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Emerging Markets (Asia) Bow to Inflationary Pressures: Currency Appreciation will Follow

I ended my previous post on the subject by noting that emerging market Central Banks were at a crossroads. Either they would raise interest rates and accept currency appreciation, or they would risk hyperinflation and economic instability. While the jury is still out on a handful of cases, it looks like most of the emerging market countries in Asia have chosen the former.

Oil Prices and the FX Conundrum

I haven’t blogged about oil prices in quite some time. After prices collapsed in the wake of the financial crisis, there really wasn’t much to talk about. However, the price of crude oil has risen more than 50% since June, and it now seems to be at the forefront of investor consciousness. Currency market watchers, in particular, need to brace themselves for the nuanced and sometimes contradictory ways in which oil prices bear on exchange rates.

These two numbers will tell when investor sentiment turns sour

Evaldo Albuquerque (February 28, 2011)

In the past weeks, the dollar has weakened against major currencies, despite the crisis in the Middle East. In other words, the dollar did not benefit from risk aversion. Currencies like the Japanese yen and the Swiss franc were used as safe-haven instead. Does that mean the dollar’s role as safe-haven currency is over? I don’t believe so.

I think it just depends how bad things get out there. You see, most traders have been using the dollar to fund risky investments. If things get really bad, they will have to close their positions by buying the dollar. So how can you tell if things are getting really bad?

This “Stock Market Sensitive” Currency Could Tumble Along with Stocks Soon!

If there was every a “stock market sensitive” currency, it’s the Australian dollar.

You see, when traders/investors are willing to stick their necks out enough to get into stocks, they are also willing to go into riskier, higher yielding currencies at the same time.

In fact, you can see how closely the Aussie (AUD/USD) tracks U.S. stocks by checking out the chart below. Click on the chart to enlarge it.

The S&P 500 is Overdue for a Sizable Correction…And So is the Aussie Dollar!

Then when you apply Elliott Wave analysis, you can see that the S&P 500 has already completed its “5 waves up” pattern. Now it’s time for a “3 waves correction” downward against that uptrend. In fact, you can look at the yellow arrow on the chart to see how this may play out.

Competition Heats Up in Retail Forex

The last few weeks have witnessed a number of major developments in the retail forex world: more mainstream firms  entering the fold, and existing firms are moving to beef up their forex operations. Not only will this permanently alter the competitive landscape, but it should also benefit traders in the form of more choice, lower prices, and increased transparency.

Untangling the Puzzle of Risk Appetite

When analyzing forex, nothing is more satisfying than establishing a strong correlation between a particular currency pair and another quantifiable investment vehicle. You see – we fundamental analysts love to kid ourselves that we can actually explain what’s going in the forex markets, but it’s only when you can visually observe (and statistically confirm) a correlation can you actually pretend that this self-assuredness is justified.

Chinese Yuan: Further Appreciation is Inevitable

Relatively speaking, the Chinese Yuan has been on a tear, appreciating ~1% in a little more than a month. One has to wonder whether this is a concession by the People’s Bank of China (PBOC) that its exchange rate regime is not viable or whether its instead a political sop. The question on everyone’s minds, of course, is, will it continue?

EU Ponders Tobin Tax

Only two years after the worst financial crisis in decades, the DJIA is now back above 12,000. Yield-hungry investors are pouring record amounts of cash into emerging markets. Commodities and food prices are rising into bubble territory. In fact, not a single meaningful reform has yet to be passed that would prevent such an event from erupting again. The EU, however, is trying to change that, with the proposed introduction of the first-ever Tobin tax on foreign exchange trades.

The Obama Budget and the Dollar

Last week, the Obama Administration released its fiscal 2012 budget to much fanfare. Unfortunately, the budget makes only a token effort to address the rising National debt, and forecasts a budget deficit of $1.1 Trillion. While the release of the budget failed to make a splash in currency markets, traders would be wise to understand its implications for the future.

Hedging High Forex Uncertainty

In forex, everything is relative. That is no less the case for forex volatility, which is low relative to the spikes in 2008 (credit crisis) and 2010 (EU Sovereign debt crisis), but high relative to the preceding 5+ years of stability. On the one hand, volatility is approaching a two year low. On the other hand, analysts continue to warn of high volatility for the foreseeable future. Under these conditions, what are (currency) investors supposed to do?!

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