Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19
Crude Oil Price Fails At Critical Fibonacci Level - 15th May 19
Strong Stock Market Rally Expected - 15th May 19
US China Trade Impasse Threatens US Lithium, Rare Earth Imports - 15th May 19
Gold Mind Reader's Guide to the Global Markets Galaxy: 'Surreal' - 15th May 19
Trade Wars and Other Black Swan Threats to Your Investments - 15th May 19
Our Long-Anticipated Gold Momentum Rally Begins - 15th May 19
Defense Spending Is Recession Proof - Defense Dividend Stocks - 15th May 19
US China Trade Issues Will Drive Market Trends – PART II - 14th May 19
The Exter Inverted Pyramid of Global Liquidity Credit risk, Liquidity and Gold - 14th May 19
Can You Afford To Ignore These Two Flawless Gold Slide Indicators? - 14th May 19
As cryptocurrency wallets become more popular, will cryptocurrencies replace traditional payments? - 14th May 19
How US Debt Will Reach $40 Trillion by 2025 - 14th May 19
Dangers Beyond a Trade War with China - 14th May 19
eBook - Greatest Tool for Trading? - 14th May 19
Classic Pitfalls for Inexperienced Traders - 14th May 19
Stock Market S&P 500 Negative Expectations Again - 13th May 19
Why Rising Living Standard in China Offers Global Hope - 13th May 19
Stock Market Anticipated Correction Starts On Cue! - 13th May 19
How Chinese Trade Issues Will Drive Stock Market Trends - 13th May 19
Amazon SCAM Deliveries for Fake Verified Purchaser Reviews "Brushing" - 13th May 19
Stock Market US China Trade War Panic - Video - 13th May 19
US Stock Market Leading Macro Economic Indicators Update - 12th May 19
SAMSUNG - BC94.L - Investing in AI Machine Intelligence Stocks - 11th May 19
US Increases Trade Tariffs Against China – Stock Markets, Gold, and Silver - 11th May 19
Who Has More To Lose In A No Deal Brexit? - 11th May 19
Gold at $1,344 Will Start Real Fireworks on the Upside - 11th May 19
Make America’s Economy Great Again - 10th May 19
Big US Stocks’ 2019 Fundamentals - 10th May 19
Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - 10th May 19
Stock Market Shake-Out Continues – Where Is The Bottom? - 10th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Seasonal Currency Reversals and Implications of Zero Fed Interest Rates

Currencies / Forex Trading Nov 20, 2008 - 03:35 PM GMT

By: Ashraf_Laidi

Currencies Best Financial Markets Analysis ArticleAlthough currencies ended up adopting their usual path of following the swings in risk appetite, it's worth explaining Wednesday's earlier spikes in EURUSD and GBPUSD. The moves were a result of broad dollar selling (also seen in a $25 rally jump in gold) on reports that Iran was pushing ahead with its nuclear program. The International Atomic Energy Agency found stated an increasing build up of enriched uranium stockpiles, which could be converted into weapons-grade material.


Despite the Iran element of the dollar decline , caution is urged of renewed selling waves in the greenback vs. all majors except the yen as seasonal reversals in FX markets usually emerge in the last 5-6 weeks of the year, paring the flows prevailing in Sep-Oct. These reversals emerge from end-of-year position squaring, with dealing desks functioning on skeleton staffs. The chart below illustrates this phenomenon for EURUSD over the last 3 years. A repeat of these trends could see reversals in EURUSD, GBPUSD and USDJPY towards $1.33, $1.62 and 100.00.

Nonetheless, One reason, however, that 2008 might prove an exception to these reversals would be for bank dealing desks to add in more hours than is usually the case in year-end in order to maximize trading revenues and ease the operating losses posted throughout the year. And as long as the laws of risk appetite continue to dictate Forex flows, proprietary desks will have no choice but to pursue lower yielding currencies, especially as stocks are resolved to retest the lows of October 2002.

FX Flows Remain Enslaved to Risk Swings

Despite GBPUSDs surge past the $1.5090 resistance onto a 1-week high of $1.52, I warned (CMC clients) that " caution is urged due to GBPUSD's knack for notorious pullbacks at the end of the London session" . Ultimately, cable peaked out at $1.5245 before tumbling 300 points as risk aversion soared amid the 6% tumble in US stocks. Remarks from Bank of England's John Gieve indicating prolonged rate cuts due to the possibility of inflation falling below the 2.0% target in 2009 (from current 4.5%). Recipients of the IntradayThoughts were informed that $1.5275 would remain intact as it presented the trend line extending from the Nov 3 high. Similarly, EURUSD gave in at the trend line resistance of $1.2780 (4-hour chart) extending from the Nov 10-13 highs.

Falling inflation and contracting home building remains the hallmark of the current economic landscape as US CPI tumbled 1.0% in October (biggest on record) exceeding expectations of a 0.8% decline, while core CPI fell 0.1% vs. forecasts of a 0.1% increase. Year-on-year figures show a 3.7% increase in the headline and 2.2% in the core. October housing starts up 791K, building permits at 708K. Although the deepening price erosion in all inflation indicators could be perceived as a positive for US stocks on the basis of prolonged Fed easing, the negative impact on profit margins remain considerable, as pricing power disappears in an already poor demand environment. Adding the element of weak foreign demand and the negative impact of currency translation from lower non-USD currencies, US multinationals are set for a multi-dimensional earnings slump, thereby, adding to the fundamental argument of the equity selling.

Feds Forecasts Chase Reality

In stark illustration of another central bank outlook falling behind the real economy, the FOMC downgraded its economic projections for 2009 and 2010 from those made in June. The range of forecasts for 2009 GDP growth was lowered to -0.2% -1.1% from Junes 2.0-2.8%, core PCE was lowered to 1.5-2.0% from 2.0-2.3%, while the unemployment rate was revised to 7.1-7.6% from 5.3%-5.8%. The Fed's continued downgrades of the economy not only show the central banks miscalculation of the real economic risks to the economy, but once again underestimate their assessment ahead. The unemployment rate for instance is widely expected by private economists to reach 8% in 2009, a figure that isnt even included in the higher end of its forecasts.

The forecasts highlight the increasing probability the Fed funds rate could reach 0% before end of Q1, a possibility already echoed by San Francisco Feds Yellen. But at least the Feds excessive preoccupation on inflation is diminishing markedly. The latest projections noted " The majority of participants judged the risks to the inflation outlook as roughly balanced, and a number of others viewed these risks as skewed to the downside--a marked shift from June, when the risks to inflation were generally seen as tilted to the upside".

The latest study from the World Gold Council showed an 18% increase in Q3 demand due to safe haven flows resulting mostly from financial market turbulence. Investment demand showed solid support from ETFs, jewelers demand advanced on falling prices, while industrial demand fell on broadening economic slowdown. Golds decline relative to most currencies has been primarily a function of the rising dollar emerging from the globalized nature of the economic slowdown and the massive liquidation in dollar shorts of the first half of the year. This point was especially highlighted by the $100 spike on September 17th when Lehman Bros failure and AIGs woes were considered a largely US-centric risk. Nonetheless, during the past month, gold continues to outperform oil prices, consolidating around the $740s is seen as a prime candidate for rallying on the earliest signs of stabilizing risk appetite and nascent signs of a recovery in Europe and the US.

By Ashraf Laidi
CMC Markets NA
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules