Federal budget and EUR/USD

hello,

After heavy negotiations, Republicans and Democrats to come to agreement regarding the federal budget and should be finally approved later this week.

Liquidated be cut worth 63 billion dollars (85 billion from within Sequester).

What is important, and what I wrote in an earlier post <more info> that this plan does not include the extension of unemployment insurance. December 28 expires special aid program in the U.S. for the unemployed. If it is not extended is about 1.3 million unemployed Americans will lose benefits (in the coming months even 800 thousand). A large part of the people in this group may simply abandon the search of job and disappear from the workforce. The result? The decline in the unemployment rate by 0.25% to 0.5%! Of course, this does not mean that the economy will benefit, just the way it works statistics.

The plan is smaller than originally deficit for the next two years (about 23 billion USD), while there will be no tax increases.

EURUSD just rubbed against 1.38 level, despite fairly widespread opinion that 2014 should be the year of the dollar. The question is, why is this happening?

chart 1. EUR/USD & short rate

Responses should look at what is happening in the market interest rate in Europe. Chart at the top (source Bloomberg), shows that the 1M LIBOR for EUR is higher than the U.S. dollar for the first time since March 2012! It also means that since the introduction of the LTRO by the ECB for the first time liquidity in the European interbank market begins "to dry" - something did not foresee the ECB. In addition, Draghi has not helped the whole history to indicate that the ECB currently has no plans to LTRO, and the market also found (although Draghi did not say) that negative rates are not a threat.

Consequently, the German short-term securities are sold out, pulling the short-term interest rate in EUR up, which in turn translates into a strengthening of the euro, as the cash flows to the euro, where deposits are getting higher profitability.

chart 2. EUR/USD & spread GER2Y - US2Y

What's next?

Current situation is not sustainable in the long term. The ECB will not tolerate a lack of liquidity and the increase in market interest in Europe. The question is whether the Bank will be able to offer additional liquidity before the January meeting? American yield will rise after the Fed meeting, but more on the average dates (FRA18x24) and the long end. I believe that normalization of interest in the European market is a prerequisite to ensure that the exchange rate returned to the level suggested by the FRA market (around 1.355 in the medium term and in the longer 1.33).

regards,
oscarjp

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The most interesting opinions representatives of the Fed about monetary policy today

hello,

Today, the only interesting events in my opinion were speeches by Fed regarding Current Issues of the economic situation in the United States, and monetary policy. In addition, it is worth noting that these are the last planned statements by the Fed until the meeting of the FED and the statement of the Ben Bernanke on 17-18 December.

Lacker, FED of Richmond:

- GDP growth next year, only slightly more than 2%;

- immediate improvement in the labor market rather unlikely;

- I expect a discussion about reducing the QE next week;

- inflation back to 2% over the next year or two;

- is unrealistic to change by FED pace of the purchases from time to time, it is difficult to define the criteria for cutting QE3.

Fischer, FED of Dallas:

- business should take advantage of low interest rates now;

- QE3 cost significantly exceeds its advantages;

- Fed should cut at the earliest opportunity (17-18 of December :));

- I am opposed to moving the threshold of raising interest rates.

Bullard, FED of St. Louis:

- Fed must be credible with the objective of inflation;

- markets should be able to "digest" the cut QE3 in the near future;

- the stock market is not far from the traditional foundations I do not see bubbles in financial markets;

- inflation, a negative surprise;

- growth of the labor market may slow down;

- cut should be small with such a low inflation.

Key sentence:

"A small taper might recognize labor market improvement while still providing the Committee the opportunity to carefully monitor inflation during the first half of 2014." 

still something:

In December a Bloomberg survey, economists involved cutting waiting QE3 in December rose with 17% in November to 34% in December. 26% of respondents expected the first cut in January. 40% of respondents still expected to cut until March 2014, no one expected to start cutting QE3 later than March. The survey has covered 35 economists and analysts.

regards,

oscarjp

why the EUR/USD does not want to fall?

hello,

On Wednesday, yield of German 10Y Gov. Bond shot up to 1,814% from 1,733%, while the highest level since Oct. 22. On Friday, we had a maximum of 1.89. Before closing exchanges yield managed to fall and ended the week at 1.84

Also strongly increased the yield of German 2Y to 0.167% found at the highest level since Oct. 29. In the afternoon yield for the same securities was already 0.218%

German bonds were once a safe haven for capital at a time when in Europe has not happened preferably. Currently, have clearly improved the situation and the probable lack of action by the ECB after Thursday's meeting results in sale of German bonds, and this is reflected into an increase in their yields and strengthening of the euro.

