Why the Yen rose despite calamity

(As featured on My Paper on 15 March)

Last Friday, Mother Nature dealt Japan a cruel blow in the form of an 9-magnitude earthquake along the northeast region of Sendai.

The earthquake triggered a massive 10m-high tsunami which has added to the colossal damage. Now the country is facing the threat of a possible meltdown of several nuclear plants.

As Nobel prize-winning economist Nouriel Roubini has put it, the disaster came at the “worst-time” as Japan struggles to reduce its massive debt.

However, in the first day of trading after the disaster, the country’s currency actually strengthened to 80.60 yes ($1.2464) against the US dollar, less than 100 pips from its all-time low of 79.75 recorded in 1995.

Amidst the extensive damage, power blackouts, nuclear meltdowns and a predicted death-toll exceeding 10,000, the real question is, why is the Yen strengthening even though the catastrophe happened in Japan?

There are 2 reasons to explain the Yen’s strengthening:

  • Low Interest Rate
  • Fund Repatriation

Low Interest Rate

With one of the world’s lowest interest rates at 0.1%, the Yen becomes a popular funding currency for traders who want to take on risk. Traders borrow the Yen and buy other assets which give a better yield, for example, the Australian dollar, which has a current interest rate of 4.75%.

However, when crisis hits, fear and panic set in, causing traders to unwind those positions and bυу back the Yen they sold. This causes the currency to strengthen.

Fund Repatriation

The Yen tends to spike more during the periods when funds are sent back to Japan. This happens in September, which is known as the fiscal half year-end, as well as in March, where 31st March is known as the fiscal year-end.

Against the risk currencies, this phenomenon is seen more against the Australian dollar, with the AUD/JPY exchange rate falling 7 out of the last 10 years in March.

However, as an export-oriented country, Japan thrives on a weak Yen. Predictably, the Bank of Japan (BOJ) yesterday poured a record 15 trillion yen ($183 billion) into the money markets to ensure financial stability.

As a form of comparison, in the days after the Kobe earthquake, the BOJ boosted liquidity injections and pumped 500 billion yen in excess funds to the money markets. This alone caused the Yen to surge about 21% in the three months after the earthquake.

With more aggressive fiscal and monetary policies mapped out by the Japanese authorities this time round, I do not see the Yen strengthening too much in the weeks ahead.

Trade Call

Sell EUD/USD at 1.3890

The Euro is experiencing high volatility in recent weeks due to the struggle between growth and inflation.

On one hand, the European Central Bank might raise rates to counter inflation. On the other hand, the region is dogged by sovereign debt issues once again.

Notice the gap on the chart when markets opened this week. However, prices did not manage to breach 1.3980. This is a clue for a possible reversal.

I am still bearish on the Euro, and we will go short once prices close below the gap. Stop loss is placed at 1.3945, and we will have a favourable risk/reward ratio of 1:1.5 on this trade.

Entry Price = 1.3890
Stop Loss = 1.3945
Profit Target = 1.3805

 

Why the Kiwi attracts so much interest

mypaper 20110308 Why the Kiwi attracts so much interest

(As featured in my paper on 8 March 2011. Click here to enlarge.)

It sometimes baffles forex traders to discover that the New Zealand dollar, or the Kiwi for short, is considered a major currency in the trading world.

Why is that so, some wonder, especially when we consider the country’s small manufacturing and technology sectors, and an economy that focuses more on tourism and agriculture.

In fact, with an annual GDP of about US$135 billion (S$171 billion), it really is a dwarf when compared to the powerhouse economies of the United States, Europe, China and its closest counterpart, Australia.

The answer is carry trade. With an interest rate of 3 per cent – currently the second-highest in the world, right behind Australia’s 4.75 per cent – New Zealand attracts traders and investors to the South Pacific nation’s higher-yielding assets.

