Forex market have become incredibly complex for many traders not keeping abreast of the fundamentals.
WEEKLY- Fundamentals Matter
21:00 GMT- Jan 29 (global-view.com) Forex market have become incredibly complex for many traders not keeping abreast of the fundamentals. The fundamentals are not simply economic statistics. They also encompass capital flows, psychology and political factors. Economic trends tend to change very slowly so they really are more a background factor than something in the foreground.
Broad economic patterns remain the same with the U.S. and U.K. on slow recovery paths, Europe has been rebounding and Asia (ex-Japan) has been doing very well. Japan remains a basket case while China is at the point of taking steps to contain bubbles in sectors of its economy. Those policy tightening actions by China have been impacting overseas markets. The most immediate impact has been sharp declines in Asian equity markets and pressure on the commodity currencies recently.
One complicating political factor all month has been severe budget problems within the Eurozone. The focus of a lot of worry has been Greece with many finding not only its budget deficit a major worry, but also its economic statistics are seen as questionable. There are also worries that some of the other smaller economies in the Eurozone, the PIGS (Portugal, Ireland, Greece and Spain) could be at risk as well. The EU has been taking a hard public stance vs. Greece in the press, but will help it as needed in the end. This issue has been weighed on the EUR over the past several weeks and falls in the realm of political factors.
Another political factor that should be a USD negative has been the skeptical trader response to the inconsistent economic agenda of President Obama. On Wednesday, the President said that his top priority is job creation in the U.S., but a good part of his program includes tax hikes that will adversely impact job growth. The markets are now saying that flowery rhetoric will no longer cut it. The Congress and administration has already frittered away a year and massive amounts of funds with its far-left agenda, outrageous pork barrel spending and brainless populism. Politicians will have to get serious about credible policies that will work immediately to create jobs or see themselves out of office in the fall. Financial markets will be only impressed by concrete actions with a high probability of success.
Related to this, Fed Chairman Bernanke was reconfirmed by the Senate overwhelmingly just shy of an end of January deadline. A rejection of his renomination would have been disastrous for U.S. financial markets and was never a serious political threat. The last minute suspense about his renomination by the Senate turned out to be just a political game.
Capital flows have been key factors this week as well. Sometimes they are hard to track because for obvious reasons they are not announced. There has been chatter of capital reflows into the JPY related to structural changes in the Japanese financial system. The GBP was said to be in demand this week also due to flows related to the Kraft take-over of Cadbury. Clearly there have been flows related to the worries about Greece out of the Eur. Late in the day Friday, the SNB conducted surprise intervention in the key EURCHF cross.
John M. Bland is an author and co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelors degree in International Economics from Berkeley .
Cautious Pre-Weekend Trade
11:00 GMT- Jan 29 (global-view.com) The focus heading into the weekend appears to be the Greek debt crisis. Pressure within the EU is on the Greek government to solve its own budget crisis, but there is no way that Eurozone will not bail it out in the end if absolutely required. Thus the political pressure on the government is intense and the markets must protect themselves against worst case scenarios heading into the weekend. These pressures continue to be a weight on the EUR.
We have see absolutely no signs of concerns from the ECB about the weakness of the EURUSD. In fact ECB President Trichet Thursday and today has been talking up the USD citing statements by U.S. officials about the desirability of a strong USD. With the Eurozone economy soft and no inflationary pressures present, monetary officials in Europe certainly welcome any economic stimulus that would result from a strong USD.
On the official U.S. side, there seems to be little focus on USD strength, although increased export demand would certainly be welcomed by U.S. officials increasingly desperate to encourage jobs growth. The focus today is on the 4Q10 GDP report. A strong annualized figure of about 4.5% is expected, but the markets are skeptical about the sustainability of such a reading. We would not be surprised to see an intensification of G20 pressure on China to allow the CNY to strengthen.
Far East equity markets had another difficult session today as investors worry about ongoing Chinese efforts to rein in growth. European sand North American bourses have decoupled from Far East equity markets recently. Today sees Canadian PPI and GDP. In the U.S., major highlights will be the 4Q09 GDP estimate, Chicago PMI and the University of Michigan Survey. See ECONOMIC CALENDAR for a complete list of upcoming forex market events and the forex forum for up-to-date market developments and technical trading ideas.