Daily Forex News

By Barbara Zigah

The Euro continues to be under significant pressure, in spite of the recent Irish bailout package, today EUR selling at $1.2997, near a 10-week low.  Further, the threat to Portugal’s economy looms large among investor concerns.  In reality, that’s nothing when compared to the worries emanating over Spain’s fiscal crisis.  The Spanish economy, in comparison to that of Greece, Ireland and Portugal, is twice as large, thus twice as important to the Eurozone’s recovery.  Of the 16 sovereign nations that make up the common currency Euro, Spain’s is the largest at 12% of economic output. Last week, the price to hold Spain’s debt rose to record levels as investors demand a higher premium for the risk involved; the spread between German and Spanish 10-year notes surged to 2.51% at one point, before settling back to 2.36% yet only a few short months ago, the gap stood at 1.70%.

The Spanish Finance Minister is doing her best to calm investor concerns, insisting that the economic reforms and austerity measures they’ve enacted are helping, and that ultimately Spain won’t need assistance.  Those arguments sound remarkably like others we’ve heard from the Irish government.  Spain’s economic future looks bleak, with 20% unemployment and no economic growth to speak.  Markets fears are not being assuaged, not when bond spreads continue to widen and the Euro continues to weaken.  Again, just like Ireland, it’s only a matter of how long the market has to wait before they acknowledge that there’s a problem.

Should Spain require a bailout, too, then it’s conceivable that the funds earmarked for bailout purposes by the European Union and International Monetary Fund will be inadequate to support it, as it could be as much as €500 billion.  And it is appearing more and more likely that a bailout may be needed, as worries over the Spanish banking sector are reemerging.  Recall, if you will, that only a few months ago Spanish banks were subjected to a stress test, the results of which were generally positive, with all major banks passing, and only a handful of the 19 regional lenders not meeting the criteria.  Recall, too, that Irish banks were put to the same test, and likewise passed with flying colors… yet the Irish banking system is about to get a hefty injection of help.  Certainly, that raises questions about the value of the stress tests.  The Spanish central bank announced that a 2^nd round of bank stress tests would be undertaken next spring.  Can Spain hold out that long?  Can the Euro?

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By Barbara Zigah

If the flurries of retailer advertisements which are inundating email servers are any indication, retailers are desperate to draw in consumers as the holiday shopping season steadily progresses.  According to ShopperTrak, which surveys and monitors mall and retail shopping in the United States, last Friday’s first official shopping day of the Christmas season got off to a bit of a slow start, with retailers posting only a .3% increase in sales over the same “Black Friday” shopping day last year.  While that figure was less than expected, through mid-November retail sales rose 6%, and online-only shopping is not included.  ShopperTrak still predicts that retail sales will grow by 3.2% through the end of the year. In a separate survey, it was noted that only 16.3% used credit cards for purchases, significantly lower than the near 31% last year.

Standard & Poor’s publishes a retail index, which last Wednesday struck a 3½ year high; on Monday, that index slipped 1.3%.  Shares in many of the largest brick and mortar stores, including Nordstrom and Best Buy, fell yesterday, with the DJIA and the NASDAQ both closing lower on Monday.  One analyst believes that the media’s reaction to Black Friday – with news cameras stationed inside Walmart to record for posterity the hysteria upon opening – is misplaced, because consumers are still in debt, unemployment high, and the future of even the whole economy too uncertain.

In spite of the upcoming Christmas holiday, the majority of consumers are still quite cautious about frivolous or discretionary spending, and when and if they open their wallets it’s more often than not because they found a “deal” that was too good to pass up.  The cheeriness of the season notwithstanding consumers are being pragmatic.  Despite a prediction by economists that the upcoming release of November’s non-farms payroll figures will show an additional 145,000 new jobs (whether or not it can be attributed to the Federal Reserve’s $600 billion stimulus efforts), many consumers remain fearful that they will soon be included among the unemployed – also estimated to be 9.6% for November.

