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PESSIMISTS PREVAIL AS THE EURO CURRENCY DRIFTS LOWER

Market Drivers July 5th, 2012

Markets tread water ahead of ECB, BoE US ISM Svc and ADP
Australian Trade slightly better
Nikkei down by -0.27% Europe down -0.18%
Oil at $87/bbl
Gold at $1616/oz.

Asia and Europe:
AUD Trade Balance -0.29B vs. -0.51B
EUR ECB Bank Rate Decision n/a
EUR German Factory Orders n/a
GBP BoE Rate Decision n/a
GBP BoE Asset Purchase Target n/a

North America:
USD ADP Employment Change 8:15
USD Initial Jobless Claims 8:30
USD Continuing Jobless Claims 8:30
USD ISM NonManuf Composite 10:00

FX markets were extremely quiet in post US holiday dealing as traders positioned themselves for a very busy North American session that includes the BoE and ECB rate decisions as well as US ISM Services and ISM report. The listless, low liquidity trade of the past twenty four hours may indeed be the calm before the storm as markets prepare for the news to come.

Presently market expectations are for the ECB to cut the benchmark rate by 25bp while the BoE is expected to increase its Asset purchase program by another 50B GBP to 375B GBP. However, those factors have been largely priced into the market. Instead traders will be keenly watching Mario Draghi’s press conference for any clues to additional LTRO or SMP measures. The EUR/USD has given back all of its post summit gains, as currency markets continue to be concerned with the state of the EZ credit. The announcement on ESM was a step in the right direction but is seen by many as too little too late.

The ECB therefore stands as the only actor in the EZ that is capable of providing the scope and scale for necessary stimulus and if they choose to follow their typical gradualist path lowering the interest rates only, the market will likely be disappointed. Under that scenario the EUR/USD will breaking below the 1.2500 level as most traders will bail from the long trade concerned over the prospect of renewed stress in the peripheral credit markets.

In UK the BoE is expected to increase its QE measures which typically would be viewed as dilutive and therefore negative for the pound, but given the moribund state of the UK economy additional QE is now viewed as positive for risk and could in fact be supportive of cable. The pair however remains under a moderate amount of stress as the LIBOR fixing scandal continues to dominate the headlines and for now any rally is likely to be capped.

After the markets digest the latest monetary policy moves attention will turn to US economic data with both ADP and ISM Services report on tap. The ADP is expected to print at about 103K and anything above 100K will be viewed as mildly positive suggesting that the slide in US labor demand may have stabilized. The other key data point will be the employment sub-component of the US ISM services report which as we have noted many times in the past is one of the more accurate predictors of NFPs.

If the US labor data surprises to the upside it should provide a boost to equities and may help stabilize risk FX if European monetary authorities prove to be reticent to take any further action. Ahead of the day’s events however, the skeptics have the upper hand with most risk currencies drifting lower as markets hold out little hope for any dramatic gestures.

Happy trading!!!

Oil, Gold to track Stocks’ Response to BOE & ECB Rate Decisions

Talking Points

>> Crude Oil, Copper to Rise if BOE and ECB Rate Decisions Boost Risky Assets
>> Gold and Silver May Advance if Stimulus Sinks Haven Demand for US Dollar

European monetary policy is in focus today with the European Central Bank and the Bank of England both due to deliver interest rate announcements. The ECB is expected to cut its benchmark lending rate to a record-low 0.75 percent while the BOE is seen boosting asset purchases by £50 billion. A recession in Europe represents the most significant headwind facing overall global economic growth this year. That means additional stimulus ought to be broadly supportive for risk appetite, but with some degree of easing widely expected policymakers will need to out-do baseline forecasts to generate a significant sentiment boost.

Economists’ median expectations have favored a third-quarter ECB rate cut for six weeks now, so a 25bps reduction in the headline lending rate alone may not amount to a meaningful-enough inflection point. A rate cut coupled with guidance on additional LTRO operations or even a reboot of the ECB’s bond-buying program is likely to be cheered on by investors however. Similarly for the BOE, expanding asset purchases to £375 billion may be treated as effectively status quo. For the outcome to significantly boost risk appetite, a larger increase seems necessary.