In addition, Spain sold bonds 5Y Gov. Bond highest price since July 2005. Yields declined to 2.72%. During the same auction in November was 2.87%. You can see that the capital securities will more and more southern countries.

Yield of U.S. 10Y Gov. Bond reached 2.87% on Thursday, the highest level since Sept. 18. Interestingly, in recent times there is a sizeable "steepening" of the curve for the dollar: yields at the long end - rise, while a short end is not.

In fact, just before the Fed's decision of 18 September 10Y yield Gov. Bond was 2.85% and FRA18x24  was 1.05% . Now, it is respectively 2.88% and 0.71%! This explains why We still do not see the strengthening of the dollar. But if the Fed actually reduced the QE, FRA rates also would increase and the dollar strengthened.

regards,
oscarjp

HFT on the Dow Jones Index Future

The entire event took place during the publication of Non-Farm Employment Change and Unemployment Rate from the U.S. market. The movement shown in the chart lasted literally a moment. The One second at the same time would take forever.

After the publication of the data, Index increased from 15,875 points to 16,061 points (up 1.17 percent) and then decreased to 15,840 levels (a decrease 1.38 percent).

chart 1. Dow Jones Future Index, 2013-12-06

This type of market situations are very dangerous for traders who invest large financial levers. Within a few milliseconds can lose all of its assets in the portfolio. It is difficult to advise anything, you have to remember to always use a stop loss, so that we always know how much money will lose maximum in case that the market does not go our way.


regards,
oscarjp

currency wars - Yuan is building a strong position in trade

Currency of the Republic of China has overtaken the euro and became the second most popular used to finance commercial transactions.

In a recent report, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), participation of the Chinese currency in international trade finance transactions (eg letter of credit) rose in October to 8.7 percent from 1.9 percent in 2012. Yuan ahead in this respect, the euro, whose share fell at the same time from 7.9 percent to 6.6 percent. The participation of U.S. dollar still is not at risk and amounted in October 2013 81 percent.

Yuan is most often used to finance international trade transactions mainly by companies in China. They represent 54 percent of world trade, another 21 percent of transactions attributable to Hong Kong and 5 percent for Singapore, the 2 percent for Germany and Australia.

The recent plenum of the Communist Party of China accepted the reform program providing for, inter alia, liberalization of the capital market, which is likely to increase the popularity of the yuan in global markets. It is worth mentioning that in recent months the Republic of China signed an agreement allowing direct exchange of yuan to British pounds and Singapore Dollars.

One of the strategic objectives of the Chinese authorities is to make the yuan a global reserve currency with a similar status as the U.S. dollar.

Is expected that by the end of 2015 the participation of the yuan in international trade will increase to 30 percent.

regards,

oscarjp

13. Summary of the trades (November 16th, 2013 - November 30th, 2013)

hello All,

As a preliminary point, I would like to apologize to all who were waiting for my two-week summary of the transactions posted to my blog. Unfortunately I could not find the time to sort my blog. But fortunately we have the weekend so that we can all catch up. What I am doing at the moment. :)

In a previous statement I left open two transactions on EUR/USD. Both the stop loss at 1.3570. At the moment the market surpassed my levels and ended the week at 1.37 levels which is a complete surprise to me. There is now a big sale of the U.S. dollar along with rising yields on 10Y German bonds. More about this phenomenon I wrote in an earlier post <relation between EUR/USD & FRA US and EU & BOND MARKET> and I will try to describe it in the next that will appear in this weekend.

Summary of trades

As previously mentioned, aggregating transactions on EUR/USD bring a total of 112 pips profit and trade based on the futures contract on the SP500 which was closed with a profit of 261 pips. <trade>

trade safe,

best regards,

oscarjp

ADP Non-Farm Employment and Useful Information before friday which no one speaks

hi,

ADP: 215 thousand.; Expected 173 thousand. Previous reading was revised up from 130 thousand. to 184 thousand.

December 28 expires special aid program in the U.S. for the unemployed. If it is not extended is about 1.3 million unemployed Americans will lose benefits (in the coming months even 800 thousand).!

A large part of the people in this group may simply abandon the search of job and disappear from the workforce. The result? The decline in the unemployment rate by 0.25% to 0.5%! Of course, this does not mean that the economy will benefit, just the way it works statistics.

As for the program itself, it was first introduced during the crisis. Normally, unemployment insurance was granted for 26 weeks, then increased it to 99 weeks. So far benefits have already been issued to 225 billion USD. Last on the program is spent less and less due to the reflection of the U.S. economy.

EURUSD are too high in relation to the spread FRAs depicting expectations for interest rates, but on the other side the FX market is also affected by the bond market. Here, in turn, we see a clear correlation between the difference in interest rates on German and U.S. bonds and the exchange rate of the EURUSD. In contrast to the FRA market, bond market indicates a stabilization EURUSD still at high levels and while every currency pair quotes more aligned with the bond market than the market FRA. Only the correlation change or change in the bond market will be able to affect a different approach to the EURUSD.

This time, without a recommendation, are waiting for tomorrow's ECB chief press conference, and of course U.S. labor market on Friday

regards,

oscarjp

PMI, ISM with comment

hello everybody :)

On Monday we met PMI readings for all euro area countries. The results below:

Poland - PMI (November): 54.4 points; expected: 53.6 points; previous: 53.4 points. Highest since April 2011.

Spain - PMI (November): 48.6 points; expected: 51.1 points; previous: 50.9 points. Lowest since June.

Switzerland - PMI (November): 56.5 points; expected 55.0 points; previous: 54.2 points.

Italy - PMI (November):  51.4 points; expected 50.9 points; previous: 50.7 points. Best since June 2011.

France - PMI (November): 48.4 points; expected: 47.8 points; previous: 49.1 points.

Germany - PMI (November): 52.7 points; expected: 52.5 points; previous: 51.7 points. Best since June 2011.

Eurozone - PMI (November): 51.6 points; expected: 51.5 points; previous: 51.3 points. 

UK - PMI (November): 58.4 points; expected: 56.3 points; previous: 56.0 points.

Denmark - PMI (November): 58.1 points.

Greece - PMI (November): 49.2 points; previous: 47.3 points.

US - PMI (November): 54.7 points; previous: 54.3 points

US - ISM (November): 57.3 points; expected: 55.0 points; previous: 56.4 points. The highest level since April 2011.

Employment sub-index 56.5 points in October was 53.2 points. Production and orders grove up over 60 points. Prices paid by manufacturers down from 55.5 to 52.5

This is undoubtedly good news for the U.S. economy. When it comes to the real economy, it is as high ISM is a good estimate for the beginning of next year. ISM has a positive effect on, among other things getting better situation on the real estate market - the construction of houses represent an increase in orders for machinery construction. Employment Index also was positive. Importantly, the Index rising six months in succession and is the longest such series since 2009

regards,

oscarjp

insider trading - where is the line of propriety ? part 5

hello,

The European Commission on Wednesday punished eight financial institutions for a total amount of 1.7 billion euros for participating in illegal cartels in the derivatives market. It's about collusion regarding EURIBOR and LIBOR.

"On Wednesday, the Commission decided in two cartel cases in the financial sector. Reached a settlement with eight financial institutions that violated EU antitrust rules, and punished them for these violations. Combined punishment amounted to 1.7 billion euros, the highest penalty that the European Commission imposed a for breach of antitrust rules "- said at a press conference in Brussels, EU Competition Commissioner Joaquin Almunia.

Four banks participated in the cartel on derivative instruments (interest rate derivatives) that are denominated in euros. These were: Barclays, Deutsche Bank, Societe General and RBS.

and

Five banks (RBS, UBS, Deutsche Bank, JPMorgan, Citigroup) and one broker (RP Martin) participated while in bilateral cartels related to derivative instruments denominated in Japanese yen.

In total, the largest punishment accounted for Deutsche Bank, more than 725 million euros.

In relation to the institutions that have not agreed to a deal, are being further investigated. Those who agreed with the EC, received the discount in punishment. Penalties do not pay Barclays and UBS, because the first revealed the existence of cartels Commission. It's just as if I stole a car, confessed to the deed and has not been punished. Total idiocy.

"We found that in a cartel relating to derivatives based on the euro participating banks coordinate among themselves affect the rate of EURIBOR. Discussed also confidential commercial information that should not be discussed with the participants of the market" - said Almunia.

In the case of derivatives based on the banks manipulated the yen JPY LIBOR rates and TIBOR.

NO COMMENT

regards,

oscarjp

Can Abenomics save the Japanese economy?

hello,

The central banks of the U.S., euro area, Japan and the UK all used a similar method to fight with crisis, lowered interest rates to values ​​close to zero, started to provide free loans to financial institutions and began to buy from banks, hedge funds, etc. assets at very high prices, far higher than market prices.

We live in times where money is printed more than the daily press. Is the printing of money will bring the desired effect?

Saxo Capital Markets’ new infographic explores the efficacy of Japan's prime minister's dangerous experiment to stimulate economic growth.

