22 Mayıs 2011 Pazar

Weekly Euro currency forecast from France Financial

Normal service is resumed this week, with my forecast of sterling down in the 1.12s meeting up with the reality of the pound ending the week at 1.1430!  A nice way to be wrong though, unless you are heading back to the UK, but I think the majority, me included, like to see as high a rate as possible.  Not only was I wrong in where we ended up, but the pound actually plumbed some severe depths during the week, hitting 1.1045 at one point.  Then we had a 3.5% swing between Wednesday afternoon and Friday evening.

A game of two halves - Monday to Wednesday
Same old story for the pound. Data released on Tuesday showed that the UK's manufacturing sector grew at its weakest pace for seven months in April.  This  data reduced even more the likelihood of an interest rate rise later in the week.   Coupled with the likelihood of a series of Euro rate hikes this summer, it is not exactly surprising that the pound headed south at a fair lick, and at one point looked like it might collapse below the 1.10 level.   

Second half fightback  -  Wednesday to Friday
I don't think anyone saw this coming.  Certainly not me anyway.
On Thursday both the BoE (Merve and his mates)  and the ECB left interest rates on hold as expected. What rocked the boat was the comments from the ECB president, Jean Claude Trichet. He adopted a much softer stance on the central bank's rate outlook than markets had been expecting after April's hike, prompting traders to take profits on the Euro's gains versus sterling earlier in the week.  That started the ball rolling.

On Friday morning the markets were eagerly awaiting the UK PPI (Producer Price Index) data, looking for a poor figure to send the pound back down to levels seen earlier in the week.  In the event, the PPI figures were much better than expected.  Still down, but down by nowhere near as much as the market had anticipated.  Thus the expected move down soon turned into a further surge for the pound.

In addition to all of this, there was an important piece of corporate news going on in the background.  Glencore, a huge multinational commodities company, was to launch shares on the UK stock market. If you want those shares, you need to have sterling.  What happens if sterling is in demand?  The rate goes up.

All good fun, but where do we go from here?  Being a naturally cautious person, I'm inclined to think that this is unlikely to be the start of the great sterling revival, but I would love to be proved wrong.   I back sterling's ability to shoot itself in the foot at any opportunity, and there is every opportunity next week, the Merve's quarterly inflation report.

I hate to say it, but I think the markets will sell sterling, and we could be down towards 1.12 levels again soon.

A bientot,   Rob

If you have any questions or comments on this, or any other subject, please don’t hesitate to contact me, Rob Hesketh:

Rob Hesketh and France Financial – Contact details Rob moved to France in 2003 after working for 30 years in International Banking in the City of London and Brussels. He joined the Spectrum IFA Group in 2005 and became registered and authorised by the French fiscal authorities in mid 2006. He is now a partner in Spectrum and looks after client relationships in the South West of France. The Spectrum IFA Group - TSG Insurance Services S.A.R.L. Siège Social: 34 Bd des Italiens, 75009 « Société de Courtage d'assurances » R.C.S. Paris B 447 609 108 (2003B04384) Numéro d'immatriculation 07 025 332 - www.orias.fr« Conseiller en investissements financiers, référencé sous le numéro F000184 par CIF-CGPC, association agréée par l’Autorité des Marchés Financiers » Get more details about Rob Hesketh, France Financial and Spectrum IFA Group

