All Hail the Kiwi

S&P downgraded Portugal two notches to BBB, citing political instability as a result of the resignation of Portuguese Prime Minister Jose Socrates, after his government lost an austerity-budget vote.

The downgrade comes after both Moody’s and Fitch lowered their ratings on the country as well.

Portugal faces the bulk of it refinancing needs within the next several months. Come April, an estimated 4.5 billion Euros will be redeemed, followed by 4.9 billion Euros in June.

Analyst Laurent Fransolet at Barclays Capital estimated in a note last Friday that the country’s current cash position was likely to be about 4.5 to 5 billion Euros, enough to cover the April redemption, though not the one in June.

“Portugal needs to find financing in the coming weeks,” Fransolet wrote, adding that funds could come through issuance, credit lines or a bridge loan. “Portugal is likely to find financing, but it is not in a comfortable position.”

In what seemed to be a contradicting retort, Eurogroup chairman Jean-Claude Juncker said in the recently concluded EU Summit, “I don’t assume that Portugal will be putting in a request for financial assistance. The situation in Portugal is very complicated. But nothing suggests that Portugal will put in a request any time soon.”

With Portugal’s 10-year bond yield advancing 13 basis points last week, it seems that Portugal will have to fork out rates in excess of 7% to roll-over its debt.

Similarly, ratings agency Moody’s issued a warning to British Chancellor George Osborne that Britain could lose its triple-A credit rating because of runaway deficits.

In a bid to rein in its debt, the government announced a shocking US$130 billion (S$164 billion) in spending cuts. The move was so bold that it drew widespread condemnation from the people; sending them to the streets in protest on Saturday.

Top News This Week

China Manufacturing PMI. Friday, 1st April 2011, 9am. I expect numbers to come in at 54.6 (previous numbers were 52.2).

US Non-Farm Payroll. Friday, 1st April 2011, 8.30pm. I expect numbers to come in at 203,000 (previous numbers were 192,000).

Trade Call

Sell GBP/USD at 1.6035

On the hourly chart, GBP/USD has been on a nice downtrend since March 22, falling over 400 pips since touching 1.6400 on March 22.

At the time of this writing, the psychological level of 1.60 has also been breached. We will continue to trade along the downtrend, going short once prices retrace to 1.6035.

A tight stop loss is placed 50 pips above the entry, and we will have 2 profit targets on this trade.

Entry Price = 1.6035
Stop Loss = 1.6085
1st Profit = 1.5985
2nd Profit = 1.5935

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Lowering Italy’s credit-rating outlook from stable to negative, the S&P cited the nation’s slowing economic growth and “diminished” prospects for a reduction of government debt as the main reason. The last time it actually cut Italy’s credit rating was in 2006.

In danger of losing its A+ credit rating, Italy’s Treasury immediately responded after the announcement, saying that it would “intensify structural changes and push ahead with measures to balance the budget by 2014.”

After the news subsided, the extra yield that investors demanded to hold Italian 10-year bonds over German bunds rose 13 basis points to 185, the highest in more than four months.

In good company, bond yields in the other debt-laden PIGS (Portugal, Ireland, Greece, Spain) fared badly as well:

1. Portugal: 10-year yields jumped 25 basis points to 9.16%

2. Ireland: 10-year yields jumped 9 basis points to 10.32%

3. Greece: 10-year bond yields jumped 57 basis points on Friday to 16.37%

4. Spain: 2-year yields jumped 29 basis points 3.62%

All were record-highs, except for Spain, which recorded the high since early January 2011.

It was a “double-whammy” for Greece because another ratings agency, Fitch, cut its long-term debt rating to B+ last Friday, four notches below investment grade, and placed it on rating watch negative.

The biggest beneficiary out of all this mayhem has been the US dollar. For the month of May thus far, it has risen against all 16 of its most- traded counterparts.

“The chance of a further bounce in the dollar is quite strong,” said Ken Dickson, investment director of currencies in Edinburgh at Standard Life Investments, which oversees $250 billion.

Early this month, it seemed that nothing could stop the Euro charging its way up. On 4th May 2011, EUR/USD touched 1.4939, a 16-month high.

All that has remarkable changed in the span of three short weeks. Now it seems that the Euro can’t seem to put a foot right.

The sovereign-debt problems did seem to fade in the background just a few months back, with QE2 in the US and high inflation in Asia hogging the limelight. Now the spotlight is firmly on the Euro again.

