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Last week, I pointed to the challenges facing Switzerland and Japan’s currencies. As for the yen, I said that nothing short of actual intervention would relieve the pressure on its exporters. I also said that I expected it to happen.

And it did.

Japan intervened this week to stop the ever-rising yen, its biggest one-day intervention on record. But many in the foreign exchange market believe the effort will fail — and ultimately a strong yen will win out.

I disagree.

First, I can’t think of one fundamental argument that would support the case for a stronger yen.

Second, Japan has every incentive to keep intervening.

Remember, this is a country attempting to weaken its currency, not save it from a death spiral of weakness.

Given that fact, unilateral currency market intervention by Japan works in their favor in several ways …

It softens the currency burden for its all-important exporters.

And it requires Japan to print more and more yen, ultimately easing monetary policy even further. Indeed, a move needed in Japan’s fight against another round of deflation.

So what do they do with all of the freshly printed yen?

They sell it and buy U.S. dollars. That means they stockpile currency reserves … an area commonly perceived to be a gauge of a country’s financial wealth and stability.

Perhaps even more favorable: It’s a politically-positive move. For a country that’s had six prime ministers in the past five years — nearly seven in the wake of last week’s elections — stepping up to the plate to weaken the yen is a political win.

Why Japan’s Intervention Will Work

Because of the incentives I discussed above, I expect Japan’s efforts to persist and pay off. But when you add in four more pieces of supportive evidence, the case is even stronger that we may have seen a long-term top in the yen.

Supportive Evidence A: The yen is way overvalued

Below is the OECD’s measure of the most overvalued currencies based on Purchasing Price Parity (PPP). As you can see the yen is among the most overvalued currencies in the world, more than 25 percent too rich against the dollar.

Supportive Evidence B: The long yen trade is overcrowded

The chart below shows the massive build up of long positions in the yen, a dynamic that typically doesn’t end well for those on the side of an extremely overcrowded position once the selling begins.

Source: Bloomberg

Supportive Evidence C: History of successful intervention

The only other time the yen was this strong against the dollar was in 1995. The yen traded as high as 79.75 against the dollar before the Bank of Japan stepped in, sending it 46 percent lower over the next three years … and in the process marking the all-time high for the yen.

Supportive Evidence D: Debt, debt and more debt

Japan’s debt load is twice the size of its economy. The Bank of International Settlements projects that by 2040 it will reach 400 percent of GDP.

As I detailed in my May 15 Money and Markets column, Japan: The Sleeping Sovereign Debt Giant, Japan faces big structural shifts that will likely make it difficult to internally finance its debt much longer. It will soon have to start competing for international capital to fund its debt. And given its non-competitive interest rates, that raises the specter of default.

A weaker yen could force other nations to follow.

In fact, Standard and Poor’s said this week the risk of a sovereign debt default in Japan is “slowly increasing.” This fundamental problem in Japan will ultimately result in a much weaker yen.

What Does this Mean For the Rest of the World?

Japan’s intervention could be just the first step in a long, sharp devaluation of the yen. And in a world where unsustainable debt and deficits are prevalent and economies are fragile, this could ignite a wave of currency devaluations in other countries.

Already, Japan’s move has started speculation that countries like South Korea, Singapore and Thailand could follow suit.

Bottom line: This intervention could mark the beginning of increased global currency risk, another round of capital flight from high-risk currencies and another, more sustained, period of global risk-aversion.

Regards,

Bryan

P.S. For more news on what’s going on in the currency markets, be sure to check out my blog, Currencies Corner. You can follow me on Twitter, too, and get notified the moment I post a new message.

This is not entirely true but metals and energies certainly fit the bill. May Crude advanced again today briefly peaking its head above $85/barrel. If momentum gains and the dollar breaks down we could be looking at $90 in the coming weeks; no this is not an April fool’s joke. Crude oil has gained over 20% since the first week of February and it looks like the bulls remain firmly in control.

Bullish engulfing candle in natural gas on good volumes carries natural gas prices back over $4. As we’ve voiced we think the upward move could start on short covering and this may be the 1st inning. Wait for confirmation early next week. We will be looking to move on July options for clients if a bottom is confirmed.

Picking a top is a dangerous and sometimes expensive game as clients and readers know in the indices of late. On a disappointing jobs number tomorrow look to gain bearish exposure. Our favored play for clients remains June ES puts.

Impressive action in sugar today as a mid-day reversal puts prices back in the green, gaining over 2% today. According to some informed floor traders we spoke to there appears to be large buying in out of the money July and October sugar calls; we will potentially be moving next week in that direction…stay tuned.