With the Black Friday weekend behind us, shoppers are likely sitting back and waiting for better bargains as Christmas nears.  One of the joys of all Christmas shoppers is the ability to sit back and say they’re finished with their holiday shopping.  The question is, are they?

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By Barbara Zigah

According to Sheila Bair, the Chairwoman of the U.S. Federal Deposit Insurance Corporation, Washington, D.C. might just be where the next global fiscal crisis starts.  In a recently published letter to the editor of the Washington Post newspaper, the very outspoken Ms. Bair suggests that the current situation – the government nearly $14 trillion in debt, and an agency saddled with 149 bank failures thus far in 2010 and more than 850 on the FDIC problem list – is nothing more than a time bomb.  Certainly, similar conditions existed in Greece and Ireland which precipitated their country’s need for a bailout.

She notes that private investors currently hold more than 70% of United States treasury obligations (including the Federal Reserve’s recently announced $600 billion stimulus package), many of which will mature within five years.  Investors perceive the U.S. notes and bonds as “safe” and so long as that perception remains, the government can continue to enjoy its favored nation status and the corresponding AAA sovereign debt credit rating.  The U.S. Dollar has been broadly strengthening since the announcement, with USD/EUR and USD/JPY higher today.

Recently in China, a credit rating agency (which had petitioned for entry into the U.S. market but was subsequently denied), downgraded U.S. long term debt to A+ from AA, and said that the country’s fiscal outlook was “negative.  The Chinese government has long been critical of the Fed’s quantitative easing plan, and it’s quite possible that the rating agency is just parroting the official stance.

But while the Chinese rating agency’s downgrade of U.S. debt is irrelevant (or at the very least sour grapes), it’s important to recognize that, should investor confidence erode, a downgrade from a credit rating agency that does matter could be forthcoming.  Then, it’s possible that the scenario Ms. Bair warns of actually might occur.

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By Barbara Zigah

The terms of the Irish rescue plan have finally been laid on the table.  The IMF/E.U. will provide the debt-laden nation with $89.4 billion (Euro equivalent) at the annual interest rate of 5.4%, to be repaid over the course of three years.  Of that nearly $90 billion, $13.2 billion will be earmarked for the nation’s troubled banking sector with an additional $33.1 billion kept in reserve exclusively for the banks’ use; the final $43.1 billion will be used to reduce the Irish budget deficit.  Brian Cowan, the Irish Prime Minister, on behalf of the government, is doing his utmost to convince the world that the bailout is the best deal that could have been negotiated.

And for the most part, those bailout terms seem pretty straightforward and uncontroversial.  What’s not, though, is the caveat put in place by the “lenders” which calls for Ireland to make a contribution of some $23.2 billion to satisfy current obligations, said contribution to be comprised of cash reserves and the heretofore untouchable National Pension Reserve Fund.  Opponents of the plan are calling it a terrible deal, a sell-out, and a disgrace that bondholders were protected, yet the costs to ordinary people would be hugely damaging.

Currency markets, however, don’t appear to be too keen on the deal either.  The common currency Euro broadly fell, with the EUR/USD falling to the lowest level in nearly two months, and EUR/GBP also moving lower.  It would be prudent not to read too much into the Euro’s recent decline, however.  The escalating debt problems in Portugal and Spain continue to worry investors, and until the path to their resolution becomes clear, the Euro will likely continue to be pressured.

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By Barbara Zigah

This week saw continued market focus on the economically troubled Eurozone and Asia.

Eurozone

Ireland officially requested assistance from the purposely created Commission, and markets were happy.  Unfortunately, that happiness was short lived, as Ireland continues to be defensive over their comparatively low corporate tax rate, and that has become a bone of contention for peripheral countries.  Too, markets wonder when the Portuguese government will take a clue from Ireland’s direction and ask for help.