According to the median estimate of at least 29 analysts surveyed by Bloomberg News, the sovereign-debt problems in Europe will limit the region’s economy to less than 2% growth this year and 1.6% in 2012.

Top News This Week

German Prelim CPI. Friday, 27th May 2011, 2am. I expect a figure of 0 percent (previous figure was 0.2 percent).

Trade Call

Sell EUR/USD at 1.4060

In a repeat of last week’s trade, we will short the EUR/USD. On the hourly chart, we see that the EUR/USD has broken the support level at 1.4064. Additionally, at the time of this writing, the hourly candle has closed below the psychological number of 1.40. This is a clue to further downside.

We will go short once prices retrace close to the support level. Entry is 5 pips below the support level. Stop loss is placed 75 pips above the entry price and we will have one profit target on this trade.

Entry Price = 1.4060
Stop Loss = 1.4135
Profit Target = 1.3985

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1. Debt Restructuring for Greece

On Monday, ministers from the European governments and the International Monetary Fund met in Brussels to discuss possible debt restructuring plans for Greece.

A debt restructuring can be achieved through methods such as an extension of maturities or a complete write-off of the principal sum. The European Central Bank or ECB however, has vehemently opposed such a plan.

This is because in the past one year, the ECB has deviated from its core mandate of fighting inflation by buying bonds of fiscally struggling countries – to the tune of 76 billion Euros in the past one year.

A debt restructuring would effectively hurt its repayment plans.
German Finance Minister Wolfgang Schaeuble said extending the maturities of Greek bonds may be a way to help ease the country’s debt crisis if private investors participate.

Schaeuble said in an interview with ARD television in Berlin, “While it’s too early to say whether more help is needed, extra measures may be needed if Greece can’t return to financial markets next year as planned under the European-led aid program agreed last year.”

Greece’s donor countries, led by Germany, are not pleased with how the events are unfolding. They are demanding deeper budget cuts in exchange for any additional help like extra cash or extensions to pay back loans.

If no concrete plans are achieved to relax rules on Greece’s 110 billion bailout package, a debt contagion of epic proportions could ensue; one which has already swallowed Ireland and Portugal.

2. IMF chief charged for sexual assault

Dominique Strauss-Kahn, the head of the International Monetary Fund, was charged with attempted rape and a criminal sex act in New York yesterday. Strauss-Kahn, 62, denied the charges and will plead not guilty, his lawyer, Benjamin Brafman, said in an e-mailed statement.

The embarrassing and potentially career-ending allegations may put an end to his prospects of running in the French presidential election in 2012.

This is the second time that Strauss-Kahn has faced allegations of misconduct as chief of the IMF. In 2008, an investigation by the IMF board led to the revelation of his relationship with Piroska Nagy, a female economist at the IMF.

While the board didn’t fire him then, the Forex world waits with bated breath on the outcome of this new case.

Top News This Week

German ZEW Economic Sentiment. Tuesday, 17th May 2011, 5am. I expect a figure of 4.6 (previous figure was 7.6).

Japan prelim GDP q/q. Wednesday, 18th May 2011, 7.50pm. I expect figures to come in at -0.5% (previous figure was -0.3%).

Trade Call

Sell EUR/USD at 1.4150

On the hourly chart, we see the EUR/USD moving in a nice downtrend. With the uncertainty surrounding Greece’s debt restructuring and the safe haven flows from last week, I expect the downtrend to continue.

We will take a trend play and go short once prices rise to 1.4150. Stop loss is placed 60 pips above the entry price and we will have 2 profit targets on this trade.

Entry Price = 1.4150
Stop Loss = 1.4210
1st Profit = 1.4090

2nd Profit = 1.4030

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Here’s a blow-by-blow round up of last week’s events:

Portugal agrees to a bailout

Portugal has become the third casualty of Europe’s soverign-debt crisis to seek a bailout from the European Union. The bailout package is worth a whopping 78 billion Euros, including about 12 billion Euros for recapitalizing the country’s banks.

As part of the agreement, Portugal will have to reduce its budget deficit over the next 3 years, cutting it to just 3 percent of its GDP by 2013.

The news was initially bullish for EUR/USD, but the currency pair then nose-dived 500 pips and ended the week at 1.4320.

