Kiwi Trader

Poor German auction spells tough times for euro

2011-11-27T21:48:00.004+13:00

Reuters 25 Nov 11 - Nia Williams

LONDON - Weak demand at a German debt auction suggests investors are starting to shun even the euro zone's strongest economy, which could trigger more losses in the shared currency as many shift from euro-denominated assets to safe havens outside the region.

As Italian, Spanish and even French yield spreads have blown out to record levels in recent weeks, the trend has been for portfolio flows to switch into German Bunds, resulting in no foreign exchange outflows from the euro zone.

Those flows, combined with talk of repatriation of capital by euro zone banks desperate to shore up their balance sheets as money markets seize up, have been cited as reasons behind the euro's recent resilience around $1.34.

But that appears to be changing and on Thursday the euro slid to a 7-week low at $1.3316 on trading platform EBS. Germany sold barely half the bonds it put up for auction on Wednesday, when a buyers' strike against the low yields on offer was fuelled by fears that Berlin could not remain immune from the crisis engulfing its heavily indebted euro partners.

In a sign that investors are cutting exposure to the euro zone as a whole, 10-year Bund yields converged with UK gilts for the first time in 2-1/2 years.

Normally, positive yield differentials would be considered a reason to buy the euro. But analysts said investors are now more likely to sell the shared currency because of fears that Germany may be forced to underwrite the fiscal excesses of weaker euro zone economies. Those worries could push the euro to $1.25 or lower by early next year, some analysts say.

"Some people are now saying if you cannot sell the Bund (at auction) you cannot sell anything. Traders will see German yields higher and the euro falling and say that is not a good sign. The euro zone crisis is just getting going," said Geoff Kendrick, FX strategist at Nomura.

Analysts described the recent widening of differentials between benchmark Bund yields and returns on the bonds of weaker economies as asymmetric. Earlier in the crisis, when peripheral bond yields rose German yields tended to fall.

"When German Bund yields no longer drop while the other side is widening, we have liquidation of these peripheral bonds as well as simultaneously a flight out of the euro. This means the euro is much more vulnerable to widening of the spreads," said Hans Redeker, global head of FX strategy at Morgan Stanley.

At 2.15 percent, 10-year German yields are still roughly a third below levels seen earlier this year, and investors are unlikely to dump Bunds as they dumped Italian and Spanish debt. But Stephen Gallo, head of market analysis at Schneider Foreign Exchange, said if weak demand for German debt escalates into an outright Bund sell-off, a huge proportion of flows that have remained within the euro zone would desert the bloc. "We may get to a point where Germany starts to get pressured, capital is going to be drying up and then the euro could drop quite low, to $1.25 or less in a matter of days," Gallo said.

INFLOWS SLOWING
In a scenario in which Germany comes under pressure, analysts said the portfolio flows could dry up fast. The latest European Central Bank data showed 20.7 billion euros of net portfolio investment flowed into the euro zone in September, at a slower pace than August when 31.9 billion euros came in.

The data supports the view that appetite for euro zone debt is waning with repatriation of capital by European banks acting as a buffer for the time being. Analysts expect foreign investors to speed up liquidation of euro zone bond holdings while repatriation inflows are likely to wane in coming months.

Deutsche Bank estimates the stock of foreign portfolio investments in the euro area exceeds the stock of euro area investment abroad by close to 3 trillion euros - a mismatch that is likely to send the euro lower in coming months. Data from Japanese bank Nomura shows domestic investors in France, the euro zone's second largest economy, has already repatriated investment from abroad for four consecutive months, to a total of 123 billion euros.

Although the data does not differentiate between repatriation from other euro zone countries and the rest of the world, it supports evidence that French banks, which have particularly high exposure to Greek debt, are trying to improve capital ratios to reduce vulnerability to a Greek default.

Nomura data also showed Japanese investors led the selling of euro zone assets mainly from Italy and Belgium in August and September, and that trend is expected to continue.

Deutsche Bank strategist Alan Ruskin said as the crisis threatened core euro zone countries, foreigners had a significantly smaller pool of assets to buy from. He forecast the single currency could hit $1.25 in the first quarter of 2012.

"It does feel like Europe has jumped the gun and there's a mismatch in terms of repatriation. Foreigners hold a lot more European assets than Europeans hold foreign assets. There's more to liquidate in a full-blooded, 'everyone goes home' situation."

Have not posted in a while, but not much has changed, has it?
Europe still in a mess!!

Update

2011-08-22T21:31:00.001+12:00

Right, getting back to the blog after some absence. Will update the positions this week, no real change, just more profits.

Thinking the unthinkable - a euro zone breakup

2010-11-29T19:49:00.002+13:00

By Noah Barkin 26 Nov 10

BERLIN (Reuters) - Contagion spreads from Ireland to Portugal and then to Spain, forcing European leaders to exhaust the $1 trillion bailout fund they set up only half a year ago to defend their ambitious single currency project. Sniping within the 16-nation euro zone mounts and popular support for the euro erodes as German taxpayers rebel against a series of costly rescues and austerity fatigue in the bloc's periphery reaches breaking point.

Eventually one or more countries decide enough is enough and break away or are forced out, reintroducing the national currencies they used before tying their fate to Europe's audacious economic and monetary union. Unthinkable only a few weeks ago, a small but growing number of experts now believe some version of this nightmare scenario could become a reality for the euro zone if policymakers fail to unite behind a more forceful strategy for saving the euro and address investor concerns about fiscal and economic imbalances.

Until now, doomsday predictions of a euro zone breakup have come mainly from Anglo-Saxon sceptics, some of whom saw the single currency bloc and its one-size-fits-all monetary policy as fatally flawed from the very start. Over the summer, British economist Christopher Smallwood of consultants Capital Economics produced a 20-page paper entitled "Why the euro-one needs to break up" and U.S. economist Nouriel Roubini, alias Dr. Doom, predicted euro members would be forced to abandon the single currency.

But as the second wave of Europe's debt crisis gathers pace, engulfing Ireland and heaping pressure on Portugal and Spain, a new group of doubters is emerging. They believe it may be difficult for the euro zone to hold in its current form, even if many think that remains the most likely scenario. Some, like Financial Times commentator Gideon Rachman, say Germany could bolt if public frustration with bailouts mounts or if Berlin is unable to convince its euro partners to back its controversial plan for a new permanent rescue mechanism.

Dissident academics have challenged the legality of German participation in the Greek rescue in the Federal Constitutional Court. If they won, the impact on the euro could be devastating. Others see a risk that economic divergence between Europe's stable core and debt-saddled periphery could end up splintering the bloc into a two-tier "Euro-North" and "Euro-South".

Still others believe Germany could engineer the expulsion of euro weaklings like Greece that it feels should never have been allowed in. "I don't think we'll see a breakup of the euro and Germany returning to the deutschemark, but what we could see is a more homogeneous euro area purged of its low performers," said Domenico Lombardi, a former executive board member at the IMF who is president of the Oxford Institute for Economic Policy.

HUGE POLITICAL WILL
These voices still represent a small minority and few of the sceptics are convinced the euro zone will fracture anytime soon. Close observers of Europe, and the policymakers charged with defending the euro, dismiss the possibility of a breakup out of hand. They cite the huge emotional as well as economic investment in the project, the political will behind it, and the pain, complexity and humiliation an exit would bring. They point to the resilience of the euro itself, which has lost some 6 percent of its value against the U.S. dollar in the past three weeks but remains a strong, stable currency by historical standards.

German Bundesbank president Axel Weber said on Wednesday there was "no way back" from the euro, reassuring his French audience that politicians would simply come up with more money if their $1 trillion safety net proved insufficient. "My guess is that for quite a few years yet policymakers will do whatever they can to save this thing," said Katinka Barysch, deputy director of the Centre for European Reform. "If you sit in London, it's doomed. They don't understand the political investment. They look at the bond spreads and think it's doomed."

Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics in Washington, said a breakup remained "unthinkable" and pointed to the bloc's response to the Greek meltdown, in which, after repeated delays, it tore up the rulebook and took decisive action to stop the rot. "If the euro were seriously at risk one could expect a much more forceful response," he said. "You would see the ECB printing 500 euro notes and dropping them from helicopters before Spain was forced to default or could endanger the euro."

FISCAL UNION A NON-STARTER
Still, if the recent turbulence has proven anything, it's that "shock and awe" measures are unlikely to appease investors for long, nor change their view that the bloc is fundamentally flawed because of a steep competitiveness gap that only a closer fiscal union may be able to solve. Going down this path is a non-starter for Germany, which has insisted instead that peripheral euro countries push through deflationary wage cuts and painful structural reforms to boost productivity, in line with its own successful economic model.

The Greeks, Irish and Portuguese are going along with these policies for now, but sceptics worry that in the years to come this strategy will be exposed as deeply flawed and that destabilising imbalances within the bloc will re-emerge. The OECD predicted last week that Germany's current account surplus would rise back to peaks of around 7 percent of GDP by 2012. It forecast 2012 deficits for Greece and Portugal of 5.9 percent and 8.0 percent respectively, well down from their pre-crisis double-digit highs but still substantial. The realisation that markets may not allow the euro zone to muddle along making only minor tweaks to its fiscal rules, as it did in its first decade, appears to be sinking in among European policymakers.

On Wednesday, the finance minister of euro newcomer Slovakia described the risk of a euro zone breakup as "very real", a day after German Chancellor Angela Merkel told parliament the euro was in an "exceptionally serious" situation. "This is a systemic crisis which requires a systemic response but we haven't seen that so far," said Lombardi. "This is being dealt with on a country by country basis, first Greece, now Ireland, and you can be sure they won't be the last country."

G20 stalemate points up disruptive power shift

2010-11-15T07:46:00.003+13:00

By Alan Wheatley, Global Economics Correspondent

BEIJING, Nov 14 (Reuters)

Economic power is leeching from the old world to emerging markets. The politics of globalisation are not keeping pace with this shift. And that makes it hard to agree joint action to tackle urgent issues such as how to reduce China's external surplus.

The Group of 20 summit in Seoul amply corroborated each of these truisms. The risk now is that, in the absence of policy coordination, a purely market-driven adjustment of global economic imbalances will be messier than it need be.

And where market forces are not allowed to prevail, as is the case with China's exchange rate, the temptation for politicians in the United States and Europe to try to force the adjustment through tariffs and import barriers can only grow.

"There is a pervasive sense that the G20 has reached the limit of cooperative efforts towards rebalancing of the world economy," said Eswar Prasad, a Cornell University professor and a senior fellow at the Washington-based Brookings Institution.

With advanced economies barely plodding along while emerging markets are enjoying red-hot growth, reconciling the different types of policies required has become difficult, Prasad said. "In an increasingly integrated world economy with emerging markets playing a prominent role, cross-border spillovers of domestic policies then set up a situation ripe for conflict," he added.

These conflicts were on show in Seoul. Emerging economy members of the G20 flailed the easy-money policies of the Federal Reserve, the U.S. central bank; President Barack Obama, beset at home by high unemployment and low growth, urged Chinese President Hu Jintao to ease the pressure on American manufacturers by letting the yuan rise faster.

But the writ of the United States in the global economic system no longer runs unchallenged.
Gone are the days when a U.S. Treasury secretary could gather four counterparts around a table and set in motion sweeping changes to exchange rates and trade positions.

In the eyes of policymakers in many developing countries, U.S. primacy and credibility have been eroded by the global financial crisis, which had its origins in the U.S. subprime mortgage meltdown.

The ultra-loose monetary and fiscal policies that the United States has adopted in response is testing faith in the dollar to destruction -- and not just among the likes of China and Russia. No less a figure than World Bank President Robert Zoellick, himself a former U.S. Treasury official, said last week it was time to start thinking about building a new monetary system.

So it is little wonder that Washington has repeatedly failed to get Beijing to do its bidding on the yuan. In Seoul, a different tactic fizzled: the G20 refused to back a U.S. plan for numerical targets for current account surpluses and deficits -- a roundabout way of applying peer pressure on China.

Instead, Hu stuck to Beijing's well-rehearsed stance that the yuan's rate of climb would remain gradual and calibrated to China's national interest. In case someone had not heard the first time, Hu repeated his position at an Asia-Pacific leaders' meeting on Sunday in the Japanese port city of Yokohama.

Stewart Patrick with the Council on Foreign Relations in New York said the Fed's recent decision to embark on a $600 billion bond-buying programme had undercut Obama at the summit. Moreover, his party's trouncing in mid-term Congressional elections had made his G20 counterparts sceptical of the president's ability to deliver on global commitments "Confidence in U.S. global economic leadership continues to wane," Patrick said.

"VICTORY FOR EMERGING MARKETS"
Illustrating how the sands are shifting, the G20 gave its blessing to developing countries such as Brazil that opt for capital controls to prevent incoming walls of cash from pushing up already overvalued exchange rates.

Not long ago, such curbs were anathema to the United States and the IMF. In another nod to the growing clout of developing countries, the Seoul summit formally endorsed a deal that gives them more power in the running of the IMF, largely at Europe's expense. "On balance, this G20 meeting was a victory for emerging markets," commented Lena Komileva, head of G7 market economics at Tullett Prebon.

The G20 is not doomed to deadlock as emerging giants try to wrestle power from advanced economies. As well as settling on a redistribution of chairs and shares at the IMF, the group agreed new rules designed to avert future bank collapses.

But the Seoul stalemate over imbalances points up the group's limitations when it is not confronted by an immediate crisis, as it was at the first G20 summit two years ago. Then, the freezing up of global credit markets and the onset of recession concentrated minds and generated a coordinated stimulus in response.

Today, divergent trade and inflation trends are leading to tension rather than policy coordination, according to economists at J.P. Morgan. "Ironically, this tension is likely to produce a desired aggregate outcome -- an easier global monetary policy setting that increases the likelihood of a strong global growth outcome next year.

"However, widening imbalances alongside inappropriately synchronised policy stances raise concern that the eventual global policy normalisation will prove far more disruptive than necessary," they wrote in the bank's weekly Global Data Watch.

In my view, this all points to a continual decline in the USD. Whatever trade you have on, do not have any part that is long USD's - KT

Position update

2010-11-13T19:45:00.010+13:00

Policy change.
I deal with my bank and use forward exchange contracts, typically rolled out at inception for 1 year. That means I don’t really worry about day-to-day changes unless the trend itself is in danger. In the past I have shown the spot rate that I have entered deals and ignored the forward points, whether they have been a benefit or cost.

But some of these carry trades have been in place a long time, and the points are getting extremely valuable. So from now on I will show the deal at the forward rate and strip out the unearned forward points for valuation.

Here are the trades I am active in:

AUD/JPY

Long AUD 3,735,990.04 short JPY at 76.69 average.

This was originally made up of two trades:
An original deal of long USD3m short JPY @103.10 (unfrozen on 5 June 2009) and a short USD3m long AUD @ 0.8030 (yes, crossing it up with the AUD has saved me!) done on 5 June 2009, creating a cross of 82.79 average.

I have not bothered with the points on the USD/JPY leg as the interest differential was so small.

The AUD/JPY deal was rolled to 7 June 2010 at a 230 point benefit and has since been rolled again at the bank to 7 June 2011 at a 380 point benefit (as AUD interest rates have climbed over the rollovers).

So the new rate due 7 June 2011 is 76.69, but only on 7 June 2011. The unearned forward points as at today are 238 points cost, so an effective spot rate for valuation purposes of 79.07. (Are ya confused yet!)

Current spot rate: 81.35

Current: Gain 228 points

Comment:

See AUD/USD comments below.

USD/JPY:
The state of Japanese government finances remains extreme. The new government will eventually break the self-imposed debt ceiling and prompt a credit downgrade by the ratings agencies. But the weakness of the USD remains paramount at this stage, especially with QE the dominant force at the Fed. The USD/JPY will eventually test the 80.00 area, and we will see the Japanese intervene below there. I am not hopeful that they will achieve anything by intervening, but the AUD upmove itself should compensate for USD weakness.

I am happy with the current exposure, but more from a carry trade perspective, in that time works the profit out.

NZD/JPY

Long NZD 3m short JPY at average of 53.33.

The NZD/JPY deal was rolled from the last trade of 1m (making 3m in total at an average of 57.23) on 28 May 2009 to 28 May 2010 at a 160 point benefit and has since been rolled again at the bank to 27 May 2011 at a 230 point benefit (as NZD interest rates have climbed over the rollovers).

So the new rate due 27 May 2011 is 53.33, but only on 27 May 2011.
The unearned forward points as at today are 121 points cost, so an effective spot rate for valuation purposes of 54.54.

Current rate: 63.80

Current: Gain 926 points.

Comment:

See Yen comments in AUD/JPY above. See NZD/USD comments below.

I am happy with the current exposure, but more from a carry trade perspective, in that time works the profit out.

EUR/USD

Square

Current rate: 1.3690

Comment:

The ongoing concerns in Europe over debt are not going away. But I believe that it is not the problem it was back in May. The ECB can buy bonds, but at present there is a bit of brinkmanship going on. They want to teach the politicians that they have to sort out fiscal policy. Eventually the ECB will again step in so I don’t see EUR weakness as long lasting.

In the long run, all other things being equal, the Euro Zone debt position is far better than the US. If the US does not move to reduce the budget deficit over time, then the USD will become the next Greece.

I still believe that Europe will raise interest rates before the US does. Watch the inflation readings. With Gold, oil and food all hugely higher, inflation is on its way. Have look at

Standard and Poors

then expand the agriculture icon!!!!

Agriculture is up 25%, with cotton up 90%!

GBP/USD
Square
Current rate: 1.6114

Comment:
Took a loss on my short GBP1m position at 1.5278 (short from 1.4990) of USD 28,800. Took a gain (back on 11 August) on my long GBP1m position at 1.5820 (long from 1.5278) of USD 54,200. Net gain USD25,400 (NZD35,376 @0.7180).

AUD/USD

Long AUD 2m short USD at 0.7907.
Current rate: 0.9861

Current: Gain 1954 points.

The AUD/USD deal was at spot of 0.8670 on 28 September 2009. Was rolled to 28 September 2010 at a 320 point benefit and has since been rolled again at the bank to 28 September 2011 at a 443 point benefit (as AUD interest rates have climbed over the rollovers).

So the new rate due 28 September 2011 is 0.7907, but only on 28 September 2011. The unearned forward points as at today are 393 points cost, so an effective spot rate for valuation purposes of 0.8300.

Comment:

Unchanged really. I believe the Australian economy remains extremely well placed to benefit from ongoing commodity demand, especially with China still growing strongly. I expect ongoing interest rate increases from Australia. I still believe that the AUD/USD has a long way higher to go yet. My new target is now 1.0500.

Happy with the current exposure.

NZD/USD

Long NZD 2m short USD at .6745.

Current rate: 0.7730
Current : Gain 985 points.

Comment:

The NZD/USD deal was at spot of 0.7160 on 28 September 2009. Was rolled to 28 September 2010 at a 190 point benefit and has since been rolled again at the bank to 28 September 2011 at a 225 point benefit (as NZD interest rates have climbed over the rollovers).

So the new rate due 28 September 2011 is 0.6745, but only on 28 September 2011. The unearned forward points are 207 points cost, so an effective spot rate for valuation purposes of 0.6952.

The NZD/USD is still looking very positive, with commodity prices still driving the NZD higher. There is also some pressure from the Canterbury earthquake offshore flows. As the re-insurers offshore pay out on the claims they have to buy NZD’s. The sums involved are large and that is driving the NZD/EUR and NZD/GBP higher, as the re-insurers are in the UK and Europe.

The NZD/USD is still following the AUD/USD, which is driven by Asian developments. The NZD/USD has not really had the benefit of rising interest rates, but this cannot be too far away now. Inflation pressures are strong in China and Asia and we need the higher NZD to insulate us from imported inflation. When the RBNZ begins to raise interest rates in March 2011, the NZD/USD will begin to test the post float highs around 0.8250. Target remains the highs of 0.8250, but we may see the 0.9000’s before this trend finally tires.

Happy with the current exposure.

Unrealised gains NZD1,174k (AUD/JPY +134, NZD/JPY +435k, AUD/USD +404k, NZD/USD +201k).
Previous realised balance: NZD2,344,360.38

Plus GBP/USD realised gains of NZD35,376

Total gains banked since August 2007:

NZD2,379,736

So if I cashed up the whole lot right now I would have made over NZD3.5m since August 2007 or slightly over 3 years.
If you don’t believe me, scroll back through all my posts to see how I did it!!

My trading style, a repeat!

2010-11-13T16:05:00.001+13:00

http://kiwitrader.blogspot.com/2009/06/my-trading-style-repeat.html

Ireland sneezes but little sign of globalised cold

2010-11-13T13:05:00.005+13:00

10 Nov 2010 Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - About six months ago, the euro zone debt crisis was hot enough to trigger headlines like "Wall Street falls on worries about Greece". It was all about contagion, fears that default in economic minnow Greece could spread not just to Portugal and Spain but beyond, crushing the euro zone in its wake. Tensions are increasing again about debt in the euro zone periphery - particularly Ireland - with some yield spreads and debt-insurance costs at record levels.

But to date there has been little sign of global contagion, primarily because investors have been looking elsewhere - mainly the Federal Reserve - and because of crisis management programmes that can now be employed by policymakers. The spread between Irish 10-year bonds and German Bunds hit a record 571 basis points on Tuesday, up from around 300 at the height of the crisis and a good 200 above where it was in mid-October.