On a brighter note, one country in the Eurozone who has clawed their way back from the recession is Switzerland.  Their economy has seemingly stabilized and is well on the path to recovery, with higher employment and an improved standard of living for their citizenry.  The Swiss Franc has been strong, and perceived as a very safe currency by risk averse investors; in recent days, USD/CHF has been flirting with parity.

Asia

Japan, once the Switzerland of Asia, has been suffering with persistent deflation over the past decade.  Consumer prices have been rising steadily for over 20 months, and exports are lower as the result of a strong Yen.  Calls for the Bank of Japan to fix the economy are growing.

United Kingdom

Even though the U.K. economy has shown some slight growth in the 3^rd quarter, Britons remain at the ready to buckle their belts tighter, once austerity measures are enacted early next year.  They’re not so keen, however, to do it to bailout Ireland.  However, the U.K. Parliament insists it is necessary, as Ireland is a key trading partner.

United States

In the United States, the U.S. Dollar has been appreciating, with EUR/USD and GBP/USD both higher.  That’s been the trend ever since the Fed Chairman announced the $600 billion stimulus program, which has been heavily criticized.  Slightly better than expected 3^rd quarter growth shows that something is working, as to whether or not it is the Fed stimulus, remains to be seen.

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By Barbara Zigah

In October, as economists had earlier predicted, consumer prices in Japan slipped for the 20^th consecutive month; the decline, however, moderated somewhat as a result of the Japanese government’s recent increase of taxes on tobacco products.  The Japanese Statistics Bureau reported late yesterday that, year-on-year, consumer prices, which excluded fresh food products, fell .6%; the hefty 33% tobacco tax, which was imposed on October 1^st, added .28% to the number.

Embedded and persistent deflation is putting significant pressure on the Japanese economy, which some experts suggest may contract in the 4^th quarter, especially given the Yen’s appreciation against the U.S. Dollar and other major currencies.  This year, the Japanese currency has appreciated more than 11% versus the greenback, in spite of September’s intervention by the Bank of Japan.  The Yen is showing some weakness in trading today, with USD/JPY and EUR/JPY at 83.83 and 111.04, respectively, which is likely attributed to the escalating Korean conflict.

The strong Yen is exacerbating declining prices, which in and of itself has a whole host of detrimental effects on the economy, including making imports cheaper, eroding corporate profits, as a result pressuring salaries, etc.  On the flip side, the Strong Yen makes exports more expensive; it was recently reported that for the 3^rd consecutive month real exports were down -1.2%, and were it not for exports to China and Asia, that number would have been even more dismal, as shipments to the E.U. was 1.9% lower from the same period a year ago, while to the U.S. there was only a 4.7% increase.

There has been growing pressure on the Bank of Japan to be more aggressive in fighting deflation, and the political parties on both sides are demanding legislation that would effectively give politicians more of a say in monetary policy.  The country’s constant political wrangling has also played a factor in the lack of monetary policy cohesiveness.

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By Barbara Zigah

Non-farms payroll data from the Federal Statistics Office in Switzerland was released earlier today, and shows an encouraging year-on-year employment rise of 1%, which bodes well for the likelihood of additional employment growth in the last quarter of 2010.  The services sector had 3^rd quarter growth of 1.2%, which outpaced by .3% the industrial sector’s growth.  The unemployment rate, as adjusted, slipped 3.6% last month.  Even more encouraging, a recently published survey indicated that those smaller and medium-sized companies which increased their labor force during the 3^rd quarter continue to be positive about additional hiring.

Switzerland’s economy has come out of the worldwide recession slightly less injured than most other struggling Eurozone countries, with much of the accolades going to higher confidence levels among consumers, which translated into more spending.  The Swiss economy is expected to show some contraction over the next few months, however, as the export-driven economy is being hampered to some extent by the strong Swiss Franc, which is perceived as a safe haven currency.

Experts suggest that, by year end, the Swiss Franc will appreciate further, as investor risk aversion becomes more prevalent and investors turn away from the other so-called safe-haven currencies, including the Japanese Yen and the U.S. Dollar.  The Japanese Yen has been under pressure of late because of the increasing tension in North and South Korea; JPY/CHF was selling at 83.45.  In Europe, the Swiss Franc may likely be well supported against other regional currencies; EUR/CHF earlier today was trading at 1.3346. However the CHF retreated back to parity with the Dollar with USD\CHF trading above 1.This comes as fears emerge about the Swiss Franc’s resilience in a European debt crisis. Nevertheless when examining past price fluctuations European debt worries can create short term selling pressure on the CHF which later tends to hold and recover quickly. Moreover the fact that investors get their risk appetite whetted the Franc tends to decline underpins the Franc’s status as a safe haven. If fact as long as the wariness and risk in the markets remain, the Swiss Franc, just like the Swiss economy, could prove rather resilient against its European pears with gains against the Dollar mostly dependent on Interest rates expectations as both are considers safe havens.

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By Barbara Zigah

At one point in time, not all that long ago, Japan’s economy was held out as one to admire – people there truly enjoyed the good things in life, and because it was Japan, you can be certain everyone had the latest and greatest gadgetry, long before the rest of the world.  Fast forward a few decades and now every economy is attempting to avoid the “mistakes” made by the Japanese government.  Unfortunately, that comes a little too late, as many of the world’s economies already erred – which economy hasn’t had an asset bubble that grew so large that it burst, or had property values skyrocket and then crash?

For the 8^th month in a row, the annual export growth in Japan slowed, primarily as a result of a too strong Yen, and slowing demand.  That doesn’t bode well for the Japanese economy, which has suffered with persistent stagnation, and suggests that the last quarter of the year might have negative growth.  The September intervention by the Bank of Japan, an effort to weaken the Yen, hasn’t worked, as the currency has returned near to the level prior to intervention; currently USD/JPY is at 83.66 Yen.  Earlier this month the central bank reported an asset purchase program in an attempt to give the economy a much needed boost, and a guarantee that interest rates would remain at their historic levels, but the Yen continues to strengthen.

Part of the problem remains the political uncertainty in the country.  Recently, there’s been a call for Naota Kan, the current prime minister (who happens to be the 5^th P.M. since 2006) to resign, and some say that should party confidence ratings fall below the 20% threshold, that he may consider it.  The public, it is said, has been growing tired of the revolving door politics being played, believing it to be at their expense.

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By Barbara Zigah

Oil prices are trending higher today, snapping a 3-day string of declines, recently priced at $82.31 per barrel on the New York Mercantile; this follows the earlier release of improved economic data in the United States.  Evidence of the potential economic recovery softened the U.S. Dollar, with USD/CAD trending lower.The encouraging economic news came in two parts:  First, from the U.S. Labor Department which reported that claims for initial unemployment benefits slipped last week to 407,000 from 439,000 beating analysts’ forecasts and reaching a level not seen since mid-2008.

Many hope that that news portends a recovering labor market.  Second, from the U.S. Department of Commerce, encouraging news, especially for retailers with Black Friday looming, that American consumers are spending more money.  October’s .3% rise in real consumer spending is the 5^th consecutive monthly increase and comes in tandem with a .5% gain in personal income.  According to the press release, this increase was supported by a surge in new car purchases.

Weekly inventories of crude oil, as reported by the Energy Information Administration, earlier today showed a surprise increase of 1 million barrels, a far cry from analysts’ predictions of a 1.8 to 1.9 million barrel decline.  Likewise, inventories of gasoline rose by 1.9 million barrels, far worse than forecasts.  However, with Black Friday heralding the start of the U.S. holiday shopping season, there’s a strong possibility that gasoline inventories may take a big hit over the coming week, as new car owners take their .5% extra income and hit the shopping malls.

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