Correlation studies suggest crude oil and copper prices remain closely anchored to broad-based sentiment trends, meaning a relatively risk-supportive outcome to the BOE and ECB outcomes are likely to drive the two commodities higher as well. Gold and silver also appear likely to advance if European central banks deliver on the stimulus front, finding de-facto support as haven flows reverse out of the US Dollar.

WTI Crude Oil (NY Close): $87.66 // +3.91 // +4.67%

Prices pushed higher as expected after putting in a Piercing Line candlestick pattern, taking out the 23.6% Fibonacci retracement at 85.11 to expose the 38.2% level at 89.97. The psychologically significant 90.00 reinforces the upside barrier. The 85.11 has been recast as near-term support.

Spot Gold (NY Close): $1615.63 // -1.72 // -0.11%

Prices are testing falling trend line resistance set from late March (now at 1619.58). A break above this barrier initially exposes the June 6 swing high at 1640.80. Near-term support lines up at 1606.74, the 23.6%Fibonacci expansion, with a drop back below that targeting the 38.2% level at 1585.44.

Spot Silver (NY Close): $28.14 // -0.14 // -0.48%

Prices are retesting the formerly broken bottom of a Flag chart formation, now at 28.54. A Hanging Man candlestick warns that a downswing may be ahead. Near-term support is at 26.75, with a break below that exposing the multi-month triple bottom at 26.05. Alternatively, a break higher exposes the 29.00 figure and 29.42.

COMEX E-Mini Copper (NY Close): $3.540 // +0.070 // +2.02%

Prices broke above falling trend line support-turned-resistance set from late January to challenge the 50% Fibonacci retracement at 3.548. A break higher exposes the next layer of resistance in the 3.618-21 area marked by a former support level and the 61.8% Fib. The 38.2% retracement at 3.474 and a former range top at 3.424 line up as near-term downside barriers.

nice thread! But its good when you copy other pple's work, you quote d source at least. This looks like stuffs frm dailyfx.com

CHINA CUTS RATE, BENEFITS THE AUSSIE

July 5th, 2012

The Bank of England increased its QE program by 50 Billion GBP as expected, but its move was completely overshadowed by the surprise announcement from PBOC that it will lower its Reserve Requirement Ratio, cut the deposit rate by 25bp and cut its lending rate by 31bp. The news sent risk currencies spiking in early North American trade with Australian dollar rising above the 1.0300 level.

The news from PBOC will be viewed as welcome move for risk assets in global capital markets as the easing of Chinese monetary policy could revive demand in world’s second largest economy. The broad move that involved all three policy instruments suggests that Chinese authorities are serious about stimulating growth to offset the depressive effects of the slowdown in the EZ which have dampened demand for the country’s exports.

Eyes now turn to the ECB with traders looking for additional easing from Mr. Draghi and company beyond the 25bp cut that is expected. If the ECB suggests that it is considering further LTRO actions the news could provide a powerful support for risk assets and spur stronger rally in high beta FX.

If the background of global monetary easing could be enhanced by positive news on US labor front from ADP and ISM Services reports then the Aussie will likely be the prime beneficiary of this move as it remains king of the carry. This week’s RBA statement and better than expected Retail sales report indicated that the rate cutting cycle in Australia is over. The pair has been able to clear the 1.0300 level and could target 1.0350 as the day proceeds.

EUROPEAN CENTRAL BANK CUTS REFI RATE TO 0.75% MULTI-YEAR LOW !!!

The Euro is tanking!
The European Central Bank on Thursday cut its benchmark lending rate by a quarter of a percentage point to a record low 0.75%, as expected. The central bank lowered the deposit rate on money parked by banks at the ECB overnight to 0% from 0.25%, while the rate on its marginal lending facility was lowered to 1.5% from 1.75%. ECB President Mario Draghi is scheduled to hold his monthly news conference at 2:30 p.m. Frankfurt time, or 8:30 a.m. Eastern.

