Aussie, N.Z. Dollars Gain on Optimism Europe Risks Fading

The Australian and New Zealand dollars rallied from yesterday’s decline on speculation risks from Europe’s sovereign-debt crisis are receding, boosting demand for higher-yielding assets.
    The so-called Aussie snapped its biggest one-day drop this year after Greek Prime Minister Lucas Papademos won parliamentary approval for a new 130 billion-euro ($172.5 billion) international bailout. Federal Reserve Chairman Ben S. Bernanke will tell Congress today that financial strains in the 17-nation region have eased, according to prepared testimony. Gains in New Zealand’s dollar were tempered as whole-milk powder prices fell for a seventh-straight auction.
   “We’ve been seeing risk assets globally performing well on the back of the more favorable environment in Europe,” said Tim Riddell, head of global markets research in Singapore at Australia & New Zealand Banking Group Ltd. (ANZ) “Our medium-term fundamental forecast is the Aussie will stay solidly bid.”
    Australia’s currency gained 0.2 percent to $1.0495 as of 5:25 p.m. in Sydney after declining 1.2 percent yesterday, the sharpest slide since Dec. 12. The Aussie added 0.2 percent to 87.87 yen after dropping 0.8 percent yesterday, the most since March 12. New Zealand’s dollar rose 0.3 percent to 81.92 U.S. cents and advanced 0.3 percent to 68.58 yen.
Greek Approval
    A total of 213 Greek lawmakers voted today in favor of the legislation to secure aid for the country and 79 against, Acting Parliament Speaker Grigoris Niotis said in remarks carried live on state-run Vouli TV.
    Greece pushed through the biggest sovereign restructuring in history earlier this month after getting private investors to forgive more than 100 billion euros of debt, opening the way for the second bailout.
   “The recent reduction in financial stresses in Europe is a welcome development for the United States,” Fed Chairman Bernanke said in the text of testimony to be delivered today to the House Committee on Oversight and Government Reform.
    Australia’s currency weakened yesterday on concern an economic slowdown in China, the nation’s biggest trading partner, would damp demand for its commodity exports.
    Steel output growth in China has slowed as it puts greater focus on consumers rather than building projects, BHP Billiton Ltd. (BHP), the world’s biggest mining company, said yesterday.
    Earnings from Australia’s minerals and energy exports may total A$199.2 billion ($209 billion) in the year ending June 30, the Bureau of Resources and Energy Economics said in a report today. That compares with a December forecast of a record A$205.8 billion, and A$179.2 billion a year earlier.
Worst Performers
   The Aussie has lost 1.2 percent in the past month and the kiwi has declined 1.4 percent, making them the two worst performers after the yen among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.
   Demand for the New Zealand dollar was limited after Fonterra Cooperative Group Ltd (FCG)., the world’s largest dairy exporter, said milk powder for May delivery dropped to $3,316 a metric ton, the lowest since Oct. 5.
   “There’s a very strong correlation between the prices that are fixed in the auction to the kiwi dollar,” said Jeremy Jukes, a foreign-exchange dealer in Auckland at Velocity Trade Ltd., referring to Fonterra’s sale. A drop in milk prices “has certainly weighed down on the kiwi.”
   Fonterra, which accounts for about 40 percent of the global trade in dairy products, last week cut its forecast payment to New Zealand farmers by 2.3 percent. Increased supply of milk products and concern that weaker economic growth will curb demand is bringing down prices, Chief Executive Officer Theo Spierings said.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, gained two basis points, or 0.02 percentage point, to 3.13 percent.

