Quotes of the Day

“On G-7 meeting weekends now I go fishing, no reporters call and writing up summaries of the G-7 for the most part is pointless as there is no news”, an analyst wrote to clients. The G-7 is expected today to be replaced by the G-20 as the main forum for global economic cooperation.

Quotes of the Day

“A currency, which the country’s own central bank likes to see weak, obviously is not an attractive investment,” a currency analyst said after a comment from Mervyn King, the Bank of England governor, caused the pound to depreciate almost 2 percent against the dollar. The comment showed that the policymakers see the a weaker pound “very helpful” in rebalancing the U.K. economy.

50 pips Profit on FOMC Statement

The FOMC announcement showed that the policymakers are starting to think about the possible options in order to wind down the accommodative measures when the economy resumes its growth. Referring to the purchases of mortgage-backed securities and housing-agency bonds, the Fed said that it “will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010”.

Stocks dropped and treasuries rose in response to the decision and it was when I decided to bet on rising risk-aversion by buying the yen. I sold eurjpy and the trade finally resulted in 50 pips of profit in almost 6 hours. The following charts show the market reactions.

Quotes of the Day

“One should always start to be concerned about inflation when you get a weakening currency, rising commodity prices, and rising gold prices,” an economist said before the FOMC decision when the committee’s statement was expected to show that they are less concerned about inflation, counting on the weak recovery and rising unemployment.

New Zealand’s Economy Surprises the Markets

An economic report showed that New Zealand’s GDP surprisingly turned positive in the second quarter (on the quarterly basis). Another report this weak also showed that the current account deficit, as a percentage of the GDP, dropped to 5.9 percent, well below the 7.4 percent which was the average estimates. New Zealand dollar appreciated in both cases. The following carts show the reactions from the Forex market.

Quotes of the Day

“There is an enormous black hole in the public finances which only major spending cuts can fill.” An economist said after a report showed that the budget deficit in Britain widened to a worrying level as the recession continues to reduce the spending power of Labor government by destroying the tax revenue.

Quotes of the Day

“There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.”, Joseph Stiglitz, the Nobel Prize-winning economist said, reminding the weakness of the GDP figures in assessing the wealth and the well-being of societies, specifically by not including some challenging issues such as the climate change, environmental sustainability, or the role of national debt in exaggerating the GDP number.

“Ripping the stimulus out prematurely would only pull the rug out from under the recovery, undermine confidence and threaten jobs.”, Australia’s Treasurer Wayne Swan said in a weekly economic note. In recent days, policymakers around the world have showed their concerns that it may still be too soon for cutting back in stimulus efforts.

Quotes of the Day

“The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.” , Niall Ferguson said, when the author of “The Ascent Monday” was pointing to the fact that the current regulatory structure could lead to another “Lehman Monday”, referring to the aftermath of the Lehman Brothers bankruptcy on September 15, 2008.

Quotes of the Day

“The classic mistake people make is they declare victory too soon”, U.S. Treasury Secretary Timothy Geithner told to a Congressional panel when he was suggesting that some of the measures, introduced to restore stability to the system, are still needed to be in place.

Bank of England Avoids Expanding its Purchases

The Bank of England (BOE) decided to keep the size of its assets purchase unchanged. Pounds rose against the Euro and the US dollar after the bank announced its decision as it was in contrast with some analysts’ expectation who suggested the possibility of 25 billion pounds increase. The following charts show the market reaction to the decision.

Forex Responses to Australian Employment Change

Australian employers cut 15000 jobs in August. Aussie depreciated in response to the report. The following chart shows the market reaction.

Aussie Reaction to the Retail Sales Report

Australian retail sales fell 1.0 percent in July, a report on Wednesday showed. The average estimate was for a 0.5 percent increase and the market reacted negatively to the unexpected drop.

Another report showed a more than expected decline in home loans. Both reports caused the market to reduce its expectation for higher interest rates by the RBA. The chart below depicts the reaction from the Australian dollar to the news in early Asian markets.

50 pips of Profit from the Continuing Weakness of the U.S. Dollar

Today, I made 50 pips of profit by buying eurusd in early European markets. The dollar is generally weak these days and my bet was that the Beige Book from the Fed, which was expected to show the policymakers’ desire to hold interest rates low, would work in favor of that trend.

Gold Breaks $1000 Level Again

For Tuesday, Sep 8:

Sentiment
Asian stocks opened higher today. The following factors affected the sentiment in financial markets:

- Finance ministers and central bankers from the G20’s members pledged not to unwind their recent efforts too soon until seeing signs of financial stability and sustainable recovery.

- Business indicators were mixed. Australian business sentiment rose more than expected, signaling that the economy may grow faster than previously estimated which may increase pressure on the RBA to raise the cash rate sooner. However, another report showed that the Japanese trade balance fell in July, adding to worries that the economy in overseas may be still far from a strong recovery.

Gold Rose
Investors coming back from the Labor Day holiday found many reasons to buy gold, finally pushing the price above the 1000 dollar per ounce for the first time in six months.

First, some investors are increasingly worried about the risk of inflation as they think that the policymakers may find themselves unable to control the inflationary consequences of printing and pumping money into the system when the world economy start growing.

Second reason was the dollar weakness, which tends to make the gold more attractive for the foreigners by making it cheaper in their currencies.

Dollar weakness itself was mostly because of worries about the widening U.S. budget deficit and to some extent from the increase in risk-appetite and carry-trading though the Japanese yen, the main source of funding in carry trading, remained relatively stronger as the comments from the newly elected party in Japan suggested that they may be less interested in currency intervention. The later tends to make holding of the yen less risky.

Sterling’s Reaction
From the calendars’ perspective, the pound was under pressure as it was expected that the UK manufacturing and industrial production show small increase. However, the weakness of its counterparts changed the balance in favor of the pound appreciation. The trend strengthened when the economic data came much better than those estimates.

The following charts show the market reactions: