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Posts by "passion trader"
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Back on June 19, after China announced it was abandoning the yuans peg to the dollar, I wrote an article saying that my suspicion was that it was doing so in order to revalue the euro higher against the yuan by bidding up the value of the euro against the dollar.
Well, it seems to be happening exactly that way.
To review, China pegged to the dollar back in mid-July 2008 just as the financial crisis was about to get into high gear as a way to protect its exports to the US. At the time, EUR/USD was trading around 1.5960 but by June 6 of this year, the pair had hit a low of 1.1876, a 25.5% depreciation of the euro against the dollar.
Now, since the yuan was pegged to the dollar, what that meant was that as EUR/USD declined, the euro was declining by an equivalent amount against the yuan, making Chinese goods far less competitive to the region.
Also, by June 6, the general consensus (based on economists and bodies such as the IMF) was that Europe was at risk of falling into a second recession due primarily to the Sovereign Debt Crisis and Austerity Programs being implemented in places like Greece, Ireland, Spain and Portugal. But even without a second recession, Europe looked set to far underperform the US and certainly the Chinese economy. Additionally, nearly every currency strategist was talking about parity and giant hedge fund traders, like George Soros, were massively short the common currency.
So, if youre China, and you want to support exports to your biggest customer (which Europe is) youve certainly realized by this point that the thing to do is to start appreciating the euro relative to the yuan by appreciating the EUR/USD pair. Problem is, though, that cannot happen as long as the yuan (symbol CNY) is pegged to the dollar and two weeks after that China decided to de-peg and allow the yuan to trade in its daily 0.05% trading band.
Of course, this move was greeted favorably by the US, who had long sought China to allow yuan appreciation relative to the dollar. The fact that it was announced ahead of the June G20 meeting, made the move look even better for the wiley Chinese.
One the next day of trading, June 21, EUR/USD opened at 1.2458. As of the close on July 15, EUR/USD was on 1.2945, a 487 pip (or 3.9%) appreciation. In the meantime, the euro as appreciated by 2.93% against CNY.
There are numerous ways for China to accomplish this but perhaps the best might be to become a buyer of European sovereign debt, primarily because it restores confidence. What is obvious is that someone is doing plenty of buying in the open market because today, Spain was able to sell bonds at a higher price (and lower rate of interest) than offered by the ECB, who announced its intention to purchase debt as the crisis deepened.
Meanwhile, the Treasury, and the Fed, is probably very happy to be seeing the dollar fall against the euro. Aside from helping exports, a falling dollar generally is accompanied by rising commodity prices, which creates a level of inflation (inflation is needed now because of the much-worse risk of deflation). And as we know, a falling dollar is also generally followed by a rise in assets like equities, which of course re-liquefies the system by creating wealth for those (like the big banks) involved.
By PETER NURSE
Of DOW JONES NEWSWIRES
LONDON -- With the Federal Reserve taking a more downbeat view on its outlook for the U.S. economy, and with the recent healthy demand at auctions from peripheral euro-zone members, the euro has pushed forward Thursday.
The Fed's board members late Wednesday lowered their growth forecast for this year to 3%-3.5%, down from 3.2%-3.7% previously. While members noted that further easing was not needed at this point of time, further stimulus may be needed should economic conditions worsen appreciably.
"With long-term forecasts being revised to show a bleaker picture than what was forecast a few months ago, the talk has shifted away from when on the horizon the Fed could tighten," BNP Paribas said.
On the other hand, this week's successful Greek bill auction and Spain's successful sales in recent weeks, culminating with Thursday's 15-year bond sale signals the end of the immediate liquidity concerns in the euro zone, said Brown Brothers Harriman & Co.
"As the ECB weans the market off of its long-term operations, drains excess liquidity and slows, if not stops, its bond purchases, the FOMC discussed the possibility that may have to consider additional actions," added BBH. "Although it seems clear to us that such action is not imminent, the direction of developments is notable. Short-term interest rate differentials continue to move in Europe's favor."
On top of this, the euro received a boost Thursday from positive second quarter earnings from U.S. banking giant JPMorgan Chase & Co. (JPM), with profit up 76% from a year earlier, helping general risk appetite.
All of this prompted the euro to rise to a fresh two-month high above $1.2778, eventually reaching $1.2865.
And more gains are possible.
The recent positive tone has opened up the medium-term scope to at least $1.3125-$1.3510, said BNP Paribas, this being the 38.2%-50% retracement of the November-June decline from $1.5145 to $1.1875, via a corrective rebound lasting until August or early October.
Potentially a larger rise could occur toward $1.3895 (the 61.8% retracement) given momentum and pattern factors, the bank added.
EURUSD Set To Trade Further Higher (Week In Review)
EURUSD: As the pair followed through higher the past week on the back of its previous week bullish run, further bull pressure is set to recapture the 1.2671 level, its May 2110 high and the 1.2721 level, its July 0910 high. These two key resistance levels must give in to set the tone for further gains towards the 1.3000 level, its psycho level or even higher. While firmly holding above the 1.2466 level, its Jun 2110 high, we look for the above view to materialize. On the downside, if a continuation of its Friday weakness occurs, we may see a decline targeting the 1.2466 level where a reversal of roles is expected to turn the pair back up again. However, on a violation of that level risk should open up towards its .50. Fib Ret (1.1875-1.2466 rally) at 1.2169 and the 1.2162 levels, its Jun 1410 low with a loss of there targeting the 1.2000 level ahead of the 1.1875 level, its 2010 low. A close below that level will have to occur to annul its entire nearer term corrective recovery and bring further weakness towards its the 1.1801 level.