Euro Gains After Greece Bailout Vote, Before German PMI

    The euro advanced against the dollar and reached a four-month high versus the yen after Greece won parliamentary approval for a new international bailout, boosting demand for European assets.
     The 17-nation currency rose against most major peers before reports tomorrow forecast to show an expansion of services and factory output in Germany, Europe’s largest economy. The dollar weakened before Federal Reserve Chairman Ben S. Bernanke tells Congress that financial strains in Europe have eased, according to testimony prepared for delivery today. Demand for the yen was limited before data tomorrow projected to show Japanese exports declined for a fifth month.
    “Some of the reports coming out of Europe and the Greek vote going through is supportive of the euro in the near term,” said Derek Mumford, a director in Sydney at Rochford Capital, a currency-risk management company.
    The euro rose 0.4 percent to $1.3276 as of 2:02 p.m. in Tokyo. The shared currency climbed 0.3 percent to 111.08 yen and earlier touched 111.15, the most since Oct. 31. The yen traded at 83.68 per dollar from 83.70.
    Greek Prime Minister Lucas Papademos won approval for a 130 billion-euro ($172 billion) aid package. A total of 213 lawmakers voted today in favor of the legislation and 79 against, Acting Parliament Speaker Grigoris Niotis said in remarks carried live on state-run Vouli TV.
German Economy
     Demand for the euro was also supported before the release of purchasing managers indexes tomorrow from London-based Markit Economics predicted to show German manufacturing and services growth accelerated. A measure of factory output climbed to 51 this month from 50.2 in February while a gauge of services rose to 53.1 from 52.8, according to median projections in Bloomberg News surveys of economists.
    The euro may extend gains against the Australian dollar, JPMorgan Chase & Co. said, citing trading patterns.
The common currency may climb toward A$1.2775, around the 3    8.2 percent retracement of the euro’s decline from the Nov. 23 high of A$1.3810 to the Feb. 7 low of A$1.2133 on the Fibonacci chart, Niall O’Connor, a New York based technical analyst at JPMorgan, wrote in a note to clients today.
     The shared currency was at A$1.2657 from A$1.2619 yesterday, after earlier touching A$1.2659, the strongest since Jan. 2.
      The euro has climbed 0.9 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The greenback advanced 0.6 percent, and the yen weakened 4.7 percent.
Japanese Trade
     Japanese exports dropped 6.5 percent in February from a year earlier, following a 9.3 percent decline the previous month, the Ministry of Finance is projected to say tomorrow, according to a Bloomberg poll of economists.
      “We’re starting to see a persistent trade deficit take hold in Japan, and that’s reducing appetite for the yen,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency margin company.
      The South Korean won and Indonesian rupiah fell as Asian stocks declined and on concern China’s slowing economy will damp demand for exports from Asia.
     “The market has got in its mind the recovery in the U.S. is stronger than it is in Asia,” said Gavin Stacey, chief interest-rate strategist at Barclays Capital Inc. in Sydney. “While the market has that mindset, the U.S. dollar strength relative to Asian currencies” is likely to continue, he said.
U.S. Recovery
     The dollar has been supported as data signaled the U.S. recovery is gathering momentum. An industry report today is forecast to show U.S. home sales rose to the highest level since May 2010. Sales of previously owned homes are predicted to have climbed 0.9 percent to a 4.61 million annual rate, according to a Bloomberg survey of economists before today’s report from the National Association of Realtors.

Dollar USA

      Last week I mentioned that though the G8 conference would impact the US dollar in the short term, the ultimate fate of the USD will ultimately be determined more by Bernanke than by anyone else. The Group of Eight’s meeting has come and gone, offering little good news for the USD. In the FOREX market, that “little good news” led to bad news for the USD, as the greenback surrendered some of the territory it had gained last week. So with the conference in the rear-view mirror… let’s look ahead.

     In his most recent column, Robert Novak wrote that despite his publically hawkish stance, Bernanke is more concerned with growth rates. Furthermore, Bernanke feels that oil and gasoline prices, if they continue to rise, could lead to the dreaded state of halted growth in addition to rising inflation. Assuming that what Novak is reporting is accurate, it would seem that Bernanke’s pronouncements last week were a charade. In other words, Bernanke isn’t likely to walk the walk. However, this might not be a bad thing. Many see the economy as not yet ready for a rate hike, and so perhaps holding rates constant for the next several months would be the best thing for the US economy.

     The USD has ended the rally it began last week, and while the short term prospects are dimmer than they were several days ago, the jury is still out regarding the long term. On the one hand, disappointing economic data that keeps coming out (most recently in the US: poor manufacturing results) would indicate that the USD is in for more stormy seas. However, analysts are noting that it has been years since people have held such bullish opinions about the USD. Many feel that the dollar is “due,” meaning that after taking its lumps for years, it is poised to finally recover. With the Saudis agreeing to pump more oil, perhaps the stars are aligning for a USD recovery. However, it’s hard to know the future for certain. As it is written in one of the Harry Potter books, we humans are not very good at reading the stars.