Modest U.S. Recovery, But Europe a Key Risk


U.S. economy expected to grow by 2 percent in 2012 as strains in Europe intensify
Key challenge is to manage pace of deficit reduction without hurting economy
Progress made but more efforts needed to increase resilience of U.S. financial system

The U.S economy continues to recover at a tepid pace, while concerns about the euro area debt crisis and uncertainty over domestic fiscal plans are creating a challenging environment for the world’s largest economy, the IMF said after wrapping up its annual review of the U.S. economy.

An IMF team, led by Gian Maria Milesi-Ferretti, Assistant Director of the Western Hemisphere Department, met with Treasury Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke, and other senior U.S. officials from May 21 to July 2 to conduct the annual review.

“The United States remains vulnerable to contagion from an intensification of the euro area debt crisis, which would be transmitted mainly via a generalized increase in risk aversion and lower asset prices, as well as from trade channels” said IMF Managing Director Christine Lagarde during a press conference in Washington, D.C.

On the domestic front, failure to reach an agreement on near-term tax and spending policies would trigger a severe “fiscal cliff” in 2013, threatening the recovery, she added. Lagarde made these remarks after joining the final policy discussions.

The IMF expects U.S. growth to remain modest during the next two years, constrained by housing difficulties, the expiration of fiscal stimulus measures, and continued low global demand, particularly in Europe. Growth is projected at 2 percent in 2012 and about 2¼ percent in 2013.

The main policy challenge is to use the limited policy space to support the recovery in the near term, while restoring medium-term fiscal sustainability and completing financial sector reforms. The crisis and ensuing recession significantly worsened the state of U.S. public finances and exposed vast gaps in the financial and regulatory frameworks, the IMF said.

Avoiding the “fiscal cliff”

The IMF stressed that it is critical to remove the uncertainty created by the “fiscal cliff” in 2013—when temporary tax provisions expire and automatic spending cuts take effect. Should the fiscal cliff materialize, the IMF warned that it could have severe consequences for domestic growth. The authorities therefore need to ensure that the pace of deficit reduction does not sap the economic recovery. The IMF also raised the importance of promptly raising the debt ceiling to forestall the risk of financial market turmoil.

At the same time, the IMF said that a comprehensive and credible fiscal consolidation plan is crucial to ensure that the public debt-to-GDP ratio stabilizes by mid-decade and gradually falls afterwards.

Given the size of the budget deficit, age-related spending pressures, and the relatively low tax ratio, the fiscal consolidation effort would need to rely on both higher revenues and cuts in entitlement spending. Some options include health care and Social Security reforms, reducing tax expenditures, and possibly introducing a value-added tax and carbon taxes.

Supporting the recovery

With inflation kept in check by the sizeable economic slack, and unemployment projected to decline only slowly, the IMF supports the Federal Reserve’s intention to keep the monetary policy stance accommodative for an extended period. Should the outlook worsen, a number of tools could be used for further easing, including through additional purchases of mortgage-backed securities.

Removing distortions

The IMF stressed the need for more aggressive efforts to accelerate the resolution of the housing crisis. These include measures to facilitate the conversion of foreclosed properties into rental units and supporting access to refinancing on a larger scale. Another option would be to allow mortgages on principal residences to be modified in personal bankruptcy without secured creditors’ consent (“cram-downs”).

At the same time, the IMF said that measures are needed to reduce the risk that long-term unemployment could morph into higher structural unemployment and reduce potential output. Active labor market policies, such as training and support for job search, should therefore be adequately funded.

Regulation of the financial sector

Good progress has been made in reforming the U.S. financial system, but vulnerabilities remain, the IMF said.

Four specific areas were highlighted for further progress:

• Regulation of the shadow banking system: Given the size of the industry and prominence in short-term funding, strengthening regulation of Money Market Mutual Funds remains critical.

