Japanese exports collapse

Here's why the Yen is unsustainable under 100.00:

TOKYO, Dec 22 (Reuters) - Japan's exports plunged at a record annual pace in November with shipments to Asia dropping the most since 1986 as a global economic slump and a surging yen slashed demand for everything from autos to electronics.

While imports fell 14.4 percent as the Japanese economy languished in recession, the 26.7 percent plunge in exports was large enough to keep the trade balance in deficit for a second month running. Japan last logged trade deficits two months in a row during a previous spell of yen strength in 1980.

The Japanese currency has surged around 20 percent against the dollar this year as investors spooked by the global financial crisis bailed out of risky assets and brought funds home. Shipments to the United States sank a record 33.8 percent on slack demand for automobiles. The United States is in recession and American demand for Japanese goods has been falling for 15 months, ever since U.S. mortgage defaults started to squeeze global credit markets.

By contrast Asian markets held up for much of the crisis, but are now crumbling at dizzying speed. Exports to Asia fell 26.7 percent in November. Shipments to China dropped 24.5 percent, the biggest fall since 1995, on weak demand for semiconductors, digital cameras and other electronic goods, the Ministry of Finance said. "The drop shows that domestic demand in China for Japanese goods is not that strong," said Kaori Yamato, an economist at Mizuho Research Institute.

The Chinese economy is slowing sharply as exports to Europe and the United States plunge. Collapsing export markets have slashed Japan's once politically sensitive trade surplus. The trade deficit of 223.4 billion yen ($2.50 billion) in November was smaller than a median market forecast of 257.5 billion yen. "Exports will probably be weak at least until the end of this fiscal year," said Maiko Noguchi, senior economist at Daiwa Securities SMBC. "After that there will be some help from fiscal spending (by other countries) but it's still not clear the economy could recover sustainably."

The Japanese government grew more pessimistic about the economy for the third straight month, citing rapidly falling output and corporate profits in its economic report for December. "Economic conditions are worsening," the government said in the report. It was the first time the government used that expression since February 2002. The deepening economic gloom at home and abroad is forcing Japanese companies such as carmakers Toyota and Honda to slash output and profit forecasts.

A Ministry of Finance survey showed earlier this month that Japanese corporate profits in July-September fell at the sharpest pace in 6-½ years. A Reuters poll showed on Monday the mood among Japanese manufacturers at an all-time low and deteriorating at the fastest pace on record in December.

Honda not happy with strong Yen

TOKYO, Dec 19 (Reuters) - The head of Honda Motor Co warned the strong yen could cripple Japanese industry and spur massive layoffs, and said the automaker would be forced to bring more production overseas if the dollar persisted below 100 yen.

"If the government is saying, 'We don't care about the export industry', then that's fine -- we'll act accordingly," Chief Executive Takeo Fukui told a small group of reporters in an interview on Friday.

Honda, Japan's No.2 automaker, this week slashed its operating profit forecast by two-thirds to 180 billion yen ($2 billion) for the business year to March 31, dragged down by an estimated currency loss of twice that amount.

Expressing frustration with Japanese authorities' slowness to act, Fukui said Honda had set long-term business plans at what was until recently a cautious assumption of a 100-yen dollar, and that any level below that would necessitate a fundamental rethink of the way the company operates.

"If we go beyond (100 yen), we would simply have to transfer more production overseas, cut more temporary workers and even start laying off permanent jobs," he said.

"Beyond that we could switch to importing more cars into Japan, bring research and development facilities overseas, and in an extreme scenario move our headquarters offshore. It would cause nothing short of a hollowing out of Japanese industry."

Under pressure to reverse the dollar's fall and an economy already in recession, the Bank of Japan on Friday cut its key policy rate to 0.10 percent and took other steps aimed at easing corporate credit strains. The dollar budged little, however, briefly falling below pre-announcement levels under 89 yen.

NO MORE REVISIONS

Fukui, who mapped out this week about a dozen steps aimed at saving near-term cash and focusing on core projects, said Honda was determined to meet its new profit forecasts after issuing its third profit warning this week.

"We don't want to revise again no matter what, so we issued our forecasts with that in mind," he said.

Honda changed its dollar-yen assumption for the second half to 95 yen, far more favourable than current levels, but Fukui said the assumption for the final January-March quarter factored in a rate of about 90 yen and presented little risk for now.

He added that the counter-measures announced this week, including delaying the start of a new domestic factory by more than a year, would help lower capital spending "significantly" next year from the 650 billion yen planned this year.

"We'll have to make sure we can secure profits next business year even if the dollar averages 90 yen," Fukui said.

Yen trades

Still in my USD/JPY and NZD/JPY trades.

NZD/JPY looking better, and happy that will work over time, and I will add more to that position eventually.

USD/JPY remains well out of the money, but I made the decision when I opened it up again at 89.63 that I would wait until BoJ acts. That may not be until 85.00 yet, but when they do it will be explosive. I will write my thoughts on the USD/JPY outlook over the next few days.

NZD/USD update

Added a further long 1m NZD short USD at 0.5820.
This coupled with existing long at 0.5515 makes me long NZD2m at an average of 0.5668.

I expected the NZD/USD to rally over Christmas/January, see earlier post for reasons. The weakness in the USD itself is an added bonus. We saw 0.6080 overnight, so this current pull back is a great spot to add some more, which I just did.

I expect a test of 0.6500 in January.

Excellent Editorial from the New Zealand Herald Today

The Editorial from the Herald is spot on:

Eyebrows were raised this week when the Reserve Bank Governor castigated banks, oil companies and food manufacturers for not bringing down prices as much as they should. In a speech entitled "Everyone needs to play their part," Alan Bollard also told power companies not to keep pushing up prices and chastised local bodies for not keeping rate rises under the level of inflation. It was a sweeping assault aimed specifically at ensuring inflationary pressures continue to be dampened. More broadly, however, it was a welcome marker in a time of extraordinary economic stress.

Some of those criticised by Dr Bollard were quick to fire back. One or two had more reason than others. But the response from the Auckland City Council and the banks suggested that, at least in their cases, the governor's attack had been witheringly accurate. Most lamentably, councillor Doug Armstrong suggested Dr Bollard was wrong because Auckland City had managed to keep its rate rises within the "council rate of inflation". The only problem is that this year's council rate, the basis for rates and water bill increases, is 5.1 per cent. Over the past three years, the official rate of inflation has averaged just 3.2 per cent. As Dr Bollard suggests, councils have got into the habit of passing on big increases and not thinking too deeply about it. It is not, after all, their money.

The banks, also, had no valid comeback to the governor's surprise at not seeing more "pass-through" from the Reserve Bank's slashing of the official cash rate. Short-term mortgage rates have been cut but not by as much as the OCR reductions. The banks, variously, attributed this to the increased cost of borrowing overseas, a wish not to reduce deposit rates by a similar rate, and Government charges for the bank deposit guarantee scheme.

To heap blame on a scheme funded by the taxpayer for the good of the banking sector is ungracious, to say the least. So, too, is the lack of any acknowledgment that banks happily extracted huge profits before the United States sub-prime mortgage crisis bit. According to accounting firm KPMG, the big banks made combined profits of $4.8 billion before tax last year. Dr Bollard says they cannot expect to maintain high profit margins in the current environment. Asking them to come to the party seems particularly reasonable, given the underpinning they have received from the taxpayer.

Other industry sectors have not received such largesse. Some also point to an inherent conflict between Dr Bollard's wish and their responsibilities to their shareholders. But most companies will, in any case, be wary of lifting their prices for fear of losing out to competitors. Those who do and suffer for it will, ultimately, have served their shareholders badly. Dr Bollard has, of course, spent the past few years delivering stern and unpalatable messages. His entreaties to householders about their ongoing spending spree went largely unanswered. So, too, did his message to banks that some of their lending practices were rash. Now, his cutting of the official cash rate seeks to prise open people's chequebooks. There may be difficulties there, too, because many are worried about losing their jobs.

It will take even longer if the councils and companies targeted by Dr Bollard do not pull their weight. He will find it hard to keep cutting interest rates if there is no evidence that inflationary pressures are reducing significantly across the board. If such were the case, a vital stimulus would be lost. That would hinder not only economic recovery but the profitability or performance of each of the enterprises targeted by Dr Bollard. They have a vested interest in playing their part.

They should heed the governor.

USD/JPY Update

Could not resist the USD/JPY move under 90.00 yesterday so bought back USD3m at 89.63 closing out the short at 96.97 (see here for details) to re instate my original position of long USD3m at 103.10.... ouch! So banked a gain but still have an overall unrealised loss.

Will update net positions over the weekend.

Still believe the USD/JPY does not make sense under 110 given the state of the Japanese economy. Buying USD/JPY at close to 13 year lows seems sensible, but admit it hasn't worked so far.

As an aside, what really pisses me off are these comments from Reuters:

"Earlier, the dollar plunged to 88.10 yen , its lowest since mid-1995, after the U.S. Senate rejected a $14 billion auto rescue plan. That heightened recession fears, pushing investors to buy the yen to cover trades that were financed by borrowing the currency at low rates."

That is such a ridiculous comment. Who still has a carry trade in place to repay given the huge falls in the NZD/JPY and AUD/JPY and the JPY generally against the world? The corporates are well hedged and the Japanese housewife just acts on maturity and generally rolls over to keep yield. They certainly don't react to auto bail out failure news.

Sure there are new carry's being placed, but those are generally with intentions of adding on lower levels, not getting out, and waiting for the big retracement/new trend back again.

Who writes this crap?

Germany tells it straight

LONDON, Dec 10 (Reuters) - German Finance Minister Peer Steinbrueck has criticised countries for rushing through what he called crass and untested economic rescue packages at a "breathtaking and depressing" pace.

In an interview with Newsweek magazine, Steinbrueck urged governments to pause before pledging to spend billions of dollars on plans to try and help their economies emerge from the global credit crunch.

A recession was unavoidable and governments should stop trying to outdo each other with ever bigger stimulus measures, said Steinbrueck.

"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing," he said in the interview, published on the magazine's website on Wednesday.

Steinbrueck singled out British Prime Minister Gordon Brown for particular criticism, accusing him of switching to economic policies that would saddle a generation with debt.

"The same people who would never touch deficit spending are now tossing around billions," he said.

"The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking."

GERMAN DOUBTS

German Chancellor Angela Merkel's government has expressed doubts as to whether ever-increasing fiscal boosts are the cure-all solution for every country's economic ills.

"For a while the position in Brussels and a few other places has been, 'We're now very much for setting up large-scale spending programmes, but we're not really going to ask what the exact effects of those might be. And since the amounts are so high, well, let's get the Germans to pay because they can'," said Steinbrueck.

"Ms. Merkel and I are trying to calm them down a bit just now, and understandably that's getting us criticised."

Leaders of Britain, France and the European Commission met in London on Monday to present a united front on a 200 billion euro economic stimulus package for the EU, but Germany was left out of the talks.

European leaders are due to meet in Brussels on Thursday and Friday to discuss the proposal.

Asked what was wrong with stimulus proposals that some countries had already put forward, Steinbrueck was highly critical of Britain's plans to inject record sums of money into its economy.

"Our British friends are now cutting their value added (sales) tax," he said.

"We have no idea how much of that stores will pass on to customers ... All this will do is raise Britain's debt to a level that will take a whole generation to work off."

Keynesianism is based on the theories of British economist John Maynard Keynes, notably the use of government spending and low interest rates to stimulate demand during a recession.

Steinbrueck said people were naturally nervous about the financial crisis but that he wanted to give Germany's own 31 billion euro stimulus package time to succeed.

"As long as we haven't even given that a chance to work, I am not going to participate in this bidding war over who can do the most. I try to exude a little steadiness and continuity instead," he said.

About time someone put the other side to bailouts - KT

USD/JPY update

The USD/JPY is looking somewhat frisky again, but early days yet.

Placed a stop loss order to buy USD 3m sell JPY at 95.50 to unwind my "freeze" trades taken at average of 96.97 and book a small gain. (offset by bigger unrealised losses on original trades of course)

Probably won't get there anytime soon, but best to make sure that I'm back in the game on this trade if we have a serious rally building.

Trading Style

I get asked a lot about my trading style. To be honest I haven’t really set out to develop one specifically at all, but after 30 years trading markets, I have realised a lot of what not to do.

First I tried fundamental trading, poring over statistics, money supply, interest rates unemployment numbers etc etc. When the Berlin wall fell, every economist predicted that unifying East and West Germany would cost billions and take decades. This was bad for the Deutsche Mark, and so on the fundmentals anyway the DEM was a sell. And yet we saw a huge and prolonged rally in the DEM, purely on the exuberance of the reunification of Germany. So fundamentals clearly did not always work, and emotions sometimes do.

Then I switched to charting and did the lot. Point and Figure, Moving averages, Stochastics, Momentum, Elliot wave, Fibonacci, you name it, I tried it. Bought the books, did the studies, bought the models etc etc. Sometimes they worked, sometimes they didn’t. Sometimes the pattern was so clear after the event, and rarely did it repeat.

Then I tried money management, and stop loss orders, take profit levels, risk analysis etc etc. I followed the reasoning that it was better to run your profits and take losses quickly etc etc.

But it was when I was watching really rich people in the markets that I realised the real truth:

It’s best not to care about the trade at all.

I have seen people with bad positions. They don’t panic. They don’t get out. They just wait. If the reason for doing the trade is still valid then they just wait. If the reason is not valid then they get out, whether a profit or a loss is realised or not.

The old adage still works: Money makes money. If you don’t care about it then you are unlikely to panic and get out at the bottom or the top . You just wait.

So I started out with small positions that I could ignore, and built up from there. I realised that all the styles are only tools to help you make a decision, and that it was my own fears that I had to understand really.

My style is to decide a trade and take a position and then just wait. I decide on fundamentals, charts, gut feeling, and a mixture of all the above. But I only get out when it feels wrong, not when some specific chart or fundamental stat starts going the other way. And even then I am reluctant to quit a trade quickly. I have seen people get very rich just by waiting for the cycles to turn again, and they do eventually.

I just wait…and you know, it usually works!

...and in between I watch a lot of cute blondes!!

Some contrarian comment on the USD...which agrees with my views!!

NEW YORK, Dec 4 (Reuters) - The reality of low interest rates and deep economic recession should finally start to catch up with the U.S. dollar in 2009, after risk aversion and de-leveraging helped push the currency to multi-year highs.

The advance -- which has pushed the dollar up almost 20 percent against a basket of six currencies since July -- is "artificial" and may subside once extreme risk aversion eases and global markets stabilize, analysts said.

"Foundations for the dollar's recent rally have not been solid. The result of repatriation, deleveraging, quantitative easing and a major scarcity of dollars," said Bob Sinche, head of global FX and rate strategy at The Bank of America in New York. "But now we are bound for a correction."

Sinche said euro/dollar may be trading at 1.38 by the end of December and that the dollar may rapidly dip to 1.44 to the euro by the first quarter of 2009 before the pair resumes a "more gradual sell-off."

The European currency was last trading in New York at $1.2804 compared with a record high of $1.6038 touched on July 15. Demand for the greenback rose as the financial crisis deepened and even as the Federal Reserve cut interest rates while the economy slowed.

"The dollar was at the receiving end of leverage flows and also concerns about the euro zone's ability to navigate its first systemic crisis," said Daniel Katzive, director for global foreign exchange at Credit Suisse Securities in New York. "But the U.S. currency is no longer very cheap. Actually, in same pairs, the undervaluation of the dollar has been erased remarkably quickly."

Goldman Sachs' senior investment strategist Abby Joseph Cohen also said on Thursday the U.S. dollar now is about at the level "it should be."

Katzive at Credit Suisse added it may be premature to call the end of de-leveraging and that price action in euro/dollar may be choppy until the end of the year.

However, he said extreme risk aversion is beginning to show signs of easing. And that combined with lower rates and a weak economy, this should start to add pressure on the dollar. The bank forecasts euro/dollar to trade as low as 1.23 in the near term but rebounding to 1.37 in about six months.

In a sign risk may be easing, most currency strategists in a Reuters poll released on Wednesday said they expect volatility in the euro, sterling and yen against the dollar to decrease in the next few weeks.

The poll implied monthly annualized volatility of 14.8 percent for the euro against the dollar in December, down from the 23.6 percent seen in November.

"If the equity markets manage to hold on to some of its gains, with some relaxation in risk aversion, we may see a pullback in euro/dollar," said Tom Fitzpatrick, chief technical analyst at Citigroup in New York. "Some weakening in the dollar is not inconceivable."

RATE CONVERGENCE
Still, for many analysts, the outlook for the dollar in the next couple of months will depend greatly on the impact that lower benchmark interest rates across the globe will have on multiple currencies.

Most major central banks have been cutting benchmark rates, aggressively trying to revive local financial markets and economies since the global financial crisis deepened in September.

This week alone, the European Central Bank, the Bank of England, Sweden's Riksbank and the Reserve Bank of New Zealand all matched or exceeded easing expectations at rate-setting meetings.

Earlier on Thursday the ECB cut interest rates by 75 basis points in its biggest move ever. Its main refinancing rate now stands at 2.50 percent, the lowest in nearly 2-1/2 years, but more than double the U.S. Federal Reserve's benchmark rate at 1 percent.

But while some analysts like Katzive at Credit Suisse expect interest rate differentials to gradually weigh on the dollar in 2009, others argue a correction won't be immediate.

"Global yield differentials are collapsing and it is perhaps just a few months before rates in the eurozone and the UK fall very close to the US rates," said Vassili Serebriakov, a senior currency strategist at Wells Fargo Bank in New York.

"But while rate convergence could remove some of the recent support for the dollar, once financial conditions stabilize and risk appetite returns, the yield attraction of currencies such as the pound and the euro over the dollar is likely to have disappeared," he added.

Wells Fargo forecasts euro/dollar will be trading at 1.26 in six months and at 1.28 in one year.

I have a lot of time for Abby Joseph Cohen -- KT

NZD/JPY Trade

Added another trade:

Bought NZD 1m Sold Yen at 49.25, thus making position long NZD2m at average of 54.54.
Review level 41.87, being long term lows.

USD/JPY deals still in the deep freeze!

Interesting article on intervention in the Yen

TOKYO, Dec 2 (Reuters) - Nearly half of major Japanese firms want authorities to intervene to prevent the yen from rising beyond 90 yen to the dollar, to support Japan's export-driven economy, a Reuters survey showed.

The yen hit a 13-year high of 90.87 yen to the dollar in October, and traders say it may climb past such a level in coming months, as investors continue to shun risky carry trades due to credit market turmoil and fears of a global recession.

"A recovery of the export industry's earnings is important for the Japanese economy at this stage," said a company in the services sector.

Japan slid into its first recession in seven years in the third quarter as exports crumbled.

Exporters have been the main engine of growth for Japan's economy, but data released last week showed that manufacturers have forecast their biggest ever quarterly fall in output in the fourth quarter, fuelling worries of a deep recession.

The yen's historic jump in October was partly due to the unwinding of carry trades, in which investors sell low-yielding currencies like the yen to fund investment in higher-yielding currencies and assets.

Asked whether they wanted currency intervention to prevent the dollar from falling below 90 yen, 97 out of 213 major firms that responded, or 46 percent, said they hoped for such action from Japanese authorities.

Sixteen percent, or 34 respondents, said they did not want intervention while 39 percent, or 82 respondents, said they did not have a preferance.

In a separate query on the chances of yen-selling action by Japanese authorities, 65 percent of respondents said they thought Japan would intervene if the dollar fell to 90 yen or below, while 35 percent said they were not expecting any intervention.

Among companies that expect such intervention, 44 percent said they thought there would be intervention if the dollar falls below 90 yen, 29 percent said a dollar slide below 87.50 yen would trigger such action, and the remaining 27 percent thought Japan would wait until the dollar falls below 85 yen.

Some respondents said currency moves should generally be left to market forces, but added that intervention may be needed to curb sharp fluctuations.

"Trying to avert sharp swings may be necessary, but it would be better to avoid intervention if possible," said a company in the oil, coal and ceramics industry.

Others were sceptical that solo intervention by Japanese authorities would be effective, and some questioned whether foreign exchange intervention was the right response to the turmoil in markets and the global economy.

But a transportation machinery maker, which said it wanted authorities to intervene to prevent the dollar from falling below 90 yen, added that the biggest worry was how long the adverse economic conditions stemming from the financial crisis would last.

"Once we escape this situation, foreign exchange conditions are likely to return to natural levels. In other words, the concern here is the time required to shake free from this situation, and this is not an issue that can be resolved through foreign exchange intervention," the company said.

Japan has stayed out the market for more than four years, the longest such stretch in Ministry of Finance data going back to 1991.

Japan sold 35 trillion yen in the 15 months to March 2004 on concerns that excessive yen strength could dampen overseas demand for Japanese exports and hurt the economy.

As I have said before, below 90.00 and the BOJ will act. KT

NZD Trade

Could not resist!

Bought 1m NZD sold USD at 0.5515.

Will review at 0.5100 and 0.6100.

See earlier post as to why.

NZD/USD thoughts

The NZD/USD has fallen from the highs of 0.8216 on 27 Feb 2008 to lows of 0.5191 on 20 November 2008, a fall of over 30 cents, or 36.81%.

The average move from high to low (in a calendar year) over the last 17 years is 15%, with the greatest move being in 2001, of 26%. So the NZD/USD is clearly oversold, by any measure, even bearing in mind the turbulent offshore markets.

There are three main drivers of the NZD/USD:

Capital Markets
I was advised last week by a major bank that in their view some 40-50% of the normal foreign exchange volume is absent from the markets due to volatility and the lack of M&A activity. I believe that a good deal of the offshore investment present in New Zealand over recent years has departed our shores. Corporate offshore investors simply would not stand by and watch a fall of the above magnitude without hedging or withdrawing funds. The key barometer of this is the NZD/JPY, which has fallen nearly 40 cents from the highs of 88.10 to lows of 48.69 or 45% this year, a record move that surely means they have departed New Zealand for now.

Importers
The import community has been engulfed with a wave of global negative news, and lower forecasts from the various banking forecasts. Hence many have taken large amounts of NZD/USD cover, not dissimilar to the events seen a few years back when they covered some years ahead. The key time of the year for importers is right now, Christmas, with the bulk of payments for Christmas stock occurring in November and December. The import community is largely fully covered in the NZD/USD, and their selling of the NZD/USD will diminish as we move into year end and they go on holiday.

Exporters
The vast majority of exporters have low levels of cover. Manufacturing exporters have various levels of cover but all the agricultural and horticultural exporters have low levels of cover, firstly because their season has yet to begin, and secondly they are waiting for lower levels as indicated by the banking forecasts.

So with the capital market players absent, and the importers largely hedged, who of substance is left to sell the NZD/USD? If the rate starts to rise then importers will only be in a position to watch, and exporters will be scrambling to hedge export receipts, as we go into the thin markets in January. There may even be buyers attracted to our (still high) interest rates given that the rest of the world will be closer to zero, even if we have dropped another 1% next week.

Buy NZD/USD!!

Stop Loss Orders

I have been asked why I don't use stop loss orders.

Stop loss orders are an order to cut a position when certain levels are reached to stop the loss getting any greater. I don't usually use them.

I do use "review levels", which are internal levels that I use to re-assess whether the position in place is still valid, or whether to just cut and run. The recent huge volatility in the markets are a case in point. The fall in the USD/JPY was nasty, and at 90.00 I would have been looking at some big losses.

So before it got that bad, I took some alternate positions as follows:

Original trades are 3m USD long short Yen at 103.10. (1m 105.66, 1m 104.00, 1m 99.64)
I sold USD1.5m bought Yen at 96.72 on 23 Oct and again sold USD1.5m at 97.21 bought Yen on 24 October (average 96.97) thus making the overall USD position bought and sold, but essentially square with a loss between the 5 trades of Yen18,390,000 or USD189,646.28.

So effectively I have locked in the loss and the 5 trades are in the "deep freeze" until I close them out or take the hit.

What I am looking to do is cut the 3m at under 96.97 and take a cash gain, with a greater unrealised loss on the original trades, then look for the USD/JPY to move back over 103.00 to make a profit overall.

But need equity markets to calm down first, so still waiting. But these trades are not what I would normally do, but when the markets are so unruly, protection is the best policy untill all calms down.

Still have the NZD/JPY carry trade, will add further if we see a move to 51.00, as I see this cross getting back to 80.00 over time.

Review levels are 90.00 in the USD/JPY and 50.00 in the NZD/JPY.

Position update

Bought 1m USD sold Yen at 99.64 last night.
Average now 3m USD long short Yen at 103.10.

Bought NZD1m sold Yen at 59.83... my first carry trade for a while!!

Position update

Here are the trades I am active in:

USD/JPY
Long USD 2m short Yen at 104.83 average.