EUR/USD Weekly Fundamental Analysis For May 23-27, 2011


EUR/USD Weekly Fundamental Analysis For May 23-27, 2011

By ForexMansion.com
The volatility remains high for the EUR/USD with the uncertainty hovering over the outlook for growth amid inflation threats and debt woes.
Last week the pair continued to fluctuate heavily amid the mixed sentiment in the market with investors growing pessimistic with the downbeat U.S. data and also cautious over the euro with the speculation over the outlook for Greece.
Debt-laden nations continue to suffer in the euro area and the Greek tragedy is still the center of attention. While for the United States, the slowing pace of recovery is agonizing the dollar as the Feds pledge to keep rates lower while also threatening the market sentiment that continued to trade on thin air!
This week growth is likely to be the predominant sentiment with investors wary over the slowing signs of the recovery. We have GDP revision for the first quarter from both Germany and the United States which will determine the sentiment over growth and accordingly monetary policy.
Other news from the euro area and the U.S. economy to affect the pair this week:
Monday May 23:
The start of the week will be with euro area’s sectors performance in May as investors are downbeat already over the outlook for the slowing global recovery. Germany will start with the Flash PMI estimates for May at 07:30 GMT. The manufacturing PMI might have slowed to 62.3 from 62.9 and the Services might have eased to 61.3 from 62.0.
The euro area Flash PMI May estimates are due at 08:00 GMT the Manufacturing is expected to slow to 57.6 from 58.0 and Services also slower to 56.6 from 56.7.
Tuesday May 24:
The start is at 06:00 GMT with the final revision for the German first quarter GDP which is likely unrevised at its strong 1.5% expansion. Also Germany’s IFO business survey will be watched at 08:00 GMT where the drop in confidence seen lately is still ongoing due to the uncertain outlook, debt woes in the euro area, and rising inflation and commodity prices which are pressuring the sentiment.
The euro area’s industrial orders for March are due at 09:00 GMT are marginally expected to affect the currency following the early news, and especially as we already saw factory orders drop heavily on the month and likely the same will be seen.
At 14:00 GMT, the U.S. will release the new home sales index for the month of April, where new home sales are expected to rise by 1.7% to an annual rate of 305,000 units, compared with the prior estimate of 300,000 units, although the housing market showed further weakness in April, as the housing market remains depressed.
Wednesday May 25:
German Gfk confidence is due at 06:00 GMT for the month of June and might have eased from May’s 5.7.
At 12:30 GMT, the U.S. will release the durable goods orders for the month of April, where durable goods orders are expected to drop by 2.0%, compared with the prior rise of 2.5%, while durable goods excluding transportation are expected to rise by 0.6%, compared with the prior rise in March by 1.3%.
Meanwhile, at 14:00 GMT, the U.S. will release the house price index for the month of March, where house prices are expected to fall by 0.5%, compared with the prior drop of 1.6%.
Thursday May 26:
We do not have any major fundamentals from the euro area on Thursday, yet Trichet is scheduled to speak on the economy at 09:20 and any hints on the outlook for growth, inflation, and monetary policy might affect the euro.
The focus will be at 12:30 GMT and the U.S. second estimate for Gross Domestic Product index for the first quarter of 2011. The economy is expected to have expanded by 2.2%, compared with the prior estimate of 1.8%, while personal consumption is expected to rise by 2.8%, compared with the prior rise of 2.7%. The GDP price index is expected to remain unchanged at 1.9% in the first quarter, while core PCE is also expected to remain unchanged at 1.5% during the first quarter of 2011.
At the same time the jobless claims for the week ending May 21, will be released, where jobless claims dropped last week to 409,000, while continuing claims also fell to 3.711 million.
Friday May 27:
The week will end with German CPI and retail sales which might add to the euro’s volatility at the end of the week. The euro area will report the M3 Money Supply at 08:00 GMT which might not affect the pair much yet the European Commission’s confidence survey for May due at 09:00 GMT will affect the euro. Confidence across sectors might have slowed further with rising uncertainty over the outlook amid rising inflation and fiscal challenges which might pressure the euro to the downside.
The income report will be released for the month of April at 12:30 GMT, where personal income is expected to rise by 0.4% in April, compared with the prior rise of 0.5%, while personal spending is expected to rise by 0.4%, compared with the prior rise of 0.6%. The income report is also expected to show that core PCE rose in April by 0.2%, compared with 0.1% reported in March, while compared with a year earlier, core PCE is expected to rise by 1.0%, compared with the prior rise of 0.9%, and the PCE deflator is expected to rise by an annualized 2.1%, compared with the prior rise of 1.8%.
At 13:55 GMT, the University of Michigan will release the final estimate for consumer confidence in May, where consumer confidence is expected to remain unchanged at 72.4 in line with the prior estimate. While the last awaited for the week will be at 14:00 GMT with the pending home sales index for April, where pending home sales are expected to drop by 1.0% in April, compared with the prior rise of 5.1% reported in March.
Originally posted here
Read more about forex technical analysis, forex fundamental analysis and forex news on ForexMansion.com
About ForexMansion.com:
www.ForexMansion.com is a part of the Finance Mansion Network which operates global financial websites. Our goal is to provide our readers with the most accurate, quality and up-to-date technical analysis, fundamental analysis and news in order to assist them in making the right financial decisions.
The Finance Mansion Network includes www.FinanceMansion.com,www.ForexMansion.com, www.StocksMansion.com, www.CommoditiesMansion.com and many more.

What’s wrong with the international monetary system?

