Currency Notes

The question of the day…for the last two years: Are the EU leaders ready to bailout Greece or throw her under the bus?

imexfx — Thu, 16 Feb 2012 22:54:46 +0000

The Euro zone financial officials and the EU political leaders are exploring ways of delaying some components of the second bailout package for Greece, or even delaying the entire bailout altogether, while they try to avoid a disorderly default. According to EU sources, the postponement could extend until April, when Greece holds their parliamentary elections. There are proposals to put off the Greek rescue program or to divide it, so that a default could be avoided. Under this split scheme, a debt swap agreement between Greece and the private sector bondholders could be carried out . The critical problem with dividing the program is whether the private creditors would be willing to take the risk of not knowing if the second major part of Greece’s financial package would be put in place. Without the total plan, Greece may not be able to make future bond payments.

The dissatisfaction expressed by Germany, Finland, the Netherlands, and others was conveyed in the proposal to hold up the bailout plan. Recent financial data from Greece showed its economy shrank 7% in the last quarter of 2011, indicating that it will be much more difficult for Greece to achieve its pledged debt targets. After two years of repeated assurances to pull Greece back from the precipice of default, European leaders are at odds between pouring more money into a besieged economy or risking an unpredictable sovereign bankruptcy. That could coerce Greece out of the euro zone, and augment increased market tension and debt contagion. Ultimately, the concern is whether Greece has the national political will to stay the course and fulfill their commitments. Even though many of the details of the agenda have been acceded to, the necessary private bond exchange has come to a halt due to broader quarrels between EU and Greek leaders. EU officials say Greece needs to demonstrate additional assurances of promised reforms, in order to receive the next 130 billion euro aid package. According to these officials, “Greece has depleted its credibility by missing targets for deficit reduction, economic reforms and asset sales that were set when it obtained a 110 billion euro aid package in May 2010.” An outcome from Greece’s failure to implement some of their promised goals, has given rise to the once unthinkable prospect of their exit or ejection from the euro zone.

As negotiations over the second rescue program have run into new hurdles, Greece believes the more thriving European countries are “playing with fire” by contemplating the idea of expelling it out of the 17 nation euro zone. Greek Finance Minister Evangelos Venizelos publicized this accusation after a decision on the aid package scheduled for Wednesday night (February 16th) was postponed until at least February 20th, and possibly until a new Greek government is elected later in the year. The Finance Minister told reporters “we are continually faced with new terms. In the euro area, there are plenty who don’t want us anymore.” Europe and Greece are in dangerous territory. Their actions and mutual reluctance to back off is bringing default closer to fruition. The frustrated attitude from EU leaders, and Greece’s ” enough is enough” resistance, is getting to a point where conjecture and reality come together.

As this crisis is turning into a catastrophe the world’s financial markets are getting hammered, not weekly, not daily, but minute to minute. The moment a finance minister, EU official, or even an anonymous aide releases an update or issues a statement, the one predictable consequence you can count on is over reaction, volatility, and instability in the global bond and stock markets, and explosiveness in the foreign currency world. If you want to know how the sovereign debt negotiations are faring….just check the currency market.

The U.S. economy: recovery or slowdown? It still comes down to a four letter word: JOBS

imexfx — Wed, 08 Feb 2012 16:37:36 +0000

U.S. consumer confidence unexpectedly declined in January. The New York based Conference Board reported on January 30th that the confidence index fell from 64.8 to 61.1 exceeding even the most pessimistic forecast. Some economists were actually projecting an increase to 68.0. Americans are worried about their job status, income, rising food and gas prices, and the prolonged weakness in the housing market. Home prices continue to deteriorate, having fallen for the third straight month in all regions of the country.

The United States is a consumer driven economy. With a lack of secure buyers, the growth of the economy falters. Without faith in the growth of employment, U.S consumers are reigning in their spending. The anxiety of becoming unemployed has stalled spending in December, the most productive sales month of the year. Purchases were basically unchanged from November. The paradox that income rose 0.5% from November to December (the most in 9 months), begs the question, where did the money go? In December, rather than consume more goods, and increase sales, and hopefully encourage employers to hire more workers, American consumers held back, ultimately saving all their increased income. The concern that additional income improvements will go into savings raises the apprehension that businesses will pull back on hiring and thus slow the economy. Consumer spending accounts for approximately 70% of U.S. economic activity. The government reported last Friday that the economy grew at an annual rate of just 1.7% last year-roughly half the growth of 2010. The weakest showing since the economy contracted in 2009.

