Comments and forex-analytics from FBS Brokerage Company - page 181
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
The United States: a ‘timid’ rebound
Here's the article by FBS published in the latest issue of FX Trader Magazine.
Almost every day we see US indicators in trader’s economic calendar. Sometimes the reports are good, sometimes they disappoint the markets. The abundance of data can be quite misleading when you want to design a longer-term strategy. What we really need is seeing the whole picture – the real economic trends behind all the fuss.
It’s almost 4 years since the global financial crisis broke out in September 2008. American authorities tried to rehabilitate the national economy and put it back on the sustainable growth track. However, the United States hadn’t managed to overcome its economic problems when new global challenges emerged.
The global economic prospects are now extremely uncertain. This makes us pose questions about US future. How vulnerable is the US to the European debt crisis? Are US debt problems gone for good? Is American economy able to move forward on its own or more rounds of monetary stimulus are needed? These are the issues which we would like to address in this article.
US economic recovery: overview
The period from the Lehman Brothers collapse and up to the second half of 2009 is sometimes referred to as the “Great Recession”. The historical parallel with the Great Depression is not without reason as we have witnessed the biggest shock for US economy in decades which resonated both in advanced and emerging market economies.
According to the data, provided by the Bureau of Economic Analysis, US GDP contracted in Q1 and Q4 2008 quarter-to-quarter by 1.8% and 3.7% respectively and in Q1 and Q2 2009 by 6.7% and 0.7% respectively. The annual growth rates may be seen on the chart below. American economy survived the sharpest contraction since 1960.
In order to support domestic economic growth through lower borrowing costs the Federal Reserve bought $2.3 trillion of bonds in 2 rounds of so-called quantitative easing, or QE, from 2008 through 2011. Then in September 2011 the Fed launched Operation Twist program which had the same purpose. There were intense debates on whether these measures have really helped. As the central bank set no distinct targets set in advance, it is quite difficult to judge about the efficiency of the steps taken by the US central bank. Analysts at Barclays Capital argue that American monetary authorities succeeded in eliminating deflation risk, but failed to generate strong economic recovery.
US real GDP has finally returned above the pre-recession levels in Q3 2011. Never the less, the growth may still not be fast enough to spur a robust recovery and ensure new jobs creation.
High unemployment remains America’s greatest pain. On the back of recession the jobless rate soared from 4.6% in 2007 to the record highs of 9.6% in 2010. It happened as people who lost their jobs in such depressed sectors as finance, housing and construction sectors were forced to change their qualification. According to the Federal Reserve Bank of San Francisco, the natural unemployment rate during the crisis grew from 5% to 7%.
In late 2011 and then in the first half of 2012 the situation at US labor market has also improved. This spring jobless rate subsided to 8.1-8.2% returning to the same levels as when Barack Obama took office in early 2009. Winter gave investors the optimism they have almost forgotten – US economy generated 200K a month encouraging hopes that the recovery will be gaining pace.
However, it turned out that the upturn in non-farm payrolls was caused mainly by unusually warm weather and a decrease in the size of the workforce. As you may see on the chart below, the pace of new jobs creation has slowed down. This may be a sign that American economy still needs monetary stimulus. Remember that one of the main pledges of the Fed’s mandate is “to promote effectively the goals of maximum employment”. If things keep deteriorating or just stagnate at this point, the Federal Reserve may decide that it has no choice but to add more easing – the policymakers are still keeping this door wide open.
Other important US economic indicators aren’t much convincing either. The Conference Board consumer confidence index, one of the main indicators of US consumer optimism, decreased from 112.6 in 2007 to 25.0 in 2009. Since that time the situation has improved, but the full recovery of the consumer confidence still remains a distant prospect: in May 2012 the reading was only 64.9 after one more leg down to 39.8 at the end of 2011.
The Federal Reserve reports that the housing market’s collapse made the median net worth of American families fell by almost 40% between 2007 and 2010, down to levels last seen in 1992. The median family income dropped by 7.7% during the mentioned period.
The ISM manufacturing PMI, the main indicator of the manufacturing sector’s economic health, shows that the industry is expanding for the 34th consecutive month since August 2009. With the help of the QE the index has reached its 7-year maximum in April 2011 at 61.4. However, since the second half of 2011 manufacturing growth has slowed down and the PMI posted 53.5 in May 2012. Such rollback may be another sign that the industry’s rebound is not strong enough to drive the US economy out of the standstill without the central bank’s help.
As for the retail sales, an important gauge of the consumer spending, a remarkable slowdown was recorded after a surge in January and February: the indicator dropped by 0.2% in both April and March. The data clearly demonstrates that the US economic recovery remains sluggish. Many economists have lowered their Q2 GDP growth estimates by almost a half of percentage point to 1.9-2%.