Based on the close today we suggested taking off all shorts in cotton; depending on your entry/exit it should we a small loss or a small profit.

The weather over the weekend and if farmers in the Mid-west can get into their fields will set the tone on grains next week. We will be advising to exit May shorts once we feel a bottom has been established in corn. Fresh entries should be looking to buy December corn when a bottom is in which we feel is imminent. The KCBOT/CBOT wheat spread continues to move in the right direction; when KCBOT trades at a premium start looking for an exit door.

Aided by dollar weakness and positive fundamentals out of Europe and Asia metals traded to fresh highs. June gold finished at its highest level in 2 weeks back above the 100 day MA. Use $1115 as support with $1145 as resistance. May silver hit $18 for the first time since late January. We expected this and higher levels in 2010 but we anticipated a correction prior to. The only exposure clients have are July $2 call spreads so we welcome a move higher but we would prefer to see a probe lower to get exposure with futures. The most recent move from $16.50 to $18 in the last 2 weeks was certainly not expected from me. The June US dollar is below 81 closing just under the 20 day MA as it appears sellers are overpowering buyers.

Continue to trade European currencies inversely depending on your viewpoint as I am content on the sidelines until we get a clearer picture. The only constant remains weakness in the Yen; losing 3% in the last 8 days. Continue to sell rallies that are capped at 1.08.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Indices look overbought but have for weeks now…brave clients are sticking with the June put options. Today they purchased June 1050 ES puts for $550/per. Sugar came within 17 ticks or 16 cents and then closed 9% off that low. Buyers were active but I want to ensure this is just not another head fake before trying to get clients long again.

May cotton is back below the 20 day MA losing 1.50 cents today. We are expecting further down side and have a target or 78.00 and then 76.00. OJ paired losses but did close lower now for 7 out of the last 8 sessions dragging prices back below the 50 day MA. We have told clients that we are interested in re-visiting longs under $1.30.

Treasuries were hit hard across the curve today; likely due the exorbitant auctions. We may NOT get the opportunity to sell from higher levels as we had expected but if prices continue south it will be without our clients. Corn and KCBOT were the lone agriculture commodities to keep their head above water today.

You know the deal; we are suggesting long exposure via futures and options in July and December corn. Some of our clients that trade spreads may be interested in this: long December KCBOT wheat against a short in December CBOT wheat at 7-9 cents under expecting the spread to flip and KCBOT to be at a premium.

Let cattle rally a little more and look to fade the rally; June would need to be contained at 94.00 and August at 92.00 or we would abandon the trade. Lean hogs continued lower; we expect a trade under 70.00 in April in the coming sessions. Precious to industrial metals were hit today; gold 1.70%, silver 2.6%, copper 1.5%, palladium 4.7%, and platinum 1.8%.

We are looking for more downside pressure in this complex especially if the dollar can stay above 82.00. The significance of the 82 level in the US dollar index serves as the 50% Fibonacci level for the last 2 years. Use 81.25-81.50 as support with 84.00 as the next stop on the upside.

The Yen got hit the hardest today and though I did not take people seriously who were whispering par just weeks ago this could happen. We are pricing out bearish plays for clients. If the Loonie can break the 20 day MA; at .9740 in June we should be on our way to a nice winning trade on clients June puts.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

Since last November, the dollar has climbed steadily against a basket of currencies — most notably against the euro. And based on my analysis, I think it’s just the early stages of this trend.

In fact, for many of the reasons I’ve discussed in past Money and Markets columns, the weight of evidence suggests that we’ve likely seen the bottom in the dollar, with a multi-year bull market ahead.

That’s a high level view. But how are things shaping up on a shorter term outlook for the buck?

Let’s take a look at the four stages of this prospective dollar bull market and the immediate catalysts that should underpin its continued strength …

Stage 1:

Marking the Bottom

My analysis of the seven-year cycles in the dollar index suggests a cyclical bottom was marked when the dollar rallied sharply off of its all-time lows in 2008 driven by the uncertainty surrounding a growing financial and economic crisis.

Back then, capital fled all areas of the world in search of safety. And the dollar represented a safe parking place.

Stage 2:

Retracement Period

Investors shunned the dollar in search of bigger returns.

Then we had the deep retracement of 2009. The global economy was showing signs of stabilization that encouraged global investors to start dipping their toes back in the water … i.e. taking risk again. That’s when capital was reversed out of the dollar in search of higher risk, higher return assets.

And just when sentiment was about as negative toward the dollar as it could possibly get, we were introduced to the first sign of collateral damage from the financial/economic crisis and the unprecedented government responses: Crumbling government finances.