Upcoming Figures

AUD Reserve Bank of Australia’s Board Minutes (Jun)

EUR Italian Trade Balance (Euros) (Apr)

GBP Consumer Price Index (May)

EUR Euro-Zone Trade Balance (Euros) (Apr)

USD Current Account Balance (Q1)

USD Housing Starts (May)

JPY BoJ to Publish Minutes of Board Meetings

FOREX-Euro, Aussie fall on Greece, global economy worries

             In the days leading up to the European Central Bank’s rate decision on July 3rd, 2008, many political leaders around Europe publically pleaded for the ECB to leave interest rates unchanged. Among others, French President Sarkozy voiced the opinion that the recent rise in inflation was due primarily to the spike in commodity prices.¹ As such, Sarkozy suggested that though hiking interest rates would not really help in lowering inflation, it would adversely impact growth. The ECB went ahead and hiked interest rates anyway, and looking back now, a month and a half later, we can begin to asses two issues: whether the rate hike was the right choice, and what the ECB should do now.

        Looking at the statistics over the past few months here, there are several main points to take away. The first is that President Sarkozy’s nightmare seems to have become reality; growth has suffered. In the Euro-Zone, as well as in its three largest economies, Gross Domestic Product (GDP) fell in the second quarter. However, the second chart (showing Consumer Price Index) indicates that inflation has either slowed or halted its rise in these same economies.

       Given that the ECB is bound to target inflation first and foremost, the above statistics would imply that the recent rate hike was the correct move – though clearly not without consequences. Inflation has slowed in its rise, and while next months’ numbers will bring about more clarity to the situation, it seems that the rate hike had its desired impact. Now, the more prudent question is if the long-term repercussions of the hike will outweigh the benefits. Will the rate hike facilitate Europe’s slide into recession? It is certainly possible. Italy is already on the brink of recession, and France’s large decline in growth indicates that it is also in trouble.

      One important note about the CPI numbers is regarding the source of the recent slowdown in the rise of inflation. As the price of oil started to fall around the same time as the rate hike, it is unclear which – or both – influenced inflation. As it is probable that both events have had an impact, it is unknown just how useful the rate hike has been thus far in thwarting inflation’s rise. However, considering the magnitude of oil’s fall in recent weeks, it is safe to assume that it has had a sizeable impact on the slowing of the rise of inflation. The fall in oil price will help alleviate inflationary pressures anyway; hence the ECB should switch focus to the other problem of falling growth.

At this point, the best move for the ECB would now be to cut rates. While the ECB was founded with an inflation-targeting mentality, it is too dangerous to ignore growth at this time. The US (seemingly) has recently skirted around a recession by aggressively slashing rates and supporting wounded members of the banking system. By admitting the problem early on, the US avoided significant damage to the financial sector, with only one of the largest banks going under. Europe, however, has taken a different path, and now finds itself on the precipice of recession. This proposition to focus on spurring growth comes from the belief that the inflation problem can largely solve itself as long as energy costs continue to fall. With oil prices down over 20% from their all-time high, it seems apparent that this fall in price will eventually be filtered down to consumers.

     Proponents of the ECB’s generally “hawkish” nature would certainly throw out economic theories such as the J-Curve to support their position. This theory suggests that through a devaluation, a country can actually increase their trade balance (and hence GDP) via increased exports and decreased imports. There is potential for this to occur, but that would involve a devaluation of the Euro that many Europeans would certainly love to avoid. Furthermore, this process of GDP rising on its own could take an unacceptable length of time. Just recently, the ECB finally admitted the problems that the Euro-Zone now faces.² It is time that the ECB make a bold move and cut rates, sending a signal to the markets that they will not stand by and watch Europe sink into recession.

Foreign Currency Exchange Origins

     How did foreign currency exchange come about? The foreign exchange market that the retail currency trader knows today, has been shaped by a long history of global historical events. Consequently, studying the history of foreign currency exchange can be a lengthy and time consuming process. Although important for cultural and historical reasons, a detailed study of specific historical events like the Bretton Woods accord and the Smithsonian Agreement is not very useful for the modern foreign currency exchange trader. It is more important for a trader that is considering foreign currencies, to understand the logic behind foreign exchange as an efficient medium of exchange for goods and service.