However, the Kiwi has suffered markedly because of the earthquake in Christchurch, falling over 200 pips against the US dollar since the tragedy struck on Feb 22.

New Zealand’s Treasury Department said that costs from the earthquake may be triple that of an earlier estimate of NZ$5 billion (S$4.7 billion). Additionally, the country’s economic growth this year is expected to be 1.5 percentage points lower because of the disaster.

This week, the Kiwi also reached its weakest level in 18 years against its Australian counterpart as New Zealand Prime Minister John Key reiterated his support for a cut in the benchmark interest rate.

Forex traders are expecting Reserve Bank governor Alan Bollard to drop the official cash rate by 25 basis points, from 3 per cent to 2.75 per cent, when he reviews monetary policy on Thursday.

TOP NEWS THIS WEEK

New Zealand Official Cash Rate on Thursday. I expect rates to be lowered to 2.75 per cent. The British Official Bank Rate on Thursday. I expect rates to remain at 0.5 per cent.

TRADE CALL

Sell NZD/USD at 0.7349 The NZD/USD pair has been on a nice downtrend since the start of last month. We will trade with the downward momentum if a rate cut occurs on Thursday.

We will enter a sell order once the price reaches 0.7349. Stop loss is placed at the previous high, and we will have two profits points on this trade.

Entry Price = 0.7349
Stop Loss = 0.7389
1st Profit = 0.7309
2nd Profit = 0.7269

 

CAD and CHF rise on Libyan effect

mypaper 20110301 CAD and CHF rise on Libyan effect

(As featured in my paper on 1 March 2011)

Movements in forex markets are triggered by market sentiment. Currencies like AUD, NZD and CAD (the Canadian dollar) do well when there is a good dose of risk appetite in the markets.

Conversely, currencies like the USD, the JPY (yen) and the CHF (Swiss franc) rally when the markets panic.

In this article, we will discuss why two currencies, the CAD and the CHF, both with seemingly opposite characteristics, are hitting new highs in forex markets.

The hot story for the past two weeks has been the civil unrest in Libya, the world’s eighth-largest oil producer.

Increasing tensions and violence in Libya could turn off oil production, which would have global repercussions. Primarily, this would drive up energy costs and significantly slow down the nascent recovery worldwide.

In a sign of things to come, oil prices rose above US$100 (S$127) a barrel last week, the first time since October 2008. Even the price of kerosene edged upwards in January.

The conflict in Libya puts forth two scenarios:

– Higher demand for oil from other oil-producing countries.
– Uncertainty in global recovery.

Among the Group of Seven nations, Canada is the biggest beneficiary of higher oil demand. As the world’s sixth-largest oil-producing country, its currency tends to strengthen in tandem with higher oil prices.

Canada remains the largest single source of oil imports into the United States. This is the reason why the CAD strengthened to a three-year high against the USD last week.

On the other hand, the CHF tends to strengthen whenever there is uncertainty, fear and panic in the forex markets. Although Switzerland is not an oil-producing country, its strong growth and virtually zero inflation seal its place as one of the world’s preferred safe havens in times of political turmoil.

This is the reason why the CHF strengthened to an all-time high against the USD last week.

TOP NEWS THIS WEEK

Australia Cash Rate. Tomorrow. Expect rates to remain at 4.75 per cent.

Canada Overnight Rate. Tomorrow. Expect rates to remain at 1 per cent.

Europe Minimum Bid Rate. Thursday. Expect rates to remain at 1 per cent.

US Non-Farm Payroll. Friday. I expect figures to come in at 155,000 (previous figures were 36,000).

TRADE CALL

Sell USD/CHF at 0.9315

The ongoing tensions in Libya will continue to influence trading. In a repeat of last week’s trade, we will continue to trade along the trend.

We will enter a sell order once the price reaches the previous high of 0.9315. Stop loss is placed 40 pips above the entry. We will have one target on this trade, with a favourable risk-to-reward ratio of 1:1.5.