The first wobbling sovereign nation, Dubai, quickly splashed water on the face of an increasingly optimistic global investment community. All of the sudden the theories of a V-shaped recovery became fractured by the realization that the widespread economic crisis could run deeper — a scenario that many had conveniently and complacently dismissed.

Stage 3:

More Fear; More Risk Aversion

The dollar has benefited from weakness in the pound.

In recent months much of the dollar strength has been driven by fears of a sovereign debt crisis. And much of that strength has come at the expense of the euro and the British pound.

We’ve seen the dominos of a potential sovereign debt crisis line up, as I detailed in last week’s column. The tremors that started in Dubai, quickly turned scrutiny toward Greece and the other weak spots in the euro zone (Portugal, Italy, Ireland and Spain). And it appears increasingly likely to soon weigh on the UK economy and the British pound.

As we know, currencies don’t operate in a vacuum. They’re valued relative to the value of another currency. So, given the recent concerns about the future of the euro and the increasing spotlight on the next sovereign debt domino, the UK, the dollar is benefiting primarily because of the weakness of other major currencies.

And there’s another developing situation that should offer more fuel for the dollar …

Stage 4:

A Falling Yen

The euro, the British pound and the Japanese yen make up 83 percent of the dollar index, the often quoted proxy for the economic firepower of the U.S. dollar on a global level.

Japan’s deflation has taken a toll on the yen.

While the pound and the euro have been under assault in recent weeks, the yen has been pushed and pulled in a tug of war: Strengthening as capital flows out of risky euro/yen and pound/yen positions, and weakening on the basis of fundamental divergences between the recovering U.S. economy and the deflation-burdened Japanese economy.

But the fundamental evidence has been clearly favoring the dollar relative to the yen for some time. What’s been lacking is a catalyst to send it higher.

Well, over the past two weeks we’ve finally gotten a clear catalyst to sell the yen against the dollar.

Catalyst for Yen Weakness

Back in August 2009, it became cheaper to borrow dollars (compared to borrowing yen) for the first time in sixteen years. In the chart below, you can see when the short-term interbank borrowing rate for dollars (Dollar Libor, the blue line) crossed below the equivalent interbank borrowing rate for yen (Yen Libor, the red line).

Source: Bloomberg

What looks like a minor rate differential can have a major impact on market perception. Since that cross occurred, the dollar lost as much as 13 percent against the yen as global investors began favoring dollars, as opposed to yen, to fund carry trades … i.e. selling dollars to fund the purchase of high yielding currencies.

But as of last week, this differential has crossed back, once again making the Japanese yen the cheapest currency in the world to borrow. And based on the diverging policy paths of the U.S. and Japanese central banks, this differential should continue to widen in favor of U.S. rates and dollar strength relative to the yen.

So given the ongoing crisis surrounding the euro, the vulnerability of the British pound from a continued spread of sovereign debt concerns AND the catalyst for a weakening yen, I’m expecting the dollar to continue its upward path against major currencies both in the short-term and longer-term.

Regards,

Bryan

About Money and Markets

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Ready, willing and able

Monday March 8, 2010

French President Sarkozy’s strong weekend words supportive of the plight of Greece have seemingly struck a chord with investors across a variety of asset classes today. It would appear that last week’s efforts by the authorities in Greece have received a positive global response leaving traders ready to once again step back up to the table to feast on bolder prospects as appetite for risk returns.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – Monsieur Sarkozy’s comments gave investors the strong impression that EU partner aid in the form of financial assistance was very much available now that a stringent budget has been implemented. That the collective EU governments have given such a strong seal of approval for the Greek measures bolsters Sarkozy’s stance that the bloc is ready, willing and able to come to the financial rescue of Greece. The determined aspect of those words is in the short term at least having as supportive impact on the euro and risk in general.

The potential for independent sovereign default on behalf of the government of Greece appears that much more remote beyond a budget that has allowed for the creation of demand for high-yielding government debt. And the ongoing ratification of the path its government is treading helps make the short posturing surrounding the euro that much more tenuous. Latest CFTC data through March 2 shows that short euro positioning by speculators took a 7% haircut. Outstanding short positions slipped to 66,770 as the euro steadied.

There is little on the data front today other than a small decline in French business sentiment, which slipped from an index reading of 104 to 102 for March. In neighboring Germany the data could have been worse for industrial production during January. A 0.6% gain fell short of an expected 1% gain, but a serious backward revision for the better left the year-over-year data with a 2.2% gain.

U.S. Dollar – A broad rise in risk appetite for Asian stocks inspired by Sarkozy’s comments has helped push the euro to $1.3662 this morning, while the dollar and yen are suffering as investors appear to be breathing that little bit easier.

Emerging market stocks have built on last week’s 4.2% rally and are fast approaching breakeven for the year. The fact that Greek debt woes are receding has helped investors buy into the Asian recovery story more to start the week. In addition, bankers close to counterparties in the Dubai World saga have hinted that the conglomerate with outstanding debt of $26 billion is preparing to submit plans to creditors that may see them receive all of their loans back. According to media reports, creditors’ best option may be patience and a willingness to remain longer term lenders might assure them a guarantee from the government of Dubai.

The “safer” world this week is setting off a domino-style resumption of risk taking. The yen and the dollar are both falling as appetite for riskier bets in the shape of natural resources, emerging stock markets and riskier currencies picks up.

Japanese yen – The yen fell against the euro but is stable at ¥90.30 against the dollar. The better tone to the euro saw it rise to ¥123.32. March is the end of the Japanese fiscal year and is typically marked by a flood of overseas earnings returning to head office. Typically this supports the Japanese unit. However, investors are having a hard time making the argument that such demand for the yen can last beyond month end given the growing differences in the shapes of recovery between the world’s two largest economies. It’s becoming easier to argue that the Fed will shift policy higher before the Bank of Japan despite warnings from former and current Fed officials that now is not the time to remove either fiscal or monetary stimulus. Last week Japan’s Nikkei newspaper ran with a story that the Bank of Japan is set to mull new initiatives to stimulate its moribund economy. This will likely see a reversion to further Bank purchases of government debt in an effort to revive corporate and retail demand for loans.

British pound – Weekend opinion polls saw a widening of the lead for the opposition Conservative party ahead of a summer election. This, along with a wider appetite for riskier currencies aided sterling, which rose to $1.5196 and its highest point versus the dollar since the end of February. The euro rose a little to buy 90.23 pence.

Aussie dollar – This week brings the February employment report for the Australian economy. The booming domestic jobs market is expected to add a further 15,000 positions after an increase of 57,000 in January. Demand for the Aussie was once again fuelled by demand for natural resources in the shape of equities in associated companies or in physical buying of commodities. The Aussie rose to a six-week peak at 91.31 U.S. cents.

Canadian dollar – Throughout the recent Eurozone crisis the Canadian dollar fared far better than its Australian counterpart. As firmer economic data continues to emerge, investors are growing increasingly skeptical that the central bank will be able to maintain its near-zero policy beyond the date it promised in June. Each swoon in the euro that was exaggerated by losses in emerging stocks and commodity prices was felt less and less so by the Canadian unit, which has quietly accelerated towards parity with the U.S. dollar. Today the Canadian dollar buys 97.38 U.S. cents.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

This phrase is coined for the college basketball tournament but I think it is an accurate description of what to expect as a trader this month. At its highs today oil was less than $3/barrel from making new highs on the year. Being bearish for the last 1-2 weeks has made our clients NO $ but we still feel a trade to $75/76 is imminent. We are not disputing a trade in summer is likely up to $90 but first a correction. We still favor $5 put spreads.

Natural gas should finish down 3.5-4.0% lower on the week. That is not too bad! Clients have a small long position in April futures and June call spreads and at the moment are all under water. We expect the next 2 weeks to be better to us in energies; that means crude down and natural gas up.

Are you kidding me that we only lost 36,000 jobs and unemployment did not change? The equity market is being propped up by the powers that be and if the free market determined prices we would be at least 10% lower. Clients are down on their June ES puts but will stay the course being they have over 3 months time.

Sugar closed up 2.4%; we suggest being long May and July via options looking for a move back to 26 cents. For the first time in 4 weeks cotton will finish lower; clients are positioned to take advantage of a set back to 75/76 cents in May.

Treasuries were hit hard today and we do think more downside is likely in the coming months but we still feel one will get the opportunity to put on shorts from higher levels. If the recovery is underway which I question and there is more talk of the Fed raising rates traders should re-visit the idea of short Euro-dollars. The charts look like in the next few sessions

Agriculture will trade lower. Aggressive traders could use that to get short while I would prefer getting long from lower levels. USDA report out next Wednesday. Our current positions for clients in Ag include long corn, long soybean meal and short soybean oil.

We have no positions in lean hogs with clients but it appears a double top could be forming around 74 in the April contract; that level acted as stiff resistance in mid-January as well. Live cattle finished about 1 penny higher on the week; clients remain short expecting a trade back near 89 cents in April.

We caution any exposure in gold as we could see a $50 move either way. If lower we would suggest buying the dip. May silver closed at the 100 day moving average today about 15 cents off its highs. We like being long but would prefer to open fresh longs on a set back to $16.50. If we do see a retracement that holds we would think the next leg up would lift prices to near $18.50 mid-summer.