Current rate:101.40

Comment:
Underwater here as the carry trade repayment has dragged this rate lower.
Will look to add a further 1m USD long on approaches to 100.00.

NZD/JPY
Square

Current rate 63.13

Comment:
Almost getting time to re-enter carry trades again. Will use approaches to 60.00 to begin building a position.

EUR/USD
Back to Square

Current rate 1.3600

Comment:
Decided discretion was the better part of valour, so cut the position out completely last week and took the gains. Will re- assess if EUR/USD moves back above 1.4000 in coming weeks as the madness around the world calms down.

Cashed out:
Short EUR4.0m (1.4283 average) long USD at 1.3885 last Friday, for a gain of USD159,200 @0.6600 NZD241,212.12 (not counting carry interest).

AUD/USD
Square

Current rate 0.7090

Comment:
Probably fallen far enough for the year, looking for a retracement. However AUD/USD has further to fall into next year. Use retracements higher into 0.7800 to begin building a short position.


Total gains banked this year to date:

NZD1,051,735.00

And that's how to become a millionaire!!!

Next trades:
Looking to buy NZD1m sell JPY on a move into the 60.00 area.
Looking to buy USD1m sell JPY on a move into the 100.00 area.
Looking to sell AUD1m buy USD on moves into the 0.7800 area.

Euro position

Just cut my Euro position completely at 1.3885, so now square.
Not sure which way this vote will go in the US tonight, so decided to take profits and re-assess next week.

So now square in the Euro trades.

Discretion is the better part of valour!!

Will update profits etc over the weekend.

Position update

Order at 104.00 was struck, so now long USD2m short JPY at an average of 104.83.

With the rate at 106.15 right now, looking good.
Euro position has lurched into profit as well overnight.

USD is strong, because they are in a mess, but it is known.
Everywhere else is also in a mess, but the scale is unknown.

And the US has a rep for sorting stuff quickly. Europe and Asia (not so much the UK) have reps for hiding and covering bad news.

Buy USDs!!

Yen deal

Couldn't wait!

Added a long USD1m short Yen trade at 105.66 on Friday
Still have an order to do another 1 m at 104.00 but I doubt we will see it.

Position Update

Orders filed at 1.4350 and 1.4400 for EUR 1m apiece.

So now short Euro 4m long USD at average of 1.4283 and at the current rate of 1.4640 not looking too good. Will re assess if 1.5000 is broken conclusively.

But certainly volatile times, with the USD correcting from recent gains as a result.

May sell NZD against the USD tomorrow if above 0.6900 in the morning.

AUD is a sell against the USD on approaches to 0.8600.

Have left an order to buy 1m USD sell Yen at 104.00, just fishing really for a good level.

We'll see how my wallet has coped by week's end!

Beware of falling BRICs

Economist, 18th September 2008.

Emerging countries are not the havens some people thought.

So much for decoupling. In the wake of Lehman Brothers’ failure, emerging markets have suffered one of their biggest sell-offs in years. On September 18th Russia’s main bourses suspended trading in shares and bonds for a third day in a row after the largest one-day stockmarket fall for a decade; the central bank poured billions into big banks and the money market in a forlorn bid to calm fears.

JPMorgan’s emerging-markets bond index fell by more than 5% in the week to September 16th, giving up in a few days all the gains it had made this year. Prices of Argentina’s credit-default swaps, a gauge of credit risk, rose to their highest-ever level. Unexpectedly, the People’s Bank of China cut its benchmark lending rate by 27 basis points on September 15th, to 7.2%, the first cut for six years.

These actions reflected a variety of concerns, such as a darkening economic mood in China and political worries in Russia. But they all have something in common: investors may be changing their minds about emerging markets.

For the past few years, China, Brazil and others, with their high growth rates and large current-account surpluses, began to seem like desirable alternatives to developed markets. For part of last year, the MSCI emerging-markets index was even trading at a higher multiple of earnings than the index of rich-world shares.

That is changing as investors lose their appetite for risk. Merrill Lynch’s most recent survey of fund managers found that they are now holding more bonds than normal for the first time in a decade (indicating a flight to safety). They also have smaller positions in emerging-market equities than at any time since 2001. In the past three months, says Michael Hartnett of Merrill Lynch, emerging-market funds have seen an outflow of $26 billion, compared with an inflow of $100 billion in the previous five years.

Falling oil and commodity prices are partly to blame. When these were rising, money poured into Brazil and Russia, which became targets of the “carry trade” (investors borrow in low-yielding currencies and buy high-yielding ones). Now oil prices are falling (dipping almost to $90 a barrel this week), they are undermining the carry trade and forcing Russia to prop up the rouble. Indebted investors are also being forced by their banks to sell as falling prices reduce the value of their collateral.

Lower oil and commodity prices ought to benefit China and India, by lowering import bills and assuaging worries about inflation. Yet India’s foreign-exchange reserves fell by $6.5 billion in the first week of September as the central bank sold dollars to slow the fall of the rupee. In China, worries are growing about weakening export demand (growth in export volumes has fallen by almost half over the past year to 11%) and falling property prices, which seem to play a role similar to equity prices elsewhere. In the past three months, property sales in big cities were 40-50% lower than a year ago, according to figures tracked by Paul Cavey of Macquarie Securities. An agent for one of Hong Kong’s largest property companies says “confidence ended this week with the fall of Lehman.”

All these countries have the comfort of huge foreign-exchange reserves. On September 16th the new governor of India’s central bank said he would continue to cushion the rupee’s fall; he also raised the interest rate Indian expatriates can earn on deposits at home and let banks borrow a bit more from the central bank. China’s interest-rate cut shows that its government, too, has room for manoeuvre. But the cut will have little direct impact on the economy because lending is limited by quotas.

It was intended to boost confidence at a time of falling share and house prices. Too bad that among emerging-market investors, confidence is in short supply.

Global meltdown continues

This article, that I blogged on last year, in August, was so right.

We are still going through the unwinding of leveraged positions, and suspicion is everywhere.

Global growth will continue to stall, as capital dries up.

Stay in the trenches, and keep your heads down!

Once the US calms, Europe as always, is next to reveal disasters.

Sell the Euro!

Position update

Re entered short Euro long USD positions at 1.4145 and 1.4238, with further orders to sell Euros at 1.4350 and 1.4400.

So current position 2m Euros sold bought USD at average of 1.4192.

Reasons:
1.
Investors will be buying USDs to shore up losses in US markets, and carry trades are being unravelled.

2.
I don't like the Russian expansion going on. Georgia is the obvious but Ukraine and Poland are very worried. Russia sending military planes to Argentina and reports of "fly bys" in the Atlantic and near Alaska with British and US planes prove that Russia is once again testing the waters.

Putin wants to return Russia to former glories, and will be pushing the envelope more in the months ahead. He has the money to do it, with oil and gas revenues flowing back to Russia.

The European Union and Nato is a plate of jelly, as depicted in last weeks Economist.

Euro investors are naturally worried. If you need proof, take a look at a Euro/USD chart. It dropped sharply on 7/8 August, just as the Olympics started.

But they were also the days when Russia retaliated in Georgia and the tanks went in.

Sell Euros!

The difference between US and European monetary policy

Europe Shuns U.S.-Style `Active Role' on Economy, Bank Bailouts
By Simon Kennedy and John Rega

Sept. 15 (Bloomberg) -- European finance ministers and central bankers said they had no plans to follow the U.S. in stimulating their economy and failed to agree on ways of rescuing any foundering financial institution.

As U.S. officials in Washington monitored the slide of Lehman Brothers Holdings Inc., European policy makers concluded talks in Nice, France, without breaking new ground on how to share the bailout cost if a bank collapse threatened to spread across the region. They also signaled restraining inflation and budget deficits was a better strategy to revive economic growth than lowering taxes and interest rates.

``U.S. policy makers have generally taken a more active role in supporting the economy and stabilizing financial markets, while the euro zone has opted for a less-interventionist stance,'' said Natacha Valla, a former economist at the European Central Bank and now at Goldman Sachs Group Inc. in Paris.

The transatlantic divide in monetary and fiscal policies may mean the economy of the 15-nation euro region takes longer to rebound after contracting 0.2 percent in the second quarter. The European Commission projects the weakest growth since 2003 this year as Germany and Spain slip into a recession and Italy and France stagnate.

``Europe faces a long-lasting slowdown and only gradual recovery,'' said Dario Perkins, an economist at ABN Amro Holding NV in London.