President Johnson stated in 1968: “To the average citizen, the balance of payments, the strength of the US dollar, and the international monetary system are meaningless phrases. They seem to have little relevance to our daily lives. Yet, their consequences touch us all consumer and captain of industry, worker, farmer and financier.”
This is true when international financial arrangements are working well; and becomes even more evident when they are not. While not all would argue there is no life left in the international monetary system (IMS), almost all would agree the present system contains inherent contradictions which lead to frequent breakdowns.
Basic principles
Four basic principles underlie the IMS: (i) a country's sovereign right to regulate internal demand to maintain stable conditions at home in terms of employment and domestic prices; (ii) free international movement of goods and capital and here, substantial progress has been made in meeting this goal; (iii) a system of mixed exchange rate regimes - from fixed exchange rate (eg China) to flexible exchange rate (eg US dollar, British pound and euro) to degrees of managed floats (eg yen and the ringgit); and (iv) a nation's right to hold international reserves in the form of gold, US dollar and other major currencies. In addition, lines of credit are available from the IMF. The reserves available and potentially obtainable set a limit on the cumulative size of a country's balance of payments (BOP) deficit, thus acting as a BOP constraint in domestic policy making. But there is no such corresponding limit for surplus nations. The system is asymmetrical; it “punishes” those in deficit and lets the surplus nations alone.
Most countries experience some trade-off between unemployment and price stability. As unemployment is lowered by policies to expand demand (as with the US stimulative packages), the higher is the price that has to be paid in rising inflation. The trade-off varies over time, and from country to country. The rationale behind this relationship centres on the tendency for money-wage increases to outstrip rises in productivity even under conditions of high unemployment. The current state of a jobless growth in the US with low inflation in the face of continuing high unutilised capacity shows no trade-off at this time. But as demand picks up and as growth picks up and unemployment trends down, inflation is bound to creep up.
G-20 finance ministers and central bank governors gather for a group photo during the IMF and World Bank spring meetings in Washington on April 15. — Reuters
What's wrong?
First, there is the adjustment problem. The present IMS has no reliable mechanism to eliminate BOP dis-equilibrium (ie payments imbalances). This is fundamental. There are three possible ways of correcting a payments deficit: use of trade and capital controls; adjustment of exchange rate; and government policies working through internal changes in income and prices. All three go against the the principles underlying the system. So, when a country experiences a deficit, there is no assurance the deficit will be eliminated before its reserves are used up; or depending on the extent to which market forces are allowed to sufficiently depreciate the currency; or whether domestic policies are tightened enough to reduce demand.
Second, there is the problem of the exchange rate, which usually doesn't react fast enough to correct imbalances. Destabilising capital flows exacerbate the problem. The IMS is also subject to massive (especially speculative) flows of funds which could complicate BOP adjustment. The flooding of cheap US dollar funds into emerging markets following QE2 (2nd phase of Fed's quantitative easing) have led to capital controls and managed exchange rates limiting their appreciation. Of late, the size of speculative flows has become too large for even the larger emerging markets to cope. This is not the end. In the event QE2 exits, the impact of large capital withdrawals on the exchange rate can be just as destabilising.
Third, there is the problem of liquidity. The system has no arrangement to generate in an orderly and predictable way, increases in foreign reserves that are needed to meet demands of growing world trade. The creation of SDRs (Special Drawing Rights) in the IMF, as and when needed, is supposed to do the job; but in practice, increases in SDRs have been few and far between. By chance, the Fed's recent expansionary program, including QE2, is now over-doing the job; indeed, these capital flows have become too large for orderly adjustments to take place.
Finally, there is the confidence problem. The system allows persistently large surplus nations to do virtually whatever they please in postponing real adjustment. Today, about two-thirds of global reserves is held in US dollar-denominated assets (especially Treasuries). China's international reserves today amounted to about US$3.1 trillion, of which US$1.15 trillion is invested in US dollars. It has been estimated that Italy's entire sovereign debt (principal plus interest until 2062) totalled US$3 trillion. In terms of oil, China's reserves can buy 25 billion barrels of Brent crude, equivalent to 13 years of its net oil imports. Indeed, it could pay for the entire Nikkei 225 list of companies, with US$30bil in change. That's how big China's reserves are.
True, the Bretton Woods system had served the world economy reasonably well. In a sense, the system operated well in the 50s and 60s but was on borrowed time. The “tearless deficits” during this period left a legacy of a large and growing “overhang” of foreign dollar holdings, which frequently threatens a confidence crisis. Persistent US deficits had since led to a diminution in the quality of the US dollar in the eyes of most foreign holders.