Business added 170,000 workers in January. This increase was less than predicted and followed a revision of the prior month that was lower than previously reported. The unease about the high number of jobless Americans is one of the reasons that the Federal Reserve recently announced maintaining its lending rate near zero. It’s a “Catch-22”. More hiring is needed to stimulate consumer spending and more consumer spending is needed to encourage more hiring.

It is a strange foreign exchange phenomenon. As the U.S. economy gets stronger, confidence and bravado returns to the financial markets motivating investment and movement of capital to other markets around the world. Consequently, the U.S. dollar gets weaker. When there are indications of global slowdowns, regional recessions, and economic uncertainties (including the US), international investments pull back and the U.S. dollar is the primary recipient of these anxieties.

What is the true underlying strength of the Euro? Hope & Other People’s Money (OPM)

imexfx — Fri, 20 Jan 2012 14:27:02 +0000

Ancient Greece, considered to be the cradle of civilization for the western world is where it all began. No, not the development of culture and sophistication, but the decline of the euro zone empire.

The addiction of excessive, cheap borrowing, major economic slowdown on the verge of recession, and fear of sovereign debt default has spread from Greece to Ireland, to Portugal, Spain and most disconcertingly Italy due to its massive debt. The market’s apprehension that these countries’ lack of ability to pay their respective government debt has created an atmosphere of major financial instability in the European banking sector. In addition, there is continuing uncertainty in trade and industry that is hindering growth and exports. So why is the euro trading at 1.28 to the U.S. dollar as opposed to parity or even below that? On October 26^th, in 2000, the euro traded as low as .8230. At that time Europe’s fiscal steadiness and solidity was far stronger than the anxiety and trepidation that exists in today’s fearful economic environment.
Through never ending meetings of European politicians, central bank officials and big business leaders continue to seek out viable and confidence building solutions. Austerity programs , private and public write-offs (HOPE), new loans and bailout funds, (OPM) are the buzz words of the day. The artificial rhetoric accomplishes its objective for a short period of time, and the EURO strengthens. Recently, the ECB provided $623 billion dollars in lifeline loans for banks as a guaranteed source of liquidity (OPM) hoping that they will begin to lend to businesses, and the EURO strengthens. This may be just another band-aid if the banks hold onto the money to shore up their own financial portfolio. The ECB plans to add another three-year longer-term refinancing operation, at the end of February. That may total 1 trillion euros (OPM) should the central bank loosen collateral requirements, and the EURO gets stronger. On Wednesday, 1/18/12, the IMF announced that it is seeking to raise an additional $500 billion dollars from its participating countries. This increase will augment the IMF’s capacity (OPM) to aid smaller countries that might be hurt by the euro zone crisis, and the EURO gets stronger. Do you see a pattern here?

So far, the oratories and the bailouts are buying time. Unless pragmatic debt negotiations, and hard compromises result in realistic solutions, the real value of the Euro will seek a new level…one much lower.

-Joel Borshof

China-Japan form currency bloc. Is this the New Kid on the block?

imexfx — Mon, 09 Jan 2012 21:21:02 +0000

In late December the Japanese government announced that Japan and China will advance direct trading of yen and yuan without using U.S. dollars as the base. Further volatility and uncertainty in the worlds’ currency markets, created by the European debt crisis, has encouraged the promotion of a medium that will cut trading costs and will supposedly reduce currency exposure. Approximately 60% of trade transactions between the second and third largest economies in the world are settled in U.S. dollars. China is Japan’s largest trading partner. Given the vast amount of trade volume between China and Japan, this accord has a far greater significance than other pacts that China has agreed to with other nations. This could be the beginning of the development of an independent market that will challenge the dominance of the dollar.

In addition, China has agreed to allow Japan to apply to purchase Chinese bonds this year. According to the finance minister of Japan, “buying of Chinese bonds would be beneficial for Japan because it would help reveal more information about financial markets in China, the world’s largest holder of foreign currency reserves.” China, in turn, is already a major investor in Japanese debt. China has also recently approved other countries and central banks eligibility to buy Chinese bonds and other yuan assets. This sizeable alternative investment marketplace could diminish the flow of capital into the U.S. and, in turn, affect the strength and growth of its economy.