The Organization for Economic Co-operation and Development sees a slow rebound of growth in the United States, driven mostly by private demand. According to the organization, American economy, in contrast, would grow by 2.4% this year and 2.6% in 2013, while the 17-member euro zone economy is expected to shrink by 0.1% this year before posting growth of 0.9% in 2013.
Just from here we are able to make first conclusions. US economy remains fragile: high unemployment and anemic growth are the issues at sight. During the past months the market’s sentiment had its positive moments. These surges of optimism were caused by occasional favorable data. For now US improvement still hasn’t become a trend. In addition, the prospects of the Unites States looked brighter as they were considered against dismal European background. The separate analysis of US economic performance demonstrates that the past post-crisis years haven’t brought an economic breakthrough.
American economy is very open and, consequently, dependant on the global economy, so the lack of the robust recovery may be also explained by the external factors, primarily the ones associated with the faltering Europe. Let’s have a look on the extent to which the euro zone’s debt problem affect the world’s largest economy and then try to outline the main prospects and challenges which lie ahead of America in these uncertain times.
America and the European debt crisis
It goes without saying that nowadays the major risks for the US come from Europe, so we can’t analyze US economic prospects without paying enough attention to this issue. There are 2 principle areas of American economic exposure to the euro zone’s problems: trade and financial effects.
Trade exposure
Have a look at US trade balance. The nation’s exports to the EU account for 19% of total exports and to the euro area – for 13% of the total. That is only 1.3% of US GDP – not much. Nobel Prize winner Paul Krugman points out that even a sharp fall in exports to the EU would be only a small direct hit for the US.
One should not forget, however, about the indirect effects. In 2010 Europe accounted for 25% of world trade. Loss of this market would slow global growth and weight on investors’ risk sentiment and, consequently, financial markets.
Commerzbank: comments on USD/JPY
Analysts at Commerzbank expect USD/JPY to slide to 78.99 (200-day MA) as in an uncertain environment yen gains momentum as a safe haven. The pair is likely to remain above 78.61 (June 15 minimum) in a short term.
However, if USD/JPY manages to break below 78.61, a decline towards 77.65 (June minimum) will become possible. Strong resistance for the pair lies at 80.07/10 (July 5 maximum and 38.2% Fibonacci retracement) and 80.61 (June high and a 100-day MA).
Chart. Daily USD/JPY
July 11: economy and currencies
On Wednesday EUR/USD remains choppy ahead of FOMC meeting minutes: will the release reveal some discussions on QE3 or Fed funds rate? FOMC minutes (18:00 GMT) are probably most important risk event of the day. US will also publish a May trade balance (forecast: 48.5B trade deficit) and hold a 10-year bond auction today.
EUR remains weak today even as European finance ministers at a meeting in Brussels worked out a way for euro bailout funds to intervene in bond markets and said the first 30 billion euros of 100 billion euros in rescue loans will start flowing to Spanish banks this month. Spain was given an additional year (until 2014) to meet a 3% budget deficit target. On Wednesday Germany sells 10-year bunds. Yesterday Spanish and Italian 10-year bond yields were below the critical 7% level, giving some relief to the markets.
USD/JPY weakens for a fourth consecutive day on expectations the BoJ won’t add stimulus on a next meeting on Thursday. EUR/JPY reached a new one-month low on demand for the yen as a refuge. AUD, NZD and CAD are strong against their US counterpart. Australia consumer sentiment improved by 3.7% in July as households became more optimistic about the economic outlook . Canada releases a trade balance (forecast: 0.5B trade deficit).
Have a profitable trading day with FBS!
If you have any questions to our analysts, you're welcome to ask or comments for this article!
Westpac: trading AUD/JPY
Westpac analysts recommend going short on AUD/JPY at current levels, setting a stop at 82.35 and a target of 78.50.
In their view, this week the Aussie will get under pressure because of the negative data releases. Firstly, Australia employment report is to disappoint the investors on Thursday after the unexpectedly strong previous print: economists forecast the number of employed to increase only by 0.3K in June after a 38.9K growth in May. Secondly, China’s GDP is likely to come out below expectations (around 7.3% vs. a 7.9% forecast), what will also influence the Australian currency.
Chart. Daily AUD/JPY
Have a profitable trading day with FBS!
If you have any questions to our analysts, you're welcome to ask or comments for this article!
BoJ expected to leave the policy unchanged
On Wednesday the Japanese yen strengthens against the greenback for a fourth consecutive day. The Bank of Japan starts its 2-day meeting today and is widely expected to leave rates unchanged and not announce any new easing measures.