Greece, too, is back up to uncomfortable levels, if not as wide as at the height of the crisis, and Portugal's spread has widened to a record as well. The impact further afield, however, has only been felt mildly so far, mainly on the euro, and even then only in the past day or so at a time when the dollar has been rising broadly anyway. "Markets fear of contagion has fallen," said Klaus Wiener, head of research at Generali Investments in Cologne. "In May, the escalation of the debt crisis in Greece threatened to end in a systemic crisis. This fear is not as pronounced any longer." The 30-day correlation between the movement in peripheral bond spreads and the euro was around -0.6 in May, meaning that widening in spreads was usually matched by euro weakness.

That correlation is now close to zero for Ireland and only slightly negative for Greece, suggesting that at least over the past month the debt problems have been isolated, having little if any impact on the currency. It is more or less the same story with stocks. In the past three weeks as the Irish spread has widened 200 basis points, the pan-European FTSEurofirst 300 stock index has gained more than three percent. It was up three-quarters of a percent on Tuesday as the spreads widened to another record.

Globally, stocks have paid even less attention, with MSCI's all-country world index rising around 4 percent over the period. Data from iTraxx, meanwhile, shows that investors are pricing in the chances of default in European companies as less than that for Western European sovereigns -- not good news for sovereigns but hardly a thumbs down for corporates, which suggests fear does not stretch to a systemic crisis which would surely engulf companies as well.

DIFFERENT CONDITIONS
There are two main reasons why the market impact from the renewed debt worries has been muted so far. One is simply that investors have had their minds on other things, notably the $600 billion quantitative easing programme launched by the Fed last week to stimulate the U.S. economy. The global economic picture has also improved, with even lagging U.S. jobs creation ticking up. "The big theme was quantitative easing, the economic cycle. It is undeniable that the data has been positive, almost globally," said Joost Van Leenders, investment specialist at BNP Paribas Investment Partners in Amsterdam.

The second big reason is that investors believe lessons were learnt in the earlier Greek crisis and policymakers stand ready to stop disorderly default contagion. Since June, a European stabilisation mechanism has been in place, funded by the European Union and International Monetary Fund, to provide as much as 750 billion euros at relatively low interest rates to euro zone countries needing them. No money has been taken, but it is seen by many as a safety net. There are also plans afoot to create a permanent mechanism. Although political differences will make agreement hard, the mere fact that it is under discussion underlines the willingness of authorities to act. None of this is to say that the current stresses in Ireland and elsewhere are negligible. It is inconceivable, for example, that a default or restructuring in Greece or Ireland would not have wider impact.

But the lack of sharp reaction outside the countries concerned so far does suggest investors are not expecting a blow up across markets similar to the one earlier this year.

Normal transmission has been resumed

2010-11-13T13:05:00.001+13:00

Sorry, been away doing other stuff. Back online now!

GBP position update

2010-08-11T17:57:00.005+12:00

Took profits on my GBP 1m long postion. This was enterered at 1.5278 and took the gain at 1.5820. So 5 pence gain, not too shabby.

Other positions unchanged, will do a position update later in the week.

Whatever happened to the euro zone crisis?

2010-08-11T17:51:00.002+12:00

Paul Taylor, PARIS (Reuters)

What a difference a few weeks make. In early June, doomsayers were predicting the demise of the euro after a 110 billion euro ($145.2 billion) bailout for Greece and a $1 trillion financial safety net for the rest of the 16-nation single currency area failed to calm market panic.

European banks were hardly lending to each other, the euro had hit a four-year low against the dollar, and there was widespread talk that Greece would have to default on its debt. "We are assigning a higher and higher probability to a break-up of the euro zone," Gina Sanchez, director of equity and asset allocation strategy at Roubini Global Economics told a Reuters Summit on June 8. "I don't want to overstate that. It's not our base case, which is they muddle through," she said. Among the grounds she cited for a possible collapse were a lack of political will to cut budget deficits and Germany's reluctance to foot the bill for rescue packages.

Just two months later, the euro zone's crisis has eased and there are signs of a return of investor confidence. The euro has gained 10 percent against the dollar, economic recovery in the euro area is more robust than forecast although uneven, European stocks outperformed the S&P500 index of leading U.S. shares in July, and interbank lending has thawed following the publication of stress test results on European banks. A healthy crop of first half corporate earnings, including at major euro zone banks, and a positive report card on Greece from the International Monetary Fund and the European Commission have fuelled a more optimistic mood.

The risk premium investors charge to hold the debt of peripheral euro zone states such as Spain, Portugal, Italy and Ireland has shrunk to the lowest levels since April. Spain's borrowing costs tumbled in a 3-year bond auction last week and the cost of insuring Spanish and Portuguese debt against default has also tumbled on the Credit Default Swaps market. Stress tests on European banks, scorned by many analysts as too soft when only 7 banks out of 91 failed, largely did the trick by providing detailed data to show most were in reasonable health and could withstand the main sovereign risks. The European Central Bank has almost stopped purchasing euro zone weaklings' government bonds, an emergency measure initiated to stabilise the bond market at the peak of the crisis in May.

RISKS EXAGGERATED?
The speed of the reversal in sentiment raises the question of whether risks of a euro zone break-up and a rolling government debt crisis were exaggerated from the start. Undoubtedly, the euro jitters were amplified by enduring hostility to the single currency project in London -- Europe's biggest financial centre -- and scepticism in the United States. Unnerved by the European Union's fractious and convoluted policy process and by domestic resistance in Germany, markets underestimated the political will of core governments to do whatever it took to stabilise the euro area.

They also seemed to grossly overdo the financial and political fragility of Spain, which was briefly seen as the next Greece and the straw that could break the euro zone's back. So has the crisis gone away or is it just taking a summer siesta? ECB President Jean-Claude Trichet was rightly cautious when he said last week: "I do not declare victory." Money markets are improving but have not yet returned to normal, he noted. Smaller banks, notably in southern Europe, are still shut out of interbank lending as counterparties doubt their solvency.

Many other risks remain, including the possibility that as market pressure eases, governments may step back from painful but necessary bank restructuring, budget cuts and long-term economic reforms due to political and social opposition. It will take years of unpopular cost-cutting reforms of pensions, labour markets, welfare benefits and the public sector to reduce bloated budget deficits and national debt piles.

Despite its impressive progress report, Greece may yet have to restructure its massive debt, forcing bond holders to take a "haircut", many analysts believe, although this process could be postponed for 3 to 5 years due to the EU/IMF bailout. The euro zone economic recovery is likely to slow as austerity measures curb public and private demand, making it harder to reduce unemployment. Money market rates may spike as the ECB withdraws more of the ample liquidity it has pumped into the banking system.

Above all, the economic imbalances and sharp differences in competitiveness between northern European states led by Germany and Mediterranean euro zone countries remain unresolved. The export-driven German economy is powering ahead while Greece languishes in an austerity-induced recession and Spain and Portugal struggle with anaemic growth while trying to curb their budget deficits. Markets may no longer see an existential threat to the euro zone, but they see lingering problems which will make investors more wary and selective than in the currency's first decade.

Position Update

2010-06-16T21:49:00.005+12:00

Have not changed any of my positions.

So still long NZD/USD, AUD/USD, NZD/JPY, AUD/JPY and GBP/USD.

Have some more grey hairs over all the positions, but am hanging in there at this stage.

I like the AUD and the NZD, I think they still have legs to recover back to 0.9000 and 0.7500 respectively.

I like the carry trades. But have been beaten up hard in May. The trick with carry trades is to hold on to them. They return between 4 -5 % pa. The rate has to fall that much every year to lose out. That has never happened. Some years down, some years up, but never down every year. So as long as you can afford to wait, you cannot lose. If you can wait 10 years, the rate has to fall 50% for you to be behind. So the secret is to hold them until the rate recovers again. It has worked for me many times.

I'm not so in love with being long GBP. But I think the budget will lift the GBP. So I will wait a while yet.

I also like the euro. The worst of the sovereign fears are now priced in. The fall post creation of the euro was close to 35 cents. The fall post GFC was close to 35 cents. This move started down from 1.5000, so I figure between 1.2000 and 1.1500 there will be a base found. That may have already happened.

France and Germany will make serious money over the summer months with the euro at these levels. France especially, as they are agricultural exporters and their exporter season starts now. I expect the data from these two countries to improve dramatically over the next 3-4 months.

So I like the euro, and I see it back towards the 1.4000 area by Christmas.

What else...

I don't like the USD. I don't like their debt load. I don't like the way Obama is demonising BP.
I think US politics is going to be paralysed post mid terms. So doing an austerity package a la Europe will be difficult, if not impossible.

I don't like US bonds as a result.

Thats about it. Sorry for the lack of posting, but haven't been really inspired.
Anyone missing the blonde of the month yet?

Big investors resist major stock sell off

2010-05-31T19:42:00.003+12:00

By Jeremy Gaunt, Reuters European Investment Correspondent

LONDON (Reuters) - Institutional investors hung on to their equities exposure more than might have been thought in May, given extreme volatility on financial markets, but also put more money in safe-haven cash, Reuters polls showed on Thursday.

Demand for alternatives, which include gold, rose. But perhaps surprisingly in the face of regional crisis, investors increased exposure to euro zone equities. Surveys of 47 leading investment houses in the United States, Japan, Britain and continental Europe showed an average mixed portfolio holding 52.3 percent of its holdings in equities. This compares with 52.8 percent in April, but is a relatively small decline given that MSCI's all-country world stock index has fallen close to 12 percent in the period between polls.

At the same time, they cut back slightly more on bonds -- to 34.9 percent of a portfolio compared with April's 35.5 percent and put money into cash. Cash holdings rose to 5.1 percent from 4.7 percent. With the month dominated by the crisis in euro zone debt, managers in the polls, longer-term investors were not universally glum. "We expect the global economy to gradually move to a sustainable recovery path on improvements in employment and capital spending, centring on the United States. The world's share markets will likely return to an uptrend," said Kenichi Kubo, senior fund manager at Tokio Marine Asset Management.

The polls even showed relative faith in Europe, the centre of the current crisis. Allocations within equities to the euro zone rose to 23.2 percent from 22.2 percent a month earlier. Despite this, concern remained that the euro zone crisis and the government cost-cutting needed to solve it could harm future economic growth. "I do think what's happening will result in slower growth in Europe," said Steven Bleiberg, head of global asset allocation at Legg Mason Inc.

Regionally, U.S. fund managers held on to their high exposure to equities. Based on 11 U.S.-based management firms surveyed between May 18 and 26, the poll found an average of 65.2 percent of assets in equities, unchanged from April. Managers also cut bond holdings to an average of 28.8 percent in May, from 29.5 percent in April, while raising cash exposure to 2 percent, from 1.7 percent. Continental European investors lifted their cash holdings to its highest in at least a year in May and cut back on bonds.

The poll of 13 Europe-based asset management companies showed a typical mixed portfolio holding 47.9 percent of its assets in equities this month, up from 47.5 percent in April. The allocation to bonds -- which includes government bonds and corporate debt -- fell to 38.1 percent from 39.7 percent. Cash rose to 8.0 percent from 6.9 percent. Japanese fund managers slightly raised their weighting for stocks in May from the previous month's seven-year low. The average share weighting among 11 institutions edged up to 45.0 percent from 44.8 percent in April.

The average bond weighting dropped to 48.4 percent from a 10-month high of 49.1 percent in April. The weighting for cash rose slightly to 3.3 percent from 3.1 percent. British fund managers continued to reduce exposure to equities in favour of bonds. The survey of 12 fund managers showed allocations to equities dropped for the third month running, falling to 50.9 percent in the average global balanced portfolio in May, from 53.5 the previous month.

GBP position update

2010-04-30T19:45:00.004+12:00

Took a loss on my short GBP1m position at 1.5278 (short from 1.4990) of USD 28,800.

But went long GBP1m also at 1.5278.

I figure that enough bad news is already priced in. We'll see.......

Three signs of a coming equity market correction

2010-04-18T21:23:00.006+12:00

LONDON (Reuters) - Jeremy Gaunt, European Investment Correspondent 16 April 2010.

Signs are appearing, at least to those who like to study financial market runes, that equities could be in for a short-term fall.

Nothing is certain, of course, what with past performance being no guarantee of future returns as the standard disclaimer reads, but three different historical trends are suggesting equities could soon turn. It all has to do with eight days in March, an aversion to cash and, contradictorily, falling equity market volatility.

First, the eight days. Morgan Stanley's European equity strategy team has taken note of the fact that this is the number of times last month that MSCI's main Europe index found itself up at least 50 percent year-on-year. "This is a rare event," it said in a note. "(It) has happened on only 80 individual days since 1919." Crunching numbers, the Morgan Stanley team found that while such occurrences are a long-term bullish signal, they are bad news over the short haul. Some 77 percent of the time, equity markets have fallen 4 percent over the next six months. "The trigger for a correction is clear," strategist Teun Draaisma said. "I expect a continuation of good economic news to turn into bad market news. The gist is that continued growth prompts central banks into a policy reaction or sends bond yields and inflation expectations up.

CASHING IN
The second signal comes from Bank of America Merrill Lynch via the roughly 200 fund managers the bank polls every month to get ideas about asset allocation and market moves. April's survey, released this week, found that cash holdings had dropped to 3.5 percent of assets among the group. Looking back, the bank said that on four out of the past five occasions that cash holdings have fallen that low, equities have declined by 7 percent over the following 4-5 weeks.

"We have an amber warning light flashing," Patrik Schoewitz, BofA Merrill's European equity strategist, said of the finding. Investors' low-yielding cash reserves, which were built up to huge levels at the height of the financial crisis, have been draining away for well over a year, mainly to the benefit of riskier assets such as equities. At some point -- perhaps now, if BofA Merrill is right -- cash levels will normalise, cutting off riskier assets from some of their fuel.

The third sign of a correction is less numeric and more psychological. State Street Global Advisors, an investor with $1.9 trillion in assets under management, says it is seeing growing interest from institutional investor clients in low-volatility equity strategies, essentially protection against stock market falls.

The best time to enter such strategies, State Street says, is when volatility has bottomed out and equities themselves have risen sharply from a low, as now. The CBI Volatility Index is below last year's low and 71 percent below last year's high. The MSCI all-country world stock index, meanwhile, has risen some 83 percent from what many believe was its cycle low a little over a year ago.

CYCLICAL BULL
None of this is to say that such a correction will spread into the longer term. BofA Merrill's Schoewitz said its study of corrections following cash reserves hitting 3.5 percent "is a very short-term signal". Furthermore, Morgan Stanley notes that while days of hitting 50 percent-plus gains has led to a correction in the short term, on 96 percent of occasions it has been followed by 10 percent rise in equities over a 12-month period. The firm believes that equity markets are currently in a cyclical bull market that should continue into next year.

But for the short term, signs are there.

And now we have the Goldman Sachs fraud case depressing markets...looks like an interesting April!! - KT

Long-term investors unfazed by close-run UK election

2010-04-08T21:03:00.005+12:00

07 Apr 10 08:30:41

By Jeremy Gaunt LONDON (Reuters)

Long-term investors do not appear overly concerned about Britain's election delivering an inconclusive result despite market wobbles about a "hung parliament". Analysts who track institutional investor flows report strong inflows into UK equities, steady demand for British government bonds and caution, rather than flight, when it comes to sterling. Fund managers, meanwhile, say investors are taking decisions on a broad range of issues, not just on the immediate potential for political uncertainty.

In short, what has been a fixation in UK media and political circles -- the rare prospect of a hung parliament in which no party has an overall majority or a strong mandate for painful measures to cut Britain's bloated debt -- is not resonating loudly with longer-term investors. "The elections are just a small part of how investors look at the UK," said Emiel van den Heligenberg, head of tactical allocation at BNP Paribas Investment Partners. "You could argue that a hung parliament is difficult ... but it should only be one of many factors. I don't see people strategically moving away from the UK."

That is not to say there will not be short-term market wobbles were a hung parliament to result from the May 6 poll. But institutional decisions -- by contrast with short-term trading -- are being driven more by issues such as euro zone weakness, the quality of UK stocks and the rise of the dollar as the U.S. economy rebounds. There is also a strong view that Britain is better placed to work itself out of economic trouble than, say Greece or Portugal, no matter what colour of government is formed.

"The UK is one of the few countries where you can expect something (in the way of austerity)," said Kommer van Trigt, bond fund manager with Robeco Group. In Reuters' late March asset allocation polls, U.S. and Japanese institutional investors actually increased their exposure to UK stocks and bonds, while continental Europeans slightly trimmed their exposure. British investors, perhaps more tuned in to domestic events, stepped back more firmly from UK assets in March. In a Reuters poll last week economists saw a median 55 percent chance of a hung parliament.

GLOBAL REACH
On the whole, investors do not appear as concerned about the election creating political stalemate as might be expected. Nowhere is this more evident than on the British stock market. The FTSE 100 is up 6.75 percent this year, outperforming most U.S. and European bourses and hitting a fresh 21-month high as Brown was preparing to call the election. A lot of this has to do with the non-UK sensitive nature of the index, which incorporates many of the world's largest and most dynamic multinationals, those most likely to benefit from a global economic recovery.

But further down the scale there have also been impressive gains that belie suggestions of concern about political uncertainty. The FTSE mid-cap index is up nearly 12 percent for the year, one of the world's best performers. The small-cap index has gained 4.6 percent. The main reason is that large investors are focusing on what they see as good value in UK stocks, not on short-term worries about politics. "We think that UK equities are very appealing," said Franz Wenzel, senior strategist at AXA Investment Managers. "Their earnings multiple is extremely low, in particular compared with the earnings growth forecasts for the next couple of years."

SHORT VS LONG
Other UK assets are not quite so immune from election jitters but still do not appear to be overcome by fears that a weak government would be unable to tackle Britain's huge debt. The 10-year UK government bond yield is higher than it was during the height of the credit crisis, but it is still relatively low given concern about a burgeoning government debt and increased supply. Simon Derrick, chief currency strategist at Bank of New York Mellon, said that flow data within the $22 trillion his bank holds as custodian or administrator, showed that far from deserting UK fixed income, investors were warming to it. "Net holdings are moving back to levels they were at in 2007," he said. "The fixed income story is pretty positive." Part of the reason, he said, was that for many investors British bonds looked a better bet than U.S. or euro zone debt.

Even when it comes to sterling -- which has been volatile as talk of a hung parliament has grown, falling 1 percent against the dollar on Tuesday -- there is more evidence that it is short-term investors at work than longer-term ones. While trading data shows many hedge funds are short sterling, fund flow analysts say the currency is holding up. "There is a recognition that sterling remains competitively priced," Derrick said. "Sterling clearly looks like a long-term relatively good buy."

Unfortunately I am starting to agree. Um......shame I am short pounds lower down. I think I will look for a dip to get them back in and actually go long, as I agree with the thrust of this story. - KT

Updated positions

2010-04-07T00:01:00.007+12:00

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 86.80
Current: Gain 401 points

Comment:

See AUD/USD comments below.

USD/JPY: The state of Japanese government finances is extreme. The new government will eventually break the self-imposed debt ceiling and prompt a credit downgrade by the ratings agencies. The recent strength in the USD will continue, pushing the USD/JPY back up towards the 100.00 area in the months ahead.

Still have a longer-term target in the AUD/JPY cross of 105.00. I am happy with the current exposure.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 65.70
Current: Gain 847 points.

Comment:
See Yen comments in AUD/JPY above. See NZD/USD comments below.
I am happy with the current exposure.

EUR/USD
Square

Current rate: 1.3402

Comment:
The ongoing concerns in Europe over debt will not go away. Their basic problem is that they have no central authority that funds the Euro Zone. Each government has its own finance department. Result: chaos when debt becomes unmanageable. Until sovereign debt concerns abate, the euro will remain on the back foot against the USD.

But in the long run, all other things being equal, the Euro Zone debt position is far better than the US. If the US does not move to reduce the budget deficit over time, then the USD will become the next Greece eventually (after the UK!).

I still believe that Europe will raise interest rates before the US does. Watch the inflation readings, Europe is already seeing some inflationary pressures in some German states.

GBP/USD
Short GBP1m long USD at 1.4990

Current rate: 1.5150

Current: Loss 160 points.

Comment:
The UK election has been announced. This will be a volatile time for the GBP/USD. The UK debt load is staggering, with a credit downgrade only a matter of time. Whoever wins the election it will be a poisoned chalice. It may be that the IMF is eventually called in as well. Either way the pound is under steady selling pressure, with my longer term target 1.3000.

Will review on a break above the 1.5500 level.

AUD/USD
Long AUD 2m short USD at 0.8670.

Current rate: 0.9250
Current: Gain 580 points.

Comment:
I believe the Australian economy remains extremely well placed to benefit from ongoing commodity demand, especially with China still growing strongly. I expect ongoing interest rate increases from Australia. I still believe that the AUD/USD has a long way higher to go yet.

My target remains1.0000.

Happy with the current exposure.

NZD/USD
Long NZD 2m short USD at .7160.

Current rate: 0.7000
Current : Loss 160 points.

Comment:
The NZD/USD has lost its way somewhat, with the RBNZ tardy in raising interest rates. They will eventually regret this.

The NZD/USD is still following the AUD/USD, which is now driven by Asian developments. The NZD/USD has not had the benefit of rising interest rates, but this cannot be too far away now. When the RBNZ begins to raise interest rates in June, the NZD/USD will begin to see higher levels again. The NZD/USD still has a long way higher to go yet. Target remains the highs of 0.8216.

