FX Research : Growing uncertainty

Growing uncertainty
by Calyon Fixed Income Markets Research

It has become quite apparent going into the second half of 2009 that the trend of improvement in equity and credit markets is stalling. Perhaps the fact that markets have come so far in such a short period of time has itself prompted a pause. An alternative explanation is that the summer lull is kicking in, with many investors taking the end of H1 2009 as an excuse to book profits and wait until activity picks up again post summer holidays. A more sinister and more likely explanation is that uncertainty is increasing. Until now there has been plenty of less negative news and use of the now worn phrase “green shoots”, but little information to judge the magnitude and speed of recovery going forward. Indeed, it is not difficult to see where market uncertainty is coming from. There are plenty of factors that could dampen both economic and market recovery in the months ahead.

Higher unemployment, massive wealth loss and increased savings will provide a clear downdraft to the global economy and prevent a more rapid acceleration in economic activity in the months ahead. Banks will be increasingly laden with bad loans due to credit card delinquencies, commercial real estate defaults and other sour loans and are unlikely to step up lending in a hurry. In addition, it is still unclear how quickly toxic debt will be removed from banks' balance sheets, which will act as another impediment to recovery. European banking sector issues in particular remain most uncertain, especially related to the German Landesbanken. The lack of transparency about industry wide stress tests may come back to haunt investor confidence. The bottom line is that the market rally may have been justified so far but there is little to carry the momentum forward. Equity valuations dropped to low levels in March but can be hardly considered cheap at present. The improvements in indicators of market stress have also reached dramatic levels and progress is likely to be far slower in the months ahead.

Data and events this week are unlikely to fuel a renewed improvement in risk appetite or answer questions about the pace of recovery. Events include central bank meetings in Australia and the UK as well as the G8 meeting. The data calendar is relatively light but there will be some interest in the US May trade balance and July Michigan confidence data. The trade deficit is set to widen slightly whilst Michigan confidence is likely to edge higher. In Europe focus will mainly centre on IP data where some improvement is expected, but not enough to bolster hopes of a rapid Eurozone recovery.

We look for no change from the RBA tomorrow, with policy rates set to remain at 3%. Although we believe rates have bottomed in Australia the RBA will likely keep the door open to further easing and a more dovish message from the RBA will weigh on the AUD especially as the Bank will be keen to dampen market expectations of early tightening. The deterioration in labour market conditions could still trigger further easing and the June employment report on Thursday will be particularly important to gauge policy clues. The BoE is also likely to keep interest rates on hold at 0.5% but there is a strong chance that the MPC will decide to expand its asset purchases by GBP 25 billion to GBP 150 billion. This may weigh on GBP and having slipped back following its test of 1.6744 last week it is likely to struggle further this week.

There will be some attention on whether G8 officials discuss the USD and its role as a reserve currency at their meeting in Italy beginning on Wednesday. However, the absence of central bankers means that discussion of currencies will be limited. Ahead of the meeting there has been a plethora of officials talking about currencies. India has joined the fray, with an advisor to the Indian Prime Minister calling for greater diversification of the countries' reserves away from the USD. This follows more comments from Russian President Medvedev on a similar note. Even French Finance Minister Lagarde highlighted the need to “explore better coordination of exchange-rate policy”. Nonetheless, the G8 meeting is unlikely to conclude with anything that is destabilising to the USD over the short term even if the longer term role of the USD is at risk. Even Medvedev stated that he sees “no alternative” to the USD at present, whilst China's Deputy Foreign Minister was supportive of the USD in his comments yesterday and ECB President Trichet highlighted the important of US officials sticking to their “strong USD” policy. In the short term the USD will benefit from the growing uncertainty about recovery prospects and any related increase in risk aversion although it seems unlikely that it will break out of current ranges.

Mitul Kotecha Head of Global Foreign Exchange Strategy

Scalpuman wrote:

Growing uncertainty
by Calyon Fixed Income Markets Research

It has become quite apparent going into the second half of 2009 that the trend of improvement in equity and credit markets is stalling. Perhaps the fact that markets have come so far in such a short period of time has itself prompted a pause. An alternative explanation is that the summer lull is kicking in, with many investors taking the end of H1 2009 as an excuse to book profits and wait until activity picks up again post summer holidays. A more sinister and more likely explanation is that uncertainty is increasing. Until now there has been plenty of less negative news and use of the now worn phrase “green shoots”, but little information to judge the magnitude and speed of recovery going forward. Indeed, it is not difficult to see where market uncertainty is coming from. There are plenty of factors that could dampen both economic and market recovery in the months ahead.