US non-farm payrolls stay high

Pushing past the 200,000 barrier for the third month in a row, the United States non-farm payroll increased to 244,000 workers last month, the highest since May 2010.

Last week, I expected a figure above 190,000, and last Friday’s result was the antidote to a weak US dollar. This bodes well for a sustained US recovery.

Amid healthy payroll figures, the only dent was the jobless rate, which rose to 9 percent the first increase since November last year. Last month’s figure was 8.8 percent.

Commodities Plunge

The killing of terrorist Osama bin Laden by the US commandos effectively killed the commodity run as well.

Gold fell over 4.5 percent, silver fell 25 percent and oil tumbled close to 14 percent.

The huge sell-off in these markets was probably due more to risk-averse flows than outright US dollar strength. A clue to this was seen in the rise of the Yen last week.

It was the only major currency that strengthened against the U.S. dollar while all others fell. This tells us that traders were seeking safe havens last week.

World events aside, an additional event was the Singapore General Election.

Financial markets barely blinked as the ruling People’s Action Party was returned to power.

However, the local currency did start edging upwards. At the start of the week, the SGD rose 0.6 percent against the USD.

Top News This Week

China CPI. Wednesday, 11 May 2011, 10am. I expect figures to come in at 5.2% (previous figure was 5.4%).

Australia Employment Change. Thursday, 12 May 2011, 9.30am. I expect figures to come in below 17,000 (previous figure was 37,800).

Trade Call

Sell USD/CHF at 0.8710

On the 4-hourly chart, we see the USD/CHF moving in a massive downtrend. From 1 April to 5 May, the currency pair fell a massive 800 pips.

With the uncertainty surrounding Greece’s debt restructuring along last week’s with safe-haven flows, I expect the downtrend to continue.

We will go short once prices fall to 0.8710. Stop loss is placed 105 pips above the entry price and we will have one profit target on this trade.

Entry Price = 0.8710
Stop Loss = 0.8815
Profit Target = 0.8605

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The biggest news that triggered the sell-off came from a press conference held by Federal Reserve chairman Ben Bernanke, the first he has held immediately after a monetary-policy announcement.

Mr Bernanke said the central bank is likely to continue reinvesting its securities holdings, including mortgage-backed securities, when they mature after June.

His dovish remarks sank the US dollar. Major currencies like the euro (EUR), sterling (GBP), aussie (AUD), kiwi (NZD), loonie (CAD), franc (CHF) and yen (JPY) all pushed stronger against the dollar.

The US Dollar Index, a trade-weighted measure against a basket of currencies, has lost more than 8 percent of its value since January.

Gold, on the other hand, has skyrocketed to new highs. When the US dollar sinks, gold rises because it acts as a hedge. At the time of writing, the US Dollar index is just above 73 and gold has reached a historic high of US$1,573 per ounce.

As long as the Fed continues to pursue an easy monetary policy, the greenback will continue to weaken and commodity prices worldwide will continue to strengthen.

This will bode well for commodity-linked currencies, such as the AUD, NZD and CAD.

TOP NEWS THIS WEEK

Europe Minimum Bid Rate on Thursday, 5 May 2011. I expect rates to remain at 1.25 percent.

US Non-Farm Payroll on Friday, 6 May 2011. I expect it to be above 190,000 (the previous number was 216,000)

TRADE CALL

Buy AUD/USD at 1.0845

The AUD has strengthened 2 percent against the greenback. On the hourly chart, AUD/USD reached a historic high of 1.1010 yesterday morning.

We will go long once the price goes back to 1.0845. Stop loss is placed at 55 pips below the entry price and we will have two profit targets on this trade.

Entry Price = 1.0845
Stop Loss = 1.0790
1st Profit Target = 1.0900
2nd Profit Target = 1.0955

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The S&P cut the outlook for US sovereign debt from stable to negative, which was the first time it had done so.

Prior to the announcement, Moody’s was the only other rating agency that had ever put the US on downgrade watch. This happened in 1996 when the Republicans refused to vote to increase the debt ceiling.

Although it’s not an outright downgrade of its credit rating, the negative outlook is seen as the all-important first step that rating agencies take before an actual downgrade of a country’s credit rating.

What would happen if the US is indeed stripped of its AAA rating?

For one, borrowing costs would soar.

Since the start of this year, traders and investors have been selling US dollars and an actual downgrade would trigger a bigger exodus out of the greenback.