Unrealised gains NZD710k (AUD/JPY +227, NZD/JPY +387k, GBP/USD -23k, AUD/USD +165k, NZD/USD –46k).

Total gains banked since August 2007:
NZD2,344,360.38

The proposed EU Greek bail-out cannot simply bypass German law

2010-03-22T16:09:00.001+13:00

This is an excellent article and lays out very well why Germany will not act in favour of Greece or anyone else!

The proposed EU Greek bail-out cannot simply bypass German law

Position changes

2010-03-10T00:24:00.001+13:00

Got cold feet on my long EUR short USD trade and closed it out today at 1.3590 for a small gain.
But decided I hate the pound, and so sold GBP1m and bought USD at 1.4990.

Will update more tomorrow.

EUR/USD new deal

2010-02-28T22:44:00.002+13:00

Bought EUR1,000,000 sold USD at 1.3570 on Friday morning.

Tough decision, given that so many are convinced that the Euro is toast. But I think that the fall from 1.5100 to 1.3445 levels is probably enough. Everyone is short the Euro, with the result that there are no more serious sellers left.

I have also heard rumours that Chinese and Russian central banks are buyers of Euro in the 1.3400-1.3500 area.

Anyway, we will see what happens over the next few weeks.

Anyone agree with me? Or are you all convinced that I have finally lost it?

Euro zone bond frenzy echoes past battles

2010-02-09T13:34:00.003+13:00

PARIS Reuters Paul Taylor

The feeding frenzy in bond markets over highly-indebted southern euro zone states recalls the runs on European currencies in the 1990s before the euro was created.

European governments eventually saw off that challenge with a sustained display of political determination backed by central bank intervention to defend the European Monetary System.

Whether they can overcome the current panic about sovereign default risks in the single currency area by showing political resolve without mutual financial assistance remains to be seen.

Then as now, traders made money by probing perceived weak links in the EU, forcing the Italian lira and the British pound out of the Exchange Rate Mechanism in 1992 and repeatedly attacking the French franc.

Then as now, there were accusations that the attacks were driven by "Anglo-Saxon" speculators hostile to European monetary union. Markets went wild on Friday afternoon rumours of secret weekend meetings of European finance officials. After a four-year battle that began in 1992 when Denmark rejected the Maastricht treaty in a referendum, political will eventually prevailed over market forces.

The last great challenge to the franc-deutschemark exchange rate at the heart of the ERM was repelled in 1995 once new French President Jacques Chirac had made clear his determination to pursue orthodox fiscal policies. Today's debt crisis is both similar and very different. The mounting market frenzy feels eerily familiar.

It began with pressure on Greece, the country with the biggest public finance problems in the 16-nation euro area, but spread last week to Portugal and, to a lesser extent, Spain. The premium that investors demand to hold Greek bonds rather than benchmark German Bunds narrowed on media reports or rumours of an imminent European bail-out, or of Chinese interest in Greek debt, only to widen further on official denials.

Each strike call, parliamentary setback or glitch in routine debt management triggered a new sell-off or an increase in the price of insuring sovereign debt against default on the highly speculative credit default swaps (CDS) market.

Seasoned market watchers say the gyrations are mainly the work of short-term speculators and do not reflect a fundamental rethink about euro-denominated assets. "We don't see any fundamental moves at all. It's purely speculative," said Patrick Smith, senior investment manager at Santander Asset Management. That speculation is easier because markets are still awash with cheap liquidity injected by the European Central Bank to avert a credit crunch during the financial crisis.

Borrowing money from the central bank at 1 percent and lending it to Greece at nearly 7 percent on sovereign bonds in solid euros ought to be a hugely attractive investment. Yet big institutional investors are holding off, partly due to market volatility, but also because they want to see the Socialist government implement tougher public spending cuts. "Greece in the long term is probably a good play but we have to wait for the government to see more signs on the expenditure side," said Jorgen Christian Hansen of Danish pension fund Unipension. "The reason Greece is getting so much attention is that it is the first real test of the Euro-system in handling countries with excessive debt and too lax fiscal policies," he said.

EU governments will try to ride out the crisis without having to bail out Greece, or Portugal or Spain, by pressuring those countries to make draconian fiscal adjustments while declaring political support for them. A single comment from Germany's finance minister a year ago that the euro zone would have to help if a member got into a serious situation was enough to calm market fever over Ireland. The question is whether the EU can enforce budget discipline rules on peripheral euro zone states which its core members mostly failed to respect over the last decade. Compounding the problem, those countries have lost economic competitiveness, and austerity will further slow their recovery from recession. Euro zone countries cannot devalue their way out of trouble.

The alternatives for Greece are to make painful and politically risky cuts in public spending, to seek abail-out or to default. Athens has to refinance 54 billion euros in public debt this year, 20 billion of it in the second quarter. It faces a crunch at the end of the year if Moody's joins two other credit ratings agencies in downgrading Greek debt below A grade.

Unless the ECB changes its mind, that would cut Greek banks off from central bank refinancing operations by disqualifying their government bonds as collateral. Analysts say that would trigger a chain reaction of bank defaults.

Outgoing EU Monetary Affairs Commissioner Joaquin Almunia shrugged off such disaster scenarios in a Jan. 29 Reuters interview, underlining to the fickleness of financial markets.

You know the markets," he said. "On other occasions, they became nervous one day and receded a week afterwards. I'm sure they'll find something bigger to worry about soon."

Asia fiddles as inflation fears resurface

2010-02-03T18:38:00.006+13:00

2 Feb 10 07:51:58, Alan Wheatley, China Economics Editor BEIJING (Reuters)

Last year was tough for Asia's economy but easy for its central bankers. All they had to do was flood their banking systems with lots of cheap cash and sit tight. But in 2010 they are going to have to earn their money.Worries about growth have quickly given way to concerns about inflation, and investors seem split down the middle about the capacity of central banks to rise to the challenge.

As global jitters over China's initial tightening of monetary policy demonstrate, some fear the response will be too harsh. Others, though, fret that some central banks, for instance in India and South Korea, are already falling behind the policy curve and will upset financial markets when they are finally forced to squeeze inflation out of the system.

For when it comes to monetary policy, a stitch in time often really does save nine. Rob Subbaraman, chief Asia economist at Nomura in Hong Kong, said the biggest risk facing Asia was that of an unexpected surge in commodity prices driving up inflation. Part of the problem is that policymakers, still fearful of an economic double-dip in the West, are wary of withdrawing fiscal stimulus and do not want their currencies to rise too fast.

And because the Federal Reserve is unlikely to raise U.S. interest rates until the second half of this year, Asian central banks will probably keep their own rates too low for too long for fear of attracting speculative money. As a result, Nomura expects inflation-adjusted borrowing costs in eight of the 12 countries it tracks to be negative by June -- a recipe for bubbly domestic demand and asset prices."When we look at the region now collectively, monetary and fiscal policies have never been so loose," Subbaraman said.

SLOWLY DOES IT
J.P. Morgan expects interest rates to be rising in some countries by early spring, but at a tepid pace relative to Asia's economic backdrop. The bank's economists reckon the average interest rate in emerging Asia will remain three percentage points below the level implied by a widely followed rule of thumb devised by the U.S. economist, John Taylor.

Central banks, a number of them under political pressure to keep borrowing costs low, instead have contented themselves so far with measures to mop up some of the surplus cash they injected into their economies. "Normalisation" of super-loose policy, not tightening, is the ugly buzzword. For instance, India and China last month increased the proportion of deposits that banks must keep with the central bank, instead of lending them out, while the Philippines raised a rate on a short-term lending facility. None of them increased their benchmark interest rates.

Given that the Reserve Bank of India on Friday issued a sharp warning over inflation at the same time as it tightened required reserves, a half point increase in interest rates is likely to follow next month, Prakriti Sofat and Rahul Bajoria of Barclays Capital said."However, based on our meetings with a number of Asian central banks, the clear theme is that policymakers remain cautious, and the risks are that rate hikes may be delayed," they wrote in a report.

NEW FOOD SPIKE?
The case for pre-emptive action is based not only on Asia's rapid economic recovery, which is absorbing the spare capacity and excess labour needed to keep a lid on prices. It is also justified, some economists believe, because a repeat of the 2007/2008 spike in global food prices is taking shape.

Western central banks play down passing increases in the cost of food because it typically accounts for just 10-15 percent of the consumer price index. In Asia ex-Japan, though, food makes up 30-35 percent of the CPI, so a jump can quickly boost overall inflation and harden expectations of a price spiral.

Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong, is among the worriers. He says the upswing in food commodity prices since 2004 has been rivalled only twice in the last century -- in the 1930s during the recovery from the Great Depression and during the commodity boom of the 1970s.

He postulates that China could be having a profound impact on food inflation as strong income growth, rapid urbanisation and westernisation of the local diet boost demand."The speed at which inflation is turning in Asia argues for a much more prudent stance on policy, and there are few Asian economies that should be exempt from tightening over the course of 2010," Maguire said.

DON'T PANIC, YET
A more optimistic view comes from economists Silvia Liu and T.J. Bond at Bank of America Merrill Lynch in Hong Kong. Leaving aside China and India, the only two countries with billion-plus populations, the economists said year-on-year food inflation had moderated in Asia to 1.3 percent in the fourth quarter of 2009 from 4.8 percent in the second quarter. The memory of 2008, when inflation peaked in mid-year at 8.5 percent, up 5.6 percentage points from the year before, remains vivid, Liu and Bond wrote in a weekly report.

But they think a better comparison is with 2004, when inflation crested at 4.2 percent, up 2.6 points from the year before.They expect Asian inflation to accelerate to 3.5 percent in 2010 from 0.7 percent in 2009.But they acknowledged that conditions could change. "In particular, if China maintains a rigid FX regime, the entire region may find it difficult to tighten monetary policy, given the low levels of U.S. rates. As a result, asset prices, money, and credit growth could all rise, raising inflation risks in 2011. This is the key risk we will monitor over the course of the year," they wrote.

Position Update

2010-02-01T21:39:00.005+13:00

Have been away on leave in Australia, and have been very slack about updating...apologies!!

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 79.64
Current: Loss 315 points

Comment:
See AUD/USD comments below.
USD/JPY: Japan is set to again increase quantitative easing, especially with the Yen strength in recent weeks. Given the overall USD weakness, the Yen will settle in the 95-100 area, with the Euro itself making all the longer term gains against the USD.

Still have a longer-term target in the AUD/JPY cross of 105.00. I am happy with the current exposure.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 63.28
Current: Gain 605 points.

Comment:
See Yen comments in AUD/JPY above. See NZD/USD comments below.
I am happy with the current exposure.

EUR/USD
Square

Current rate: 1.3880
Comment:
I must admit I have been surprised by the USD strength in recent weeks. Euro money supply is shrinking. US money supply is expanding. The USD must weaken against the Euro in the long run as a result. Overall I see the USD weakening considerably due to ongoing quantitative easing pressures. Remember Europe is not in a QE stance. Europe will raise interest rates before the US does.

I will add a new position EUR1m long if we see sub 1.3600.

AUD/USD
Long AUD 2m short USD at 0.8670.

Current rate: 0.8820
Current: Gain 150 points.

Comment:

I believe the Australian economy remains extremely well placed to benefit from the commodity demand, especially with China still growing strongly. I expect an interest rate increase from Australia, either tomorrow or in March. I still believe that the AUD/USD has a long way higher to go yet. Target remains 1.0000.

I will add to positions if AUD/USD 0.8600 is seen.

NZD/USD
Long NZD 2m short USD at .7160.

Current rate: 0.7010
Current : Loss 150 points.

Comment:
The NZD/USD is following the AUD/USD, and to some extent the EUR/USD moves. As we are now in the export season for New Zealand, upward pressure will intensify. This will compound when the RBNZ raises interest rates in April this year. The NZD/USD still has a long way higher to go yet. Target remains the highs of 0.8216.

I will add to positions if NZD/USD 0.6800 is seen.

Unrealised gains NZD130k (AUD/JPY -148, NZD/JPY +287k, AUD/USD +34k, NZD/USD -43K).

Total gains banked since August 2007:
NZD2,344,360.38

Away

2009-12-19T18:24:00.002+13:00

At the Fleetwood Mac concert this weekend!

No change to positions.

Will update next week, but not convinced by recent USD strength.

I see it as profit taking and position adjustments into year end.

The AUD and NZD will rally again in the new year. The USD and the JPY remain toast.

But stand by for when the game changes, when US interest rates actually do rise.

But still not until at least mid year at this stage.

Bank of Japan hints that there is room for fresh steps

2009-11-30T19:21:00.002+13:00

NAGOYA, Japan, Nov 30 Reuters

The head of the Bank of Japan said the bank will act decisively in the event of renewed financial market turmoil, his strongest hint yet at fresh support for the economy that analysts say could involve buying more government bonds or a return to quantitative easing. A government spokesman said quantitative easing will indeed be part of the talks when BOJ Governor Masaaki Shirakawa and Prime Minister Yukio Hatoyama meet this week, as the government leans on the central bank to act against deflation.

"We absolutely don't have any plan to prepare for exiting our easy policy," Shirakawa told business leaders in Nagoya, central Japan. "We had some developments in financial markets last week. If we experience financial market turmoil again, the BOJ will act aggressively and decisively," he said. Despite mounting pressure from the government, which is worried about the risk of another recession, the BOJ has said there is little it can do beyond keeping interest rates at the current 0.1 % to push up prices.

But analysts say the BOJ will eventually be pressed to increase its government bond buying or revert to a quantitative easing policy of flooding markets with extra cash. "It is likely the BOJ will do more. The most important measure is the BOJ's purchase of government bonds," said Simon Wong, a regional economist at Standard Chartered in Hong Kong. "The current path paves the way for the BOJ to further ease in terms of buying of JGBs, and the current inflation environment creates a perfect backdrop to expand monetary policy."

And that will mean a weaker yen as they will be doing what the USA and UK are doing...printing money!! KT

Asked whether the BOJ could increase its bond purchases, Shirakawa said the bank will take the most appropriate policy action to deal with economic and financial developments at the time. "The financial market is a living thing, so we'll always think of how best to maintain market stability," Shirakawa told a news conference. "We're in a position now to provide ample liquidity to the market." He said he recognised the pain felt by Japanese companies from the yen's surge to a 14-year high against the dollar, adding that he would closely examine how currency moves affect the economy. So print some more money! KT

He said the BOJ held a very cautious view of the economy and shared the government's view that the country was in mild deflation in the sense that price falls are likely to persist.

INTERVENTION NOT RULED OUT
The government has declared Japan to be in deflation and has criticised as too optimistic the BOJ's view that annual consumer price falls will gradually ease and that another recession is unlikely. Hatoyama's government, only two months old and largely untested on fiscal policy, has adoptedthe kind of heavy-handed approach towards the BOJ that previous governments have used to influence monetary policy. But it has been vague on exactly what it wants the BOJ to do. The administration is considering including measures to deal with the recent surge in the yen in an economic stimulus package it plans to compile this week.

Data on Monday showed industrial output rose 0.5 percent in October and manufacturers forecast further rises in the following two months, easing some concern that the economy could slow to a standstill or even contract early next year. But the yen's surge last week is hurting manufacturers' profitability and could derail an export-driven recovery. Finance Minister Hirohisa Fujii left markets guessing on whether Tokyo would step into the currency market to stem further yen rises, warning on Monday that he had never said intervention was impossible.

Voter support for Hatoyama's cabinet is above 60 percent but has slipped gradually. The nightmare scenario for the cabinet is an economic downturn ahead of an upper house election in mid-2010. A rebound in the manufacturing sector has been driving Japan's recovery since earlier this year. The economy grew 1.2 percent in July-September after a revised 0.7 percent expansion the preceding quarter.

As the economy weakens, the yen will become a real political football. QE is not far away here! KT

Beef, lamb and dairy prices

2009-11-22T13:08:00.005+13:00

The Press takes a look at developments in beef, lamb and dairy prices.

Lamb
In the past month, the value of the New Zealand dollar has declined by 3 per cent against the British pound. However, this is still 13 per cent above its level at the same time last year, and 17 per cent above the average of the previous five years.

Meanwhile, the British CKT lamb leg price (cost, insurance and freight) is at the same level as this time last year and appears to have hit a ceiling for now. This would indicate exporters' margins have reduced in the past year, which is now being reflected in the falling schedule prices at the farm gate.

Why we sell our lamb at the UK lamb prices is stunning. NZ lamb is the best in the world, we must brand it as such, and be more expensive than other lamb...because it is the best! We still have a long way to go. We have to stop being commodity exporters and export a brand! KT

A further decline in schedules of up to 15 cents a kilogram was experienced across the country, with the larger falls occurring in the North Island. This has seen the schedule price of a 17.5kg lamb slip below $90 for the first time since March. Prime lambs at saleyards appear to have come into line with schedules, particularly in the North Island, where a medium prime lamb is fetching just under $90. In the South Island, the same lamb has an average $97 price.

Beef
United States imported bull gained a further US2c/lb this week, lifting to US142c/lb. The US6c/lb lift in price over the past two weeks has come about as the availability of imported bull remains tight. It is still early in New Zealand's new slaughter season, but bull numbers are already well down on where many market participants expected them to be.

Figures for the five weeks of the new season suggest New Zealand is already 6000 head down on its five- year average as good grass cover remains prevalent across the country. As mentioned in earlier reports, this rise in price will be tested when an influx in slaughter numbers is seen.

US imported cow gained US1c/lb, as the US domestic market looked to firm slightly on the back of improved export figures to Asia. US imported cow finished the week at US131c/lb. The strengthening US imported market has flowed through to farm gate prices, with an average 4c/kg lift in schedule prices across the grades.

Grain fed beef is more expensive than grass fed beef. But NZ cows live on average 7-8 years longer than US cows. NZ cows are outside eating grass in the sunshine. US cows are inside, standing on concrete and eating corn. It's like battrey hens. I know which beef I would rather eat, and yet most of our beef goes into mince for burgers. It is a crime. KT

Dairy
The NZX Agrifax weighted- average dairy commodity price peaked in November 2007 at US$5460 a tonne, before it fell 58 per cent over the course of 18 months to bottom out at US$2290 in June. Since then, the weighted-average dairy commodity price has recovered almost half of these losses, this week lifting to US$3990/tonne.

This highlights the volatility of the dairy commodities market. Anhydrous milkfat's rapid price gains over the past couple of weeks simmered this week, with only a 2 per cent rise from US$4800/tonne to US$4900/tonne. Casein and cheddar had minimal gains of 1 per cent to US$8200/tonne and US$3800/tonne respectively.

Underlying demand for wholemilk powder remains firm, adding a further US$100/tonne this week to reach US$3500/tonne. Skim milk powder's gain was slightly larger at US$150/tonne to US$3350/tonne. Butter firmed over the week, climbing 7 per cent from US$3450/ tonne to US$3700/tonne.

More than 50% of French milk goes into making cheese. Most of the exported NZ milk production goes into milk powder, the lowest end of the product range. We have to go up the value chain, then our produce exporters will be able to handle a stronger currency without getting killed.

When you have a brand, if the exchange rate goes up, you put the price up!
If you export a commodity, you are stuck with the overseas price.

We must change the model, or we are doomed!! KT

On Monetary Policy

2009-11-21T11:38:00.005+13:00

Here are two great posts from The Visible Hand in Economics:

On Monetary Policy

and on

the Brazilian experience

Both well worth the read, and providing some sense, compared to some of the silly comments
being made here and here.

The debate is good, but really some of the comments are so ill informed!

Rising for a fall?

2009-11-21T11:11:00.004+13:00

This is a good summary of the current state of play, with opinions from both sides:

Rising for a fall?

Saturday Nov 21, 2009
By Heather Stewart and Larry Elliott, Observer

The din from the commodity pits on the Chicago exchanges is growing louder. Real estate agents in London's Kensington and Chelsea say they can't meet demand for 1 million-1.5 million ($2.2 million-$3.4 million) homes. Wall Street's high-tech Nasdaq exchange has wheeled out its confetti machine for the first time since the credit crunch.

Everywhere the story is the same. Gold: at a record high, above US$1100 ($1476) an ounce. Shares: 50 per cent up since March. Oil: back to almost US$80 a barrel. Bonds: yields on two-year gilts (British government bonds) at a record low. Average British house prices: up 11,000 this year.

Around the world, asset prices are booming. Relief that the global economy has avoided the Armageddon feared in March, combined with large dollops of virtually free money, have helped put a smile back on the faces of the speculators. Too big a smile, according to some experts, since the buoyancy of asset markets is not reflected in the real economy.

Away from the frenzied financial world, among struggling firms and cash-strapped families, signs of recovery from the worst downturn since the 1930s have been much patchier. The US returned to growth in the third quarter, thanks to Washington's cash-for-clunkers scheme to encourage car sales, and tax breaks for first-time homebuyers. But unemployment is at its highest level since 1983 and the number of Americans losing their homes is still rocketing.

In Europe, the big economies of Germany and France returned to growth six months ago but consumer spending remains painfully weak. In Britain, the latest official figures show the economy still contracting in the autumn after six successive quarters of negative figures. Mervyn King, Bank of England Governor, warned last week that Britain has "only just started on the road to recovery".

As share prices rocket, the question is: are policymakers trying to solve the problems caused by one of the biggest bubbles in history by pumping up another speculative frenzy?