And now for the pièce de resistance. While Japan and China have been cultivating their trade treaties and economic agreements, they have also been quarrelling for decades over a group of disputed islands in the East China Sea. This on-going, sometimes quite heated, disagreement, has been the source of severe strain on their political discourse and international diplomacy. However, China and Japan, two unlikely political allies, have established a common cause: North Korea. The new prime minister of Japan recently said that he and his Chinese counterpart had agreed to work together in dealing with North Korea, and promoting stability on the Korean peninsula. The new prime minister’s first official visit to Beijing would have routinely focused on historically sensitive issues such as the islands claimed by both countries. But with the death of Kim, and the ascension of his son to power, the main subject matter has shifted. Will this new political alliance hold up in the long term, when past confrontations are revisited or new ones acted out? China has a history of utilizing its economic power to punish enemies and allies alike. Economic trading blocs and attractive, comfortable investment markets do not flourish well or long under a cloud of fear and intimidation.

Is India on the path to a Sovereign debt crisis?

imexfx — Mon, 19 Dec 2011 13:25:01 +0000

It begins with the financial instability of a nation’s banking system. Rising interest rates and a higher price tag for insurance against default of a bank’s bonds are the harbinger of difficult fiscal times ahead. These increasing cost of funds for Indian banks are growing at the fastest rate in Asia and are creating a cash crunch for Indian lenders. Indian banks have had to borrrow from the central bank, The Reserve Bank of India, everyday since last April to offset cash shortages. At the same time bank officials continue to raise interest rates to combat inflation. Because of ever increasing interest rates, banks are encountering risks on their profit margins due to the scarcity of liquidity and higher exposure to non-performing assets.

Indian bank lending to corporations and small businesses has steadily decreased month over month on an annual basis, and the central bank has recently forecasted that bad loans will rise 25% in the year. Moody recently downgraded India’s banking system to negative, saying a domestic economic slowdown and the surge in borrowing costs will boost bad loans. The average expense of credit-default swaps that insure against non-payment by several Indian banks have more than doubled in 2011. The cost of these swaps for State bank, the largest lender and standard-bearer of India hit a two year high. In addition, State Bank had its financial strength rating cut due to inadequate capital buffer and rising non-performing assets.The Bankex Index, Indian’s primary gauge of banking stocks, has lost 26% this year.

As the central bank persists in hiking up interest rate, yields on government and corporate bonds continue to climb, augmenting the cost of funds, a slowdown in growth and increased volatility in the foreign exchange markets. The rupee plunged 16.6 percent this year and touched an all-time record low of 54.30 to the dollar. It’s on track now for the biggest decline since 2008. The Reserve Bank of India today limited trading of Indian Rupee forward contracts in order to restrain speculation.

An increase in its cost of funds, a rising of their non-performing assets, a marked decrease in their business lending, a decline in the growth of the economy and an unstable and explosive currency; Is this the beginning of a lack of confidence with India’s banking system and government financial good faith?

The U.S. Federal Reserve Bank rides to the Rescue

imexfx — Fri, 02 Dec 2011 16:20:18 +0000

Do you remember a few years back when the major European banks were required to go through a financial examination to determine their fiscal stability? It was designated as the “European Bank Stress Test” and 91 of the foremost banks passed with flying colors. Initially, the market response was one of relief and reassurance. However, it was later disclosed that the banks were allowed to remove from their portfolio their considerable exposure to their holdings of sovereign debt. So much for restoring lost confidence. To ease public concern, it was then decided the following year to have the banks re-take the test, but this time including their true risks to debt issued by countries like Greece, Ireland, Portugal, Spain, and Italy. Again, surprisingly, a majority of the banks did well. All was right with the world. But, in a short time, it was revealed that while the banks included their exposures to sovereign debt, as long as they were receiving interest on these bonds, they were not required to mark to market their accurate exposure to these investments. So, it was decided to re-test the re-test.

In the meantime, European banks have stopped lending and borrowing from each other. International financial institutions have for the most part cut back or cut off credit lines creating a substantial loss of liquidity to these banks and their customers. The IMF has limited funds and the ECB, at this moment, refuses to be the lender of last resort. There are strong disagreements among the EU governments on how to resolve this monetary trainwreck. German Chancellor Angela Merkel refuses to support an expanded European Central Bank role in solving the debt crisis. The distress of rising interest rate costs for banks is so immense that European Union leaders are considering proposing that bank debt issued prior to 2013 be exempt, compelling private investors to take losses, with the intent of keeping lender’s funding costs from increasing. But, for the moment, availabilty of much needed resources remains quite limited.

So the US Federal Reserve Bank rides to the rescue.