Yields would sky-rocket and that would make lending to the world’s largest debtor that much more difficult.

Additionally, a higher default risk could erase the US dollar’s current status as the ultimate safe haven. That title already seems shaky, judging by the recent gains in the Swiss Franc and gold.

For now, because the US dollar features so much in world trade, the negative outlook by S&P ravaged it in the Forex market, setting many records in the process.

Take a look at the record moves against the US dollar last week:

• The Euro and Sterling Pound hit one-year highs
• The Aussie and Swiss Franc hit their highest levels on record
• The Loonie (CAD) and Kiwi (NZD) hit three-year highs
• China’s Yuan reached 6.507, its highest ever on record
• Singapore dollar reached 1.233, also its highest ever on record

Not to be outdone, many other Asian currencies strengthened as well. They included the Taiwan dollar, Indonesia Rupiah and the Malaysia Ringgit.

The Ringgit was particularly impressive, returning below 3RM (S$1.238) per U.S. dollar for the first time in 13 years.

The onslaught of the Asian currencies caused the Bloomberg-JPMorgan Asia Dollar index to rise to its highest level since 1997.

This week, all eyes will be on the Federal Reserve. We would have to wait till Thursday to see if the central banks’s comments will help or further hurt the battered dollar.

Top News This Week

USD Federal Funds Rate. Thursday, 28 April 2011, 12.30am. I expect rates to remain below 0.25%.

Federal Open Market Committee Press Conference. Thursday, 28 April 2011, 2.15am. Look out for Bernanke’s conclusion of QE2 which ends in June 2011.

NZD Official Cash Rate. Thursday, 28 April 2011, 5am. I expect rates to remain at 2.5%.

Trade Call

Sell USD/CAD at 0.9540

On the hourly chart, USD/CAD has dropped about 265 pips since its high on 18 April 2011. A 94-pip range is detected with resistance at 0.9549 and support at 0.9455.

Trading with the downward momentum, we will go short once prices bounce off the resistance, and exit before prices reach the bottom of the range. Stop loss is placed 60 pips above the entry, and we will have one profit target on this trade.

Entry Price = 0.9540
Stop Loss = 0.9600
Profit Target = 0.9480

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Central bank Governor Zhou Xiaochuan said that he sees “no absolute limit” on how high the reserve requirements can go; adding that monetary tightening will continue for “some time.”

The move came less than two weeks after an interest-rate increase, which took key one-year borrowing costs to 6.31% and the deposit rate to 3.25%.

The main reason for the move was due to China’s stubbornly high inflation figures. On Friday, it was reported that China’s Consumer Price Index (CPI) for March was at 5.4%, mostly attributed to higher food costs.

This was well above People’s Bank of China (PBOC) target of 4%.

In last week’s article, I had forecasted an optimistic figure of 5.2% for China’s CPI; but the actual figure of 5.4% beat out even my most bullish estimates.

Additionally, the PBOC announced last week that its foreign exchange holdings, already the world’s biggest, increased by USD 197 billion in the first quarter to USD 3.05 trillion.

This is 3 times more than the world’s second-place country, Japan.

Interestingly, in the last 10 years alone, China’s enormous trade surpluses and its continuous buying of US dollars to suppress the Yuan’s value have led the reserves to balloon 17-fold.

For every US dollar that China buys, China prints about 6.5 Yuan, adding even more cash to its economy, thereby stoking inflation. To neutralise this cash, China conducts “sterilisation procedures” like raising reserve ratios and limiting banks’ lending.

Hence, by locking up excess liquidity in the financial system, the Chinese government can help to tame inflation by controlling the money supply.

Since the global financial crisis, China has raised its reserve ratio 10 times and hiked interest-rates 4 times. This is a stark comparison to other central banks like the Fed and the ECB, and further highlights China’s role in leading the global economic recovery.

Top News This Week

USD Existing Home Sales. Wednesday, 20 April 2011, 10pm.
I expect figures to come in at 5.04 million (previous figures were 4.88 million).

Australia PPI. Thursday, 21 April 2011, 9.30am.
I expect figures to come in at 1% (previous figures were 0.1%).

Trade Call

Buy NZD/USD at 0.7865

On the hourly chart, NZD/USD has been on a nice uptrend for 2 weeks. With Australia due to report good numbers this week, I expect the spillover effect to push NZD/USD up as well.