Cost-Sharing Plan
The lack of a cost-sharing plan means the pain would be even greater should a pan-European financial institution run into troubles similar to those that battered Bear Stearns Cos., Fannie Mae and Freddie Mac in the U.S., said Nicolas Veron, an economist at Bruegel, a Brussels-based research organization.

Ministers have so far agreed only to knit bank supervisors closer together and pledged to cooperate in managing any crisis. Unwilling to commit taxpayer money up front, they resisted calls to devise a plan for splitting the bill should a bailout become necessary to prevent a collapse of the financial system.

``The policy response would be slower and less efficient given the lack of a framework and that would pose a significant cost to the economy if something happened,'' said Veron.

By contrast, the U.S. has been able to step in swiftly to help ailing institutions. The government this month assumed control of Fannie Mae and Freddie Mac, while in March the Federal Reserve helped finance JPMorgan Chase & Co.'s purchase of Bear Stearns.

Biggest Banks
The U.S. has the advantage that the institutions it monitors are largely contained within its borders. Europe's biggest banks held an average of 24 percent of their assets in European countries other than their own in 2006, double the amount of 1997, according to Bruegel.

European policy makers also face more constraints than their U.S. counterparts in responding to weakening growth. One is inflation, which remains above the ECB's 2 percent limit. Governments have their hands tied by EU rules that require budget deficits to be below 3 percent of gross domestic product.

Neither restraint exists in the U.S., allowing the Fed to cut its benchmark rate to 2 percent and President George W. Bush to enact $168 billion of stimulus. Europe's strategy amounts to a bet that expansion can be better revived by controlling inflation and budgets than by pump-priming growth with short-term stimulus that generates higher prices and bigger deficits.

Spending taxpayers' funds on fiscal programs to spark growth would be ``like burning money,'' German Finance Minister Peer Steinbrueck said. Luxembourg Finance Minister Jean-Claude Juncker questioned the success of the U.S. approach, and said declines in the euro and oil price would help Europe.

Fiscal Easing
``This should calm the ECB a bit as it increasingly fears that fiscal easing would oppose the central bank's efforts to bring down inflation over time,'' said Juergen Michels, an economist at Citigroup Inc. in London.

ECB President Jean-Claude Trichet, who has demanded governments control their budgets, said the test would be ``implementation in practice.'' Price stability remains the bank's ``fundamental concern,'' he said.

Rather than driving up deficits, the European officials said they plan to cushion their economy by allowing automatic stabilizers such as higher welfare payments to kick in. They also pledged to make their economies more flexible, increase financial- market transparency and lend more money to small- and medium-sized industries.

``We're not going to sit on our hands,'' French Finance Minister Christine Lagarde said. Still, slowing growth alone will be enough to end four years of fiscal consolidation with JPMorgan predicting a budget deficit of 2 percent of GDP in the euro area next year, up from 0.6 percent last year.

Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc., predicts an extended period of weak growth may prompt countries such as France and Italy to ``exploit'' a revised rule that allows a temporary breach of the limit in times of weak expansion. Italy, France, Ireland, Portugal and Greece are at risk of breaching the deficit ceiling next year, according to Commerzbank AG.

No currency positions at present

Have no exposures to the market right now.

Madman Alan Bollard stunned with the 0.50% interest rate cut, so closed out the long NZD short AUD position at 0.8173, for a gain of NZD36,351. (original position entered at 0.7937)

The rally in the Euro on Friday night was too steep for my liking, and was stopped out at 1.4230, which was close to the high (rats!) over the weekend. This realised a gain of USD162,900. (Entry average was 1.4773). @0.6600 NZD246,818.

Total banked gains to date this year are NZD810,523.00

Will look to go short Euro again this week, beginning on rallies into 1.4400, sooner if a deal is struck for Lehman Bros on Asia opening tomorrow.

May sell some NZDs as well if it moves over 0.6700 tomorrow.

Updated positions

Been a wild week, with big currency moves, and have been travelling, so haven't had time for updates.

Added to short Euro position again at 1.4660 and 1.4500, so now short 3m Euros at average of 1.4773 and well in the money, with spot sub 1.4300.

Still holding long NZD short AUD1m position, still looking for this cross to head to 0.8500.

Toying with buying NZD, selling USD after recent heavy falls, as it is looking more likely that Bollard cannot cut due to the recent falls in the TWI. But he is as mad as a hatter, so still may cut anyway to appease Cullen.

I will wait till the Monetary Policy Statement before doing anything.

Alos considering buying USD's against the Yen, and running a carry trade. Need to see some stability in USD/JPY first, we'll see.

Latest Currency Positions

The USD looks to have stopped gaining for the present, with the markets taking more note of US centric troubles. The Euro and Yen began to strengthen on the hourly charts and that caused me to place take-profit orders if the US weakened too much. These were done last week and so have taken some profits, still keeping a Euro 1m position.

Still think that global growth is falling faster around the world than in the US, and that US interest rates must go back up again. The bigger trend is for a stronger USD, so will look for opportunities to again buy USDs on weakness.

Here are the trades I am currently active in:

NZD/JPY
Square

NZD/USD
Square

EUR/USD
Long USD short 1m Euro at average of 1.5160

Current rate 1.4775: Gain

Cashed out:Long USD (1.5160 average) short Euro 2m at 1.4780, for a gain of USD76,000 (@0.7100 NZD107,042) (not counting carry interest).

Comment:
Immediate target 1.4500, then 1.4000. Above 1.5000 requires rethink again.

USD/JPY
Square

Cashed out:
Long USD2m (107.50 average) at 109.50, for a gain of JPY4,000,000
(@78.00 NZD51,282) (not counting carry interest).

AUD/USD
Square

NZD/AUD
Long NZD short AUD1m at 0.7937

Current rate 0.8200: Gain

Comment:
Target 0.8500, as the AUD/USD will be sold due to falling commodity prices, and the NZD/USD will fall slower and maybe stabilise and move higher due to food prices remaining strong. (people still have to eat!)

Total banked gains to date this year:

NZD527,324.00

Currency Position update.

Got cold feet on the Euro and Yen positions last week and placed stops for Euro 2m at 1.4780 and 2m USD Yen at 109.50, which were both duly filled. Will update profits and current positions later.

Nothing to smile about

Aug 5th 2008 From The Economist

The oil price is dropping. Reasons not to cheer.

CUSHING is a small town and a trading hub in Oklahoma, home to about 8,400 people and a latticework of oil pipelines. On Monday August 4th, someone agreed to deliver 1,000 barrels of light, sweet crude at Cushing next month for less than $120 a barrel. Only last month, the same deal was made for over $147. This steep drop in the oil price will raise many people’s hopes for the world economy. But, inasmuch as the falling price of oil (and that of other commodities) is a symptom of worsening economic troubles in America and beyond, it may be merely a confirmation of their fears.

Optimists will argue that the extortionate oil prices of July were an aberration, the result of unwholesome speculation divorced from the reality of supply and demand. Traders, after all, now hold over 286,000 contracts for delivery of oil next month in Cushing, but only a tiny fraction of them, about 2%, have any intention of getting their hands on any crude. Most would struggle to locate Cushing on a map. The aim of many of them is simply to sell their contract, before it expires, at a higher price than they paid for it.

Those looking on the bright side will also hope that a fall in the oil price will untie the hands of central bankers, allowing them to postpone the rate rises they may be contemplating to fight inflation. In his testimony to Congress last month, the Federal Reserve's chairman, Ben Bernanke, said it was the central bank’s “critical responsibility” to stop high energy costs triggering a ruinous race between prices and wages. Similar warnings were voiced by the president of the European Central Bank when it raised interest rates in July.

But the problem with the optimists’ case is that these two arguments are in tension with each other. If speculation is to blame for the high oil price, then higher interest rates, not lower ones, may be warranted, at least in the medium term. Cheap money, after all, results in expensive assets, as the bubble in stocks then houses showed. In a research note published last month, Marco Annunziata of UniCredit argued that once the current crisis is over, central banks may return to the “unfinished job” of restoring interest rates to a less bubble-blowing level.

That the oil price may be so high because interest rates are so low is also an argument long pursued by Jeffrey Frankel of Harvard University. He points out that rates now fail to compensate savers for inflation: real interest rates are negative. As a result, the return to pumping a barrel of oil, selling it and investing the proceeds is often less than can be gained by leaving the oil in the ground and waiting for its price to rise further. Although there is no sign that producers are actually sitting on their hands, the theory suggests that they might do so until the oil price is so high—so far above its long-run value—that they begin to suspect it might fall.