For the past two weeks, European banks have basically been closed out of the dollar borrowing market, or if they can borrow, they only have access to funds a week at a time. With the lack of liquidity intensifying, the US Fed, along with several other central banks provided entry to capital funding. The intended objective is to ease the strains in the financial markets, offer lower dollar interest rates and try to halt a toxic credit crunch in Europe. While this may bring a short reprieve, it is just another band aid. As per Chancellor Merkel said, “it is fighting debt with more debt.”

The ongoing differences and battle of constantly changing proposals on how to work through this eurozone debt and banking disaster between EU leaders and the ECB creates volatility and instability in the world’s currency markets. This uncertainty and explosiveness of the euro vs. the US dollar and other trading partners just compounds their predicament in creating a secure and comfortable investment environment.

Japanese Central Bank- Throwing good money after bad

imexfx — Fri, 11 Nov 2011 12:48:09 +0000

The Japanese Yen is the flavor of the day, the week, the month and the year. Whenever there is even a hint of economic and/or political commotion, the Yen is the sought out asset by international investors and speculators. It is an interesting phenomenon, considering that Japan’s budget deficit is almost twice the size of their GDP. However, there is a major difference between Japan’s debt and the U.S. deficit or the European Sovereign Debt debacle. Japan’s exposure is all domestic. They have no exposures to international creditors.

For years Japan has been able to pay domestic creditors with proceeds generated from huge international trade surpluses. The paradox, though, is that the stronger the yen become, the larger the negative it has had on Japan’s trading efforts. Japan has fallen from the second largest economy in the world, behind the U.S. and China to number three. The prolonged escalation of the Japanese Yen has had a continuing diminishing impact on Japan’s trade surplus. Their industrial output has fallen, retail sales are down, and export growth is slowing considerably.
Japanese exporters have been exerting immense pressure on the Central Bank (CB) to intervene in the foreign exchange markets to force the value of the yen lower, even if the central bank has to take action unilaterally. This year Japanese exporters have indicated to the government that they could remain profitable, if the value of the yen was at 86.30 or weaker. So you can imagine the compelling demands they are putting on the government with the yen trading at 77.

In most instances, when a CB intervenes without the support of other major central banks, the success of imposing and maintaining a specific rate or range for a currency in a 4 trillion dollar a day liquid market is not simply an uphill battle, but a major war. Nevertheless, when the Japanese Yen hit record highs in August, the CB intervened by itself, selling yen and purchasing over 58 billion dollars of foreign currencies. The result of the lower valued yen however, was costly and short lived.

With the persistent turmoil and uncertainty in the eurozone, capital flows to Japan continue to boost the worth of the yen. On October 31st when the Yen hit another post WWII record high of 75.35, the central bank, unaccompanied by any international assistance, intervened in the currency markets selling an estimated 100 billion dollars worth of yen. Still, this staggering sum had only a brief influence on the rate of the yen. Due to the currency interventions of the Central Bank, Japan now holds foreign exchange assets that have lost a half trillion dollars in value.

The foreign exchange markets anticipate additional interventions by the Japanese CB. This will give investors and speculators another opportunity to buy the yen at a lower cost. However when the central bank halts their sale of yen for foreign currencies, the value of the yen will increase – because the underlying problems of the European Sovereign Debt and banking crisis remain unresolved and in disarray.

Isn’t it ironic that a weaker yen initially allowed Japan to develop into an exporting Goliath producing massive trade surpluses which ultimately turned the yen into the currency of choice. This may eventually impact Japan’s capability to accumulate considerable surpluses, and thus expose the yen to market induced weakness.

In the meantime, it appears that the Central Bank of Japan is throwing good money after bad.

For questions /information, contact Joel Borshof

joel@imexfx.com

European Sovereign Debt Crisis: Has China Boarded the Train?

imexfx — Fri, 28 Oct 2011 13:48:05 +0000

As part of a plan to lower Greece’s debt burden, and to try and contain the two year European Union crisis, it has been reported that euro zone leaders have come to an agreement with private banks and insurers. The agreement imposes upon those banks and insurers to accept a 50% loss on their holdings of Greek sovereign bonds. EU leaders have also increased their rescue fund, the European Financial Stability Facility, from $600 billion to $1.4 trillion, in order to enhance confidence in their bailout program and to safeguard the European Union from further contagion.

To aid in the rebuilding of faith and assurance in the EU, French President Sarkozy has requested support and investment from China, which has been approached on several other occasions in the past. Chinese Premier Hu Jintao responded by indicating that China may assume a supportive role in shoring up the bailout package. It is Hu’s hope that the measures being implemented will help to stabilize markets.