This was what happened after dotcom shares collapsed in 2000, when former Federal Reserve Chairman Alan Greenspan slashed US interest rates to 1 per cent and left them there for three years, setting off the biggest housing boom in US history. And this time, central banks and finance ministries have added tax cuts, spending increases and "quantitative easing" - the creation of electronic money - and so created an even headier brew.

Ravi Batra, US economist and author of Greenspan's Fraud, says: "We are repeating the mistakes of Greenspan but on a much bigger scale. There is going to be another big pop in the new year."

He is not the only Cassandra. Nouriel Roubini, one of the few economists to see the crisis coming, warned this month that the US had replaced Japan as the centre of the global "carry trade" (whereby investors borrow money cheaply in a currency with low interest rates and buy risky assets that offer a return higher than the interest due on the loan).

With the US Federal Reserve pledging to keep interest rates only just above zero for "an extended period", Roubini says dollars, instead of yen, are now being used in "the mother of all carry trades", forcing up the price of all kinds of other assets.

Central bankers past and present sought last week to allay fears that, just like last time, it would all end in tears. Frederic Mishkin, a former Federal Reserve board member, said there were two sorts of bubbles: "credit boom" bubbles and "irrational exuberance" bubbles. Credit boom bubbles - like the one that burst in 2007 - were far more dangerous than irrational exuberance bubbles, such as the wild buying of technology shares, he argued, because they created a toxic feedback loop. A rise in the price of an asset such as housing allows consumers to borrow, but they then invest the money in buying a bigger home, driving prices up ever further - and so it goes on.

When prices plummet, hapless homeowners not only have a property worth a fraction of what they thought, they're also sitting on a mountain of debt. Mishkin sees the dotcom boom as less catastrophic because it didn't involve this vicious circle, and he regards the current rise in asset prices as being of this harmless, irrational kind.

Mervyn King agrees with this analysis. During a sepulchral press conference to launch the Bank of England's quarterly inflation report, the governor made it clear that he was losing no sleep over the rise in asset prices. The bank believes some increase in such prices - bonds and shares, in particular - is good for the economy because it lowers the cost of financing for companies and makes them more recession-proof. It is one of the channels by which the Bank believes the 200 billion it is injecting through quantitative easing will feed through to the rest of Britain.

King's message was clear: after a near-6 per cent drop in output since early 2008, it is premature to be drawing comparisons with the Dutch tulip mania of the 1630s, Isaac Newton losing his shirt in the South Sea Bubble of 1720, the boom-busts in US railway shares in the 19th century, or any of the periodic speculative stock market frenzies of the 20th century.

King said: "It's very important that we don't end up in a world in which everyone describes every increase in asset prices as a bubble, and every fall in asset prices as the bursting of a bubble." He made it clear he was not worried because there had not been the "rapid extension of credit" seen in the early 2000s - indeed, we are gripped by a credit shortage.

GERARD LYONS, chief economist at Standard Chartered, says he sees no sign yet that prices in the US or Britain have risen out of control: "It should not be a surprise that in the early stages of a recovery, property prices and equity prices rise, particularly if they have taken a big hit."

He is concerned, however, about China, where a return to strong growth has been achieved with a massive government stimulus programme, which has led to a jump in bank lending - potentially making it a damaging credit boom.

"Where asset prices have risen sharply alongside rampant lending and credit growth, there is more reason to think it's a bubble, and China fits into that category," he says, though he adds Beijing is well aware of the risk and is now clamping down on lending.

Even the severest critics of Mishkin's and King's laid-back approach to the current buying spree accept that some recovery in asset prices - of perhaps 20 per cent - has been justified. After the collapse of Lehman Brothers in September 2008, financial markets continued to fall sharply throughout the northern winter as global output contracted and credit dried up. By March, investors had fully priced in the possibility that the world economy could be heading for a new Great Depression, so even the first tentative pieces of good economic news sparked a relief rally.

But markets tend to have only two moods: deep gloom and wild euphoria.

Having prepared for the return of soup kitchens in the spring, they are now betting on a strong and rapid return to business as usual - a so-called "V-shaped recovery". And that's what worries analysts, who are not comforted by the age-old cry that "it's different this time".

"It sounds too good to be true and it is," says Robert Barrie of Credit Suisse. "It's time to take asset prices and credit more seriously. They can have long-run effects that are big and problematic. They took a long time to show themselves last time and could do so again."

Concerns about a new speculative bubble fall into three categories. The first is that the recent track record of central banks does not engender much optimism that they will be able to distinguish between a credit bubble and an irrational exuberance bubble, or indeed spot either sort developing.

The fed, for example, denied that the US housing market was a bubble right up until the global financial system was paralysed by the sub-prime meltdown in 2007, and the Bank of England flatly rejected arguments that central banks ought to "lean against the wind" and prevent prices in markets such as housing getting out of kilter.

Moreover, as London market analyst Andrew Smithers noted last week, even the popping of the irrational exuberance dotcom bubble, dismissed by Mishkin as relatively harmless, had baleful long-term consequences, since it led to the cuts in interest rates and taxes in the US that fed the housing bubble.

A second concern is that the fundamentals of the global economy remain weak, and when investors catch up with that grim reality, there will be another brutal crash. "The speculative economy that caused the problems in the first place has again reared its head," says Graham Turner of GFC Economics. "But the real economy continues to flounder; 2010 will be a very big year because the global economy is not fixed."

Danny Gabay, of Fathom Consulting, says the reaction of markets this month to the statement of G20 finance ministers in St Andrews, Scotland was indicative of the over-optimistic mood. "The communique said that conditions were far too weak to consider removing the economic stimulus, yet stock markets rallied by 2 per cent. Ministers were saying things are so fragile they daren't take their foot off the pedal."

Finally, there is the worry that the underlying reason bubbles keep recurring is that the modern global economy can only run on cheap money and debt, which fuel regular and powerful speculative cycles.

Batra says that in the US there has been a profound mismatch between the increased supply of goods from improved productivity and the squeeze on real wages dating back to Ronald Reagan's presidency. "Greenspan resorted to debt creation and budget deficits to bring demand and supply into balance," he says.

Turner says bubbles reflect how global capitalism now works, with firms moving operations offshore to cut wage costs, leaving demand in the world's major economies so weak that it can only be kept going by spoon-feeding consumers with cheap credit.

Even some who believe that we are back in a bubble say central bankers have little choice, such is the scale of the downturn. "My view is that we have to go on with quantitative easing for as long as we possibly can," says Crispin Odey, a London hedge fund manager.

So what happens next? Policymakers hope the rise in asset prices is a catalyst for stronger growth next year, with consumers feeling richer as house and share prices rise and so spending more. Businesses will respond to stronger consumer demand and easier financing by boosting investment and creating new jobs.

But at some point, governments and central banks will have to withdraw their emergency support by pushing up interest rates, selling the bonds they bought through quantitative easing and cutting public spending. Only then will it become clear whether central bankers are cleverly "smoothing" the most painful adjustment in the world economy since World War II, as King argues - or unleashing yet another bout of irrational exuberance.

Exuberance breaking out all over:

Shares: Heading for a fall?
Gut-wrenching declines in world share prices became a relentless routine at the height of the financial crisis, with Wall Street's Dow Jones index dropping by almost 400 points in a single day in the weeks after Lehman Brothers collapsed.

The Dow peaked at more than 14,000 in October 2007. By early this year, when traders were seriously beginning to factor in the possibility that recession in all the world's major economies would give way to a 21st-century Great Depression, it had more than halved.

Yet most of the world's indices have roared back from their lows; and some countries, including France and Germany, bounced out of the downturn more quickly than many expected.

In New Zealand, the NZX50 index fell by 44 per cent from its peak in 2007. But from its low point in March, the market has climbed by 30 per cent.

The Dow is now back above 10,000; the FTSE100 index of stocks on the London exchange has gained 50 per cent since it bottomed out in March and is back above 5300; emerging economies' stock markets have roared ahead.

Analysts are divided about whether this is a sustainable resurgence - or a dangerous bubble.

Oil: Recovering lost ground
During the relatively innocent pre-Lehman days of mid-2008, central banks fretted about inflation as oil prices surged to their record of US$147 ($197) a barrel.

Prices had already been on the slide before the financial crisis reached a peak of intensity in September and October last year, but then crashed to a low of just US$38 a barrel between Christmas and the new year as the global economy went into reverse.

Since then, prices of crude have been steadily rising as China has stockpiled commodities and traders have anticipated renewed demand throughout the world.

News that every G7 country bar Britain is growing again has helped to underpin confidence in rising energy prices and oil briefly clambered back above the US$80 mark this month. Some broking firms believe that prices are now on course to surge back through US$100 a barrel, although this would have a dampening effect on the global recovery.

Bonds: Key indicators of success
Rising prices for government bonds should come as no surprise, because they are a key indicator of the success of the aggressive policy response to the crisis by central banks.

Under "quantitative easing" - the creation of electronic money - the central bank purchases bonds from the commercial banks. The reduced supply of bonds pushes up their price and reduces yields, which move in the opposite direction to the price.

Long-term interest rates - which affect both what companies pay for their borrowing and what households pay for fixed-rate mortgages - have been driven down as a result of this policy.

In the US, the government has not just bought government bonds but corporate debt as well, to help reopen frozen credit markets and enable firms to borrow more cheaply. In Britain, the policy has been more beneficial for large corporations than small- and medium-sized companies, which are dependent on bank loans.

Gold: Safe as houses
Gold is the ultimate "safe haven" commodity in times of trouble - the Bank of England has a gold ingot that was damaged, but not destroyed, by a World War II bomb. Gold has surged in price by almost 50 per cent since January, as investors fled riskier assets.

This week the cost of a troy ounce of the precious metal hit another record, above U$1140, and TV advertisements have appeared on both sides of the Atlantic urging consumers to dust-off long forgotten jewellery and sell it for cash.

Gold has partly benefited from the waning power of the US dollar, as the two tend to move in opposite directions. The most potent symbol of the glittering metal's rising appeal came this month, when the Indian central bank bought 200 tonnes of gold from the International Monetary Fund, replacing rapidly depreciating dollar assets.

However, analysts warn that there have been unsustainable bubbles in the gold market before: the price rocketed to a peak of US$850 an ounce in early 1980, before rapidly losing more than half its value.

Housing: Don't believe the hype
Gazumping is back in London's top postcodes, mortgage approvals are on the rise and the long-predicted housing crash turned out to be a short, sharp shock, instead of the early 90s' long slog.

House prices fell 20 per cent between 2007 and this year as confidence collapsed, and it became near-impossible to secure a mortgage. But in the northern spring prices began to bounce back, and have risen for the last six months.

They are now down 13.1 per cent from the peak - though the bounce has been concentrated in London. Rock-bottom interest rates helped prevent the rash of repossessions and forced sales of other crashes, helping to prevent prices from falling off a cliff. But with fewer homes changing hands than in the boom years, some believe the crash is far from over.

Even estate agents, usually the most optimistic observers, warn that a shortage of properties for sale could be distorting the market.

In New Zealand, Quotable Value's house price index fell 10 per cent from late 2007 to early this year, but climbed by about 2 per cent in the three months to June, and according to Real Estate Institute figures, prices have kept climbing since.

Capital controls not the answer

2009-11-20T18:07:00.002+13:00

ADRIAN CHANG 20 November 2009
The Independent

New Zealand's volatile currency woes won't be resolved by capital controls, according to a visiting central banker from a country with a history of fiddling with the dials.

Alexandre Pundek Rocha, senior adviser to the board of the Central Bank of Brazil, who was visiting New Zealand this week to promote greater business ties with Brazil, told The Independent capital controls in his region have a long history of failure.

His comments come during a period of exceptional currency volatility in New Zealand, with the kiwi increasing by about 52 per cent since March. Trade groups, economists and commentators complain unchecked capital inflows from the carry trade have hijacked the dollar.

The arguments are familiar to Pundek, who saw similar things happen in Brazil during the 1990s. He concedes countries like Brazil and New Zealand tend to attract speculative capital and have a comparative disadvantage with China, which pegs its currency at an undervalued rate.

Brazil abandoned its peg against the US dollar in January 1999 after speculative attacks on the Brazilian real caused its peg to fail. The central bank then turned to inflation targeting, much like the system in New Zealand, but has maintained much wider powers to interfere on foreign capital markets than our own Reserve Bank.

For example, it can unilaterally set a tax rate of between zero to 25 per cent on foreign capital entering the country to invest in fixed-interest bonds or shares. It exercised this power on October 20, instituting a 2 per cent tax on new money entering the country to invest in these asset classes.

Our own Reserve Bank governor, Alan Bollard, has had to restrict himself to rare and secretive forays into the currency markets and largely fruitless attempts at jawboning the dollar down.

Has Brazil's capital tax worked? It's difficult to tell, says Pundek. Capital flows have been exactly the same before and after the tax, but that doesn't mean it has failed. "You never can tell, because the flows today [without the tax] could have been even higher than they are today."

But his personal view is that imposing capital controls does nothing to address the underlying issues. He recalls in 1999 Brazil had an 8 per cent tax on incoming capital but that failed to stop a flood of speculative capital pouring into the country and driving up its currency, the real. "You delay the process, but you can never stop the process." Exactly

Senior Brazilian trade representative Mario Marconini from the Federation of Industries of Sao Paulo, says there's a growing realisation from Brazilian businesses that trying to control the exchange rate is fruitless. Yup

The long-term answer can only come from concerted international action to apply pressure on China to allow more flexibility in its exchange rate, Pundek says.

By removing China's artificially low exchange rate, the massive trade imbalances created by that rate can be corrected.

China remains the problem - KT

Economics focus: The lessons of 1937 | The Economist

2009-11-11T17:41:00.002+13:00

The lessons of 1937 Jun 18th 2009
From The Economist

In a guest article, Christina Romer says policymakers must learn from the errors that prolonged the Depression

Christina Romer is the chairwoman of Barack Obama's Council of Economic Advisers and a scholar of the Depression

At a recent congressional hearing I cautiously noted some “glimmers of hope” that the economy could stabilise and perhaps start to rebound later in the year. I was asked if this meant that we should cancel much of the remaining spending in the $787 billion American Recovery and Reinvestment Act. I responded that the expected recovery was both months away and predicated on Recovery Act spending ramping up greatly.

Only later did it hit me that I should have told the story of 1937. The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%.

The second world war aside, the United States has never experienced such sustained, rapid growth. However, that growth was halted by a second severe downturn in 1937-38, when unemployment surged again to 19%. The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war.

In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. Also important was an accidental switch to contractionary monetary policy.

In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street.

In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion.

When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession. The 1937 episode provides a cautionary tale.

The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow.

In this regard, not only should we not prematurely stop Recovery Act spending, we need to plan carefully for its expiration. According to the Congressional Budget Office, the Recovery Act will provide nearly $400 billion of stimulus in the 2010 fiscal year, but just over $130 billion in 2011. This implies a fiscal contraction of about 2% of GDP. If all goes well, private demand will have increased enough by then to fill the gap. If that is not the case, broad policy support may need to be sustained somewhat longer.

Perhaps a more fundamental lesson is that policymakers should find constructive ways to respond to the natural pressure to cut back on stimulus. For example, the Federal Reserve’s balance-sheet has more than doubled during the crisis, drawing considerable attention.

Monetary policymakers have made it clear that they believe continued monetary ease is appropriate. Moreover, the Fed’s credit programmes are to some degree self-eliminating: as demand for its special credit facilities shrinks, so will its balance-sheet. But now may also be a sensible time to grant the Fed additional tools to help its balance-sheet contract once the economy has recovered.

Some have suggested that the Fed be authorised to issue debt, as many other central banks do. This would enhance its ability to withdraw excess cash from the financial system. Granting such additional tools now could provide confidence that the Fed will be able to respond to inflationary pressures, without it having to create that confidence by actually tightening prematurely. Fiscal health check Now is also the time to think about our long-run fiscal situation.

Despite the large budget deficit President Obama inherited, dealing with the current crisis required increasing the deficit substantially. To switch to austerity in the immediate future would surely set back recovery and risk a 1937-like recession-within-a-recession. But many are legitimately concerned about the longer-term budget situation. That is why the president has laid out a plan to shrink the deficit he inherited by half and has repeatedly emphasised the need to reduce the long-term deficit and put the debt-to-GDP ratio on a declining trajectory.

In this regard, health-care reform presents a golden opportunity. The fundamental source of long-run deficits is rising health-care expenditures. By coupling the expansion of coverage with reforms that significantly slow the growth of health-care costs, we can dramatically improve the long-run fiscal situation without tightening prematurely. As someone who has written somewhat critically of the short-sightedness of policymakers in the late 1930s, I feel new humility.

I can see that the pressures they were under were probably enormous. Policymakers today need to learn from their experiences and respond to the same pressures constructively, without derailing the recovery before it has even begun.

This is an excellent article, still relevant as to why US interest rates are not going up anytime soon. KT

No Change

2009-11-09T21:07:00.000+13:00

Have not altered positions at all at this stage.
Still happy with all positions.

Position Update - Finally!

2009-10-24T13:59:00.008+13:00

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 84.88
Current: Finally!! A Gain by 209 points.

Comment:
By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Target is 85.00 enroute to 105.00.

I remain comfortable with carry trades.

Extra background:
Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 69.42
Current: Gain 1,219 points.

Comment:
I remain comfortable with carry trades with the NZD/JPY up over 56.5% this year!
Happy with the current exposure.

EUR/USD
Square

Current rate: 1.5000

Comment:
Overall I see the USD weakening considerably due to quantitative easing pressures. Recent data, especially in housing and unemployment indicates there is no pressure to change monetary policy, and easy conditions in the US will be the norm for a considerable time yet to come.

Cashed out: Way too soon!
Long EUR1m (1.4465) short USD at 1.4550, for a gain of USD8,500.00, NZD12,142.86 (not counting carry interest).

AUD/USD
Long AUD2m short USD at 0.8670.

Current rate: 0.9222
Current: Gain 552 points.

Comment:
I took profits (see below) at 0.8610, but then reinstated again, as it is clear that the AUD/USD has a long way to go yet. Target is now 1.0000.

Cashed out:
Long AUD2m (0.7312) short USD at 0.8610, for a gain of AUD301,509.87, NZD369,950.76 (not counting carry interest).

NZD/USD
Long NZD2m short USD at .7160.

Current rate: 0.7542
Current : Gain 382 points.

Comment:
I took profits (see below) at 0.7010, but then reinstated again, as it is clear that the NZD/USD has a long way to go yet. Target is now the highs of 0.8216.

Cashed out:
Long NZD2m (0.6241) short USD at 0.7010, for a gain of NZD219,400.86 (not counting carry interest).

Unrealised gains NZD886k (AUD/JPY +112k, NZD/JPY +527k, AUD/USD +146k, NZD/USD +101K).

Previous realised balance: NZD1,742,865.90

Plus EUR/USD realised gains of NZD12,142.86
Plus AUD/USD realised gains of NZD369,950.76
Plus NZD/USD realised gains of NZD219,400.86

Total gains banked since August 2007:

NZD2,344,360.38

English relaxed over high dollar

2009-10-24T12:46:00.004+13:00

Published today in the press:

New Zealand's high dollar is a vote of confidence in the country's economy, and there is no silver bullet to bring it down for exporters, Finance Minister Bill English says.

The kiwi dollar was trading against the US yesterday at around 76c.

"The dollar is one way the market is telling us Australia and New Zealand have performing economies, because relatively speaking we are," Mr English told Canterbury business leaders yesterday.

Taking a five-year average, the New Zealand dollar was the highest it had been since the 1960s so concerns about the dollar did have some historical basis, Mr English said. "What can we do about this? In many respects not much. We've just got to make sure we've got the story clear."

Mr English said the dollar was high compared with the US and the British pound, but was not high relative to the Australian dollar and Australia was still New Zealand's biggest export market.

"One of the reasons that we are high against the UK and the US is because frankly they are in a bit of a mess."

New Zealand's economy had not shrunk by as much as Britain, US and Europe.
Another driver of the high dollar was low interest rates in other countries, Mr English said.

Interest rates in the US, Japan and the UK were either zero or low, so when investors were offered a triple A-rated New Zealand Government bond at 5.5 percent interest, it was attractive to them compared with the alternative.

New Zealand was now attracting interest from people who were wanting to diversify away from US dollars to buy New Zealand debt or the New Zealand dollar, he said.

Those things were out of the Government's control. "If there was a silver bullet to do with the dollar then we would fire it, but there is not one." The high New Zealand dollar was one of the reasons the export sector had shrunk in the last decade, he said.

New Zealand's economy had an imbalance between the tradeable and non-tradeable sectors. In the last five years the tradeable sector had shrunk by 10 percent and the non-tradeable sector had grown by 15 percent. The biggest driver of that growth was government spending. Growth in the future would not come from a fast-growing government or fast-growing credit, it had to come from the tradeable sector.

"It's (the tradeable sector) up on blocks and someone has taken the wheels."

Mr English also said countries all around the world were going to increase taxes but one country that would not was Australia, which was competing directly for New Zealand's companies and its people.

"We can not afford to raise taxes if they do not," he said.

Excellent article!

I will post later on today as to why, but we need more of this thinking!!

Apologies for lack of updates!

2009-10-15T19:28:00.001+13:00

But it's been bloody busy!!

Why Europe Recovers Before the US

2009-09-29T20:17:00.003+13:00

Here is a great article on why I like the Euro:

Jerry Bowyer CNBC 24 Sep 2009

“I will not let anyone tell me that we must spend more money." - German Chancellor Angela Merkel, March 29th, 2009

America works even when it's tried in Western Europe, and the old world fails even when it's tried in North America.