Then, and only then, will they feel motivated to pump, preventing the price rising any further. Rather than paving the way for lower interest rates, the oil price may have dropped in anticipation of higher ones. The same day as the price breached $120 a barrel, America’s Department of Commerce showed that inflation, as measured by the price index for personal consumption expenditures, rose by 4.1% in the year to June and by 0.8% compared with just a month ago. Only in the aftermath of Hurricane Katrina have prices jumped so much in a single month.

These price pressures may prevent the Federal Reserve doing much more to stimulate the slowing American economy. And it is that slowdown, echoed in the euro area, that surely underlies the fall in the price of oil in recent weeks. According to one recent study a 10% increase in the price of oil reduces American demand for the stuff by only about 0.3-0.8%. But a decline in American income has a bigger effect. The United States will guzzle 430,000 fewer barrels a day this year, according to analysts at Lehman Brothers.

Signs of this new temperance are already visible. Luxury pick-up trucks and SUVs now account for 12-13% of car sales (seasonally adjusted) compared with 18% last year, they point out. And on July 28th, the Department of Transportation reported that Americans drove 9.6 billion fewer miles (15.5 billion km) in May than they had a year before.

Speculation does not drive the oil price. Driving does.

BNZ on the inflation menace and the Reserve Bank

From the BNZ Strategist dated 14 August 2008

"Unrelated to the cycle but of significant importance to New Zealand’s medium term prognosis is the approach that the Reserve Bank of New Zealand takes to containing inflation. Recently inflation has burst through the top end of the Bank’s target band. The RBNZ can be excused for much of this as the major driver has been a global supply shock, the first round impacts of which the Bank has no influence over.

What concerns us more, though, is what the Reserve Bank is doing in terms of its inflation target. We can’t help but feel that the RBNZ has gone soft on inflation. There no longer appears to be any great desire to get annual inflation back to the mid point of the target band. Rather, anything under 3.0% seems to do.

We might well be wrong in jumping to this conclusion but this increasingly appears to be the accepted view of folk in financial markets.

There is a large body of research that says if you are to be an effective central bank

(a) inflation expectations need to be anchored and

(b) there needs to be a clearly identified and understood target.

We would contend that there is increasing uncertainty about both. It should thus be of no surprise that inflation expectations seem increasingly to be headed for 3.0%. While, so far, this is an adaptive response to rising headline inflation, there is a real danger that they get stuck there which will ensure that the central bank’s job gets harder and that the neutral nominal interest rate will be higher than would otherwise have been the case.

If this is so, start getting used to higher interest rates, on average, for longer than has been the case. And for the populace as a whole remember that the higher is inflation, the harder the hit to those on fixed incomes and the less well off. " Unquote

Exactly my point, see earlier post on inflation - KT

Currency position update

The USD continues to decline, as the world belatedly realises that global growth is falling faster than in the US, and that maybe the USD is not the worst currency in the world after all.

Here are the trades I am currently active in:

NZD/JPY
Square

NZD/USD
Square

EUR/USD
Long USD short 3m Euro at average of 1.5160

Current rate 1.4700: Gain

Comment:
Immediate target 1.4500, then 1.4000. Above 1.5000 requires rethink again.

USD/JPY
Long USD2m short JPY at 107.50

Current rate 110.50: Gain

Comment:
Target 111.00, but will be slow going, with Yen buyers slowing down the moves as carry trades are unwound.

AUD/USD
Square

NZD/AUD
New position taken on Monday, as blogged last week: Long NZD short AUD1m at 0.7937

Current rate 0.8155: Gain

Comment:
Target 0.8500, as the AUD/USD will be sold due to falling commodity prices, and the NZD/USD will fall slower and maybe stabilise and move higher due to food prices remaining strong. (people still have to eat!)

Total gains to date this year:
NZD369,000.00

The inflation menace is up and running.

Inflation is the world’s major menace, and it hasn’t gone away, just been asleep for a few years. Global inflation is back, and this will be the theme for some years, perhaps into the end of 2010, as central banks grapple with resurging inflationary pressures.

The problem is, they are not tackling inflation the way they should be.

There are two schools of thought on what a central banks job should actually be in setting monetary policy.

One is that central banks should go for growth (and other more nebulous targets) and try to kick start the collapsing growth in their economies by lowering interest rates.

This ignores the reality that Japan has had low to zero interest rates for 10 years, and sadly, no resulting growth.

Equally it ignores the fact that New Zealand has had the highest interest rates in the western world for a number of years and has had reasonable growth, only slowing this year as global growth tumbled on the back of the credit crisis.

So it is plain that the level of interest rates is not necessarily a driver of the level of growth in an economy. Growth is a function of many elements; the relative level of interest rates does not solely drive it.

Consumer confidence, wage rates, tax rates, government policies, property values, exchange rates, the level of productivity, these and many other factors all contribute to drive growth pressures. Central banks who ignore inflation and change interest rates to target growth do so at their peril.

Recent examples are the US, New Zealand and maybe, Australia.

The second school of thought, and my preference, is that central banks should solely focus on inflation and nothing else. The level of interest rates is set to control inflationary pressures, be they primary as in oil and food shocks, or secondary in transport cost increases and plastic prices increases, to name but a couple of obvious ones. In my view, the job of a central bank is to control inflation, even, if necessary, through a recession. (By the way, a recession does NOT necessarily mean no inflation).

Example: The European Central Bank: probably the best CB in the world.

The US has the excuse in being willful on inflation because of the sub prime disaster and their property meltdown, flowing into the credit crisis. The reality remains that banks lent money to people who could not repay it, over properties that were vastly over priced. It is not the role of a central bank to bail out bad lending decisions. With US inflation at close to 6% and US interest rates at 2%, they have negative real interest rates. This is madness. The price is higher inflation, with recent US data being the highest in 17 years and set to go higher yet.

Here in New Zealand, The Reserve Bank of New Zealand has no such excuse, and lowering interest rates when they are forecasting higher inflation is worse than madness, it is simply not doing their job.

Governor Alan Bollard is gambling that the slow down in the economy will compensate for the higher (one off) prices feeding through from (principally) higher food and oil prices. He is right to look through these one off impacts.

But he is wrong that secondary inflation pressures will not result. Every company I have spoken to is seeing price increases across the board. Bollard thinks they will not be passed on because of the pressures of falling sales.

I have news and its all bad for the Reserve Bank. Companies would rather sell less at a profit than more at a loss. Everyone is putting up prices to recover margin, and what is worse, people expect prices to go up, so inflationary expectations are rising quickly.

The very thing he is there to defend against is happening, inflationary expectations are rising, and once that rabbit is out of the hat, there is no catching it again without a huge amount of pain.

No growth and high inflation is the fear of any government but sadly, that is where we are headed again.

Currency Update

At last! The strength in the US dollar that I have been waiting for has begun. This is the beginning of a major move, that will last for some considerable time. It has already impacted sharply on the major and minor currencies around the world.

I am long 3m USD (see previous posts!) against the euro at an average of 1.5160, which has at last moved into profit, with this pair closing this morning at 1.5000.

I was long 1m USD against the yen at 106.30 and added another USD1m on the break above 108.50 at 108.70 this week. So am now long USD2m at an average of 107.50, with this pair closing this morning at 110.20.

Gains to date actually banked are NZD369,000.

Looking to buy NZD and sell AUD1m on open on Monday, as this cross is moving higher, with a target of 0.8500 in the next few months.

Excellent article by Brian Fallow

Brian Fallow: Keep focus on targeting inflation

5:00AM Thursday August 07, 2008 By Brian Fallow

It has been as long in gestation as a baby rhinoceros, but the outcome of the finance and expenditure select committee's inquiry into the monetary policy framework is expected soon.

If a week is a long time in politics, 15 months is an eternity.

The inquiry was launched against a background where the Reserve Bank had driven interest rates sky high in a bid to deflate a housing market bubble and rein in the associated debt-fuelled spending binge, in the process saddling the export sector with painfully high exchange rates.

But a lot has changed since then.

The housing boom has turned to bust. The world is no longer awash with cheap money; on the contrary, a credit crunch has made the imported savings upon which we rely a lot more expensive. Interest rates, the dollar and petrol prices are falling. But even with its recent fall, crude oil costs almost twice what it did when the select committee's terms of reference were agreed. And while inflation then was running at 2 per cent, we are now staring down the barrel of 5 per cent.