It seems that lately the regulator has become slightly more optimistic: the country's economy is headed for a moderate recovery as improvement in domestic demand eases the pain from slowing global growth. According to a Regional Economic Report released July 5 by the BoJ, in Q2 business conditions improved in all nine regions of Japan. Tankan manufacturing and non-manufacturing indices showed improvement in Q2 (-1 and 8 respectively).
Some analysts, however, expect the regulator to follow the central banks of Europe, Britain and China with its own monetary measures in a united effort to fight the global slowdown. Moreover, weaker national currency would be beneficial for the Japanese economy. Bank of The BoJ Governor Masaaki Shirakawa said on Tuesday that the bank is ready to undertake all the necessary measures to bring the nation out of its deflationary state. According to him, the BoJ has already accumulated 54 trillion yen of asset purchases, but is aiming for 70 trillion.
UBS: We continue to expect the BoJ to add more stimulus on a meeting and by this to weaken the yen. A deterioration of machinery orders and another drop in the current account confirmed the bad sentiment of economy watchers. Moreover, Japan is still struggling to recover after Fukushima.
Bank of Japan Governor Masaaki Shirakawa
Photo: Reuters
Credit Suisse: trading EUR/USD
Analysts at Credit Suisse recommend going short on EUR/USD at current levels with a stop at $1.2340 and an initial target of $1.2160.
In their view, the fact that yesterday EUR/USD didn’t manage to overcome the $1.2340 resistance creates potential for a further decline. The next support for the pair lies at $1.2150 and $1.1985. Only a break through $1.2401/$1.2408 will let the pair reach $1.2693.
Chart. Daily EUR/USD
Have a profitable trading day with FBS!
If you have any questions to our analysts, you're welcome to ask or comments for this article!
FOMC: easing options remain open
The US dollar strengthens against the euro after the minutes of the FOMC June 19-20 meeting, in which Fed officials decided to extend the Operation Twist, revealed some members said additional stimulus may be needed to support the weak labor market. However, the greenback depreciates against the high-yielding currencies.
While several policymakers were in favor of the policy easing, the others believed that would only make sense if the economic rebound loses momentum or inflation drops. The Fed underlined that rates are likely to remain at "exceptionally low levels" at least through the end of 2014. Several Fed members said in an intriguing manner that it is necessary to develop "new tools" to ease financial conditions.
Photo: Bloomberg
BofA: USD to rise regardless of FOMC
Specialists at Bank of America expect the greenback to remain strong regardless of the speculation the Fed will ease the monetary policy. They point that the overall trend for the US currency remains bullish.
According to their technical forecast, the Dollar index will increase to 85.32 (78.6% Fibonacci retracement from a 2010-2011 decline) if it manages to break above 83.54. A downward movement will become likely if the index falls below 83.00 and 80.73 support levels.
Chart. US Dollar Index (DXY)
Source: marketwatch.com
Commerzbank: bearish on NZD/USD
NZD/USD remains strong after a FOMC meeting minutes didn’t give any clear hint on the additional policy easing in the nearest future. Analysts at Commerzbank, however, remain bearsh on NZD/USD and expect the pair to decline to 0.7844 (38.2% Fib of 2012 downtrend) and 0.7825 (55-day MA) after a 2-month upward movement.
In their view, a break below 0.7825 would pave ground for a drop to a 0.7469/0.7371 support zone. According to specialists, the New Zealand currency will remain under pressure while it trades below 0.8319 (April maximum). However, resistance at 0.8085 and 0.8255 (78.6% Fib) looks too strong for the pair to overcome it, so NZD/USD is likely to move on a downside.
Chart. Daily NZD/USD
Bank of Japan: no easing, only technical changes
REUTERS/Issei Kato (JAPAN)
The Bank of Japan has made a technical change to its asset purchase and lending program. The total size of the program was maintained at 70 trillion yen ($879 billion). The BOJ expanded its asset-purchase program by 5 trillion yen to 45 trillion yen ($564 billion) cutting the loan facility by the same amount to 25 trillion yen. As a result, the total amount of the asset purchase and lending program remained unchanged at 70 trillion yen.
The BOJ pledged to increase its purchases of short-term public debt – previous extensions of the program had been mostly for long-term government bonds. As for the benchmark rate, the central bank left it in the 0-0.1% area.
Japanese Finance Minister Jun Azumi called for more support from the central bank for growth and inflation to meet a 1% price goal. Azumi expects BOJ policy effect to emerge gradually.
The market weren’t much impressed by the move which is not regarded as monetary easing. USD/JPY has briefly spiked to 79.96 before sliding to the levels below today’s opening around 79.50 yen. Investors bought yen as a refuge ahead of the release of the euro zone’s industrial production later today and important Chinese data tomorrow.
The pair remains supported above 200-day MA at 79 yen. Some market players say that Japanese exporters will sell the currency above 80 yen.
Chart. Daily USD/JPY