Entry Price = 0.9315
Stop Loss = 0.9355
Profit = 0.9255

 

“Currency Wars” and 6 Ways to Profit from It

Currency Wars Currency Wars and 6 Ways to Profit from It

(As featured in Your Trading Edge on Jan/Feb 2011 issue. Click here to read pdf.)

Mario Singh explores the global forex outlook and what the seven trading milestones of 2010 mean for currency traders in 2011.

The year 2010 was eventful for the currency market.

Some currency pairs broke new highs while others found new lows. Understanding some major milestones from 2010 will help us to be better prepared for the currency market in 2011.

Milestone #1: Greece receives a bailout package

On 15 May 2010 Greece received the first tranche of a 110 billion euro bailout package jointly provided by the European Union and the International Monetary Fund.

In return for the loan, the Greek cabinet vowed austerity measures aimed at achieving budget cuts of 30 billion euros in the next three years and reducing Greece’s deficit from the current 13.6 per cent of Gross Domestic Product (GDP) to less than three per cent of GDP by 2014.

In the aftermath of the bailout, the European single currency fell to its lowest level against the dollar since 2006, reaching 1.1876 on 6 June 2010.

Milestone #2: China de-pegs from the US dollar

On 21 June 2010 China announced that it would de-peg its currency from the dollar; a first after 23 months of pegging.

It was a step in the right direction because it was largely a vote of confidence in global economic recovery. The initial impact caused a slight appreciation in the yuan, which would have hurt Chinese exporters.

However, on the international front, the Chinese government felt that global consumers were back to their spending ways and there wasn’t a need to protect their exporters. On the domestic front, the strong yuan made foreign goods cheaper for domestic consumers and would help to curb inflation within the country; a signal that the Chinese government was looking to stimulate domestic demand.

Milestone #3: Bank of Japan intervenes for the first time in six years

On 15 September 2010 the Bank of Japan (BoJ) sold about $20 billion worth of yen. This was the first time in six years that the BoJ had intervened in the currency markets in an attempt to weaken the yen.

Like the intervention that took place in March 2004, the effect was short-lived, with the 300-pip blast-off in the USD/JPY pair negated after about two weeks.

The intervention would have delivered more firepower had it been a coordinated effort between the BoJ, the Federal Reserve and the European Central Bank (ECB). However, for the Fed and the ECB to ‘help’ Japan and sell the yen, they would effectively have had to buy their own currencies in the process. The Fed and the ECB were opposed to doing that because buying their own currencies would inherently cause the dollar and the euro to appreciate. That would run counter to their plans to maintain a weak currency to pull their economies out of the slowdown.

This led to the solo effort by Japan, which didn’t meet its objective of weakening the yen.

Milestone #4: USD and EUR hit historic lows against CHF

On 8 September 2010, EUR/CHF hit an all-time low of 1.2764. In similar fashion, just one month later, on 14 October 2010, the USD/ CHF hit an all-time low of 0.9462.

The massive demand for the Swiss franc was caused by the general wave of fear and panic among traders and investors. Unconvinced of global economic recovery, they fled to safe havens.

Two main themes dominated the move:

1) Europe’s woes with sovereign debt issues. As well as Greece, Ireland seemed to be teetering on the brink of spiraling debt. In November 2010, interest rates soared on Irish government bonds.

The gap between Irish and German borrowing costs also shot up to record highs. To make matters worse, borrowing costs in Spain and Portugal also spiked.

2) The Fed’s impending decision on a further round of quantitative easing.Talk was rife in the financial markets that the recovery of the American economy remained sluggish. Unemployment was at stubbornly high levels, just shy of 10 per cent. Many economists were predicting a fresh round of asset purchases by the Fed, valued at between USD500 billion and USD800 billion.

Milestone #5: Aussie reaches parity for the first time

The star of the currency show in 2010, the Aussie hit parity against the US dollar for the first time in history on 15 October 2010. The strength of the Aussie hinges on two factors:

1) Continued weakness and low interest rate for the US dollar. Australia has the highest interest rates (4.75%) among the G20 countries, which makes the carry trade very attractive for traders and investors.

2) China’s insatiable appetite for raw materials. Australia has been lapping up China’s demand for raw materials, namely gold, iron and coal. This has caused the currency pair AUD/USD to peak. In fact, for the second half of 2010, we saw how the AUD/USD moved in tandem with China’s trade figures.

Milestone #6: Fed launches second round of QE

On 3 November 2010, the Fed announced a second round of monetary stimulus, dubbed QE2, in a bid to jump-start the sluggish recovery of the US economy.

It will buy long-term Treasuries worth $600 billion until June 2011, and reinvest $250 billion to $300 billion more in Treasuries with the proceeds of its earlier investments.

The bond purchases will total up to $900 billion and will be completed by September 2011. This is the second time the Fed has had to step in and revive the economy through a round of asset purchases. From November 2008 to March 2010, the Fed launched its first Quantitative Easing Program, buying $1.7 trillion in Treasuries and securities.

Milestone #7: Gold and silver at historic highs

On 9 November 2010, silver hit a record high of $29 per ounce. On the same day, gold was seen at a price of $1424 per ounce. These prices were the highest ever reached by both precious metals.

This occurred just one week after the Fed announced its second round of asset purchases, causing the dollar to plunge. Widely seen as a natural hedge against the falling value of the dollar, gold and silver prices took off after both traders and investors hedged their bets and
found solace in commodities.

G20 Meeting

The G20 meeting, held in Seoul in November 2010, was a bit of a letdown. The term ‘Currency War’ was used frequently by many nations leading up to the meeting, but concrete details of how countries would prevent currency devaluations and cope with trading imbalances were
sorely lacking.

The highlight of the meeting was probably when US President Obama called the Chinese currency “undervalued”, though it was something traders knew all along.

Looking forward to 2011

‘Currency Wars’ was the major theme for 2010, and I expect the sequel to be played out in 2011. With the Fed’s second round of QE announced in November 2010, the possibility of higher interest rates for the United States in 2011 has all but vanished.

With low yields in the United States and sovereign debt problems plaguing peripheral countries in Europe, it is not difficult to see that the biggest beneficiaries of money flows in 2011 will be in the Asia- Pacific region.

China, in particular, will do very well. With its incessant demand for raw materials and its focus on building domestic growth, China will be the star of the growth story in 2011. Additionally, its strategic downsizing of US debt in the later part of 2010 sheds light on its emergence as a true global superpower.

2011 forecasts

Here are my thoughts for the majors in 2011.

EUR/USD
With the PIGS (Portugal, Ireland, Greece, Spain) coming into the currency spotlight for all the wrong reasons, I expect the euro to remain depressed for much of 2011. Its ‘web of debt’ will always be in the way of organic growth. Additionally, it is no secret that a low euro would help the region to increase its exports.
Year-end call: EUR/USD at 1.31

USD/JPY
With a failed intervention on 15 September 2010, Japan knows that its economy is heavily reliant on the progress of the American economy. However, with high unemployment and low spending, the US economy is badly wounded. Hence, the Japanese government and Japanese exporters have started to get used to a stronger yen. Many exporters have re-adjusted their hedging positions to factor in a stronger yen for 2011.
Year-end call: USD/JPY at 85

GBP/USD
Called the ‘whipping boy’ in 2010, Sterling remained fairly resilient towards the end of last year. However, dogged by conflicting signs of economic recovery and inflation, the Bank of England reported that higher costs of living were certain and inflation will remain above its two-per-cent target until the end of 2011.
Year-end call: GBP/USD at 1.45

USD/CHF
Influenced by its label as a safe haven, many traders and investors fled to the Swiss franc during bouts of fear and panic in 2010. Although Switzerland is an export-oriented country, the Swiss National Bank has forsaken currency intervention and become used to its strong currency.
Year-end call: USD/CHF at 0.95

USD/CAD
On the domestic front, Canada is expected to do well in 2011. With oil as its biggest export and the possibility of more rate hikes, the Canadian dollar should strengthen over the next 12 months. However, bearing in mind that close to 80 per cent of Canada’s exports land in the United States, its gains will be somewhat muted, with weak US demand.
Year-end call: USD/CAD at 0.98

AUD/USD
Winning the title for favorite carry trade, the Aussie racked up an impressive 15 per cent gain over the dollar in the latter half of 2010. Piercing parity for the first time in history in October 2010, the Aussie is poised to extend its gains in 2011.

Reserve Bank of Australia Governor Glenn Stevens has dropped clues that rate hikes will continue well into 2011; and with China’s huge appetite for raw materials, the Australian economy will be red-hot.
Year-end call: AUD/USD at 1.06

In summary, some currencies are in for a bumpy ride, while others will continue to extend their gains.

One thing is certain: the Asia-Pacific region is poised to be the recipient of hot money flows in 2011, which will see its currencies rising.

Let’s trade forex!

 

The Sting of Global Inflation

mypaper 20110222b The Sting of Global Inflation

(As featured in my paper on 22 February 2011. Click here to enlarge.)

Over the weekend, finance chiefs from the Group of 20 (G-20) nations convened for the first time this year and discussed issues ranging from trade imbalances to currency reserves. 

A meeting of this magnitude is closely watched by the forex market, as the collective clout of its members accounts for about 85 per cent of the global economy. 

High on the agenda was devising a “list of indicators” to identify and reduce trade imbalances among the nations. After all, failure to recognise its importance led to the deepest global recession in seven decades.

As officials endeavoured to craft an early-warning system for trade imbalances, the tone of the meeting took an unexpected twist to tackle a more pressing issue: global inflation.  The sting of global inflation has already led the G 20’s up-and-coming powers, China, Brazil, India, Indonesia and South Korea, to raise borrowing costs this year.

The biggest economies were not spared either. In fact, last month alone, China’s inflation accelerated to 4.9 per cent, exceeding the government’s 2011 target for a fourth month; US year-on-year inflation reached 1.6 per cent, the highest in nine months; Europe’s inflation rate of 2.4 per cent was the fastest since October 2008, higher than the European Central Bank’s ceiling of 2 per cent.

Additionally, China also increased its reserve requirement ratio for the second time this year, and the eighth time in 12 months. Having only raised interest rates on Feb 8, the move reflected China’s urgency in taming its roaring inflation. Interestingly, I noted that China’s move was carefully timed, as it came one day before the G-20 meeting. This was done possibly to deflect on-going opinions that the yuan is undervalued.

Higher reserve standards are not “the only method that we’ll use to battle inflation, it’s about using all means, including rates and currency”, People’s Bank of China governor Zhou Xiaochuan said in an interview in Paris last Friday. “One method doesn’t exclude the other.”

Unimpressed with China’s efforts thus far, US Treasury Secretary Timothy Geithner sang the same old song of China’s currency being “substantially undervalued” during the G-20 meeting.

TOP NEWS THIS WEEK

US unemployment claims. Thursday.

Expect figures to come in at 400,000 (previous number was 410,00).

TRADE CALL

Sell USD/CHF at 0.9523

On the hourly chart, USD/CHF is moving in a downtrend, hitting a three-week low of 0.9432. I expect the downtrend to continue after prices retrace momentarily. We will enter a sell order once the price reaches the upper level of the range, and exit before it falls to the support level of 0.9432. We will have one target on this trade, and stop loss is calculated based on a 1:1 risk/reward ratio.

Entry Price = 0.9523
Stop Loss = 0.9583
Profit = 0.9463

 


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