This past spring, United Kingdom Prime Minister Gordon Brown and United States President Barack Obama attempted to launch a "global new deal." They attempted to persuade other developed countries, especially in the European Union, to embark on a coordinated program of very high stimulus spending.

Angela Merkel led the opposition, issuing a resounding 'nein'. French President Nicholas Sarkozy added his 'non' to the chorus shortly thereafter. The rest is history. The Obama administration enacted a stupendously large spending program; the United Kingdom followed suit. The European Union resisted the clarion call of international Keynesianism and left the recovery largely to the private sector.

And then, something fascinating happened: They recovered, and we did not. Some of these numbers are a little close to the line and clearly other factors were involved too: The US has had the largest stimulus so far, Britain after that, Germany slightly less than Britain and France much less.

So far,the GDP data shown below indicates that the second quarter (that is, roughly the spring season) growth numbers showed expansion in the two countries that most conspicuously failed to used Keynesian tools. The data also shows that the two countries which most stubbornly hewed to the Keynesian line continued to contract.

Famed French economist Guy Sorman recently told me, "We invented the word 'entrepreneur', exported it to you, and then forgot it. Now, you are sending it back to us."

He's right. At precisely the moment when the United States is shifting toward discarded European solutions such as nationalization, inflation, and fiscal manipulation, a number of European countries are liberalizing their markets.

Angela Merkel has been described by many observers as the German version of Margaret Thatcher. The entrepreneurial Sarkozy ran on a platform of creating a France that "wakes up early."

Not all of this is a matter of electoral shift. The European Union has some structural factors which have helped it resist bad policies. For example, the Union itself imposes certain spending and debt limits on member countries. These limits emboldened European politicians who resisted Anglo-American policy bullying.

Furthermore, the European experience with hyperinflation earlier in the twentieth century persuaded them to focus their central bank exclusively on matters of price stability. The United States, on the other hand, has given our own central bank a "dual mandate" for inflation control to be balanced by low unemployment. In other words, the fiscal phrenology of the Philips curve was hard-wired into the very structure of the Fed.

It's not over yet; there are promising signs that perhaps last year's electoral swing to the left was a summer/fall fling rather than a serious relationship. Time will tell.

But for now, we see played out across the Atlantic a dictum uttered by Someone who was neither a European nor an American: The last shall be first, and the first shall be last.

And it has resulted in debt that the children of the children being born today will be paying off.

It also means the USD must weaken against the Euro in the long term.

It is now just a matter of time - KT.

AUD and NZD trades

2009-09-29T13:06:00.003+13:00

I re-established my long NZD and AUD trades yesterday.

Bought AUD2m sold USD at 0.8670.
Bought NZD2m sold USD at 0.7160.

Target 0.9000 and 0.7500.

Review at .8000 and 0.6800

A weaker greenback?

2009-09-29T12:49:00.002+13:00

I totally agree with this article from Reuters. The USD will continue to weaken in a big way!

Neal Kimberley (Reuters 28 September)
Twenty-four years ago, major nations called for depreciation of the dollar to rebalance the global economy.

Now, as another effort at rebalancing looms, the dollar will again bear the brunt - though officials will try to ensure its fall is less dramatic this time.

That's the implication of President Barack Obama's announcement this week that he will push world leaders for a new global "framework" in which the United States would cut its huge trade and budget deficits.

Agreeing on this framework would be politically difficult, since it would require policy changes by many countries - China, for example, would probably have to rein in its explosive export-led growth.

But as the euro's climb to a new one-year high versus the dollar this morning shows, markets are starting to think the rebalancing process may start as soon as this week's Pittsburgh summit of leaders from the Group of 20 nations.

The Plaza Accord of 1985 called for "orderly appreciation of the main non-dollar currencies against the dollar"; it was followed by central banks' coordinated intervention to ensure that happened.

This time, with the world shakily emerging from a financial crisis, policymakers are likely to try to manage the dollar's drop in a more low-key fashion.

They are unlikely to issue an explicit call for the dollar to fall. In fact, the U.S. Treasury may continue proclaiming its "strong dollar policy" in an attempt to keep the markets calm.

No one in the G20 wants to risk a freefall of the dollar that could disrupt global trade as it recovers from recession. And in contrast to the 1980s, developing nations such as China are now challenging the dollar's long-term role as the world's top reserve currency.

The dollar's premier status helps the United States to obtain foreign capital and in order to keep that access, Washington is likely to encourage central banks around the world to continue holding dollars. This would require slow depreciation of the currency rather than a panicky slide.

So unless policymakers completely lose control of the forex markets - which cannot entirely be ruled out - the dollar's slide is likely to be slower and smaller than it was after the Plaza Accord, when the currency sank about 50 percent versus the yen between Sept. 22, 1985 and the end of 1987.

The overall direction of the dollar does not look in doubt, however. Top presidential adviser Lawrence Summers has said he wants a U.S. economy that is "more export-oriented and less consumption-oriented".

A lower dollar is a logical tool to achieve that goal, and letting the currency weaken would probably be faster and easier than most other big policy steps to reshape the U.S. economy, such as tax changes and health reform.

The International Monetary Fund, which is advising G20 nations on economy policy, is hinting heavily at the need for currency realignment.

In a report released this week, it said "current policies and the assumed constellation of exchange rates may not be sufficient for the needed rebalancing of demand."

It added that policy reforms by the world's big economies to restore growth "would be more effective if accompanied by a real effective renminbi appreciation, offset by euro and dollar depreciation".

An international understanding on dollar depreciation may well not be reached in Pittsburgh. A French official said last Friday that Pittsburgh would merely set the stage for future talks on foreign exchange rates.

"At this stage there will not be currency discussions, but the framework that we hope to put in place...is a way of discussing later the question of exchange rates," said the official, who declined to be named.

But giving China and other developing countries more power in the IMF and the World Bank could be part of an informal quid pro quo in which China quietly undertook to resume appreciating the yuan against the dollar.

The rise of the euro as high as $1.4821, breaking the December 2008 peak of $1.4719, is a technical signal that the market thinks the dollar is increasingly vulnerable.

For many traders, the break suggests a good chance of a rise to at least the psychologically important level of $1.50 in coming weeks or months. Yup

The European Central Bank might seek to limit speculation against the dollar by expressing concern about such a move. But the market does not appear to worry that the ECB could actually intervene to support the dollar.

When the European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia said last week that excessive appreciation of the euro could hurt Europe's economy, the euro fell back only marginally and briefly.

The market knows that even at levels just above $1.5000, the euro would remain well below its all-time high against the dollar of $1.6038, hit in July 2008.

And any rise of the euro against the dollar in the current circumstances would probably be seen by policymakers as the result of general dollar weakness, not excessive euro strength. When euro/dollar reached its July 2008 peak, euro/yen hit a similar high; now, euro/yen is a full 35 yen lower.

The Japanese may also be willing to see their currency strengthen. Before new Finance Minister Hirohisa Fujii took office this month, he said a strong yen was generally good as it boosted the purchasing power of Japanese. He is keeping his head down now!

Fujii subsequently backed away from that comment, but speculation will remain that after sweeping to power last month, the Democratic Party of Japan may try to shift the country away from its reliance on exports and its opposition to yen strength.

In the context of a G20 drive to rebalance the global economy, this could easily cause the market to think the yen should be trading stronger than 90 to the dollar.

Do not be long USD's, as it will not be pretty in the long term!

US dollar carry trade starting to look shaky

2009-09-20T23:02:00.004+12:00

For those USD bulls out there?

Gertrude Chavez-Dreyfuss and Wanfeng Zhou
NEW YORK, Sept 17 (Reuters)

A risky strategy using the US dollar to finance bets in higher-yielding currencies such as the Australian dollar could unwind quickly if this year's rally in global stocks fades.

Record low US interest rates, a commitment by the Federal Reserve to refrain from tightening monetary policy for a long period of time, along with improving global economic prospects have prompted investors to sell the US dollar in carry trades the last few weeks.

Carry trades involve transactions in which investors borrow in a low interest currency and use the funds to invest in higher-yielding assets in other countries. These strategies thrive in an environment of low volatility and economic expansion.

A nearly 70 percent surge in the broader MSCI world stock index from its low in March this year has also enhanced the carry trade's appeal. The Australian dollar , on the other hand, a carry trade beneficiary which moves in tandem with stocks, has risen 23 percent versus the greenback.

But dollar carry trades could have a shorter lifespan than most people think. A sustained pullback in stocks could dim the carry trade's attraction." Everybody's piling into equities and selling the dollar in carry trades and the main driver is not recovering earnings, it's the fact that prices keep going up," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Connecticut.

Not too long ago, the yen and Swiss franc, with their near-zero interest rates, were the preferred funding currencies in carry trades. But a couple of weeks ago, the cost of benchmark three-month interbank dollar funds fell below those of the yen and Swiss franc. "It wouldn't surprise me that in the middle of one or two earnings cycles, people would reevaluate global prospects for growth," Wilkinson said. "So it makes me wonder how fast you can short the dollar without running the risk of a fast snapback in your face."

PERSISTENT CREDIT STRESS
In many regions, less bleak economic data has morphed into upbeat reports and it seems the rebound in stocks and the dollar's sell-off has taken on a self-reinforcing quality despite persistent worries about rough times in credit and a weak lending trend by banks.

Analysts also say the interest-rate environment is too uncertain for a dollar-carry trade to survive for too long, and they believe the yen carry trade will re-emerge because of Japan's wide output gap. The output gap refers to the difference between an economy's current output and its maximum potential output. A wider gap reflects declining wages and lower inflation, and it impedes a central bank's ability to raise interest rates.

Japan's rates were low for years, which made such trades easier, but analysts do not foresee such a repeat in the U.S. "Japan has a much larger output gap than the U.S.," said Paresh Upadhyaya, portfolio manager, at Putnam Investments in Boston. "I don't believe U.S. rates will remain low for a long enough period of time for the dollar to cement its status on a multi-year basis as a funding currency."

Analysts give U.S. dollar carry trades a shelf life of six months to one year -- nowhere near the yen's lifespan of almost a decade as a carry trade vehicle. Samarjit Shankar, managing director of global FX strategy at BNY Mellon in Boston, said much uncertainty remains about the outlook for the rate-tightening cycle once the global recovery takes hold."

Interest rates will be changing quite a bit going forward. It's a much more fluid situation in terms of the attraction of lower rate currency for funding the carry trade."

DOLLAR UPTURN NOT FAR-OFF?
Technical indicators are also starting to suggest that dollar selling is getting overextended.In the options market, traders say over a three-month horizon, euro puts, or bets the euro will fall, are getting more expensive than calls, referring to options which reflect expectations the currency will rise. This shows that as the euro rises, more and more investors are buying downside protection in case it falls.

Meanwhile, according to Barclays Capital's implied probability distribution data, which is useful in pricing call and put options, the market has also attached a high probability that the dollar will rally against the yen. Barclays fair value estimates predicted a decline of 0.3 percent in the latest week, but the actual fall in spot was 2.6 percent, making the greenback 6.2 percent undervalued. That's the largest undervaluation in the last 12 months.

These numbers suggest a turn higher in dollar/yen is imminent as positioning has become overstretched.This was also evident in Barclays' implied distribution data. The probability of dollar/yen trading above 94.57 yen was about 25 percent in the latest week compared with a 22.8 percent chance the pair will move below 86.4 yen.

Have booked profits on some trades today.

2009-09-14T21:49:00.003+12:00

Have taken profit as follows:

AUD/USD Long AUD2m short USD at 0.7312.
Closed at 0.8610

Gain of 1298 points.

NZD/USD Long NZD2m shortUSD at .6241.
Closed at 0.7010

Gain of 769 points.

EUR/USD Long EUR1m short USD at 1.4465
Closed at 1.4550.

Gain of 85 points.

Still have AUD/JPY and NZD/JPY carry trades.

Will update on gains to date etc tomorrow if I get time.

EUR/USD position

2009-09-10T01:18:00.001+12:00

Added a new position.

Bought 1m EUR at 1.4465 sold USD.

Did this yesterday on the break higher. Was doubtful whether it would go on , so have a stop on it at 1.4450.

We will see how weak this USD really is.

No change to positions

2009-08-16T18:49:00.003+12:00

Left all current positions in place, as the correction lower I was looking for remains elusive, with more and more evidence pointing to stronger AUD and NZD against both the USD and the YEN.

So, steady as she goes!

2009-08-10T00:46:00.003+12:00

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 81.65
Current: Loss by 114 points.

Comment:
By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Target is 85.00 enroute to 105.00.
I remain comfortable with carry trades.

Extra background:Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 65.50
Current: Gain 827 points.

Comment:
I remain comfortable with carry trades with the NZD/JPY up over 44% this year! Happy with the current exposure.

EUR/USD
Square
Current rate: 1.4185
Comment:
Overall I see the USD weakening considerably due to quantitative easing pressures. But would not be surprised to see the USD strengthen over next few weeks.

AUD/USD
Long AUD2m short USD at 0.7312.

Current rate: 0.8370
Current: Gain 1058 points.

Comment:
These rallies have probably done enough for the minute, so will be taking profits at some stage this week.

NZD/USD
Long NZD2m short

USD at .6241.

Current rate: 0.6715
Current : Gain 474 points.

Comment:
These rallies have probably done enough for the minute, so will be taking profits at some stage this week.

Unrealised gains NZD770k (AUD/JPY –65k, NZD/JPY +379k, AUD/USD +315k, NZD/USD +141K).

Previous balance: NZD1,742,865.90
No changes realised.
Total gains banked since August 2007:

NZD1,742,865.90

Fascinating article from Professor Willem Buiter

2009-07-11T16:31:00.003+12:00

Quantitative easing, credit easing and enhanced credit support aren’t working; here’s why.

July 3, 2009 11:07am

Quantitative easing - expanding base money in circulation (mainly bank reserves with the central bank by purchasing government securities) - isn’t working in the US, the UK or Japan. Credit easing - outright purchases of private securities by the central bank, which can either be monetised or sterilised - is achieving little in the US or the UK, although it has not been pushed too hard yet. Enhanced credit support in the Euro Area - providing collateralised loans on demand at maturities up to a year at the official policy rate - is not working either. These policies are not improving the ability and willingness of banks to lend to the non-financial sectors. They have had little positive impact on the corporate bond market. It is not surprising why this should be so, once we reflect on the actions and the conditions under which they are taking place.

In a nutshell: quantitative easing (QE), credit easing (CE), and enhanced credit support (ECS) are useful when the problem facing the economy is funding illiquidity or market illiquidity. It is useless when the binding constraint is the threat of insolvency. Today, liquidity is ample, even excessive. Capital is scarce. Capital is scarce first and foremost in the banking sector. A panoply of central bank and government financial interventions and support measures have ensured, at least for the time being, the survival of most of the remaining crossborder banks. It has not done enough to get them lending again on any scale to the household and non-financial enterprise sector.

Sure, as the economy weakens, the demand for credit is racing the supply of credit down, but there can be no doubt that many firms and households are credit-constrained, and cannot find external finance either from the banks or from the capital markets. Only the larger enterprises, and those with a good credit track record have access to the capital markets. Small and medium-sized firms and new firms without a credit track record cannot go the the markets. So with zombie banks and highly selective access to the corporate bond markets, we are set for a slow and anaemic recovery.

This is made worse by the poor state of household finances in many western countries. With property prices down and banks tightening credit conditions, households have suddenly woken up to the true horror of their highly indebted state. Fear and caution have taken over from optimism and an instinctive belief in the sustainability of a consumption plan financed through Ponzi finance made possible through house prices rising at a proportional rate in excess of the interest rate on housing debt. This rediscovery of prudence by households has lead to a form of Ricardian equivalence that makes tax cuts ineffective and limits the multiplier from public spending increases. Many highly indebted households have reduced their consumption to a (generally socially defined) ’subsistence’ level. Any additional income is saved or used to pay down debt.

Quantitative easing The central bank buying longer maturity government securities will help when the underlying problem is too high a value of risk-free long-term interest rates. That, however, is not the problem. If anything, long-term risk-free rates continue to be surprisingly and damagingly low. So outright purchases of government securities by the central bank do nothing to alleviate liquidity pressures on banks, let alone the banks’ capital shortage. They are no more than a sop to the ministry of finance and its deficit financing preoccupations. At best, such monetisation of the public debt will, if it not expected to be reversed, have a ‘fiscal’ effect - helicopter money. But if households are saving their windfalls, even this will fail to boost the economy.

Credit easing

The central bank purchasing private securities outright will help if there are liquidity problems in the markets for these securities, making for excessive spreads over corresponding maturity risk-free rates. Apart from that, such outright purchases help only if the central bank pays over the odds for the securities and thus helps recapitalise the banks. No doubt the massive past liquidity injections by the central banks of Japan, the US, the Euro Area, the UK and elsewhere in Europe have taken the liquidity spreads out of the corporate bond yields. Corporate borrowing through issuance in the markets is running at a high level, even in the Euro Area. Much of this substitutes for bank finance that is no longer available. If the authorities believe that the spreads of corporates over Treasuries are still in excess of what is warranted by differences in default risk, they should by all means buy more corporate debt. If they believe, as I do, that these spreads are likely to be a fair reflection of credit risk differentials, then even credit easing is a waste of time.

Enhanced credit support

Enhanced credit support to the banks, along the lines of the ECB/Eurosystem making a humongous volume of collateralised loans to the banks likewise only works if the Euro Area banking system suffers from a shortage of liquidity or if the ECB/Eurosystem offer too generous terms for these loans. Euro area banks take the ECB’s liquidity and re-deposit most of it with the ECB rather than using it to engage in new lending. Euro Area banks are among the most zombified by their capital inadequacy and excessive leverage.

Throughout the north-Atlantic region, the problem is not that the banks are illiquid. They are short of capital. Many of them would be insolvent but for the anticipation of further government support, on top of the massive support already given to the sector. In addition, while the fiscal authorities are prompting banks to raise more capital and have injected public capital in the wonkiest banks and while central banks are injecting liquidity in the economy on a scale never seen before, regulators and supervisors are often forcing banks to act procyclically, by building up their liquid assets now and by aggressively deleveraging now. Surely, if ever St. Augustin’s prayer - Lord give me chastity, but not yet - was appropriate, it is now for banks.

That banks are drowning in liquidity is apparent from the divergent behaviour of the stock of bank reserves with the central bank. which is increasing fast, and the broad money stock held outside the financial sector (for these purposes, the non-bank financial sector is just the off-balance sheet segment of the banking sector and should be consolidated with it). As pointed out by Ben Broadbent of Goldman Sachs (where I am an advisor - all views and opinions expressed are strictly and emphatically my own and not those of any organisation I am associated with etc.), the increase in M4 outside the financial sector in the UK has recently been much smaller than the growth of commercial bank reserves with the bank of England. Similar patterns exist in the US and in the Euro Area.

Conclusion

Pushing on a string is difficult. Pushing a zombie on a string is even harder. Pushing a zombie bank on a string is impossible. Unless the balance sheets of the banks are strengthened sufficiently, through massive further injections of capital, the removal of toxic assets and much lower leverage, unconventional monetary policy will not work. The banking system in the north-Atlantic region is not facing a liquidity shortage - it has got liquidity coming out of its ears. It is facing a capital shortage. Much of it still totters on the edge of insolvency. Recapitalising banks slowly through large spreads on low business volumes and through quasi-fiscal subsidies extended by the central banks in their financial support operations will take years - years of impaired intermediation and abysmally restricted external finance for households and non-financial corporations.

Recapitalising the banks and paying off private household debt through high unanticipated inflation would be possible, but undesirable. I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival. The mandatory recapitalisation would be first through new equity issuance in the market, then though mandatory debt-to-equity conversion and similar haircuts for unsecured bank creditors, and last through increased government equity stakes. All these capital injections should take the form of tangible common equity. Anything else would be cosmetic.

Subsequent regulation of the banking sector (broadly defined to include all highly-leveraged entities with serious maturity and/or liquidity mismatch on their balance sheets) will then be necessary to prevent a recurrence of the disaster we are now struggling through.

In preparation for the Jubilee, I am going long in ram’s horns. In good Torah/Biblical tradition, we should have one of these every 49 or 50 years.

We skipped a few. Let’s have a big one now.

KT - Don't agree about the Jubilee at all though, see the other comments on his blog!!!

Yen Intervention looming?

2009-07-10T13:40:00.000+12:00

Reuters 09Jul09 06:49:31
By Vivianne Rodrigues and Nick Olivari

NEW YORK (Reuters) - Japan could be one step closer to intervening in the foreign exchange market for the first time in five years as a soaring yen further jeopardizes the country's chances of pulling out of recession.

Growing unease about the global economy has prompted investors to rush out of trades that bet against the yen while favoring higher-yielding but often riskier currencies.

The move accelerated on Wednesday and spurred talk of intervention or at least jaw-boning of the exchange rate by Japanese officials, after investors bought back yen, pushing it to multi-month highs against both the dollar and euro.

If the yen strengthens to trade below 90 to the dollar, "it is more a question of 'when' than 'if'," said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, in New York. "At this stage, the pace of the move rather than the absolute, is their main concern. They want to see stability, they have mentioned it many times before."

Japanese officials have said repeatedly the country is not considering intervention in currency markets. However, given the country's reliance on exports, they may be more motivated.