The single currency rallied to a high as 1.2490 in the NZ session on Monday due to improved risk appetite after weekend's announcement by PBOC to allow greater flexibility of the yuan ahead of the coming G20 meeting prompted investors to buy riskier assets initially. Stocks and commodity currencies also rallied in Asia and Europe. However, euro ended the day down against the dollar as the single currency was pressured by Fitch's downgrade of French bank BNP Paribas, this action had caused the yuan-induced euphoria to fade quickly on lingering worries over the European debt crisis. ECB's Trichet said that governments which breached the EU's fiscal rules could face tougher punishment, such as loss of voting rights and his comments also pressured euro, price eventually fell to 1.2303 in NY afternoon while DJI also pared all initial gains and ended the day down. Cross-selling in euro especially against the Swiss franc also pressured euro as eur/chf fell to a fresh lifetime low of 1.3665.
In other news, Fitch Ratings cut its rating on French bank BNP Paribas on Monday by one notch to AA- but the outlook is stable. Euro was pressured as investors were worried as the European debt crisis would spread to the European banking system. Earlier, the PBOC said over weekend that ' a more flexible currency will direct resources to domestic-demand driven sectors such as services and help curb an excessive reliance on exports'.
Versus the Japanese yen, although the greenback opened lower in NZ and fell to 90.01, bargain hunting by Japanese importers quickly lifted the pair and the yuan's fixing (6.8275) was the same as Friday's level. The pair then maintained a firm undertone as firmness in Asian equities (N225 up 2.4% and Shanghai Composite up by 2.9%) boosted risk appetite for yen carry trades. The pair rose sharply and eventually reached 91.48 in European mid-day. However, the pair retreated sharply from there and ended the day at 91.09 as DJI pared initial gains of 144 points and ended the day down by 8 points at 10442.
The British pound rallied in tandem with euro in NZ and climbed to 1.4936 at European opening but cable fell sharply in tandem with euro and weakened to 1.4738 in NY afternoon.
The commodity currencies also rose as PBOC's move would boost China's buying power abroad and aud/usd surged to 0.8860 while nzd/usd rose to 0.7153 and spot gold hit a record high of 1265.10. However, the commodity currencies pared their gains later due to euro's weakness.
Economic data to be released on Tuesday include: Swiss Trade balance , Germany Ifo index , EU Current account , Consumer Confidence , Canada CPI , U.S. Existing home sales.
http://www.acetraderfx.com
What is your view ?
By Martin Santa
BRATISLAVA (Reuters) - Slovakia rejected on Friday calls to sign Europe's 750 billion euro stability programme, a necessary step for the financial safety net to go ahead, amid political wrangling.
All countries must sign off on the European Financial Stability Facility (EFSF) before it can go ahead and Slovakia's rejection could jeopardise European finance ministers' plan for the facility to be operational by the end of June.
Slovakia was asked during a European Council meeting in Brussels on Thursday to sign the deal.
Outgoing Prime Minister Robert Fico, however, said his government lacked a mandate to do so. He said it was ready to sign if given the nod by centre-right parties that are trying to form a government after winning elections last week.
"We are ready to sign if they say 'Yes, we respect that mechanism'," Fico told a news conference on Friday.
Pressure has been building on Slovakia from abroad to take at least the first step and sign off on the facility.
"We are confident that the prime minister and the new government know their European responsibility", a German government spokesman said on Friday.
Slovakia is due to contribute around 4.5 billion euros to the 750 billion euro financial safety net, which was established by euro zone governments this month for member countries if they run into financial difficulty.
OPPOSITION TO GREEK AID
The issue has become the centre of a domestic political struggle between Fico's leftist administration, which lost its majority in the election, and centre-right parties, who have opposed European aid to Greece.
The conservative Christian Democrat Union (SDKU), the Christian Democrat Movement (KDH), the liberal Freedom and Solidarity (SaS) and the mostly ethnic Hungarian party Most-Hid have been negotiating to form a cabinet but have not yet won an official mandate from President Ivan Gasparovic.
The SDKU's election leader and the likely next prime minister, Iveta Radicova, said Fico had full authority to sign off on the EFSF.
"Slovakia's prime minister and the government have a full (power) to decide (on the EFSF)," Radicova told reporters earlier on Friday.
She declined to ask Fico to sign the plan and refused to comment on how she would decide.
Finance Minister Jan Pociatek slammed the opposition stance.
"This is like playing with an atomic bomb. It is unpredictable what could happen if the mechanism will not be available on time," he said.
Slovakia needs to sign the agreement on the EFSF but can later decide not to participate in the aid mechanism without preventing other countries from going ahead.
Once 90 percent of all the mechanism's guarantees are confirmed by participating countries, the aid scheme can become operational.
Slovakia has a separate problem concerning the 110 billion euro EU/IMF bailout package for debt-laden Greece.
The country, which joined the euro zone in 2009 and is much poorer than Greece, is due to vote next month on its 800 million euro contribution to the package. But, before the election, the centre-right parties refused to say whether they would commit Slovakia's share to the bailout should they take power.
(Additional reporting by Jan Strupczewski in Brussels and Andreas Rinke in Berlin; Editing by Susan Fenton)
Extracted fromhttp://in.reuters.com/article/idINIndia-49437820100618