Higher unemployment, massive wealth loss and increased savings will provide a clear downdraft to the global economy and prevent a more rapid acceleration in economic activity in the months ahead. Banks will be increasingly laden with bad loans due to credit card delinquencies, commercial real estate defaults and other sour loans and are unlikely to step up lending in a hurry. In addition, it is still unclear how quickly toxic debt will be removed from banks' balance sheets, which will act as another impediment to recovery. European banking sector issues in particular remain most uncertain, especially related to the German Landesbanken. The lack of transparency about industry wide stress tests may come back to haunt investor confidence. The bottom line is that the market rally may have been justified so far but there is little to carry the momentum forward. Equity valuations dropped to low levels in March but can be hardly considered cheap at present. The improvements in indicators of market stress have also reached dramatic levels and progress is likely to be far slower in the months ahead.

Data and events this week are unlikely to fuel a renewed improvement in risk appetite or answer questions about the pace of recovery. Events include central bank meetings in Australia and the UK as well as the G8 meeting. The data calendar is relatively light but there will be some interest in the US May trade balance and July Michigan confidence data. The trade deficit is set to widen slightly whilst Michigan confidence is likely to edge higher. In Europe focus will mainly centre on IP data where some improvement is expected, but not enough to bolster hopes of a rapid Eurozone recovery.

We look for no change from the RBA tomorrow, with policy rates set to remain at 3%. Although we believe rates have bottomed in Australia the RBA will likely keep the door open to further easing and a more dovish message from the RBA will weigh on the AUD especially as the Bank will be keen to dampen market expectations of early tightening. The deterioration in labour market conditions could still trigger further easing and the June employment report on Thursday will be particularly important to gauge policy clues. The BoE is also likely to keep interest rates on hold at 0.5% but there is a strong chance that the MPC will decide to expand its asset purchases by GBP 25 billion to GBP 150 billion. This may weigh on GBP and having slipped back following its test of 1.6744 last week it is likely to struggle further this week.

There will be some attention on whether G8 officials discuss the USD and its role as a reserve currency at their meeting in Italy beginning on Wednesday. However, the absence of central bankers means that discussion of currencies will be limited. Ahead of the meeting there has been a plethora of officials talking about currencies. India has joined the fray, with an advisor to the Indian Prime Minister calling for greater diversification of the countries' reserves away from the USD. This follows more comments from Russian President Medvedev on a similar note. Even French Finance Minister Lagarde highlighted the need to “explore better coordination of exchange-rate policy”. Nonetheless, the G8 meeting is unlikely to conclude with anything that is destabilising to the USD over the short term even if the longer term role of the USD is at risk. Even Medvedev stated that he sees “no alternative” to the USD at present, whilst China's Deputy Foreign Minister was supportive of the USD in his comments yesterday and ECB President Trichet highlighted the important of US officials sticking to their “strong USD” policy. In the short term the USD will benefit from the growing uncertainty about recovery prospects and any related increase in risk aversion although it seems unlikely that it will break out of current ranges.

Mitul Kotecha Head of Global Foreign Exchange Strategy

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Great currency update by calyon again taken from TLOT

(www.thelordoftrading.com) http://forum.thelordoftrading.com/economic-news-comments-research-f5/fx-research-growing-uncertainty-t44.htm#82


I
just want to point out that I do agree with this article, but i noticed
the physiological (body wise) affects from me reading this article, I
was more immediately alert, and my mind was agreeing, and I was nodding
my head yes as I read this article.

This type of bodily
reaction worries me as this will also affect the psychology and state
of mind as a trader. As a trader its should be said that a trader must
be aware of his mental state.

Going out and finding every
article that agree's with your stance doesn't make it right, in fact if
anyone that took pyschology 101 they have a name for such actions;
"confirmation bias" looking and for and agreeing to anything that
proves you right and discrediting anything that is against it.

As
a trader its necessary to be aware of both sides and make the best
choice of the two (bullish or bearish ... or whatever other view).

As
such,neo-classical methods and quantitative analysis are lacking in
this respect where they do not account for such variables. Such studies
may fall more in the realm of behavioral economics. Such ideas are
worth considering as psychological or physiological affects can make or
break a trader (its impossible to trade purely without emotion).

-Snapman