Sunday, 24 August 2008

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:



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).

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


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).


Long NZD short AUD1m at 0.7937

Current rate 0.8200: Gain

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:

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.

Monday, 18 August 2008

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

Sunday, 17 August 2008

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:



Long USD short 3m Euro at average of 1.5160

Current rate 1.4700: Gain

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

Long USD2m short JPY at 107.50

Current rate 110.50: Gain

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


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

Current rate 0.8155: Gain

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:

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.

Saturday, 9 August 2008

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

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.
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