can be learned quickly and easily. There are several free reputable courses available online and many online forex dealers provide demo accounts where novice traders can learn the market before risking any real money.