Investors are also mindful that the Group of Seven industrial powers in October issued a rare inter-meeting statement singling out yen volatility, giving Japanese authorities the green light to stem its surge at that time.

The yen also jumped against the Australian and the New Zealand dollars as it quickly broke through key levels around 93.40 to the U.S. dollar to touch its highest since February.

The yen moved more than 3 percent against both the dollar and euro Wednesday in its biggest one-day moves since March and November, respectively.

Japan has a long history of trying to stem yen strength by intervening to buy dollars, but it has stayed out of the market since a 35 trillion yen ($377 billion) campaign over 15 months ended in March 2004. The Ministry of Finance has gradually moved away from heavy intervention because that last campaign had mixed results.

A summit of the Group of Eight major economies in Italy starting on Wednesday was silent on currencies but the sharp moves are unlikely to go unnoticed, analysts said.

"As the yen starts getting close to the 90 mark, we are going to see Japan stepping up the rhetoric at least," said Vassili Serebriakov, currency strategist at Wells Fargo Bank in New York. "It's inevitable."

Central banks have become more active in currency markets in recent months to prevent price volatility from threatening a nascent economic recovery.

FOLLOWING THE SWISS EXAMPLE?
The Swiss National Bank surprised the market in March by buying euros and U.S. dollars and selling the franc. It was the first time that the SNB had intervened since 1995.

The SNB denied they intervened to weaken the currency -- instead acting to stop it from rising. Swiss monetary authorities have sold the franc several times after the March announcement, with more aggressive forays in the last days of June, traders said. As a result, the Swiss franc has fallen about 4 percent versus the euro since March.

The Japanese currency has also strengthened in the past as investors unwound carry trades, trading around 88 to the dollar late last year as the global economic crisis intensified.

Momentum is now building again to hold yen as risk aversion rises. "As risk aversion goes up, the yen is regaining some of the safe-haven characteristics it has lost," said Serebriakov. "Carry trade positions now are not as large as they were pre-crisis, but the yen will keep benefiting. And let's see what happens if we get to the 90 mark.

That's probably the line in the sand."

Quantitative easing debate

2009-07-06T00:12:00.000+12:00

This is an excellent explanation of the current debate around quantitative easing issues:

Morgan Stanley - Global QE, Global Inflation

July 03, 2009

By Joachim Fels & Manoj Pradhan, London

Inflation complacency:

With headline inflation gauges in negative territory in many countries and the global economy only just emerging from the ‘Great Recession', it may seem absurd or at least premature to worry about inflation risks.

Indeed, most investors appear to be undaunted by inflation, a view that is also reflected in market-implied 10-year inflation expectations for the US and the euro area of less than 2%, which would be lower than actual inflation over the past decade. In our view, however, markets are too sanguine about longer-term inflation risks. It appears more likely to us that in the coming decade inflation will significantly exceed the levels seen over the past decade.

Three reasons to expect higher inflation:

Our inflation view is based on three pillars, which we discuss in turn:

• We think that most observers vastly overestimate both the size of the ‘output gap' and the importance of this gap for determining inflation. Our earlier research has shown that global factors, rather than national output gaps, are the main determinant of inflation these days.

• The ‘secular' global forces that helped to push inflation lower or keep it low over the past couple of decades - productivity, deregulation and globalisation - will likely be less prevalent in the years ahead.

• Quantitative easing (QE) is in full swing globally, and we think that central banks will be slow to exit from it collectively, especially if economic growth remains subdued. The longer super-easy global monetary conditions remain in place, the more likely it becomes that inflation expectations and actual inflation will start to rise significantly.

Output gap approach problematic: The most frequently voiced argument for low inflation in the foreseeable future is that the Great Recession has created a huge gap between actual and potential output and thus much spare capacity that will take years to be absorbed.

However, we are inclined to discount the output gap argument for two reasons:

• First, any real-time estimates of the output gap are highly uncertain due to data revisions and because estimates of potential output evolve as more data become available. For example, as work conducted by Athanasios Orphanides during his time at the Fed has shown, monetary policymakers' misperceptions about the size of the output gap were a major factor in the inflationary surge in the 1970s. For a long time during and after the mid-1970s recession, the Fed believed the output gap to be larger than it actually was. The reason for this was that it overestimated potential output, which later turned out to be much lower than initially thought.

In fact, there is reason to believe that the credit and economic crises of the past year have led to a downshift not only in actual output but also in potential output. With the end of the consumer and housing boom in the US, the UK and other countries, resources and excess labour need to be shifted into other sectors, which will take time and could keep structural unemployment high. Also, the cost of capital is likely to stay higher than in the bubble years, and the plunge in capex will contribute to lower potential growth, too, in our view.

Our more sceptical view on potential output and thus the size of the output gap is supported by our natural interest rate model, which also generates an estimate of potential output. Tellingly, our model produces an output gap for the US that is much smaller than the ‘official' one generated by the Congressional Budget Office (CBO). Similar results have been reported in a recent study by San Francisco Fed economists Justin Weidner and John Williams ("How Big Is the Output Gap?" FRBSF Economic Letter, June 12, 2009).

• The second reason why we are inclined to discount the ‘output gap' argument is that in our previous research we found that output gaps only have a weak influence on inflation. Rather, global inflation has become the dominant driving force for domestic inflation rates. If our estimates are anything to go by, an output gap of 1% pushes inflation down by barely 15bp in the US (see Inflation Goes Global, July 16, 2007).

Global factors less disinflationary:

So how about the global factors determining inflation? In the last one or two decades, central banks were helped in keeping inflation low by a confluence of three factors: globalisation, deregulation and faster technological progress.

However, the tailwinds for central banks from each of these factors have turned into headwinds:

• Globalisation is likely to proceed less rapidly in the next several years due to the creeping protectionism that has been reinforced by governments' reactions to the Great Recession. Increased support for national industries is likely to slow restructuring and reduce import competition.

• Deregulation has been largely achieved in most sectors. Now, consolidation in deregulated sectors and government-induced re-regulation in some areas are reducing competition, and thus potentially adding to inflation pressures.

• The big boost to productivity from the IT boom of the 1990s is behind us, and trend productivity growth in the technology leader, the US, has probably slowed significantly. Lower productivity growth that is not accompanied by slower wage increases implies rising unit labour cost pressures.

But monetary policy matters most:

The most important factor for the global inflation outlook, however, is the current and future stance of monetary policy. Central banks have responded to the crisis with an unprecedented amount of monetary stimulus, and we fear that the accommodation will be kept in place for too long.

QE is alive and kicking...

The sharp increase in US 10-year yields and mortgage rates, with 10-year yields reaching 4% in mid-June, led many investors to question the effectiveness of the QE programme. While a continued increase in yields would certainly create headwinds for economic recovery, it is important to keep in mind that keeping yields low was only one aspect of the programme. As important, if not more so, is the increase in money supply and excess liquidity. On this measure, the Fed has continued to run a successful campaign, as have a host of other countries that have implicitly or explicitly turned to QE.

...globally:

On our count, the Fed, the ECB, the BoE, the BoJ, the Swiss National Bank, the Swedish Riksbank, the Norges Bank and the Bank of Israel all adopted some form of QE around September 2008 (see "QE2", The Global Monetary Analyst, March 4, 2009). M1, the measure of narrow money supply, has been growing strongly in most of these countries since then. M1 growth in the G4 is ticking along at 12%, driven by M1 growth of nearly 20% in the US, around 8% in the euro area, and a move into positive territory for M1 growth in Japan. Outside the G4, money supply is moving up strongly in Switzerland and Israel, with the latest M1 growth numbers showing 42%Y and 54%Y growth, respectively. The Norges Bank's QE programme has kept the monetary base at highly elevated levels and M1 growth has begun to shrug off the effects of previous tightening and is now in positive territory. Finally, the increase in the monetary base allowed by the Riksbank has pushed up M1 growth to over 6%.

While there has been no QE announcement from the Chinese monetary authorities, the efforts made to increase money supply and credit in China over the past few months have been highly successful. M1 growth has clocked in at 18.5%Y while loans are growing at 28%Y. India briefly flirted with QE-type policies (see India: Flirting with QE, April 7, 2009) by buying a sizeable chunk of government bonds since April. However, efforts to push up money supply don't seem to have been pursued vigorously since then. Both economies are expected to outperform the global economy. If anything, our economics team sees the dramatic rally in equities and property as a development that central banks will have to monitor closely (see Rise in Asset Prices: New Challenge for Asian Central Banks, June 30, 2009).

More to come:

In the major economies, there is plenty more to come. The Fed is about halfway through its US$1.75 trillion purchase programme, while the Bank of England has about 18% (£23 billion) of its programme yet to go. Meanwhile, the ECB will start purchasing €60 billion of covered bonds this month. In short, there is plenty of firepower waiting to come out of the central banks' QE muzzles. If the impact on money supply so far is anything to go by, we can expect excess liquidity to continue to grow (see "The Global Liquidity Cycle Revisited", The Global Monetary Analyst, May 27, 2009) and support economic recovery and asset markets.

....but the way out is tricky:

While talk about ‘QExit' has started, we believe that central banks will most probably not be able to withdraw monetary stimulus rapidly without putting at risk the tenuous recovery that our global team expects. On our latest forecasts, the G10 economy will shrink by 3.5% this year and grow by only 1.3% in 2010. In such a scenario, central banks are likely to unwind QE and normalise policy rates fairly simultaneously and very slowly (see "QExit", The Global Monetary Analyst, May 20, 2009), raising the risk of inflation.

Importantly, given the importance of global factors that we pointed out earlier, keeping the inflation genie bottled up will mean that it probably won't be sufficient if one or two central banks get the timing of exit right - this is a feat that a majority of central banks will have to achieve in order to keep global inflation subdued, in our view.

Farrah Fawcett

2009-06-27T12:10:00.001+12:00

The original Blonde Angel has died.

Rest easy Farrah

Hat Tip: Yes Minister

Outstanding positions update

2009-06-21T20:00:00.000+12:00

Here are the trades I am active in:

AUD/JPY
Long AUD 3,735,990.04 short JPY at 82.79 average.

Current rate: 77.60

Current: Loss by 519 points.

Comment:
By buying AUD I have converted this trade from a crappy USD/JPY deal to a AUD/JPY deal. See post here. Now waiting for the AUD to react to commodity moves. Target is 85.00 enroute to 105.00.

Extra background:
Sold USD3m and bought AUD at 0.8030, thus making the USD/JPY trade long AUD3,735,990.04 short JPY at 82.79.

NZD/JPY
Long NZD 3m short JPY at average of 57.23.

Current rate: 61.82

Current: Gain 459 points.

Comment:
I remain comfortable with carry trades with the NZD/JPY up over 40% this year! Happy with the current exposure.

EUR/USD
Square

Current rate: 1.3940

Comment:
Overall I see the USD weakening considerably due to quantitative easing pressures. So if pressed I would go long euro. But see more profit in other trades at present, so will not commit the capital.

GBP/USD
Back to square

Current rate: 1.6504

Cashed out:
Long GBP1m (1.5050) short USD at 1.5690, for a gain of USD64,000 (at 0.6150) NZD104,065.04 (not counting carry interest).

Comment:
Definitely took profit too early, but I needed my limit resources elsewhere.

AUD/USD
Long AUD2m short USD at 0.7312.

Current rate: 0.8060

Current: Gain 748 points.

Comment:
With oil in demand, and commodities generally pressured higher, I remain comfortable being long AUD. Happy with the current exposure.

NZD/USD
Long NZD2m short USD at .6241.

Current rate: 0.6422
Current : Gain 181 points.

Comment:
Now that the downgrade is off the agenda, and interest rates look to have stopped falling, there is nothing holding the NZD/USD down. Target 0.6500 enroute to 0.7000. Happy with the current exposure.

Unrealised gains NZD200k (AUD/JPY –312k, NZD/JPY +223k, AUD/USD +232k, NZD/USD +56K).

Previous balance: NZD1,638,800.86
Plus GBP/USD gains of NZD104,065.04
Total gains banked since August 2007:

NZD1,742,865.90

My trading style, a repeat!

2009-06-20T15:23:00.000+12:00

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 take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, Reuters, CNBC, CNN, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced the trading since August 2007, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.....

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

Is the USD doomed?

2009-06-16T19:42:00.000+12:00

Reserve fear a distraction for dollar watchers

By Mike Dolan
LONDON, June 16 (Reuters) - The raging debate about the future of the U.S. dollar's reserve currency status may be masking the real drivers of its near-term direction.

Even as Russia, China and Brazil ratcheted up rhetoric about a new global reserve currency and diversifying their huge foreign currency stashes away from dollars, the U.S. currency has staged a remarkably healthy rebound this month.

Against the world's most traded currencies, the dollar <.DXY> has clawed back a quarter of the losses it has suffered since March -- losses that were driven by growing confidence in financial and economic recovery.

The billions parked in U.S. money market funds and Treasury securities during the worst of the credit crunch streamed out to seek higher returns in riskier plays such as equity, often outside the United States and significantly in emerging markets.

Fund tracker EPFR estimates that $104 billion has left money market funds since the start of the year and almost $30 billion flowed directly to emerging market equity, mostly since March.
But as the stock market rally has stalled, or at least taken a breather, the dollar has bounced more three percent.

And this bounce came in the face of persistent Russian and Chinese reserve warnings and ahead of Tuesday's summit between these two emerging giants and their new-found economic allies from the BRIC grouping -- Brazil and India.

SMOKE AND MIRRORS
So why has talk of diversification by the world's biggest reserve holders not weakened the dollar further?After all, China and Russia hold more than a third of the $6.7 trillion global reserves stockpile and at least 50-60 percent of their combined holdings is denominated in dollars.

For sure, it was cited as a contributory factor as the dollar skidded through April and May. And data released on Monday showed public and private holdings of Treasuries held by Russian and Chinese names fell by $6 billion in April alone.

But analysts reckon this is small compared with the massive private sector investment swings in and out of the United States in recent months and probably for several months to come.

With equity and bond markets still torn by uncertainty about the next leg of the post-crisis economic story, the dollar's negative correlation with stock market nervousness appears to be re-establishing itself.

As stocks look to lurch lower again, the dollar may well attract another "safety" bid -- just as in the earlier part of the year.Against that, central bank reserve shifts are unlikely to be either sudden or in great size.

For a start, major central banks from Moscow to Beijing or Brasilia would have as much as anyone to lose from any sudden or prolonged loss of confidence in the dollar, given they still hold hundreds of billions in dollar securities. Neither would they want to precipitate a financial crisis that could shock the consumers of one of their biggest export destinations.

Also, whenever the dollar weakens, central banks that fix their currencies at least partly to the dollar are forced to buy at least some dollars to maintain that peg. Periods of dollar weakness are therefore met with official dollar purchases -- even if the proportion is gradually less over time.

Analysts at Goldman Sachs point out that global reserve accumulation, which peaked about $7 trillion last summer, has resumed as the dollar has weakened since March and as crude oil prices surged.

SDR DOUBTS
Others point to the more recent debate about emerging countries switching U.S. Treasury holdings for bonds from the International Monetary Fund -- bonds that would be denominated in the IMF's basket currency, the Special Drawing Right.

However, this flow too may prove more marginal in the short run than it first seems.

Dollars already make up some 40 percent of the SDR basket, limiting the drop in dollar allocations from about 60 percent dollars at present.

As commitments to date from China, Brazil and Russia to the proposed IMF bonds amount to about $70 billion, that would involve a reduction in dollar holdings of $14 billion at most.

The IMF itself is adamant there is no risk the dollar's dominant status for some time.

"The dollar is the principal reserve currency in the global economy and will remain so for as far as we can see," IMF First Deputy Managing Director John Lipsky said on Monday.

So is this is a story for another day?

"The prospects of an aggressive change in the U.S. dollar allocation in the Russian foreign reserves remains very low," Commerzbank analysts told clients on Monday.

"But it is also worth stressing here that the secular move away from the U.S. dollar into other regional bellwether currencies in the emerging markets space is still on, and will probably intensify over the next many years."

Goldman Sachs takes a similar view: "We do believe that the dollar will effectively remain unchallenged as the main reserve currency for a long time but there is also little doubt that the constant reserve diversification talk creates uncertainty."

Time to buy in the Hamptons??

2009-06-16T13:50:00.000+12:00

NEW YORK (Reuters) - New York City real estate prices are looking increasingly shaky as instability in two of the city's sexier submarkets -- second homes in the Hamptons, and new condos in Manhattan -- register the latest signs of a housing downturn.

Property prices in the Hamptons, a fabled playground of the rich on nearby Long Island, rose steadily for almost two decades, but the prices on almost 1-in-3 of current listings have been cut an average 11 percent from the initial asking, said Sofia Kim of real estate website StreetEasy.com.

Back in town, the number of sales in new developments dropped a whopping 71 percent in April from a year earlier as condo developers enmeshed in complicated financing arrangements have been slow to slash prices even as the market corrected all around them, Kim said.

But if prices on these new condo towers do not fall to match the rest of the market and stay empty as a result, then it could eventually trigger foreclosures of entire properties, forcing much bigger price cuts as lenders seek to reduce their liability.

"If you have a property not priced at market, is it going to sell? Something has to give," said Jonathan Miller, author of real estate broker Prudential Douglas Elliman's market reports.

The intensifying of the malaise afflicting New York City comes as housing in parts of the country that got hit hardest by the bust are showing signs of life. Home sales in California, Arizona and Nevada -- states known for risky lending and speculation during the boom years have risen as foreclosures and short sales lure buyers into the market. In New York, it's the opposite.

When the rest of the country was watching new neighborhoods begin to disintegrate into foreclosure ghost towns in 2007-2008, Manhattan landlords would still publicize new buildings by hosting parties featuring pop stars, sushi and girls twirling hula hoops in a bid to convert still-airborne Wall Street bonuses into down payments.

Today, that bonus pool has dried up amid job and compensation cuts in the financial services sector that drives the city's economy. "Things are much more subdued," Kim said. "There's no money for parties."

The elite in the real estate industry had once hoped Manhattan could escape relatively unhurt as other housing markets suffered. But the collapses of financial powerhouses such as Lehman and Bear Stearns destroyed such thinking.

"What ended up killing us was the foreclosure crisis because that's what killed Wall Street," said Rick Hoffman, a regional senior vice president in the Hamptons for the Corcoran Group, a high-end brokerage. "It bit us in the end."

A BACHELOR'S KITCHENETTE
Glass towers designed to appeal to finance industry hotshots had been shooting up across Manhattan as Wall Street's bonus boom powered a surge of new development, said Barry Hersh, a former developer and a professor of real estate at New York University's Schack Institute of Real Estate.

Now many developers are struggling to secure lender approval to cut unit prices, he said. Without that, they could face foreclosure and bankruptcy, he said.

Some lenders, wary of an announced foreclosure's negative effect on sales, might opt for a more subtle scenario in which they quietly take control of a property.

"You walk in there as a potential buyer and there's still a developer and a broker and a marketing person but in reality the developer has been eliminated from the equation and the bank is deciding whether or not to accept your offer," Hersh said.

Of course, some condo developers are doing what must be done and lowering prices either in consultation with lenders or behind the scenes with buyers.

The developers of the Georgica at 305 East 85th Street, for example, in Manhattan went so far as to address its disappointing sales by relaunching the building in mid-May with a revised marketing and pricing plan, said Beth Fisher, a director at Corcoran Sunshine Marketing Group.

Her group advised the developers not to move forward until they had negotiated the necessary price adjustments with its backers, who agreed to a range of cuts, some as much as 20 percent.

"You're not going to outsmart the market," she said. "You have to give buyers what they want."Others maintain appearances but lower the real price -- often about 5 percent -- by using concessions such as extra storage or the payment of transfer fees as bargaining chips, said Brown Harris Stevens broker Elaine Clayman. "They just don't want to look like the prices are going down," Clayman said.

BLUE BLOOD ON THE BEACH
Hamptons owners cannot hide that. The blood out there may be blue, but Wall Street's bite is still spilling it.

The average sales price in the Hamptons and in the nearby North Fork market plunged 36 percent from a year ago and 25 percent from the fourth quarter to $1.1 million in the first quarter, and the number of sales were down by half year-over-year, according to Prudential Douglas Elliman.

"We track bonuses pretty closely in the Hamptons," Hoffman said. Fat bonuses whip up the market; skimpy ones flatten it.

Take one Southampton property: It offers 13,500 square feet on five beachfront acres, a pond out back, nine bedrooms, a "wine cellar/grotto" and a $20 million discount to $60 million from a previous price of $80 million, according to StreetEasy.com.

As of late May, another house was on the market for $2.6 million, which was down 40 percent from $4.4 million. And the price of a third was reduced 34 percent to just under $2 million.Hamptons owners holding out for higher bids can rent their trophy homes instead of selling them. But because so many people are opting to do that, the rental market is weak too, Prudential Douglas Elliman's Miller said.

Sellers loath to lower the price are putting more property on the rental market. Tenants smelling blood are demanding lower rents. "It's a double hit," Miller said.

NZD/USD Update

2009-06-11T13:38:00.000+12:00

Added another long 1m NZD short USD at 0.6320 post the decision from the Reserve Bank this morning to leave NZ interest rates unchanged.

Total position now long NZD2m short USD at an average of 0.6241.

I think NZ interest rates will plateau for a while now, but no further moves lower.
The NZD will gain over the next 24 hours, especially tonight, with the target 0.6500 initially, enroute to the 0.7000 area this year.