However, China will need time to carefully evaluate this plan. According to Shen Jianguang, a Hong Kong-based economist for Mizuho Securities Asia Ltd. “What worries China is that there is so much disagreement among European policy makers. It doesn’t want to be seen spending money on a plan that even Europeans don’t want to support.”

In the meantime, the foreign exchange markets are just as volatile as the stock and bond markets, with the Japanese Yen remaining the favorite safe haven currency. The Yen has risen four times to record highs this year, against the U.S. Dollar. International investors and speculators have increased their Yen assets by more than double the 2010 amount, due to the prolonged debt crisis in Europe.

For questions /information, contact Joel Borshof: joel@imexfx.com

Don’t look to China to lead the world out of it’s economic woes

imexfx — Fri, 14 Oct 2011 15:25:00 +0000

For many years and through many recessions, the United States’ economy was the steam engine for the world. It was joked that when the US caught a cold, the rest of the world got the flu. But what happens when the US economy gets the flu? With economic globalization, the symptoms for regional recessions and financial uncertainty have spread quickly and with far reaching effects.

The US recession induced by the collapse of the housing industry, the enduring high unemployment, the deficiency of corporate investment, and low consumer confidence has now extended to economic provinces throughout the world. The 17 countries that comprise the European Union have a combined economy larger than the US. Nevertheless, faced with a developing sovereign debt crisis and enormous banking instability, Europe is facing an economic meltdown – so there is little chance of Europe assuming the position of the worlds’ economic steam engine.

Over the recent years, China has been steadily and relentlessly developing into a major trade, industrial, and financial superpower. Last year it surpassed Japan as the second largest economy in the world behind the US. China has amassed 3.2 trillion dollars worth of foreign exchange reserves and is holding 1.2 trillion dollars of US treasuries. It is no wonder that the world was looking towards China to be the next steam engine to lead the needed economic recovery.

However, there are major concerns regarding China’s own economic stability. Banks, insurers, and developers have tumbled in value 43% in 2011 Shares of Chinese banks have been seriously deteriorating in spite of recent government purchases in trying to shore them up. These efforts have not changed the bearish outlook. A Chinese report released today has indicated a slowdown in their primary monetary earning locomotive: EXPORTS.

The government controlled low value of the Chinese Yuan, has long been a key dynamic in maintaining the significant edge China has enjoyed with their exports. In an attempt to put China on a level playing field with their trading partners and effect a reduction of China’s huge trade surplus, the US Senate recently passed a currency measure. It would pressure China and other countries to allow their currencies to appreciate. This measure remains to be voted on by the House of Representatives. Nevertheless, China will continue to set its own policy, but, it will take some of the steam from their engine.

For questions /information, contact Joel Borshof: joel@imexfx.com

Double dip recession, depression or just a slowdown? The questions remain…

imexfx — Fri, 30 Sep 2011 11:50:07 +0000

US Durable Goods orders dropped while consumer spending and consumer confidence are down. Corporations are not hiring new employees or investing, despite sitting on 2 trillion dollars in reserves. The financial markets are once again concerned with the growing number of people still being fired, and home sales are down to record levels – due to high unemployment, increased foreclosures and tighter mortgage requirements.

It has just been reported that health care insurers are pushing premiums sharply higher, giving corporations an additional reason not to bring on new employees. Furthermore, if individuals are paying more for their health insurance, they have less discretionary money to support the recovery of the economy and help the comeback of small businesses…and that’s just the United States.

Japan and European countries are not only feeling the effects from the lack of growth in the US, but they are also experiencing major slowdowns of their own. The EU region is trying to deal with another run away crisis reflecting the unresolved European sovereign debt debacle and the instability and creditworthiness of the entire European banking system. It is a house of cards, built on sand. If one falls many others will likely follow as well. Last week, the world’s major central banks had to arrange a three month dollar lending facility, to insure liquidity for these banks. Despite this, Europe is still facing a financial meltdown in conjunction with an expanding economic slump.

The volatility and explosiveness of the major traded currencies, due to the uncertainty of a viable solution, only augments this instability in the financial markets. If the EU leaders, the ECB, IMF, and the World Bank don’t get this right, you can forget about a double dip recession. We could be facing a global depression.

We want to hear from you. Leave comments or email us with questions.

Joel L. Borshof

President

IMEX

732.583.7888

joel@imexfx.com