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Commodity Currencies Losing Direction Amidst Uncertain Economic Outlook And Psychological Pressure

January 23, 2013 in Forex Fundamentals and News

AUDJPY - direction less movesCommodity currencies has been seeing a directionless volatile moves against the U.S. dollar. AUD/USD has tried twice to touch the psychological 1.0600 level since yesterday but failed miserably. First time it had gone as high as 1.0578 and then after a drop to 1.0549 it again recovered but failed strongly at 1.0574 and fell sharply to 1.0527 before entering a sideways mode. USD/CAD has made 3 attempts since Friday to test 0.9950 level but failed each time. The first attempt took it to 0.9932 followed by 0.9946 and the last one failed at 0.9945. After recovering from 0.9815, the pair is moving into a narrow range between 0.9900 and 0.9950.

Mixed economic data

Today’s consumer price index data for quarter 4 of 2012 from Australia came out weaker than the market expectations. The quarter on quarter change in the CPI in Q4 was 0.2% against the consensus of economist for a change of 0.4% and the previous change of 1.4%. The year on year change of 2.2% was better than that of quarter 3’s 2% but was less than the expected 2.4%.

Today’s China Conference Board’s leading index data which aggregates six economic indicators to measure economic activity in China indicated a slowdown from previous 1.1 to 0.4 in December. China being the largest export market for Australia affects the sentiments for Australian dollar strongly.

On the other hand yesterday’s data showed an unexpected drop in the existing home sales in the U.S. also. The month on month change in the existing home sales in December 2012 dropped to -0.1% from the previous  4.8% while the market consensus was for a drop to 1.2%.

Global economic outlook concerns

U.S. debt crisis

US debt to GDP ratio

Though Republicans have shown some flexibility for their demand to have the budget spending cuts to increase government’s borrowing levels but this only gives a temporary relief.  On Wednesday in the U.S. the house vote is scheduled for Republican party sponsored legislation to allow Obama administration to extend the borrowing limits to cover the cost obligations for next 3 months. The estimates are that the U.S. Treasury will not have sufficient funds to pay all its bills sometime between Feb. 15 and March 1 week. Delays in firm steps to tackle the issue with longer-term goals is a threat not only to the U.S. economy but the global economy.

Mixed sentiments in Euro zone

Even though the progress in decisive steps in policy decision and Greece bailout have brought in some optimism but one the other hand the crisis is far from over. The high unemployment levels in Europe and ECB’s expectation that the euro-zone economy will shrink 0.3% in 2013 do not create any overall optimistic picture about the economy. The efficient channeling of rescue funds in the time to come and mutual agreements about the same remains a challenge.” Making the ECB a single European bank supervisor this year is a major organizational challenge”,  European Central Bank President Mario Draghi said late yesterday in Frankfurt.

Commodity currencies

Any uncertainties about global outlook keep the uncertainties on for the global currencies. Some positive recent outlook about China’s economic growth in 2013 have been favoring the strength of Australian dollar but on the other hand the overall global economic uncertainties are keeping the Aussie in check. Same is the case with Canadian dollar which has weaken against the US. dollar recently but is now hesitating ahead of the psychological level of 1.000 or parity.

ECB’s bond buying, cure or just buying time for the debt crisis?

September 6, 2012 in Forex Fundamentals and News

By announcing that ECB will buy unlimited government bonds to help Euro, ECB President Draghi did what he had to or for that matter any person in his shoes and his position. Debates are taking place and more debates would take place but the fact remains same that something had to be done and that something had to boil down to this as the immediate step.

The solution to Financial crisis like this can not come in days or months or even in few years but the breathing time for those whatever number of years required is also needed. The debate should not be about this step taken but about the way ahead and what should be done during that breathing time to avoid a fall on the face.

The yield on the bonds which were going high because of the reducing values of the bonds have suddenly seen a check and the yields on government bonds started falling across Europe. With the support the borrowing costs will go down for the countries in crisis with some renewed confidence about the safety of the money. All these will help.

On the other hand with the influx of money, the raise in inflation in those countries can not be ignored in the coming times. Money comes in, the value of money goes down, prices increase, earnings of the normal people do not increase, the purchasing power of individuals go down, the demand of the goods and services go down because of high prices, production goes down, unemployment increases, the growth of the economies slow down,,,, Well, it’s always that economical cycle which can not be ignored.

It can not be ignored but can be kept in check by better economic reforms. The million Dollar question (in fact many Billion Dollar question in this case) is whether the economies in question i.e. Greece, Ireland and Portugal and then Spain and Italy would be able to tread through the troubled time with enough economic reforms to come out this crisis healthier? The question is whether the breathing time given would not add to further strain on Euro in longer term by the additional risk factors of the unlimited bond buying.

Well, all the above are anybody’s guess at this point of time but one thing is sure that a common currency like Euro can not fall so easily because if it falls, it will not be alone and will take most of those which matter along.