We will go long once prices bounce on the uptrend, and dip to 0.7865. Stop loss is placed 50 pips below the entry price. Since we are playing the trend, we will have 2 profit targets on this trade. Our first unit will exit at 0.7915 and the other will exit at 0.7965.

Entry Price = 0.7865
Stop Loss = 0.7815
1st Target = 0.7915
2nd Target = 0.7965

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Although the rate hike was the first in almost three years, it was widely anticipated by traders. They welcomed the news, and sent the euro higher against the United States dollar, blasting over 200 pips to hit 1.4483 yesterday morning.

Another favoured risk currency, the AUD/USD, moved in similar fashion, surging past 1.05 for the first time.

The rate hike by the ECB widened the differential between US and European yields, and based upon Euribor futures, the market is looking for at least another 50 basis points of tightening from the ECB before year-end.

The Euro bulls seemed to throw caution to the wind, despite sovereign-debt problems lurking in the background. Portugal has officially requested aid from the IMF, and the bailout program will be in the region of 80 billion euros (S$145 billion).

With the ECB rate hike, the main question is, why doesn’t the Fed believe in raising interest rates as well? After all, both have the same mandate of controlling inflation.

Inflation came in at over 2 percent for both the US and Europe last month, but the ECB tightened monetary policy, while the Fed loosened monetary policy by continuing its purchases of US Treasuries.

The answer lies in the Fed’s additional mandate: To maintain maximum employment. Although unemployment appears higher in Europe (20% in Spain, compared to under 9 percent in US), it ain’t the ECB’s job to oversee employment in its member nations.

The Fed on the other hand, is not convinced that raising rates at this point will help bring down the jobless rate.

Top News This Week

Canada Overnight Rate, today expect figures to remain at 1 percent.

China CPI, on Friday. Expect figures to rise to 5.2 percent from 4.9 percent.

Trade Call

Buy AUD/USD at 1.0511

With oil still remaining above US$100 per barrel and with the return of risk to the markets, I expect the commodity currencies to do well.

On the hourly chart, AUD/USD has broken new highs, surging past 1.05 late last week. I expect the uptrend to continue, especially with the return of the carry trade.

We will go long once prices dip to 1.0511. Stop loss is placed 50 pips below the entry price, and we will have a slightly better risk reward ratio, taking profit at 60 pips above the entry price. We will have 1 profit target on this trade.

Entry Price = 1.0511
Stop Loss = 1.0461
Profit Target = 1.0571

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The forecast was for 191,000 jobs, but the numbers came in at 216000 instead, higher than my own estimate of 203,000 in last week’s article.

As an additional boost, the unemployment rate fell to the lowest level in two years, at 8.8 per cent. It has fallen a full percentage point (from 9.8 per cent) in as little as four months.

Movements in the forex market are triggered whenever key economic figures come in greater or lower than expected.

The commodity currencies were the first to benefit from the risk rally. When markets opened yesterday morning, the Australian dollar rose to a record high of 1.0416 and the Canadian dollar climbed to a three- year high of 0.9625.

Several of the most traded Asian currencies rose as well. The South Korean won climbed 0.4 per cent to 1,086.65 per US dollar and the rupiah increased 0.3 per cent to 8,676 according to data compiled by Bloomberg.

The Thai baht and the Singapore dollar both gained 0.2 per cent, to 30.23 and 1.2601 respectively.

The real question now is whether the Federal Reserve would be convinced to start unwinding emergency stimulus and start raising rates soon.

There is some disagreement within the central bank as to how and when to withdrawal emergency stimulus.

Top News This Week

Australia Cash Rate, today I expect figures to remain at 4.75 per cent.

Britain’s Official Bank Rate, on Thursday. Expect it to stay at 0.5 per cent.

Europe Minimum Bid Rate, on Thursday. It is likely to go up to 1.25 per cent from 1 per cent.

Trade Call

Buy EUR/USD at 1.42550

The big news this week is the possible rate hike by the European Central Bank, which would be the first such increase in almost three years.

On the hourly chart, EUR/USD is facing resistance at 1.42450, with a false breakout spotted yesterday. Prices failed to close above the resistance.

If the ECB proceeds to raise rates on Thursday, we will go long once prices hit 10 pips above the current resistance level. Stop loss is placed 60 pips below the entry. We will have one profit target on this trade.

Entry Price = 1.42550
Stop Loss = 1.41950
Profit Target = 1.43150

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