Clients were advised to take profits on their Yen shorts today as prices have peeled off 3 cents in the last 2 sessions. We advised those still interested in currencies to get short the Loonie. We are looking for a move in the Loonie back under 95 cents. We are operating under the influence that stiff resistance comes in at .9750/.9800.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

Greek austerity plan helps euro

Wednesday March 3, 2010

Stern spending cuts and further increases in tax levies announced today in the Greek budget provided somewhat of a reprieve to the euro in midweek trading. Improvements in British data also helped reduce the appeal of selling the unit short, while concerted regulatory efforts to track down profiteers engaging in the creation of an Armageddon-style ending for the Eurozone may also be helping reduce the value of outstanding bets against the euro.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – The euro is marginally higher against the dollar at $1.3624 with two clear catalysts this morning. The government of Greece announced in a budget plans to reduce by 5% the level of outstanding debt to GDP to 8.7% during 2010. The package amounts to 2% of GDP and involves €2.2 billion in spending cuts as part of a €4.8 billion package. The deal appears to have been received well in the markets and PM Papandreou must be hoping that the measures will help draw Athens closer to Berlin and Paris ahead of key discussions starting on Friday and lasting into the weekend.

On the revenue side the government raised taxes on sales of tobacco and alcohol while reducing spending on civil servants’ salaries. A 30% reduction in civil servants bonus payments received tri-annually is unlikely to be a treat for those losing the benefit, but will sit better with EU leaders who need such a sweetener in order to encourage them to sell the notion of a German-Franco aid package to help lower the cost of capital to Greece. For his part Mr. Papandreou warned of the growing catastrophe should the cost of Greek membership to the EU exclude his nation from the low borrowing costs provided to each other member.

U.S. Dollar – EU officials have recently accused investors of distorting the realities of the current crisis by clouding the market’s view on the perceived outcome. Betting against the euro and specifically through buying various instruments that magnify the perceived outcome of an event is being frowned upon by the authorities. Investors buying credit default swaps, for example, who pushed the price of insuring against debt default ever higher are being judged by EU officials as creators of a problem that could still lead to an undesirable outcome. The U.S. Department of Justice has also sent letters to some hedge fund attendees at a recent dinner in New York during which 23 trade types were discussed. I’m not suggesting that the sponsors conspired to “educate” the hedge funds on how to profit from the crisis, but am highlighting the extent to which the crisis attracted the construction of trade types that would benefit from a collapse of either Greece, the Eurozone or both.

The dollar remains stable on Wednesday and faces several key pieces of data over the next three sessions with employment data being the dominant theme. Recent evidence suggests an amelioration in the pace of labor market improvement with weekly initial claims last week rising uncomfortably towards the half million mark for the first time in three months. The Challenger Gray and Christmas mass layoff report is the first measure of health and it came in 77% lower than a year ago. We can’t read much into this and already know that the bulk of redundancies have already been made. The ADP employment reading showed private employers shed 20,000 jobs in February – in line with forecasts. Of course weekly initial claims are due tomorrow while the most important official non-farm payroll is due Friday. Reaction to all of these is likely to be tempered by developments in Europe. An improvement in dealings with Greece could conceivably overshadow negative U.S. numbers, which might otherwise provide a risk-aversion boost for the dollar.

British pound – The pound rose for the first time in seven sessions against the dollar and is stronger against the euro and yen. A Nationwide Building Society survey of consumer sentiment improved to a reading of 80 despite a forecast of 73, and while this is not a major calendar event, it does provide some respite from recent tepid data. Elsewhere the February service sector PMI reading at 58.4 compares to a reading of 54.5 in January and proves the fastest pace of growth within the sector for three years. The pound is trading at $1.5062 and up a cent on the dollar.

One overlooked factor that I did highlight at the time of the Prudential’s announced plan to takeover AIG’s Asian business is the likely sale of sterling that coincided with Monday’s official announcement. Today a spokesman for the company did confirm that a sterling hedge was made ahead of that announcement in relation to the $35.5 cash and stock deal. Since that time shares of the company have fallen by 20% and this fact is casting doubt on Prudential’s ability to pull off the deal.

Aussie dollar – Some vindication for Tuesday’s interest rate increase – if it is needed – came today in the shape of accelerating growth. The Australian Bureau of Statistics said that fourth quarter growth was three-times the pace of the third and registered an annualized 2.7% pace as demand from its Asian trading partners spurred exports. The Aussie unit is flat at 90.35 U.S. cents today while it appreciated to a decade high against its neighboring New Zealand where growth is returning at a slower pace.