Global payments imbalances require a co-ordinated global action to resolve. This is hard to come by. Of the four problem areas, I think the matter of speculative and exchange rate instability is serious. This involves two aspects: (a) threat imposed by the “overhang” of convertible claims against the reserve currencies (especially US dollar) where such claims are today touching 15% of global GDP (6% 10 years ago); and (b) the danger of private speculative runs against currencies under pressure, especially the greenback. They are inter-related. To top it all, the IMF practice of allowing nations to choose their own exchange rate regimes didn't help the adjustment process. Fixed exchange rates operated uneasily alongside flexible exchange rates, including managed floats and permutations of these two major regimes, in the hope that somehow policies would be co-ordinated to converge and foster imbalances adjustment. Nothing like it will ever happen as each regime did its own thing to protect its national interest.
And so, until today, the four problems of adjustment, exchange rate, liquidity and confidence underlying the IMS persisted. One thing is clear: there is no political will to reform. The US, for which reform means the diminution of the dollar's global role, is lukewarm. And Europe is distracted more than ever with protecting the status of the euro and the EU's sovereign debt crisis. France, as chair of G-20, wants to find an IMS that more accurately reflects the new structure of the world economy. But the major emerging nations, especially the BRICS (Brazil, Russia, India, China & South Africa) want to move away from a virtual one-reserve regime to one based on multiple reserve currencies.
Are payments deficits good or bad?
For most, payments deficits are instinctively bad. But think about it. After all, the purpose of international trade is to obtain goods and services from abroad at less than can be produced (or not available) at home. Imports are the benefits of trade. A trade deficit means more goods and services are being received from abroad than are being given up. Surely that's good from the deficit nation's point of view. But this deficit has to be financed. So, the nation either loses reserves (uses savings) or borrows (living on credit), and this may prove uncomfortable as the deficit persists. In the end, the deficit country has to take corrective action, such as deflationary domestic policies (austerity measures), exchange controls, or devalue its currency. All of them conflict with one or more of its domestic economic goals. There is a cost to adjust.
The soft solution is to use reserves (“its function is to render exchange rate stability compatible with freedom for individual nations to pursue national economic goals”). While drawing down reserves or borrowing may reduce the conflict of objectives, it nevertheless increases the potential for future conflict.
That's exactly what's happening in the US. It has run persistent deficits for so long that its debt is now too high (close to 100% of GDP) and its liabilities to nations accumulating US dollar reserves (especially China and Japan) have grown so large that it can trigger off a confidence run on the greenback.
This has proved inconvenient at a time when the US continues to need expansionary policies to bring down its high unemployment. Surplus nations have the opposite problem since these surpluses are inflationary and reflect an inefficient utilisation of reserves in the form of involuntary foreign lending. It can be viewed as the mere hoarding of resources that might have enhanced future output and welfare if added on to domestic investments instead. To sum up, today's mixed exchange rate regimes provide no mechanism for systematic and effective BOP adjustment that does not conflict with major goals of public policy.
IMS reform
Reform of the IMS is clearly needed. V. Lenin once said that “the surest way to destroy the capitalist system (is) to debauch its currency.” The IMS is at the heart of the world economy. When rules of the global monetary game are unclear, inadequate, some even obsolete, nations find it difficult to play; indeed, some may exploit them to their advantage.
This undermines the very fabric of the IMS. Some history. In 1944, Bretton Woods gave birth to the IMF and today's US dollar-centred IMS. The Bretton Woods conference was dominated by two strong-willed economists, H.D.White (US) and J.M.Keynes (UK). The UK wanted a system in which global liquidity is regulated by a multilateral agency (IMF), while the US (for self-interest) preferred a US dollar-based system.
Because of its enormous political power, the US got its way. Keynes, for all his intellect and persuasiveness, failed to: (i) endow the IMF with the power to create a new global reserve unit as an alternative to the US dollar; and (ii) secure a global regime which forces surplus as well as deficit nations, and the issuer of the reserve currency as well as its users, to adjust. It's a pity as Keynes' failures haunt us to this day. Nations with chronic surpluses (Germany, China and Japan) and the US as dominant supplier of US dollar reserves, do not face the same pressures to adjust their imbalances as do deficit countries that are often bullied to do so.
In my view, what is needed is a tripolar IMS organised around the US dolar, euro and RMB (China's yuan or renmimbi). Let's face it, neither the euro nor the RMB are in any position today to challenge the US dollar. The world will be better off with a viable alternative to the US dollar. Their interplay forces on the reserve currencies a market discipline earlier and more consistently. This way, central banks seeking to accumulate reserves will have a choice, so that the US no longer has “so much rope with which to hang itself” (so says my friend Barry Eichengreen). Another view is to transform the IMF's SDRs into an international reserve currency (IRC). The trouble is, the SDR is not market tradable. To be an effective IRC, the IMF will have to be accorded the role of a world central bank. This is unlikely; indeed, a non-starter, as it was in the Bretton Woods days.
At the recent G-20 finance ministers meeting in Paris, all central bankers acknowledged that global imbalances remain a critical problem, and that a solution will involve policy co-ordination. Yet, each played down its own role. Until a solution is found, the “accumulation of foreign exchange reserves is a powerful instrument of self-insurance.” There is no political will to reform only the will to congregate and obfuscate. In the Bretton Woods days, the might of the US called the day. Today, it's nobody's call. What a pity.