I will update on all my positions later in the week, or at the weekend, but suffice it to say, they are all going brilliantly, and it will be time to buy a new jag soon!!

USD/JPY position update

2009-06-05T20:20:00.000+12:00

The position is: Long USD 3m short Yen at 103.10 average.

However I am not comfortable being long USDs, as I believe the USD has some serious weakness ahead in the next few years. However I am happy being short JPY.

Sooooo, I began discussions with my bankers. If I went long AUD and short USD3m would they offset the USD3m long/short and treat it as a AUD/JPY deal for limit purposes?

Essentially doing another 3m USD and marking the position to limits on a gross basis would mean I would not have enough capital to do this and my other trades as well, or at least not comfortably.

I got an agreement today that they would net the trades and treat it as a AUD/JPY deal if I added the AUD/USD leg.

So sold USD3m and bought AUD at 0.8030, thus making the trade long AUD3,735,990.04 short JPY at 82.79. Given that the current spot is at 78.00 I still have a long way to go, but at least I do not have a USD exposure, which is what I wanted to move to.

And I haven't impacted on my limits at all!

Position additions

2009-05-28T18:35:00.000+12:00

Added another long AUD1m short USD at 0.7773 today, thus making the position long AUD2m at an average of 0.7312.

Added another long NZD1m short JPY at 59.50, thus making position long NZD3m short JPY at average of 57.23.

Bought NZD1m sold USD at 0.6162 as a new position.

I liked the NZ budget, and so do the rating agencies, taking NZ off credit watch and returning NZ to a stable outlook.

Just need to find the time to post the new blonde of the month now!!

GBP/USD Position

2009-05-21T20:55:00.000+12:00

Closed out long GBP1m at 1.5690. More later, bit rushed at present!

Position Update

2009-05-11T20:23:00.000+12:00

Here are the trades I am active in:

USD/JPY
Long USD 3m short Yen at 103.10 average.

Current rate: 98.60
Current: loss

Comment:

Looking for a rally up through 100.00 one day! This has become a long, long, long term position.

Extra background:
First short USD3m freeze trade taken against JPY at average of 96.97 closed at 89.63, generating gain of USD245,676.67, NZD423,580.47 (not counting carry interest).

Second short USD3m freeze trade taken against JPY at 95.90 closed at 98.10, generating loss of USD67,278.29, NZD112,130.48 (not counting carry interest).

NZD/JPY
Long NZD 2m short JPY at average of 56.10.

Current rate 59.70
Current: Gain
Comment:

I am comfortable with carry trades with the NZD/JPY up nearly 27% this year! Will add more on a move to 56.50.

Extra background
Short NZD2m freeze trade taken against JPY at 53.50 closed at 54.02, generating loss of NZD19,252.13 (not counting carry interest).

Cashed out:
Long NZD3m (54.69) short JPY at 59.92, for a gain of NZD261,849.13 (not counting carry interest).

EUR/USD
Square
Current rate 1.3550

Comment:
Still can’t make my mind up on EUR/USD. I could see it go either way, so best to stay out of it.

GBP/USD

Long GBP1m short USD at 1.5050

Current rate 1.5180
Current: Gain

Comment:

I think that there is too much bad news priced into cable, so have started to build a position. First for me in cable since I started this blog.

AUD/USD

Long AUD1m short USD at 0.6850.

Current rate 0.7650
Current: Gain
Comment:

Happier now that CRB index has broken higher. Will add to position in the 0.7350 area.

NZD/USD
Square

Current rate: 0.6075

Comment:
Still waiting to see NZ budget and possible downgrade.

Previous balance: NZD1,508,334.34
Plus NZD/JPY gains of NZD261,849.13
Less USD/JPY (freeze trade) losses of NZD112,130.48
Less NZD/JPY (freeze trade) losses of NZD19,252.13
Total gains banked since August 2007:

NZD1,638,800.86

GBP/USD

2009-05-06T20:58:00.000+12:00

Have been watching this for a while, and finally took the plunge.

Bought GBP1m and sold USD at1.5050.

Target 1.5500, review at1.4500.

USD/JPY

2009-05-06T20:05:00.000+12:00

Cut the USD3m freeze trade out at 98.10 and booked a loss from 95.90 (Of course, have a lesser loss on the original trade).

Overall I remain more comfortable being short yen and long USDs. Anything else, even as a freeze trade, does not sit right with me, so have taken the loss and back to an overall long USD position against the yen.

Will update progress to date on all positions tomorrow if I get the time.

USD/JPY Position

2009-04-30T18:33:00.000+12:00

Have placed an order at 95.90 to unwind freeze trade taken earlier this week.
Will finese this over next few days.

Will try to update overall positions and profit tracking to date in the next few days.

Pissed off! NZD/JPY

2009-04-29T15:40:00.000+12:00

I am pissed off that I did not follow my plan, and allowed myself to be swayed by short term thinking!

I bought the NZD back at 54.02 this morning and cashed out the freeze trade I foolishly took yesterday at 53.50 for a loss. I think the NZD/JPY goes a lot higher, and hedging around that view is so very short term.

Set it and wait! that should be the plan!

USD/JPY Position

2009-04-28T18:48:00.000+12:00

Not happy with the moves in the USD/JPY and sold USD3m bought JPY at 95.90.
This is another freeze trade, and will reopen it when things calm down again.

NZD/JPY position

2009-04-28T13:33:00.000+12:00

Agree with recent comments that it looks a bit dodgy and could test 50.00 again.
So have placed a stop loss at 53.50 and this may become another "freeze" trade for a while.

Here's an idea!.......discussion welcome!

2009-04-27T16:22:00.000+12:00

A friend emailed me this:

Dear Mr. President:

Please find below my suggestion for fixing America's economy.
Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan.

You can call it the Patriotic Retirement Plan:

There are about 40 million people over 50 in the work force.

Pay them $1 million apiece severance for early retirement with the following stipulations:

1) They MUST retire. Forty million job openings - Unemployment fixed.

2) They MUST buy a new American CAR. Forty million cars ordered - Auto Industry fixed.

3) They MUST either buy a house or pay off their mortgage - Housing Crisis fixed.

It can't get any easier than that!

If more money is needed, have all members of Congress and their constituents pay their taxes...

Now that made me think about it!! - KT

NZD/JPY

2009-04-23T22:32:00.000+12:00

Bought another 1m NZD sold Yen at 54.50 thus making position long 2m NZD short JPY at an average of 56.10.

Review levels 53.00 and 60.00

A game of two halves

2009-04-18T13:58:00.000+12:00

Roger J Kerr, April 15th, 2009

In the clichéd rugby vernacular, it appears to be “a game of two halves” for the Kiwi dollar currency movements over the next 12 months. While having made impressive gains to 0.5900 from the low 0.5000’s over recent weeks there are a number of short-term forces and events that suggest the NZD/USD exchange rate will not sustain its gains and return to the low 0.5000’s.

However in the medium term to longer term (the latter part of 2009 and into 2010) against a back-drop of an improving New Zealand economy and potentially local interest rates increasing ahead in timing of other countries, the Kiwi has a far higher probability to be appreciating above 0.6000.

First Half: Bollard, English and Greenback restrict scoring opportunities

The short-term variables revolve around local interest rates/monetary policy, the USD exchange rate on global markets and the Government’s budget at the end of May.

RBNZ Governor resorted to some good old-fashioned “open mouth” monetary operations two weeks ago as he attempted to jawbone both interest rates and the NZ dollar downwards. His view was that the recent increases were inconsistent with his desirable monetary policy settings and that the economic recovery could be threatened if monetary conditions move away from the required “super-loose” position.

The verbal intervention only had a very brief impact on the NZD currency market. The Kiwi fell to 0.5600 from 0.5700 on the day, but has since returned to above 0.5800 as global investor sentiment improved and the NZD is finding some overseas investor favour.

The term swap interest rates were increasing due to one-sided fixed paying demand, as both household mortgage borrowers and large corporate borrowers rushed to secure fixed rates as they believed that the interest rate cycle has bottomed.

The RBNZ themselves caused this view about future interest rate direction by stating in their early March Monetary Policy Statement that “New Zealand’s capital markets must remain competitive”. The moneymarkets and borrowers took that to mean that our interest rates could not go too far below Australia’s as we need to still attract voluntary foreign capital inflows to fund the massive $16 billion current account deficit.

The RBNZ statements added to the volatility of interest rates and exchange rates in recent times, just at a time in the economic recession that businesses and industry sectors are crying out for stability and certainty.

The RBNZ now seem more likely to cut the OCR interest rates from 3.00% to 2.75% or 2.50% later this month. That action may cause some independent NZD selling, but the markets should have already priced this eventuality into the rate. Any RBNZ interest rate reductions in April and May will be the last. Term swap interest rates beyond three years are unlikely to fall on these last OCR adjustments downwards.

The second potential short-term negative factor for the NZD/USD rate is a stronger USD/weaker euro on global FX markets. The USD has already recovered from $1.3700 against the euro to $1.3100 as expectations mount that the European Central Bank will be forced to cut its official interest rates form the current 1.25% to zero over coming months. Lower interest rates in Europe and a closing of the differential to US interest rates should return the USD/EUR rate to $1.2500. The stronger USD should drive the kiwi to 0.5500 and below, but the NZD cross-rates to GBP, EUR, JPY and AUD are unlikely to fall - more likely to be stable to higher. The weaker euro has already lifted the NZD/EUR cross rate from 0.4000 to above 0.4400 in recent weeks.

The third factor that some believe will be negative for the Kiwi is the risk of NZ Government sovereign credit rating downgrade after the budget at the end of May. In the author’s opinion, Finance Minister Bill English will meet Standard & Poor’s expectations of controlling the size of the Government’s deficit and debt increases over coming years. It may take a suspension of annual payments to the NZ Superannuation Fund to make the numbers work, but the Government knows full well that it must avoid a credit rating downgrade at all costs. The NZ Government needs to compete against other Government debt issuers for investor support over coming years, maintaining our AAA rating is imperative to that strategy. Those currency market players short-selling the NZD going into the budget and expecting a rating downgrade will be disappointed.

The NZD/USD exchange rate is expected to hold above 0.5000 over coming months, but not trade above 0.6000.

Second Half: Forwards on top, backs find wide open spaces

Further out into late 2009/early 2010 the following factors suggest an appreciation in the NZD to above 0.6000:

NZ economy coming out of recession on an export-led recovery in late 2009 – earlier than Australia and other countries,
NZ interest rates rising later in the year, ahead of all other countries, the interest rate differential to the US moving upwards,
Our commodity prices continuing to stabilise over coming months,
Net migration inflows increasing as fewer Kiwis leave and more ex-pats return,
The Balance of Payments current account deficit reducing over the next 12 months from 9% of GDP to 5% as profits of foreign owned companies here reduce substantially and the trade balance moves into surplus with weaker imports and stronger exports.

Excellent commentary from Roger Kerr, his thoughts are entirely in line with mine! - KT

NZD/JPY

2009-04-15T08:33:00.000+12:00

Bought 1m NZD sold Yen at 57.70.
I am starting to build a position again in the NZD/JPY.
Target is 60.00 initially. Will reassess if 56.00 is broken.

Is inflation coming?...probably...but not just yet.

2009-04-13T12:24:00.000+12:00

This is a brilliant article from The Economist 21 March 2009:

Today’s fattened central-bank balance-sheets evoke fears of inflation. Deflation is the bigger worry

Back in 2002 Ben Bernanke, then still a Federal Reserve governor, declared that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” That does not mean it is easy.

On March 18th America’s inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said “inflation could persist for a time” at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed’s announcement that it plans to purchase $300 billion in Treasury bonds and an additional $850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. It is not alone: around the world, central-bank balance-sheets have ballooned (see chart).

This is scary stuff to those who swear by Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon.” But the role of the money supply in creating inflation is less obvious than monetarism suggests.

The quantity theory of money holds that the money supply, multiplied by the rate at which it circulates (called velocity), equals nominal income. Nominal income in turn is the product of real output and prices. But does money supply directly boost nominal income, or does nominal income affect velocity and the demand for money? The mechanism is murky.

Central banks control the narrowest measure of the money supply, called the monetary base—typically, currency plus the reserves that commercial banks hold with the central bank. But the relationships between the monetary base, broader monetary aggregates and nominal income is highly unstable.

Central banks have mostly given up trying to target inflation via the money supply. Instead, they study the “output gap” between total demand and the economy’s potential to supply goods and services, determined by such things as the labour force and capital stock, as well as inflation expectations. When demand exceeds supply, inflation rises. When it falls short, inflation falls, and in the extreme becomes deflation. To influence demand, the central banks move a short-term interest rate up or down by adjusting the supply of bank reserves. Changes in the policy rate ripple out to all interest rates paid by borrowers.

The financial crisis has bunged up that transmission mechanism. Risk aversion, fear of default and depleted bank capital have caused private borrowing rates to deviate sharply from policy rates. Central banks have responded by expanding loans to financial institutions, purchasing private securities and buying government debt. They have financed this growth in their assets through increased liabilities such as commercial-bank reserves, swaps with central banks and other ways of printing money.

Is this monetarism? It depends on whom you ask. The Fed calls its policy “credit easing” to emphasise that, though its policy rate is almost zero, it is using different channels to ease credit and boost spending. Even its Treasury purchases are to “improve conditions in private credit markets”. That these actions expand the money supply is secondary. Similarly, the Bank of Japan is buying stocks and may make subordinated loans to banks to boost their capital and lending capacity; the money supply is not a consideration. The Bank of England, on the other hand, calls its purchases of government and private debt “quantitative easing” and explains it in monetarist terms. It expands investors’ holdings of money, encouraging them to shift to other assets, boosting wealth and investment. It acknowledges this may not work. Indeed, merely the news that it would purchase government debt drove down long-term interest rates, just as the Fed’s announcement did, an entirely conventional stimulus to demand. The rhetoric may be different but the policies are largely the same.

If the unprecedented monetary and fiscal stimulus works, output gaps will eventually close. Then central banks will have to reverse their unconventional policies and raise interest rates. They may hesitate in the face of political pressure or an explicit decision to err on the side of inflation rather than deflation. In that case, inflation will rise.

Go forth and multiply

But for the moment deflation is a bigger threat. If the Fed’s current policies fail, fiscal policy can be employed to boost demand. There, too, the Fed has a role: it could buy the bonds needed to finance tax cuts or government spending, thereby limiting the impact on long-term rates. Such debt monetisation evokes fears of hyperinflation. But inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply. Laurence Meyer of Macroeconomic Advisers, a consultancy, reckons America’s output gap will reach 9% of GDP by next year. To eliminate that he says the Fed would have to monetise more than $1 trillion of additional stimulus over two years, assuming standard multiplier effects.

The obstacles are primarily political, not economic. Finance ministers are averse to debt and central banks even more so to monetising it for fear of becoming a tool of the government. That aversion is usually healthy but not when deflation looms. The option should be on the table, as long as there are safeguards for the Fed’s independence. Frederic Mishkin, a former Fed governor now at Columbia University, says the important thing is that the Fed, not the Treasury, be the initiator of such purchases, and only after stating that it is consistent with price stability.

On March 15th Mr Bernanke said that the biggest risk facing the economy now is that “we don’t have the political will, we don’t have the commitment to solve this problem.” At least for the moment, it is not the Fed chief’s gumption that is lacking.

The real danger will be the lack of will, both political and financial to unwind the stimulus, both fiscal and monetary. Then we really will have inflation, possibly hyper inflation.

But that is next years, and perhaps even 2011's big story - KT

Thoughts on the Japanese yen and my trading style

2009-04-11T12:02:00.000+12:00

I posted this on 1 January this year, and it remains equally true today:

1 January 2008
OK, some thoughts on my trading generally and the USD/JPY.

I am long 3m USD against the Yen again, after taking positions at 103.10 and then taking counter trades (freeze trades see here) at 96.97, which I then closed out at 89.63.

Taking a profit of USD245,676.67 (@0.5800 NZD423,580.47) and leaving an unrealized loss of USD410,143.33, NZD703,504.85, at current rates of 90.70 and 0.5830. Net unrealised loss at present therefore NZD279,924.38.

But first some stuff on trading style.

I take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

But after more than 30 years in the markets I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced just the last years trading, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.

Anyway the Yen, and sorry if this is generalised, but I’m just not going to write a book or do detailed analysis, you can easily find that elsewhere.

Before….
In the past the Yen has generally traded strong when Japan is in recession because their exporters do so well. The golden rule has been that China and Japan make it, and the US consumer buys it. This drives demand for Yen.

They don’t import much during a recession because domestic demand is weak and so the trade flows favour a strong Yen because there are more buyers than sellers of Yen due to the trade surpluses. The capital markets tend to weaken the Yen as funds flow out, but even that has not been a given, as foreign funds have bought into Japan and these can offset the outflows on Uridashis, and the carry trades.

But over time the carry trades became huge and I was caught in the wave of repayments as these trades reversed, hence my “lock up” between 96.97 and 89.63.

Now….
Japan is in a recession, but the key difference is that so is the rest of the world, with the US consumer, the main proxy buyer of Yen absolutely stuffed, both from an asset (property and shares) and credit (ability to borrow) perspective.

I believe that the capital markets are stuffed as well, with raising funds in Yen and buying international assets much more difficult to do, and the major players, the investment banks, are either gone or shadows of their former selves. Japan Inc is the only player left.

I am comfortable at being long USD/JPY again because I think that with the US and the world slowing, the demand for Japanese (and Chinese, which sources stuff from Japan) goods globally will be abysmal and will take years to pick up to where they were, if they ever do.

If you scroll back some posts you will see the disastrous affects that the strong Yen is having on Japanese industry, with Japan now running trade deficits for the first time in many years, and production collapsing.

So with sellers of Yen outweighing buyers on the trade front, and the bulk of the carry trades repaid (buyers of Yen), what happens if funds full of cash step out from Japan again seeking a higher global yield?

The Yen must weaken.

Two more factors.

Firstly Japan Inc can buy stuff cheaply. With record lows in global shares and a strong Yen, they can buy market share at a fraction of the prices 12 months ago. Once they see that markets are stabilising (have a look at the TED spread and the VIX), then they will venture out of the fox hole again. Japan Inc are probably the only players who can actually borrow Yen in size now anyway.

Secondly the Bank of Japan. They are under huge pressure. To lower interest rates. To lend to their under pressure corporates. To weaken the Yen by intervention. To do some and all the above… and they are, with heavy pressure coming from the Finance Ministry.

The Yen will weaken in the months ahead, with my initial levels 96.00, 101.70 and then key at 104 enroute to the 120.00 area.

Then it will be overdone!

NZD/JPY Update

2009-04-06T23:32:00.000+12:00

Took profit on all NZD/JPY positions.
Long 3m NZD short JPY at average of 54.69, closed out at 59.92 for a gain of NZD261,849.13.

I think this run is a tad overdone. It will still go higher overall, but looking to bank the gains and then will re-enter trades on a pull back lower.

NZD/JPY

2009-04-02T17:15:00.000+13:00

Added a further 1m NZD/JPY position at 55.00, taking the total to 3m NZD long JPY short at average of 54.69.

AUD/USD

2009-03-31T21:49:00.000+13:00

Bought AUD1m sold USD today at 0.6850. This time I will hang on to it for a while!

Position Update

2009-03-26T19:30:00.000+13:00

Did not realise that it was January when I last posted this!!

Anyway, here are the trades I am active in:

USD/JPY
Long USD 3m short Yen at 103.10 average.

Current rate: 97.75

Current: loss

Comment:
Looking for a rally up through 100.00 in April.

Extra background
Short USD3m freeze trade taken against JPY at average of 96.97 closed at 89.63, generating gain of USD245,676.67, NZD423,580.47 (not counting carry interest).

NZD/JPY
Long NZD 2m short JPY at average of 54.54

Current rate 56.20

Current: Gain

Comment:
I am comfortable with carry trades again. Will add more if a solid break above 0.6000 is seen in the NZD/USD, 100.00 in the USD/JPY or if 55.00 is seen in the NZD/JPY.

EUR/USD

Square

Current rate 1.3550

Comment:
Still can’t make my mind up on EUR/USD. I could see it go either way, so best to stay out of it.

AUD/USD

Square

Current rate 0.6930

Cashed out:
Long AUD1m (0.6425) short USD at 0.6600, for a gain of USD17,500.00 @0.5300 NZD33,018.87 (not counting carry interest).

Comment:
I am still watching the CRB index closely, and if this starts to point higher, I will re-instate position in the AUD/USD. But needs to break up through 0.7100 and sustain it to be much more confident.

Also like the AUD/JPY carry trade, so will look to build a position if we see a dip to 66.00.

NZD/USD
Square

Current rate: 0.5750

Comment:
I cashed out my long NZD2m position taken at 0.5668 at par. Think the NZD looks a bit overdone but still want to buy on weakness. Will wait for the next dip. If we break above 0.6000 will have to get involved anyway.

Previous balance: NZD1,475,315.47
Plus AUD gains of NZD33,018.87

Total gains banked since August 2007:

NZD1,508,334.34

NZD/USD Update

2009-03-25T02:19:00.000+13:00

Closed out long 2m NZD at 0.5668 at break even at 0.5668. Will re-establish long lower down on the correction lower. Still prefer being long overall, and do not want to be short at all.

AUD/USD update

2009-03-18T21:21:00.000+13:00

Apologies for lack of activity recently but have been busy with conferences and client needs.

Have taken profit on long AUD position at 0.6600. Think that equities are overdone at these levels, and I'm still very wary about the current Euro strength.