Recent data suggests the Japanese economy is recovering from its deflationary cycle, with inflation at its highest for a half a decade. Japan’s consumer price index (CPI), which identifies the change in prices of consumer goods and services over a specific period, reveals an upward trend in consumer costs. Is this a sign of Abenomics in action? Next year’s consumption tax increase means the BOJ’s fiscal stimulus is expected to continue during 2014 to target the 2% inflation rate, despite the promising figures in the CPI release. Do you think Abenomics will work? Will the ‘three arrows’ of Abe’s radical policy experiment boost Japan’s real economic growth in the long-term? What will be the consequences of Abenomics on trading opportunities?

chart 1. Abenomics Infographic; 2013-12-01

The early effects of the reform programme have triggered a surge in the Japanese stock market, accelerated by the anticipation of growth revival. So far, so good for the markets and traders. But how will Abenomics accommodate public debt of over 200% GDP, and will Abe’s radical policies inspire a long-term economic recovery in Japan?

Infographic explores the efficacy of amed after, and engineered by, Shinzō Abe, Japan’s prime minister, to stimulate economic growth.

Abenomics is based on the untested formula of monetary easing, fiscal stimulus and structural reforms. In early 2013, Abe promised to increase public spending across Japanese infrastructure and renewable energy, committing $116 billion to reignite Japan’s struggling economy. This short-term stimulus aims to boost GDP and job creation by building business confidence and inspiring private investment.

A new inflation target of 2%, conceived by Abe and enacted by the Bank of Japan, prompted a massive quantitative easing programme worth $1.4 trillion. This stimulus measure was introduced with the aim of buying up government debt in a battle to counter deflation. Monetary easing has resulted in a weakening of the yen to the point of a rise in inflation. A devalued yen is a boon to Japanese exports, as manufacturers can sell more goods to a more receptive foreign market. As a result, the Nikkei stock index has rallied by gaining more than 40%, driving stock price increases and, consequently, invigorating business growth. Japan’s lower currency has dipped against the US dollar, with forecasts suggesting wages, prices, employment and business investment will all rise.

The third, and potentially most critical, strategy of Abenomics is the unrolling of proposed structural reforms. Abe’s move to revamp Japan’s healthcare field, energy policies and IT industry is an overhaul in key industry sectors to maintain economic growth beyond short-lived QE lifts and fiscal spending. To what extent does Japan’s financial stability hinge on these structural reforms? Abe’s decision to join negotiations on the Trans-Pacific Partnership (TPP), a regional free trade agreement, may be crucial to elevating the ratio of Japan’s international trade from 20% to 70%, under the free trade agreements.

A series of initiatives to lay the groundwork for future growth includes schemes to help Japanese engineering companies to sell more nuclear power plants and high-speed trains abroad as well as a domestic-based proposal to increase female numbers in the workforce.

For Abenomics to succeed, Japanese households will need to reverse the recent deflationary trend of excess saving and encourage consumers to spend more. In the infographic, Mads Koefed, Head of Macro Strategy at Saxo Bank, suggests that ‘the new experiment in Japan has boosted consumer sentiment and that has now resulted in consumers spending more of their money’. Will a more optimistic outlook translate into a revival for the world’s third largest economy? It is premature to gauge the success of Abenomics at this stage, and there are question marks over the proposed structural reforms. Fears remain over Japan’s alarming national debt, and an eventual rise in interest rates would add a greater burden on the government, undercutting reform measures. Will an offshoot of Abe’s remedies to Japan’s macroeconomic problems inflict a greater debt load?

Further problems await Japan: the unsustainable ratio of the elderly to the working population, fallout should fiscal stimulus fail, and snowballing costs for imports. This symptom of a weakened yen is exemplified by Japan’s post-Fukushima nuclear programme, which relies heavily on imports. Although Japan’s aggressive monetary easing programme has helped the yen devalue against the US dollar, Abe’s monetary easing plans threaten to distort the financial markets. The Bank of Japan’s purchases of financial assets have created significant uncertainty in the bond markets, with Japan’s 10-year government bond unexpectedly rising to a record high in May 2013.

Abe’s structural reforms carry with them several risks. The domestic agriculture sector could suffer from increased marketplace competition should tariffs on imports be removed. Any agreements with the TPP would mean greater dependency on government support among Japanese farmers, adding a further load on finances.

Data published in late November indicates that household spending has risen 0.9% in October (from 2013 figures), but is this a long-term ascent, leading to stable economic growth?

regards,
oscarjp