Canadian dollar –Canadian Prime Minister Stephen Harper reveals his outline for the next year’s budget. Businesses are aware that record spending aimed at offsetting the headlong fall in to recession is ending and will be looking for additional measures to maintain the pace of growth. The Canadian dollar this morning is struggling to continue its recent move higher, but is equally showing no signs of relenting after the Bank of Canada’s upbeat economic assessment at Tuesday’s policy decision to keep interest rates unchanged. A single Canadian dollar buys 96.76 U.S. cents today and is creeping towards parity.

Japanese yen – Little movement in the yen overnight although it continues to make gains against the U.S. dollar at ¥88.63. The euro buys ¥120.88 while a pound buys ¥133.44.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Housework

Tuesday March 2, 2010

Several nations have unfinished housework before investors can make further informed assumptions over future currency direction. That’s the message stemming from the world’s largest and most furiously traded market this morning. Hawkish comments from a Fed messenger boosted the dollar although are likely to cause conflicting rebuttals. The ongoing discussions to get the Greek house looking tidier as keeping euro sellers busy, while Britons are growing more alarmed at who is best cut out to do the nation’s dirty laundry after the summer election. It’s central bank meeting time for the commodity units with investors wondering whether the RBA’s raise in interest rates today concludes its housework, while Canadians are wondering whether the same process is soon to get underway in earnest.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

U.S. Dollar – I wonder whether the fact that Philadelphia Fed President Charles Plosser doesn’t get to vote on the FOMC throughout 2010 makes him more provocative than if he did vote. His comments to the Wall Street Journal carried today sound pretty hawkish and argue for a closer end to low interest rates. He says the Fed should back-off its “extended period” positioning and notes, “I don’t like that language. It ties our hands, or people believe that it ties our hands.”

The dollar surged in value against the euro to $1.3425, triggering plenty of stops at the recent $1.3450 low. However, this exercise has flushed the system of more weak longs and the euro has subsequently rebounded, unable to follow through to the downside. The euro subsequently rose to $1.3572 and now stands at $1.3554 -  more than a cent above its overnight low.

Euro – So much is already known about the woes of Athens that one has to expect at some point the market will overcome its bearish attitude along the way. Typically when markets turn, it occurs at the moment of maximum bearishness when there are no sellers left because everyone is already short. We keep witnessing the type of sharp rebound for the euro as empty pockets of resistance get burst as shorts scramble to exit.

For now the euro remains hampered by the remaining housework that has to be completed before it can recover. Over the weekend EU Monetary Commissioner Ollie Rehn laid the groundwork for further austerity measures that must be rapidly implemented “in the coming days.” Failure to do so will render meaningless Friday’s trip to Berlin where Greek Prime Minister George Papandreou will meet his German counterpart, Angela Merkel. A lack of progress with his domestic chores will dishearten Ms. Merkel who is struggling to justify a what is increasingly being seen as a handout to the people of Greece who have become permanently adjusted to living with an expensive safety net providing living standards far beyond their means.

Ms. Merkel’s discussions with Mr. Papandreou are hinged around rapid-fire progress on the domestic front. According to unnamed German lawmakers, a package of up to €25 billion awaits Greece via state-owned German lenders in the event it is needed to shore up debt issuance by Greece.

Greece faces a weakening economy and is hindered by the additional burden of rising interest rates to fund its debt. The domestic fracas is also creating stiff public opposition with another union calling for a national strike to coincide with the March 16 deadline for submitting further plans to the EU. At this point the government retains widespread public support for its austerity measures but aggressive pressure or an acceleration of demands from EU members could turn the plebiscite hostile.

The EU has spelled out to Athens that it could introduce fuel and alcohol levies as well as a sales tax and include a luxury tax on sales of expensive cars and yachts. Greece also has a so-called “14^th wage,” which provides two additional payments during the year giving workers an additional one month’s wage.

British pound – The pound has now weakened for six days straight against the dollar. Another opinion poll released on Monday showed the narrowest lead for the opposition Conservative party in two years as Britons are apparently shrinking from an austere Conservative mandate aimed at reducing public debt. The public is apparently thinking twice about who is best suited to tackle the mammoth debt burden. The pound has now rebounded from weakness to $1.4855 and so held Monday’s lowest point in 10 months at $1.4782 and currently stands at $1.4960.

Aussie dollar – The RBA officially raised its short term benchmark interest rate to 4% stating that inflation would be consistent with its target. That suggests that rates could now be on hold and as such dulled investor appetite for the currency. It initially fell in response to the news, but has later rebounded against a weaker U.S. dollar today and currently stands at 90.53 U.S. cents.