The point is that this would be the worst possible time for politicians to undermine the credibility of the monetary policy regime.

The challenge monetary policy faces has switched from dealing with runaway house price inflation and its spillover effects on household debt and consumption to how to keep the lid on inflation expectations in the face of a sustained oil shock. "The currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation.

"If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term. A critical responsibility of monetary policy-makers is to prevent that process from taking hold."

These are not the words of Reserve Bank Governor Alan Bollard, though he has made the same point several times in recent months. It was his American counterpart, Federal Reserve chairman Ben Bernanke, testifying to Congress last month.

With inflation across the developed would running at 4.4 per cent, this is not just a local problem.
Under a flexible inflation-targeting regime, such as we have here, the appropriate central bank response to a surge in oil prices is to "look through" it, allow the shift in relative prices to do its work and not tighten policy.

But the caveat - repeated with increasing urgency by central bankers lately - is that that tolerance cannot extent to "second round" effects, where people try to avoid a drop in real wages or profit margins by passing on higher costs to their employers or customers, creating a persistent inflationary spiral.

In embarking on an easing cycle two weeks ago, Bollard is in effect trusting to the severity of the recession and the flexibility of labour and product markets to avert that danger. Much as people might want to pass on higher costs, they might not be able to.

But that is a gamble on his part, because one of the big structural changes which has occurred in the economy has been the shift to a much tighter labour market.

Such is the gap in incomes between New Zealand and Australia, and most other developed countries, that we lose almost as many Kiwis as we gain immigrants. Net migration, while positive, consequently does little to offset the dominant demographic trend of an ageing population.

So unemployment has been low and labour force participation high by historical and international standards. We will get some fresh data this morning on whether that has changed much.

But even if it has and the danger of an old-fashioned wage-price spiral passes, and even if petrol prices continue to fall, the underlying trends look as if they are here to stay. The challenges posed by a common labour market with Australia will remain. So will an oil price outlook driven by relentlessly rising demand in Asia and a rising cost curve on the supply side, even if there is some temporary relief at the heavy cost of a global economic slowdown.

So can the monetary policy framework cope?

"This framework has worked well ... [It] was designed to have the necessary flexibility to cope with the business cycle, shocks that may occur, the inevitable errors in forecasting and lags in the effects of policy decisions. The framework does not assume that inflation can be fine-tuned over short periods."

Again, these are not Bollard's words, but those of his Australian counterpart Glenn Stevens last month. They are, however, very much in line with Bollard's trenchant defence of the current regime in a speech last week.

He pointed out that real per capita incomes had grown more rapidly in the low inflation environment since 1990 than in the high-inflation 1970s and 1980s.

He pointed out that most developed countries had followed New Zealand in adopting an inflation target for monetary policy and that our target band was a middle-of-the road one.

In an implicit response to Winston Peters he said the "superficially attractive" option of requiring monetary policy to pursue multiple objectives such as growth, employment, exports and the balance of payments had been tried before, here and abroad, and found to result in stop-go policies and high inflation.

Inflation expectations have been on a clear upward trend since the start of the decade, rising from less than 2 per cent then to nearly 3 per cent now in the Reserve Bank's own survey. The National Bank's business outlook survey has expectations higher still.

And with the Reserve Bank itself forecasting inflation to hit 5 per cent in the September quarter (which it hopes will be the peak), confidence that we are still in a low-inflation environment will come under further strain.

Yet even at this delicate juncture it appears that the Government is prepared to undermine that confidence by politicising the monetary policy arrangements.

Associate Finance Minister Trevor Mallard said in Parliament early last month - and not at all off the cuff - that the tools available to the Reserve Bank had not been able to address the inflation challenges presented first by the housing market and latterly by high oil and food prices. "In fact in the first case it could be argued they exacerbated the problem."

The Government was open to looking at alternatives, Mallard said. But, when pressed the following day about what they might be, he said: "I'm not proposing any change at all and I want to make it absolutely clear no decisions or current proposals are before the Government."

The financial markets seem to have looked at the political polls and Bill English's defence of the status quo and concluded that the issue is moot.

But the risk remains that Labour will have another go at making this an issue of political branding ahead of the the election, sacrifice 20 years of bipartisan support for the inflation-targeting regime and undermine the Reserve Bank's credibility - just when we need it most.

Hat Tip: The visible hand in economics

I totally agree with all the above...both Cullen and Bollard are guessing that they are right about inflation coming down in the medium term...but if they are wrong, we and all the country pay a terrible price, anyone remember the inflation of the seventies?

They are gambling with our low inflation futures!

But then, they will not be around to worry about it. KT

Position update

Here are the trades I am currently active in:

NZD/JPY
Square

NZD/USD
Square

EUR/USD
Long USD short 3m Euro at average of 1.5160

Current rate 1.5425: loss

Comment:
STILL watching and waiting for a turn in the EUR/USD back below 1.4500.

USD/JPY
Long USD1m short JPY at 106.30

Current rate 108.40: Gain

Comment:
Not sure how this will work out yet, so keeping position to USD1m at this stage.

AUD/USD
Square

Comment:
Cut the AUD1m long at 0.9500 and took a gain of AUD82,105.26 (Not counting carry interest)

Total gains to date this year:
NZD369,043.58

Next trade:
Looking to buy NZD1m sell AUD on a move into the 0.7800 - 0.7900 area.

Currency stuff

The USD looks to be gaining ground on the back of comments from various US officials, now worrying about inflation.

Sub prime is so yesterday's news. Now the Fed is worried about the USD weakening further, and the impact on inflation as a result.

Ultimately they can intervene and raise interest rates in the US if they have to, and traders know this.

This is moving the USD to strength against the Euro (at last, given I have bought USD3m!) and also against the Yen.

So have bought USD 1m and sold Yen today at 106.30. Also cut the AUD1m long position today at 0.9500 and banked the gains (went long at 0.8720).

So only have USD long positions now against Euro and Yen.

Will blog on updated positions and total gains to date on the weekend.

Michelle Pfeiffer - Makin' Whoopee

This is Michelle showing the world why she deserves all the glory!!

She is older now, but still gets me going!!

The Budget......

....was boring.

But at least the markets have begun to reprice the lower interst rates that were being foolishly predicted.

When will people realise that lower growth does not equal lower interest rates?

Lower inflation equals lower interest rates, and we have all kinds of inflationary pressures looming due to higher oil prices.

Wait until Bollard confirms this in June. Then watch interest rates move back up and the NZD/USD retest 0.8000.

No Minister is such an excellent blog

Here's why and here and here

Great reading!!

Position update

Here are the trades I am active in:

NZD/JPY
Square

NZD/USD
Square

EUR/USD
Long USD short 3m Euro at average of 1.5160

Current rate 1.5480: loss

Comment:
Watching and waiting for a turn in the EUR/USD back below 1.4500.

AUD/USD
Long AUD1m short USD at 0.8720

Current rate 0.9430: Gain

Comment:
Will probably take profit on next test of 0.9500, and will cut and bank the money if below 0.9200 is seen.

Total Gains to date:
NZD266,412.00

Next trade:
Looking to sell NZD1m buy USD on a move into the 0.7900 - 0.8000 area.

Euro update

Added another 1m Euro and bought USD at 1.5600 yesterday. So total position is now short Euro 3m long USD at an average of 1.5160.

Still well in loss, but I believe the USD is oversold and the Euro still has a number of issues ahead of it as the sub prime losses spread to European banks.

Will add to AUD long position if 0.8900 is seen in next few days.
Still waiting for good levels to short NZD against the AUD.

EUR/USD, now 1.5330 spot.

Just sold a further 1m Euro and bought USD at 1.5330, making the position now short EUR2m long USD at an average of 1.4940.

Will review again if 1.5500 is seen, but still expect bad news to hit Europe as the sub prime mess rolls on. The US banking scene has been up front (more or less) on their losses. Europe has a long way to go, and the markets are not yet factoring in bad news from Europe.

When Europe goes, it will be a hard fall.

Watch this space.

Position Update

Here are the trades I am active in:

NZD/JPY
Square

Current rate 83.30

Comment:
Decided discretion was the better part of valour, so cut the position out. Will re- assess in March or if below 80.00 is seen.

Cashed out:
Long NZD1.5m (82.90 average) at 85.00 yesterday, for a gain of NZD37,058 (not counting carry interest).

NZD/USD
Square

Current rate 0.8000

Comment:
The NZD/USD dropping whilst the USD is weak is not a good look, and looked toppy, so closed the position out.

Cashed out:
Long NZD1.0m (0.7500 average) at 0.8100 yesterday, for a gain of NZD74,000 (not counting carry interest).

EUR/USD
Long USD short 1m Euro at 1.4550

Current rate 1.5200: loss

Comment:
Waiting for bad news on the Euro to run the EUR/USD back below 1.4000.
If 1.5300 is seen, I will double the USD Long position.

AUD/USD
Long AUD1m short USD at 0.8720

Current rate 0.9330: Gain

Comment:
Expect test of 0.9500 this year.

Total Gains :
NZD266,412.00

Next trade:
Looking to sell NZD1m buy AUD on a move into the 0.8800 area.

Position Update

Here are the trades I am active in:

NZD/JPY
Long NZD1.5m Short JPY at average of 82.90 (79.50, 88.00, 81.20).

Current rate 86.60: gain

Comment:
Volatility has calmed down, but thought it was time to bank some gains, so halved the position, still expecting an eventual test of 90.00 this year.

Cashed out:
Long NZD1.5m (82.90 average) at 87.30 yesterday, for a gain of NZD75,600 (not counting carry interest).

NZD/USD
Long NZD1m Short USD at average of 0.7500 (0.7300, 0.7700)

Current rate 0.8150: gain

Comment:
Expecting a test of 0.8500 this year. But decided to bank some gains, so halved the position.

Cashed out:
Long NZD1.0m (0.7500 average) at 0.8150 yesterday, for a gain of NZD79,754 (not counting carry interest).

EUR/USD
Long USD short 1m Euro at 1.4550

Current rate 1.5100: loss

Comment:
Waiting for bad news on the Euro to run the EUR/USD back below 1.4000.
If 1.5300 is seen, I will double the USD Long position.

AUD/USD
Long AUD1m short USD at 0.8720

Current rate 0.9400: Gain

Comment:
Expect test of 0.9500 this year.

Total Gains :
NZD155,354.00

That will keep the wolf from the door for the next wee while.

Next trade:
Looking to sell NZD1m buy AUD on a move into the 0.8800 area.

Large Issuance Of NZD Bonds Props Kiwi - RBC

[Dow Jones] Chunky NZD-denominated uridashi and eurokiwi issues over past 2 months has helped to remove "an otherwise significant drag on NZD," says RBC Capital Markets senior FX strategist Sue Trinh; notes issuance of these bonds have offset redemptions recently, leading to positive net issuance for 1st time since July 2007.

In January there were NZ$1.7 billion of these bonds issued vs scheduled redemptions NZ$1.3 billion, February issuance so far NZ$1.7 billion vs scheduled redemptions NZ$1.6 billion.


Still more coming in than going out, expect NZD/USD to continue to trade higher ahead of RBNZ Monetary Policy Statement on March 6th.

More Uridashu investment

This could be why the NZD/USD has been so well bid this week:

TOKYO, The European Investment Bank (EIB) will sell a NZ$845 million ($663 million) uridashi bond, documents filed with Japanese financial authorities showed on Thursday.

The bonds will be issued on Feb. 19, with the sales period running from Feb. 8 through Feb. 19. The kiwi bond will have a 7.38 percent coupon and mature on Feb. 22, 2010.

EIB is rated triple A by Moody's Investors Service and Standard & Poor's.

US Federal Reserve Chief Lends His Ear To A Diverse Group

WASHINGTON -- Alan Greenspan, the former Federal Reserve chairman, tops a long list of academics, executives and economists who met with the Fed's current chairman, Ben Bernanke, during a turbulent period for the nation's economy.

According to records obtained under a Freedom of Information Act request, Mr. Bernanke had lunch with Mr. Greenspan on Jan. 2. That was just eight days before Mr. Bernanke delivered a speech in Washington that signaled a newly aggressive approach to interest-rate cuts.

Neither the Fed nor Mr. Greenspan would elaborate on what was discussed. A Fed spokeswoman described the lunch that day as "social" and Mr. Greenspan said it was "private."

Last year, Mr. Bernanke's second in office, was a stressful one for the economy and -- by extension -- the Fed chief. Pressures from the housing slump and the subprime mortgage market spread to Wall Street, where big banks announced heavy mortgage-related losses. Mr. Bernanke's meetings offer a rare window into his private daybook from January 2007 through last month.

Mr. Bernanke met separately with the chief executive of Fannie Mae and Freddie Mac, the government-sponsored mortgage giants, and at least twice with former Senate Banking Committee Chairman Phil Gramm, now the vice chairman at UBS Investment Bank. On Sept. 5, he met with Lloyd Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., whose company weathered the credit-market turmoil better than some competitors.

Mr. Bernanke also spoke with some of the country's top business leaders, including John Chambers, chairman and chief executive of Cisco Systems Inc., Samuel Palmisano, chairman and CEO of International Business Machines Corp., Alan Mulally, CEO of Ford Motor Co., James Dimon, chairman and CEO of J.P. Morgan Chase & Co., and G. Kennedy Thompson, chairman and CEO of Wachovia Corp.

Other visitors included House Financial Services Committee Chairman Barney Frank (D., Mass.) and Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee. The schedule shows 26 different meals, meetings and phone calls with lawmakers, most of them Democrats. He also met with consumer groups and labor union leaders, including James Hoffa, general president of the International Brotherhood of Teamsters.

"It's useful for board members to hear a broad range of views and insights from market participants, consumer groups, business leaders and academics," Fed spokeswoman Michelle Smith said.

Mr. Bernanke frequently has breakfast with Treasury Secretary Henry Paulson, and his schedule also has included conversations with Jean-Claude Trichet, president of the European Central Bank, and Mervyn King, governor of the Bank of England.

Position update

Thought it was time for an update, so here are the trades I am active in:

NZD/JPY
Long NZD3m Short JPY at average of 82.90 (79.50, 88.00, 81.20).

Current: gain

Comment:
Volatile, certainly caused a few grey hairs when down at 78.00, but expecting an eventual test of 90.00 this year.

NZD/USD
Long NZD 2m Short USD at average of 0.7500 (0.7300, 0.7700)

Current: gain

Comment:
Expecting a test of 0.8500 this year.

EUR/USD
Long USD short 1m Euro at 1.4550

Current: loss

Comment:
Waiting for bad news on the Euro to run the EUR/USD back below 1.4000.

AUD/USD
Long AUD1m short USD at 0.8720

Current: Gain

Comment:
Expect test of 0.9500 this year.

Next trade:Looking to sell NZD1m buy AUD on a move into the 0.8900 area.

At last, some help for the bond insurers

NEW YORK - Eight large banks have joined forces to seek a rescue plan for MBIA Inc, Ambac Financial Group Inc and other troubled bond insurers battered by the global credit crunch.

The $2.5 trillion bond insurance industry is struggling with mounting losses and capital shortfalls, jeopardizing the "triple-A" credit ratings that insurers such as MBIA and Ambac depend on to function normally.

The eight banks are Barclays Plc, BNP Paribas, Citigroup Inc, Allianz's Dresdner Bank, Royal Bank of Scotland Group Plc, Societe Generale, UBS AG and Wachovia Corp.

The banks retained Greenhill & Co, a boutique investment bank, as an adviser, CNBC said, citing the unnamed source.

The banking industry itself has suffered more than $100 billion of write-downs in the last year related to mortgages and other complex debt. Bond insurers got caught after venturing beyond writing coverage for bonds typically used to finance hospitals, roads, schools and sewer systems. Instead, to increase profit, they chose to also underwrite structured products, including securities backed by risky subprime mortgages. That decision backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities sank.

Unless the market or the insurers stabilise, investors may unload hundreds of billions of dollars of bonds, raising borrowing costs and ultimately burdening taxpayers. It could also result in hundreds of billions of dollars of additional write-downs at banks worldwide, analysts have said. Standard & Poor's estimated total banking industry losses tied to mortgage problems will exceed $265 billion.

Regulators including New York Insurance Commissioner Eric Dinallo have been meeting with industry participants to discuss a rescue. Dinallo was not immediately available for comment. Credit rating agencies have taken away triple-A ratings from a handful of bond insurers.

In recent trading, the cost to protect MBIA debt against default fell to 14 percent upfront plus 500 basis points (5 percentage points) a year, from 17.5 percent upfront plus 500 basis points, according to CMA DataVision. Ambac debt protection costs fell to 14.5 percent upfront plus 500 basis points, from 18.7 percent upfront plus 500 basis points.