      The barter system was originally used by our ancestors as a means of exchange. Bartering was inefficient as an exchange mechanism because it required that a lot of time be spent in negotiation to strike a deal. Also, much time was needed to search for the goods required for bartering. The barter exchange system was eventually enhanced by the public acceptance of standardized sizes and grades of metals like gold, silver and bronze for the exchange of merchandise. This metal currency for exchange had many advantages including durability and storage. During the middle ages, a variety of paper IOU's started gaining popularity as a medium of exchange.

Throughout the years, people began to realize that carrying around paper currency was a lot more advantageous than carrying heavy bags of precious metals. Consequently, stable governments eventually adopted paper currency and backed its value with gold reserves. This led to the birth of the gold standard. On July of 1944, the Bretton Woods Accord pegged the US Dollar to gold at a price of $35 per ounce. The Bretton Woods Accord also fixed other foreign currencies to the dollar. It lasted until 1971, when US president Nixon let the dollar "float" freely against other foreign currencies and suspended the conversion to gold.

      As we fast forward to the present, the foreign currency exchange market has grown into the largest financial market in the world, with an aggregate daily volume of 1.5 trillion dollars or greater. Even though foreign exchange has traditionally been an institutional (Inter-Bank) market, the growth of the Internet has propelled online currency trading among private individuals to the stratosphere, widening the retail currency trading market considerably.

Currency Trading Market Introduction

      Currency is the ultimate commodity. A foreign currency trade takes place every time a company or government buys or sells products or services in a foreign country; one currency is exchanged for another. A large number of individuals and organizations also do currency trading for speculative purposes. Consequently, it is no surprise that the foreign currency exchange market, also known as "forex" or "fx" market, is the largest financial market in the world. The currency trading market is much bigger (trades more volume) than all the world's stock markets put together. No other financial market even comes close to its sheer size and global reach.

To get an idea of the unbelievable size of the currency trading market, we have to look only at the growth and daily volume in foreign exchange activity. From 1997 to the end of 2000, daily currency trading volume surged from 5 billion to 1.5 trillion dollars. The currency market continues to grow at a phenomenal rate.

In the past, only corporations and wealthy individuals could trade currencies in the currency market through the use of bank proprietary trading systems, which required at least US$1 million to open a trading account. That was before the Internet came along. Now, the market is totally changing. Thanks to modern advancements in online trading technology, investors with only a few thousand dollars can now have 24-hour access to the online currency trading market.

     For day traders and swing traders, the currency market provides an alternative to stock market and futures trading. A trader only has a few major currencies to trade (the Dollar, Yen, British Pound, Swiss Franc, and the Euro are the most popular), whereas he is faced with tens of thousands of stocks to choose from. Currency trading also provides greater leverage than stocks and futures, and the minimum investment required to open a currency trading account is much lower (increasing leverage increases risk). All of these advantages compounded with the ability to choose flexible trading hours (currency trading goes on around the clock), has resulted in many stock traders deserting the stock market to day trade currencies. If you want to try out currency trading, click on the link below:

Exchanging Foreign Currency in New York City

• Exchanging your foreign cash or Traveler's Checks for American cash can easily (though sometimes expensively) be done at Currency Exchange Offices and many of New York City's larger banks.
• Typically you'll get the best rate for buying U.S. dollars once you arrive in the U.S.
• It often makes sense to exchange in bulk -- commission rates often decline as the amount of money exchanged increases.
• Some currency exchange offices offer free (or inexpensive) buy-back programs. Even with popular chains, you will probably have to do the buy-back at the location of the original transaction in order to get the favorable rate.
• Exchange rates are typically better in the city than at the airport currency exchange locations.

Where to Exchange Your Foreign Currency in New York City:
Do call ahead to confirm that a particular branch will be able to accommodate your particular foreign currency.

• Travelex: Find a Travelex NYC Branch (Jamaica = JFK Airport; Flushing = LGA Airport)
• American Express Travel Offices: NYC American Express Travel Office
• Chase Bank Offices: Chase Branch Offices
• Currency Exchange International: NYC CEI Locations

What is the current exchange rate?

• You can find the current exchange rates published daily in the New York Times and the Wall Street Journal.