Still like being long AUD/USD, but I think I can re-enter in the low 0.6400's again.

Will update on all positions tomorrow if I get time.

AUD/USD

2009-03-03T21:52:00.000+13:00

Following RBA decison today and break above 0.6400, decided to go long AUD1m against USD at 0.6425. Review levels 0.6250/6550.

Aussie govt high yields to limit bond indigestion

2009-02-27T14:03:00.000+13:00

24 Feb 2009 Reuters

By Cecile Lefort

SYDNEY, Feb 24 (Reuters) - Australia's state-backed debt could triple in the next three years as governments and banks go on a borrowing binge, but the country has significant advantages over major sovereign issuers such as the United States to offset the risk of debt indigestion.

As many governments around the world are piling up huge amounts of debt to fund efforts to counter the global downturn, analysts expect the same of Australia.They estimate outstanding debt will be as high as A$500 billion ($322 billion) by 2012, triple current levels. That would equal half the country's annual economic output, a lot for investors to swallow when governments globally are competing for their cash.

"There probably will be some issues with digestion," said Sally Auld, a strategist at JPMorgan in Sydney. But she highlighted mitigating factors such as increasing investor demand for debt that carries a sovereign label. "Triple A rated supply is going to go up but also demand for that sort of paper will go up as lots of funds who liked credit now switch back to more vanilla products," she said. But that could apply to other countries as well. As elsewhere, Australia has launched a substantial stimulus package of A$42 billion to fight a looming recession.

But unlike many other sovereign issuers, Australia is starting from a position of strength thanks to years of budget surpluses and a strong banking sector that avoided investing in the U.S. subprime mortgages that triggered the global financial crisis. Australia's high bond returns and a weakening currency are also major pluses. "In a relative sense, yields in Australia are still quite high, they will help attract offshore investors," said Auld. Australia's 10-year bonds yield 4.11 percent, much higher than similar bonds in countries with the same AAA rating. U.S. 10-year bonds, for example, yield 2.78 percent and British 10-year bonds yield 3.46 percent.

Last week, the governor of the Reserve Bank of Australia said policy rates could still fall, but they were unlikely to fall as much as in the United States or Britain, suggesting yields will maintain a premium over debt in those countries.

For federal or regional governments, now is also the right time to borrow because bond yields are at 50-year lows. Moreover, Australian bonds may seem cheap to many punters. The Australian dollar has fallen over a third since July against the U.S. dollar, and is expected to fall further.

NO DEBT
Another key advantage for Australia's ambitious borrowing plan is it is starting almost from scratch with near zero debt outstanding, so its bonds have a scarcity value. In fact, Australia's is starting from a rare net asset position of 4 percent of GDP, based on the end of the financial year 2007/08 on June 30.

Even with net debt expected to reach 5 percent of GDP by 2011/12, it will still be well below net debt of about 20 percent of GDP in Canada, about 40 percent in Europe, Britain and the United States and about 80 percent in Japan, UBS says.

By keeping its debt outstanding steady at around A$50 billion for the past five years, the central government made its debt scarce when compared with other AAA-rated nations. Its debt level is a fraction of the US$10 trillion in outstanding debt of the United States or the 128 billion pounds ($185.8 billion) in Britain. "At least in the initial phase, new CGS (Commonwealth Government Securities) issuance is likely to be in demand," said Westpac Banking Group's chief interest rate strategist, Damien McColough.

Australia's recent bond auctions received good demand with bid-to-cover ratios above four times. This is almost double the level of demand seen in U.S. Treasury auctions, although they tend to offer much greater amounts of debt than in Australia. This week alone, the U.S. will borrow $94 billion - three times the total in Australian government bonds outstanding.

FEDERAL VERSUS STATES
But the government is not the only borrower. The country's state governments are looking to suck up almost as much money, if not more, to fund their own infrastructure plans. And the central government has inadvertently put the states at a disadvantage by guaranteeing wholesale borrowing by the country's banks, effectively lending them its AAA rating. The guarantee has been vital for banks to secure funds. They have raised A$58 billion already this year.

But it has also introduced a new competitor for the states and one that pays lenders a more attractive return -- as much as 100 basis points (bps) more than semi-government bonds. And after Standard & Poor's cut the rating on Friday of Queensland Treasury Corp, the largest state authority borrower in Australia, the gap will only increase further. "If there is going to be an (indigestion) tipping point, it's going to occur in the states before it occurs in the government. There will be less investors for state-debt in the near term than with the federal government," said Westpac's McColough.

Commonwealth Bank of Australia's head of debt research, Adam Donaldson, predicts the total amount of AAA-rated bonds, sold by the Treasury, the six local semi-governments and banks that now benefit from a sovereign guarantee, will balloon to nearly A$500 billion by 2012, triple the level of June 2008. "One can't help but fret the market is going to have difficulty absorbing that issuance," Donaldson said.

I can sense a long AUD trade looming at some stage!! KT

NZD/USD

2009-02-23T21:40:00.000+13:00

Stop filled on Friday, so back to long NZD against the USD. Still not comfortable with this really, but if we see a move over 0.5300 will sell it again. Overall more comfortable being short than long, but need to get the right entry levels. Still think it is more of a 0.4500 to 0.5500 range now than 0.5000 to 0.6000.

There is plenty of bad news brewing for the NZD/USD. Still happy being long NZD/JPY however, and will top this up some more on dips now that the USD/JPY looks more perky.

Overall still happy with all my positions. Will update these later in the week.
Need to get Miss January posted before I run out of February!

NZD/USD Update

2009-02-19T20:55:00.000+13:00

Have placed a stop on 4m NZD/USD position at entry level of 0.5150.
This will return me to original position of NZD2m long at 0.5668.

Basically have concluded that there is so much bad news priced into the NZD/USD, not sure whether it can move much lower. But it can't rally much either in these markets so may yet go back to short at higher levels if seen.

Also like the way the Yen is weakening and a weaker Yen will help the AUD and the NZD higher.

We'll see.

Japanese Yen

2009-02-18T21:14:00.000+13:00

Continues to weaken, and the USD/JPY is looking perky and retesting the highs seen earlier this year.
Early days yet, but maybe the recovery in this rate is finally beginning.

This is good news, since I am long......but at much higher rates!!

So it begins - Recession fans economic nationalism in the UK

2009-02-18T21:08:00.000+13:00

GRIMSBY, England, Feb 18 (Reuters) - At the Job Centre in Grimsby, a hard-knock town on Britain's east coast, security guards man the doors.

Inside the government-run office, dozens of men and women, many in their teens or early 20s, crowd the waiting area, hunched over computers scanning the job listings.

Outside, others gather to smoke, drawing hard on their cigarettes before coming in to search for the latest opportunities, then drawing even harder on their way out when they have discovered once again that there is nothing going.

All the while, security staff watch for trouble.

"There's always a few problems in here," says Danny Brewitt, a 19-year-old who has been looking for construction work for weeks without success, thwarted by an economy that has dragged Grimsby and the rest of the country deep into recession.

Asked to put his finger on why there seems to be so little work available, Brewitt does not hesitate in replying.

"It's the foreigners," he says. "The Poles and other immigrants who come here will work for less."

He is quick to explain that he has no problem with Polish people, or immigrants in general, it is just the fact they will accept the minimum wage (about $8 an hour) for most work, whereas skilled or semi-skilled British workers expect more.

"They're undercutting the market," says Brewitt frankly.

Whether or not that is true -- and there is plenty of evidence that hundreds of thousands of migrant workers from new European Union states who have come to Britain in the past four years have added much more to the economy than they have taken away -- it highlights a worrying aspect of the downturn in Britain: an accelerating drift towards economic nationalism.

"BRITISH JOBS FOR BRITISH WORKERS"

Since the global financial crisis began in late 2007, British Prime Minister Gordon Brown, a former finance minister with a long economic track record, has cast himself as the man to lead Britain -- and even the world -- in uncertain times.

In that role he has wasted no opportunity to urge other states not to resort to protectionism to defend their economies, and will host a meeting of the 20 largest economies in London in April when that message is likely to be strongly reiterated.

It is comments he made before the crisis began, after taking office in June 2007, that have undermined his anti-protectionist credo and given British workers, traditional supporters of Brown's Labour Party, a reason to feel aggrieved.

Speaking to Labour supporters in September 2007, Brown promised "British jobs for British workers", a pledge that even at the time made the jaws of some Labour faithful drop.

Now the phrase is a rallying cry for British workers, who have held a series of protests at power plants countrywide in recent weeks, demonstrating against the employment of foreign contractors to work on critical energy sites.

Some of the most drawn-out demonstrations have been at the Total-owned Lindsey oil refinery near Grimsby, where British workers have criticised the employment of imported Italian and Portuguese labourers on the construction of a new plant.

"We've fought tooth and nail to get a decent deal for ourselves and now others are being brought in to do the work," said Paul McDowall, a disgruntled British worker, earlier this month, calling on Brown to respect his British jobs pledge.

"It's got nothing to do with racism. You have to protect our workers and their rights, otherwise what are you going to do?"

Under EU and British law, companies such as Total have the right to bring in foreign contractors to work in Britain.

The free movement of labour is a central tenet of the 27-member union. Under the rules, more Britons are working abroad than citizens of other EU members working in Britain.

As the economic downturn deepens, with Britain's gross domestic product forecast to contract by as much as 2.8 percent this year and unemployment edging above 6 percent, Brown and other Labour leaders are aware it will be a struggle to placate British workers while avoiding protectionism.

POLITICAL FALLOUT

There are already signs of political fallout, with the demonstrations at the Lindsey refinery spreading to half a dozen other power stations and nuclear plants nationwide.

The far-right British National Party (BNP), which is opposed to EU membership and wants limits on immigration, has seen its popularity surge in the East Midlands and areas near Grimsby, according to the party's regional coordinator Geoff Dickens.

In a local council election in the town of Boston, the BNP won the seat, defeating Labour, Conservative and Liberal Democrat opponents.

"We're seeing a steady increase in support across the whole area and have been for about a year," said Dickens. "It's a region where there's a certain amount of discontent and where earnings have traditionally never been that high."

On its website, the BNP has a banner at the top reading: "British Jobs for British Workers. When we say it, we mean it!"

In Grimsby, a grey and weather-beaten town of about 90,000 people where the unemployment rate in some areas is 20 percent, the darkening outlook is steadily taking its toll.

Grimsby was once one of the largest fishing ports in Britain, with a vast fish-packing and frozen-food industry, but its docks are run down and fish merchants are moving out.

Kevin Stansfield is a second-generation fish merchant who has invested heavily to try to stay in business. His son has followed him into the game even though Stansfield advised him against it. There was no other work to pursue.

Asked what he believes to be the biggest problem for jobs and industry in Grimsby, he and a colleague are quick to reply.

"It's the foreign workers," they say, almost in unison. "They'll work for next to nothing and that undercuts the market. Local labour just can't compete."

By Luke Baker.

Sadly, this will become a global trend - KT

Trade protectionism

2009-02-15T16:56:00.000+13:00

BEIJING, Feb 15 (Reuters) - China's official Xinhua news agency slammed the "Buy American" requirement of the U.S. economic stimulus package, saying in a commentary that trade protectionism is a "poison" that will harm poor countries.

The remarks are the first indication of the reaction in Beijing to the U.S. measure, which has been criticised by U.S. business groups that fear it could invite other countries to keep American goods out of their own stimulus programmes.

"History and economic theory show that in facing a financial crisis, trade protectionism is not a way out, but rather could become just the poison that worsens global economic hardships," Xinhua said in the overnight commentary, issued in response to the passing of the U.S. plan.

The U.S. Congress approved the $787 billion plan to jump-start the world's biggest economy on Friday, stipulating that public works and building projects funded by the stimulus use only U.S.-made goods, including iron and steel.

The plan does require that procurement be carried out in a manner consistent with U.S. obligations under multilateral and bilateral trade pacts -- potentially giving Canada, the European Union, Japan and some other countries the chance to benefit from the additional spending.

But countries such as China, India, Brazil and Russia, which are not members of an international government procurement agreement, would be shut out.

Xinhua cited the example of the Great Depression of the 1930s as showing that moves to protect domestic markets, and ensuing trade wars, could have only negative effects on the global economy.

"Trade protectionism will also cause catastrophic effects to some poor countries, making the current financial crisis one of a humanitarian crisis as well," it said.

This is all so true, and very sad to see the "land of the free" going this way - KT

Japanese Yen

2009-02-09T20:39:00.000+13:00

The Yen is looking weaker, both against the USD and the NZD

...Will it last the week?

NZD Update, maybe a "freeze" trade looming?

2009-02-06T12:49:00.000+13:00

After much debate with myself, I have left both the long position (NZD2m @0.5668) and the short position (NZD4m @0.5150) in place, still net short NZD2m.

Given the back pedaling from the ratings agencies this week, all is not as it seems. I suspect the government has been active behind the scenes, looking to stop a possible downgrade. It was the threat of a downgrade that caused the NZD/USD to drop from 0.6000 to 0.5300 in the first place. Then cutting interest rates by 1.5% pushed the NZD even lower to 0.5000.

If the NZD/USD develops a range between 0.5000 and 0.6000 in the weeks ahead there may be opportunities both sides of the trade.

So I may buy back NZD2m in the low 0.5000 area and move to net square then trade both sides from there.

Not sure yet, but leaving both trades open gives me some options........

NZD Update

2009-01-29T23:01:00.000+13:00

Cut the long NZD position.

Sold NZD4m at 0.5150, thus taking the long position out and taking the hit and turning it into a NZD2m short position.

I don't like the NZD, just too much bad news and offshore investors taking fright. Export interest has not assisted the NZD, and if it can't rally in January, it can't rally at all.

I have a target now of 0.4500.

Will review if we see a break above 0.5500.

Position update

2009-01-28T19:40:00.000+13:00

Still in all open positions...none of them making any money.....yet!

At least vols continue to drop. As one trader said markets today are "mountains up and mountains down"

Oh well, patience is meant to be a virtue!

NZD/USD update

2009-01-20T16:54:00.000+13:00

Getting worried about the EUR/USD slipping lower, with 1.3000 a big level, and looking to test lower. This may drag the NZD/USD and the AUD/USD lower. My position in the NZD/USD is not looking good, and I am unhappy with the reaction to the S&P comments last week.

So may cut position out if we move below 0.5200 in next few days.

The NZD does not look like a winner now, and when I feel this way, it is usually best to cut and run.

We'll see......

More in-house financing next year, say CFOs at manufacturers

2009-01-08T12:42:00.000+13:00

This is interesting data - KT

Recession? What recession?

Half of the CFOs at manufacturing companies recently surveyed said they expect their company’s revenues to go up in 2009, while nearly four in ten said they were predicting increased earnings.

Remarkably, over half of the finance chiefs said that the current state of the economy will have no impact on their growth plans. In fact, nearly seven in ten CFOs said they expect to boost the price of their products in 2009. That’s a fair jump from the 56% predicting price hikes last year.

The survey, conducted by Granite Research Consulting for Bank of America Business Capital, elicited responses from some 600 finance chiefs at mid-size and large manufacturers.

“Overall, these results reflect the severity of the current economic downturn and the uncertainty about how long it will take to work our way out of it,” said Mickey Levy, chief economist for Bank of America. “But, CFOs are taking necessary steps such as trimming inventories and operating costs in order to remain competitive, as they try to weather the storm.”

Indeed, only about a fifth of CFOs indicated that their capital expenditures for next year will be higher. Last year, about a third expected an increase in capex.

Meanwhile, 40% of finance chiefs expect to spend less or refrain from making capital expenditures altogether in 2009.

Nevertheless, about 80% of the CFOs surveyed said their company’s borrowing needs will either increase or stay about the same in 2009. While half of the finance chiefs indicated that credit availability has remained steady over the past twelve months, about a third said their lender has restricted credit availability. Last year, only 10% said they were expecting a shrinking of available credit.

And while nearly 60% of the respondents are considering financings next year, over half plan to use internal means to raise the cash. The most likely type of capital-raisings? Cash flow financing, asset-based financing, and leasing.

Given that response, it’s not overly surprising that CFOs said cash management (63%) and letters of credit (59%) remain the most commonly purchased services from banks.

John Goff, Financial Week, 11 December 2008.

Position update

2009-01-02T21:10:00.000+13:00

Here are the trades I am active in:

USD/JPY
Long USD 3m short Yen at 103.10 average. (reopened again at 89.63 after freezing at 96.97)

Current rate: 91.10

Current: loss

Comment:
See today’s post on Yen thoughts.

Short USD3m against JPY taken at average of 96.97 closed at 89.63, generating gain of USD245,676.67, NZD423,580.47 (not counting carry interest).

NZD/JPY
Long NZD 2m short JPY at average of 54.54
Current rate 52.70
Current: loss

Comment:
I am increasingly comfortable with NZD/JPY carry trades. Will add more if a solid break above 0.6000 is seen in the NZD/USD.
Review at 41.87, being long term lows.

EUR/USD
Square
Current rate 1.3844
Comment:
I can’t make my mind up on EUR/USD. I could see it go either way, so best to stay out of it.

Anyway I have enough up elsewhere to cope with!

AUD/USD
Square
Current rate 0.6930
Comment:
I am watching the CRB index closely, and if this starts to point higher, I will add a position in the AUD/USD. But needs to break up through 0.7100 and sustain it to be more confident.

NZD/USD
Long NZD2m short USD at average of 0.5668.

Current rate:0.5780

Current: gain

Comment:
I have posted before my reasons for the NZD/USD testing higher over the summer.
See here.

Previous balance: NZD1,051,735.00
Plus JPY gains of NZD423,580.47 above

Total gains banked since August 2007:

NZD1,475,315.47

Thoughts on trading and the Yen.

2009-01-02T16:02:00.000+13:00

OK, some thoughts on my trading generally and the USD/JPY.

I am long 3m USD against the Yen again, after taking positions at 103.10 and then taking counter trades (freeze trades see here) at 96.97, which I then closed out at 89.63.

Taking a profit of USD245,676.67 (@0.5800 NZD423,580.47) and leaving an unrealized loss of USD410,143.33, NZD703,504.85, at current rates of 90.70 and 0.5830. Net unrealised loss at present therefore NZD279,924.38.

But first some stuff on trading style.

I take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

But after more than 30 years in the markets I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced just the last years trading, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.

Anyway the Yen, and sorry if this is generalised, but I’m just not going to write a book or do detailed analysis, you can easily find that elsewhere.

Before….
In the past the Yen has generally traded strong when Japan is in recession because their exporters do so well. The golden rule has been that China and Japan make it, and the US consumer buys it. This drives demand for Yen.

They don’t import much during a recession because domestic demand is weak and so the trade flows favour a strong Yen because there are more buyers than sellers of Yen due to the trade surpluses. The capital markets tend to weaken the Yen as funds flow out, but even that has not been a given, as foreign funds have bought into Japan and these can offset the outflows on Uridashis, and the carry trades.

But over time the carry trades became huge and I was caught in the wave of repayments as these trades reversed, hence my “lock up” between 96.97 and 89.63.

Now….
Japan is in a recession, but the key difference is that so is the rest of the world, with the US consumer, the main proxy buyer of Yen absolutely stuffed, both from an asset (property and shares) and credit (ability to borrow) perspective.

I believe that the capital markets are stuffed as well, with raising funds in Yen and buying international assets much more difficult to do, and the major players, the investment banks, are either gone or shadows of their former selves. Japan Inc is the only player left.

I am comfortable at being long USD/JPY again because I think that with the US and the world slowing, the demand for Japanese (and Chinese, which sources stuff from Japan) goods globally will be abysmal and will take years to pick up to where they were, if they ever do.

If you scroll back some posts you will see the disastrous affects that the strong Yen is having on Japanese industry, with Japan now running trade deficits for the first time in many years, and production collapsing.

So with sellers of Yen outweighing buyers on the trade front, and the bulk of the carry trades repaid (buyers of Yen), what happens if funds full of cash step out from Japan again seeking a higher global yield?

The Yen must weaken.

Two more factors.

Firstly Japan Inc can buy stuff cheaply. With record lows in global shares and a strong Yen, they can buy market share at a fraction of the prices 12 months ago. Once they see that markets are stabilising (have a look at the TED spread and the VIX), then they will venture out of the fox hole again. Japan Inc are probably the only players who can actually borrow Yen in size now anyway.

Secondly the Bank of Japan. They are under huge pressure. To lower interest rates. To lend to their under pressure corporates. To weaken the Yen by intervention. To do some and all the above… and they are, with heavy pressure coming from the Finance Ministry.

The Yen will weaken in the months ahead, with my initial levels 96.00, 101.70 and then key at 104 enroute to the 120.00 area.

Then it will be overdone!

Japanese exports collapse

2008-12-22T19:42:00.000+13:00

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

2008-12-22T18:53:00.000+13:00

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

2008-12-19T21:49:00.000+13:00

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

2008-12-19T15:14:00.000+13:00

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

2008-12-13T14:15:00.000+13:00

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

2008-12-13T10:17:00.000+13:00

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

2008-12-11T16:26:00.000+13:00

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

2008-12-08T21:26:00.000+13:00

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

2008-12-08T14:57:00.000+13:00

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.

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.

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!!

2008-12-08T11:45:00.000+13:00

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

2008-12-03T12:07:00.001+13:00

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

2008-12-02T16:41:00.000+13:00

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

2008-11-27T12:08:00.000+13:00

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.