Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economy was running so close to capacity that it faced heightened risks of an outbreak in inflation that could require higher interest rates to tame. In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation "hawk" by stressing the need to keep price pressures contained.
BOJ policy board members voted to hold its ultra-loose monetary policy steady because the Japanese economy still hasn’t escape from deflation. This decision was in line with market expectations.
Japan has shown signs of economic recovery in recent years after more than a decade of stagnation. But it is still fighting deflation, a situation in which prices slide continuously, deadening economic activity by bringing down wages and profits.
Everyone should most likely be aware that tomorrow is Alan Greenspan’s last meeting as Fed chairman. The Fed are widely expected to raise interest rates to 4.5%. Ahead of the meeting, the currency market is taking a breather and is expected to do so until a rate increase is announced.
I have not traded at all this week and it isn’t because I’m waiting for the Fed announcement. It also isn’t because I’ve been frightened away from the market. I just feel like I’ve lost my way a bit. Not only that but my posts have been fewer and I’m finding myself reaching for something to write about. I don’t know if I just need a break or if this is the beginning of the end. I hope it isn’t. I’m not one to quit very easily.
One thing I know that has been affecting me is my full-time job. There have been many changes going on at my company and I don’t know if it’s going to be for good or bad. I have a new boss as of last Friday and I’ve really had to dig in deep at work. This has prevented me from doing anything Forex related during work hours. Some of you may remember that I accepted a forex related job a couple of months ago that I was going to start after I received my bonus at my current position. It turns out that I’m not going to take the job after all. The manager who hired me quit suddenly in the beginning of the year. I was able to reach out to him to find out why and was shocked by his words. He told me flat out not to work there. He said the environment was absolutely terrible and that he actually felt bad when he sent me an offer letter. He said he was trying to delay the entire hiring process hoping that I would get tired of waiting and give up. I’m talking about one of the larger Forex retail brokers in New York City not having a men’s bathroom. I don’t want to mention them by name now. I’d rather things cool down before I say anything.
I’ve been hearing a lot about the inverted yield curve on Bloomberg radio the last couple of days so now is the best time than any to mention it.
An inverted yield curve occurs when long-term interest rates have lower yields than short-term interest rates. It’s actually a pretty rare occurrance, the last being about 5 years ago. What does this say about the economy? History says that there could be an oncoming recession.
Here’s a little more from investopedia:
These yield curves are rare, and they form during extraordinary market conditions wherein the expectations of investors are completely the inverse of those demonstrated by the normal yield curve. In such abnormal market environments, bonds with maturity dates further into the future are expected to offer lower yields than bonds with shorter maturities. The inverted yield curve indicates that the market currently expects interest rates to decline as time moves further into the future, which in turn means the market expects yields of long-term bonds to decline. (Remember that as interest rates decrease, bond prices increase and yields decline.)
You may be wondering why investors would choose to purchase long-term fixed-income investments when there is an inverted yield curve, which indicates that investors expect to receive less compensation for taking on more risk. Some investors, however, interpret an inverted curve as an indication that the economy will soon experience a slowdown, which causes future interest rates to give even lower yields. Before a slowdown, it is better to lock money into long-term investments at present prevailing yields (because future yields will be even lower).
What does an inverted yield look like compared to a normal yield curve? (Click thumbnail for full-size image)
Left: Inverted Yield Curve Right: Normal Yield Curve
There’s a decent article written by DailyFX that takes a look ahead to 2006. I’ll summarize the major factor that could affect the currency in 2006:
-Change in focus from bearish to bullish EURO hinges on ECB rate hikes. If delivered, interest rate differentials between euro and dollar gradually compress
-Will Japan put an end to their zero interest rate policy? Will revaluation occur with the Yuan? If the answer is yes to either one, the Yen could rebound
-GBP may have another tough year considering England is fighting inflation, slow growth, and a slide in the housing market all at once. The GBP may be hardest to pull out from its slumber
-With so much instability in the world, Switzerland may see an influx of capital as investors seek safety and stability. In addition, Switzerland had the fastest growing economy among the majors in the second half of this year. If this continues, they could benefit from this as well
-Will crude prices stay below $60 dollars a barrel? Doubtful. CAD could have another big year
-Will growth continue to slow and gold prices top out? Hopefully not for the Aussies sake.
Read the entire article at www.dailyfx.com
"Catching the market by surprise, the Fed released its decision 2 minutes early. The dollar sold off against the Euro as the statement contained a whiff of dovishness. In the new and much shorter statement, the Fed dropped the sentence, “the Committee believes that policy accommodation can be removed at a pace that is likely to be measured” and replaced it with “The Committee judges that some further measured policy firming is likely to be needed.” According to the Fed, core inflation still remains relatively low, but they will continue to watch economic data and the trend in energy prices to make sure inflation does not tick higher once again.
The newest CBOT Committment of Traders report was released. Go to Forex Volume. This week’s changes:
-Crude Oil Longs take control again
-CAD longs back in style (see Crude Oil)
-Minor increase in CHF Short positions
-Minor increase in long GBP positions
-Increase in shorts by 11,729 positions in JPY
-AUD significant decrease in short positions
CFTC Commitment of Traders report was released today and data updated at Forex Volume.
Crude oil positions are always present in the report even though it is a non-currency because of its direct affect on certain currency pairs especially USD/CAD.
This weeks report at a glance indicates the following:
1. CAD substantial increase in Long positions, cut in short positions
2. CHF, GBP, JPY relatively unchanged
3. Substantial decrease in USD Index positions and USD Index Longs
4. EUR has 5000 less long positions, 2000 less short positions
5. AUD has 3500 more short positions, 1500 more long positions
By Martin Crutsinger, AP Economics Writer
Federal Reserve Chairman Alan Greenspan expressed concerns Friday that America’s failure to deal with its exploding budget deficit and worldwide efforts to erect trade barriers could disrupt the global economy.
Speaking at an economic conference in London, Greenspan said that so far the United States has had no problem financing its current account trade deficit, which last year hit a record $668 billion, because of the flexibility of the American economy.
After the jobs report this morning, which reported a nonfarm payroll growth of 215K and 5% unemployment, traders were up in the air on which direction the currency market should go.
Usually the volatility after this report is quite high after the announcement but that volatility didn’t exist this morning. Just now are the majors putting pressure on the USD.