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"Japanese tax hike: pro et contra "(2012-06-27)

Japanese tax hike: pro et contra




Japan's lower house has voted to approve doubling the country's consumption tax to 10% over three years. The legislation now goes to the opposition-dominated upper chamber, where it is expected to pass during the current session of parliament ending September. However, the decision was not unanimous: 363 lawmakers voted in favor, while 96 - against.

Prime Minister Yoshihiko Noda championed the controversial bill regardless of the objections from his own party. In his view, the tax hike is needed to reduce the snowballing budget deficit (forecasted to reach 214% of GDP in 2012). Japan’s government says that the increase will generate $170 billion a year for the budget. Opponents believe the hike is premature and will weaken the economy further because it will limit the consumption.

Analysts at UBS fear that the first tax hike in 2014 could bring the economic recovery after the last year’s earthquake and tsunami to the deadlock. According to the Cabinet Office’s Economic and Social Research Institute, a 1% point increase in the tax will cut GDP growth by 0.32% a year after. In this case a strong economic stimulus will be required to support the rebounding economy.

In a short-term, the international investors take the “wait-and-see” approach, because they have already burned many times by trying to trade USD/JPY on Japan’s political events. Specialists at Sumitomo Mitsui Banking Corporation also don’t expect the Japan’s fiscal policy and the internal political differences to be the core factors to specify the yen's direction.

Yoshihiko Noda, Prime Minister of Japan, a member of the Democratic Party of Japan
Photo: Franck Robichon/EPA





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"All eyes are on German parliament "(2012-06-29)

All eyes are on German parliament


Although there are still issues of confrontation among the European policymakers including joint debt, euro bonds, the region’s policymakers have managed to show their resolve in combating the debt crisis.

All eyes are now on the parliamentary vote in Germany tonight on whether to ratify the ESM Treaty and the Fiscal Compact Treaty.

Germany was forced to give up and allow easing conditions on Spanish banks’ rescue and potential Italian bailout. The Chancellor Angela Merkel said after that she was “very satisfied that we took good decisions on growth.” Now she will have to explain the deal to German lawmakers.

The debate will begin at 15:00 GMT. The demand for safer assets will get some support on the news.

Photo: German Bundestag/Müller




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"EU summit: analysts aren’t entirely happy "(2012-06-29)

EU summit: analysts aren’t entirely happy


All the talk is about EU summit. Here are the analysts’ comments on the issue.

UBS: the innovation of an “effective single supervisory mechanism” and the ESM being able to recapitalize banks directly “will likely come far too late to be of immediate use during the recapitalization of the Spanish banking system.” “Any funding provided to recapitalize Spanish banks over the coming months is still very likely to inflate the Spanish sovereign debt levels.”

Lloyds Bank: “It is one step on a very long road. But we don't have any details, and arguably the detail is where the risk lies, because the market will start to pick holes in it as we've seen previously.”

BOTMUFJ: among questions the market will ask is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy will it be to agree on the banking supervisory mechanism. “Our initial view is this deal is no game-changer, and any EUR/USD rally will simply offer attractive levels to sell”.

Westpac: “Definitely some good news for risk markets here, though it is not the ‘big bazooka’.”

Image from todayheads.com




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July 2: economy and currencies
(2012-07-02)

July 2: economy and currencies





On Monday EUR/USD weakens after an impressive growth on Friday on the positive EU Summit results (euro leaders eased terms on loans to Spanish banks). Today the single currency is under pressure of expectations that the regional unemployment may reach record 11.1% in May, while manufacturing PMI – to decline to 44.8 in June. The market, therefore, expects the ECB to cut interest rates to 0.75% on the forthcoming meeting (July 5). According to analysts at UBS, the latest EU summit has clearly bought time for the euro, but it still does not remove the bearish case for the currency.

USD/JPY declines today: both Tankan manufacturing and non-manufacturing PMI indices exceeded the previous prints and the expectations (-1 and 8 respectively). However, most analysts still expect the BoJ to expand its asset purchases on a meeting on July 11-12. The Tankan is probably up because the low commodity prices improved the sentiment. AUD/USD weakens; however, the Aussie remains near to an almost two-month high on bets RBA will leave interest rates on hold at 3.5% tomorrow. NZD/USD maintained its biggest gain in three weeks vs. the greenback as Asian stocks extended a global rally. The MSCI Asia Pacific Index (MXAP) gained 0.3% today. The S& P 500 Index rose 2.5% on June 29, after Stoxx Europe 600 Index climbed 2.7% following the EU Summit.

Events to watch today:

Canada: Bank holiday
Switzerland: Retail sales are likely to increase by 0.9% in May after a 0.1% growth in April.
Great Britain: Manufacturing PMI is to grow to 46.7 from 45.9. However, the indicator still remains below 50, what indicates industry contraction.
Euro zone: Analysts expect the Italian manufacturing PMI to decline to 44.6 from 44.8. Unemployment rate in the region is to increase to 11.1% in May from 11.0%.
US: ISM manufacturing PMI is forecasted to decline to 52.1 from 53.5. Later investors will pay attention to FOMC member Williams speech.

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BMO: trading EUR/USD ahead of ECB
(2012-07-02)

BMO: trading EUR/USD ahead of ECB





These days, after the EU leaders demonstrated readiness to act to resolve the crisis, the market participants are trying to guess where will the euro move now and what to wait from the ECB on July 5.

Strategists at BMO Capital Markets recommend going long on EUR/USD at the current levels, targeting at 1.2825 and with a stop at 1.2425. Specialists believe it will make sense to buy all the risky assets including the euro, the Aussie and the kiwi if the currency block holds out. According to analysts, the ECB is likely to reward political leaders by cutting the interest rate. This action could help to ease economic conditions and to reduce risk.