Governor Stevens also maintains that most borrowers still face lower than average lending costs at this point and also acknowledged that the economy has thus far benefitted from a firm domestic currency in the shape of weaker than otherwise inflationary pressures. Evidence that previous moves on rates is working comes today in the form of a 7% decline in building permits for January after applications to build or renovate new houses or apartments slowed.

Canadian dollar – The Bank of Canada left interest rates unchanged at 0.25% this morning as it announced its monetary policy decision. However, there is growing speculation that Governor Carney might begin to sound off about prospects for raising rates later during 2010. The core rate of inflation rose last month to the Bank’s 2% target, although the headline rate was a fraction more subdued at 1.9%. But fourth quarter annualized growth data revealed yesterday of 5% spanked the daylights out of an official 3.3% projection. The Canadian dollar surged after the BoC described recent growth as “vigorous” sending the dollar to 96.93 U.S. cents.

Japanese yen – Buoyant global stock markets continue to contain investor appetite for the yen, which is weaker at ¥89.14 against the dollar. The euro also strengthened back above ¥121.00.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Friday February 26, 2010

Although the Greek sovereign fears remain close to hand, the forex market is a little calmer to end the week as dealers move to lighten the load a little wrapping up profitable short positions against the euro. In a day in which inclement weather has largely closed Manhattan due to heavy overnight snowfalls, there is a lack of impetus to take further bets in favor of the dollar especially in light of some tepid economic data of late, which in a sense provides a reprieve for the euro. Meanwhile an upward revision to fourth quarter GDP growth is providing some respite for the dollar. Growth came in  at 5.9% after an initial reading of 5.7%.

Euro – The euro is coming back from a hosing on Thursday when it hit a one-year low against the Japanese yen. Dealers are reportedly buying the euro at the end of the week with a real lack of fresh news that would justify taking further risk aversion bets. A weak GDP report from Britain saw dealers ditch sterling in favor of the euro, which gives the appearance of a more robust euro rebound today. Still, those gains are real and the euro is on a roll to end the week. Against the dollar the single currency buys $1.3570 ahead of Friday morning data for the U.S.

U.S. dollar – The dollar index is lower on Friday. A WSJ article reports massive hedge fund positioning against the euros, described elsewhere as “career bets against the euro.” This much we know on account of explosion of futures positions reported by the CFTC in recent weeks. The news is not exactly a shocker on a day when New York city is under a foot of snow and pinned beneath a snow storm lasting into next week, which will keep many investors out of Manhattan today. According to some investors, hedge funds today are buying the euro against the dollar and yen where significant weakness has been evident in recent days. Yesterday the euro slipped to a one-year low against the Japanese unit. Friday economic data brings a revision to fourth quarter U.S. GDP, a February consumer sentiment reading and January existing home sales data.

British pound – An upward revision to the final quarter pace of growth in the U.K. gave traders an immediate reason to cover short positions held in the pound, but the buoyant mood didn’t last long. The initial 0.1% rate of growth was revised significantly higher to 0.3%, but a downward revision to the pace achieved in the third quarter meant that the annual rate of contraction deepened by one-tenth to a 3.3% pace. Coupled with a decline in business investment during the quarter the report ultimately failed to please. A 1% pace of decline in the value of home values was for the month of February was reported by the Nationwide Building Society, which further dented sentiment. Overnight the pound recovered from a dip beneath $1.5200 helping drive the sterling index to a four month low and an 11 month low against the Japanese yen while against the equally ailing euro the pound reached a six-week low at 88.78 pence.

Aussie dollar – Despite its physical distance from Greece, the Australian economy continues to feel the weight of the fiscal challenges weighing on the Eurozone. The impact remains one of Aussie dollar avoidance as Greek fiscal situations and its entourage in terms of potential ratings upsets grips traders’ attention. Overnight the Aussie slumped to as low as 88 U.S. cents before moving back to 88.96 in early New York trade. Next week the RBA decides on whether to lift interest rates for a fourth time and is quite likely to move to 4%. The current degree of risk aversion is weighing heavily on the Aussie possibly in part because of the drama surrounding the sharp decline in the euro. The further the single European currency slides, the greater attention it draws to the potential for a sharper slowdown in global growth.

Japanese yen – Industrial output surged 2.5% in January as manufacturers ramped up production to meet strong regional demand. The reading was far stronger than the forecast growth of 1.1%. It was the 11th straight monthly increase. Shipments to China surged as reported in trade data released earlier in the week. At the same time retailers were also kept busy with a 2.6% surge the best performance in 17 months. However, the consumer price index for January continued to deliver news of deflationary waves lapping up on Japan’s shores. Prices slipped 0.2% between December and January and declined 1.3% on an annual basis. Core prices, which exclude volatile food prices slipped 0.6% on the month. The yen is only marginally weaker against  the dollar on Friday at ¥89.13, despite the dollar’s broader weakness with a lack of fresh risk aversion impetus is apparent.

Canadian dollar – Riskier commodity units have recently been shunned and despite its low interest rates akin to those on the U.S. dollar, the Canadian unit has recently fallen from grace. Today, the Canadian dollar is higher at 94.58 supported by a rise in the value of gold and aided by a lack of reason to add to risk aversion positions.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Thursday February 25, 2010

Unsurprising though it may be, risk aversion kicked in a notch overnight as news of a potential downgrade within a month by Standard & Poors for Greece. Such a move would leave its long-term debt rating on the border of junk status increasing pressure on the government already finding the headwinds pretty tough. The euro slipped on this news along with confirmation from Moody’s that it too might further downgrade the sovereign nation in the event that it deviates from its fiscal plan. Selling the euro in response to such mind-boggling simplicities has created a nasty odor in the markets today with equity prices falling and perceived riskier currencies falling back.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – Weakness in the euro was most pronounced against the yen, where the unit fell to ¥120.24. The euro has not traded below ¥120 in exactly a year and today’s threatened break down in the pair known for its ability to dictate risk appetite is reminiscent of a meltdown in January last year as markets braced for the (equity market) lows that were put into place during early March. Against the dollar today the euro has rebounded off a double-bottom at $1.3450 but continues to demand dealers’ attention at $1.3476.

The euro’s weakness follows a successful national civil servants strike on Wednesday in Greece with public workers staging antireform demonstrations. According to people familiar with the matter, the demonstration delayed the government’s announcement of a further package of fiscal austerity measures said to be as large as €2.5 billion. On this basis the government will issue a €5 billion 10-year bond to help it raise €22 billion before €22 billion worth of bond maturities before the end of April. The government has already raised €13 billion and has a full year funding total of €54 billion.

While the currency markets are getting hot under the collar today it appears that the government of Greece is working hard in coming up with a solution. However, investor attention is also being diverted towards the possibly more problematic escalation of economic crisis in Spain where a generous social safety net is part of the problem crippling Spanish finances. Today’s WSJ carries an in-depth analysis of the situation and tosses out the implication of a withdrawal from the monetary union by Spain. Increasingly dire projections for the euro are surfacing from global analysts over coming months.

U.S. Dollar – The renaissance of European fiscal headwinds creates an exit from the flux I described earlier in the week and adds impetus to the rising dollar on risk aversion. In his testimony to Congress Fed Chairman Ben Bernanke described a nascent U.S. recovery and one that remained in need of ultra-low interest rates for an extended period. The wording he chose had the ability to unwind some demand for the dollar, which had earlier risen on the prospect for higher interest rates sooner rather than later.

Overall his testimony was tepid and taught us relatively little with stock traders reversing a negative stance and warming to the prospect of ongoing easy money conditions that may aid corporate profits.

Japanese yen – Today’s boost to risk aversion caused by rising Greek yields and credit insurance has taken a global toll. The Japanese yen continues to steal back losses incurred when investors assured themselves that short-term U.S. rates were likely hitched to the discount rate. The yen rose per dollar to ¥89.47 and strengthened to ¥137.00 against the British pound.

Aussie dollar – The inability of the Australian dollar to make headway when conditions look optimal is frustrating investors wanting to see higher peaks against the dollar. While bulls can cite a variety of factors to support the Aussie unit, the mere resurgence of risk aversion with an epicenter in Athens is enough to turn investors into sellers as though a fault line would show up in Sydney. The Aussie is weaker at 88.79 U.S. cents today and is weaker 1.5% against the Japanese yen at ¥79.36. It was only earlier this week that lower prospects for rising global interest rates saw investors flock to the Aussie dollar on the grounds that it would maintain its yield advantage for longer against the U.S. dollar. Aussie weakness continues to leave investors scratching their heads today with a further highly likely quarter point interest rate increase to be announced when the RBA concludes its meeting on Tuesday.

Canadian dollar – With the stronger greenback comes weakness in gold prices and a negative tone in the energy patch, where crude oil prices are $1.11 lower at $78.90. Gold prices are hovering above a two-week low, which appears to be weighing pretty heavily on the Canadian dollar, which felt the weight of a stronger greenback this morning as it slipped a half penny to 94.21 U.S. cents.

British pound – The pound still appears to be in need of some first aid as it stumbles against the dollar to $1.5281 this morning. At this point sterling is at its weakest since May of last year. Dealers continue to trade the pound from the short side given the central bank’s recent comments that growth remains weak and susceptible to downside risks.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.