It is no great secret that economies around the globe are slowing. Those countries with heavy debt burdens have been challenged to find growth, while emerging economies and export-driven countries continue to thrive. Such is life in the global marketplace.
Overnight, the Japanese Tankan Sentiment survey rose the least in nearly 18 months as manufacturers were more pessimistic about economic prospects due to the rising Yen. This may put additional pressure on the BOJ to continue with intervention measures, especially now that Yen is creeping higher at 83.5.
In the Euro zone, economic confidence figures came in higher than expected in stark contrast to Japan, which has helped push the Euro higher.
In the UK, mortgage approvals fell from last month as the housing market is showing signs of slowing, though the figure came in slightly higher than analyst expectations. In addition, service industries contracted in July.
The US dollar is trading at 8-month lows vs. a basket of currencies that comprise the US dollar index. Overnight, markets were mixed as the Nikkei closed higher but European stock markets are slightly lower and the US is set to open slightly lower as well.
However, today can be characterized as neither risk-taking nor risk-aversion as the fundamentals are driving todays early market action.
In the forex market:
Aussie (AUD): The Aussie is higher as an index of leading economic indicators rose .8% and Barclays put out a report saying the RBA may hike rates 2 more times this year, which could put interest rates at 5%.
Kiwi (NZD): The Kiwi is lower as New Zealands trade deficit widened due to declining exports which reached a 9-month low. This may cause the RBNZ to refrain from hiking rates for the rest of the year.
Loonie (CAD): The cost of raw materials in Canada rose higher than expected which could foreshadow inflation and cause the BOC to raise rates. In addition, a report out from the Bank of Nova Scotia said that Canadian interest rates should be one full percentage higher than where they currently are, citing the Taylor rule which uses historical economic data to project rates.
Euro (EUR): The Euro is higher as business climate and sentiment figures came in higher than expected, despite the strikes taking place around the region to protest austerity measures. This also flies in the face of the potential debt problems in Ireland and Portugal. (Click chart to enlarge)
Pound (GBP): The Pound is lower as mortgage approvals fell and the services industries contracted as economic growth begins to slow. This has prompted policy-maker Adam Posen to call for more quantitative easing to support economic growth. While this most likely not going to happen, it should come as no surprise to anyone that Posen is actually an American citizen.
Dollar (USD): The US dollar is weak, weak, weak; falling to 8-month lows vs. a basket of currencies. The threat of further quantitative easing by the Fed and weakening economic conditions has driven dollar sentiment. However, I wonder if further quantitative easing (QE2) would actually be seen as a negative and push the Dollar HIGHER, as the flight to safety trade takes place. Or this could just be a lot of hot air intended to jaw-bone the dollar lower.
Yen (JPY): The yen has been trading in a tight range and has been maintaining relative strength despite the threat of further intervention by the BOJ. The Tankan Survey and CapEx figures came in worse than expected showing signs that economic sentiment is deteriorating. The commitment of the BOJ to halt a rising Yen will be tested shortly. (Click chart to enlarge)
Manipulating ones currency is an easy way to attempt to fix structural economic problems. There are three basic manipulations going on in the currency market place. The first is quantitative easing, whereby a Central bank prints money out of thin air and buys bonds in an attempt to increase the money supply to devalue a currency. This is the preferred method in the US and UK.
The second way is through actually currency intervention, whereby a Central bank sells its own currency and buys the currency of other countries in massive amounts, attempting to influence prices directly. We have seen both the Swiss and more recently the Japanese do this in 2010.
The last way is by creating a currency peg, whereby a Central bank controls the exchange rate of the currency and does not allow it to float freely in the market. This creates an unfair advantage as it restricts trade imbalances from leveling out. This is the preferred method of the Chinese.
As long as these beggar thy neighbor policies exist around the globe, world economic growth will continue to slow. So prepare yourself now by learning how to avoid and profit from these manipulations by learning how to trade the forex market today!
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