Chart. Daily EUR/USD




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July 3: economy and currencies
(2012-07-03)

July 3: economy and currencies





The risk sentiment revived today. US dollar and Japanese yen are weakening versus its peers, while commodity currencies go up. Asian stocks rose for a fifth day in a row. The MSCI Asia Pacific Index (MXAP) had added 0.8% today after gaining 2.7% last week.

As expected, the Reserve Bank of Australia decided to stay on hold leaving its benchmark rate at 3.5%. Australian building approvals increased by 27.3% in May (vs. the forecast of only +5.1%). China also cheered investors up: non-manufacturing PMI rose from 55.2 in May to 56.7 in June (3-month maximum). AUD/USD renewed 2-month maximum.

Events to watch today:

Britain: Construction PMI in June is expected to fall to 53.1 after a 54.4 in May. Analysts expect the net lending to individuals to slide from 1.4B in April to 1.1B pounds in May showing that the banks are less willing to lend money to consumers.

US: Factory orders, a leading indicator of production, may turn out to be weak. This, together with poor June ISM manufacturing PMI released yesterday and the coming labor market data on Friday may fuel the speculation of more easing from the Fed. Don’t forget that the market is pricing in a rate cut by the ECB on Thursday – the market seems hopeful for monetary stimulus here and there that curbs demand for safe havens.

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"Key options expiring today"(2012-07-03)

Key options expiring today


Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2400, $1.2415, $1.2575, $1.2585, $1.2600, $1.2645, 1.2650;
USD/JPY: 79.75, 80.00, 81.20;
GBP/USD: $1.5600, $1.5700;
EUR/GBP: 0.8025, 0.8040;
AUD/USD: $1.0000, $1.0120, $1.0150, $1.0200 (large), $1.0250.

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July 4: economy and currencies
(2012-07-04)

July 4: economy and currencies





US markets are closed for the Independence Day holiday, so trading volumes will be rather thin.

Asian session was rather quite with shares rising to 7-week maximum on the hopes for more monetary policy stimulus to support the faltering global economy beginning with the ECB on Thursday. The expectations of more easing predominate over the market warming investor’s sentiment.

Australian retail sales rose by 0.5% in May (vs. +0.3% expected). Aussie and kiwi gained against their American counterpart.

EUR/USD edged down ahead of tomorrow’s Spanish bond auction and the ECB meeting. According to the forecasts, ECB will lower its key interest rate by 25bps to 0.75%. Today’s release of final June services PMI is to confirm that the region’s service sector keeps contracting. Spain is scheduled to sell 3-, 4- and 10-year debt; a 10-year bond yield was at 6.25% yesterday compared with a record maximum of 7.29% reached on June 18.

Elsewhere, don’t miss UK services PMI release: the index is still seen above the critical 50 mark, though economists expect a decline from 53.3 in May to 59.2 in June.

Financial markets keep watching the development of the scandal about Libor manipulation (British bank Barclays has been accused of manipulating worldwide interest rates and other European and US banks will likely follow the suit). Bob Diamond, Barclays’ former CEO faces grilling in Parliament after resigning yesterday. The whole situation raises the risks of confidence to the whole banking system and its ethics.

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"Key options expiring today"(2012-07-04)

Key options expiring today


Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).

Here are the key options expiring today:

EUR/USD: $1.2450, $1.2500, $1.2800;

USD/JPY: 79.50, 80.00;

EUR/GBP: 0.8060;

AUD/USD: $1.0000, $1.0100.

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July 5: economy and currencies
(2012-07-05)

July 5: economy and currencies





AUD/USD fell from a 2-month high as the demand for risky assets is down. Asian stocks dropped amid signs of a global economic slowdown: the MSCI Asia Pacific Index (MXAP) of shares lost 0.5%. Moreover, a report showed today that the Australia’s trade deficit increased to 0.29B in May from 0.03B in April, but came out below forecasts.

EUR/USD is crawling in the $1.2525 area, 23.6% Fibonacci retracement from May decline. Italian Prime Minister Mario Monti told yesterday after a joint press conference with German Chancellor Angela Merkel that Italy’s deficit would rise from 1.3% predicted to 2% of GDP. German finance ministry revised German deficit forecast down from 1% to 0.5% “thanks to the favorable overall economic development”. Francois Hollande, the French president, announced tax increases of 7.2 billion euro in order to ease upward pressure on the country’s large debt burden. French government is counting only on 0.3% growth in 2012 compared with previous estimates of 0.7%.

USD/JPY rose to the highest level in more than a week before sliding below the day’s opening level as Asian shares declined.

Events to watch today:

Euro zone: Markets stand still ahead of the important news to come out. German factory orders are expected to increase by 0.1% in May after a 1.9% contraction. Spain and France holds a 10-year bond auction on Thursday, while the ECB is to announce its rate decision. Many analysts forecast the regulator to cut rates to 0.75% today. Yet, risk rally has tempered as traders feared Mario Draghi, president of the ECB, would again resist the pressure to act. Later in the day the ECB press conference will take place.

Great Britain: The house price index is to decline by 0.3% in June after a 0.5% growth. The BoE meeting is an important event of the day: will the regulator add stimulus? Markets expect the expansion of the asset purchase program to 375B. The official bank rate is to remain unchanged at 0.50%.

US: ADP non-farm employment may improve by 103K in June compared with a 133K change in May. The number of unemployment claims is to increase to 385K, what means that the labor market remains weak. ISM non-manufacturing PMI is expected to contract to 53.1 in June from 53.7.

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