• Volcker rule: A ban on proprietary trading by banks should, in principle, reduce systemic risk.

• Housing finance: Measures to help the recovery of private securitization would ease mortgage market conditions.

• Funding for regulatory agencies: Adequate implementation of domestic and international reforms requires appropriate funding to the regulatory and supervisory agencies.

Global spillovers

As the world’s largest economy, the policy actions of the U.S. have significant effects on global growth and stability. Striking the right balance between fiscal consolidation and economic policy support would benefit the rest of the world, as it would avoid the risk of a spike in U.S. interest rates and an abrupt decline in U.S. growth in 2013. Further progress in implementing financial reforms would also be globally beneficial and reduce the scope for regulatory arbitrage.

A final report will be issued once it has been discussed by the IMF’s Executive Board in late July.

So much for convincing investors that Europe is fixed.

SPAIN GETTING A BEATING, DOWN 3%

The European Central Bank's latest monetary policy decision—a 25 bps rate cut—hasn't bolstered confidence, either.

UPDATE: Markets across Europe are tanking, with Spain taking the biggest hit. A quick look at the scoreboard:

German DAX: -0.7%
French CAC 40: -1.1%
Italian FTSE MIB: -2.3%
Spanish IBEX 35: -3.1%

The IBEX 35 is just getting destroyed:

Even more worrisome is the fact that borrowing costs are shooting higher for Spain and Italy. The Italian 10-year is back over 6 percent.

But the rise in yields is particularly important for bonds with maturities of less than three years, or before the expiration of the two game-changing LTROs from the ECB.

We've been following the Spanish two-year as a good indicator of this stress—our "Most Important Chart In Europe"—and it's up 44 basis points today to 4.53 percent.

Risks of deflation rising again:

By James Saft

Thu Jul 5, 2012 12:24am EDT

(Reuters) - The Federal Reserve can and will fight the threat of falling prices.

What is a lot less clear is whether the extraordinary monetary policy we may soon be seeing will be effective in staving off another recession.

The recent run of data on prices has shown a clearly falling trend, doubtless driven by a recession in Europe and a marked slowing in China's economy.

U.S. manufacturing contracted in May, according to a survey from The Institute for Supply Management. Even more striking: the index of prices paid decreased to 37 from 47.5, with 50 denoting the line between rising and falling prices. That is nothing less than a lurch towards deflation.

The consumer price index fell by 0.3 percent in May on a seasonally adjusted basis, the first such fall in two years and the worst since December 2008, at the height of the financial crisis.

Manufacturing readings out of Europe and Asia have also had a gloomy tone, and commodity prices are down by about 10 percent since the beginning of March.

What's more, despite the fog that surrounds Chinese economic measurement, there are strong signs of slowing there and that credit-fueled appetite for resources and property has reversed.

In the 67 years for which we have data, the U.S. economy has slipped into recession 75 percent of the time the ISM fell this badly in nominal terms, according to economist David Rosenberg of Gluskin, Sheff in Toronto.

"We haven't seen something like this since April 2009 and the difference back then is the recession was coming to an end. This time it is the expansion that is looking fatigued and policymakers are running out of responses," he wrote in a note to clients.

This is exactly the point: The Fed's Herculean efforts have been effective in staving off deflation, if only temporarily, but far less good at fomenting actual sustainable growth.

As the now Fed chief Ben Bernanke laid out in his famous "helicopter" speech in 2002, a central bank possessed of a printing press can always fight deflation by, if need be, raining down money from the skies.

But fighting and winning are two different things, especially when a central bank is having to fight the battle without aid from fiscal authorities, as is likely to be the case in the U.S.

If current tax and spending plans aren't amended the deficit would be shrunk by about 4 percent of GDP next year, something the International Monetary Fund believes would slash U.S. growth to well below 1 percent, with contraction early next year.

DEBT DEFLATION

Despite virtually zero interest rates, despite QE1 and 2 and Operation Twist, and even despite a rush to supposedly safe Treasuries which have driven financing rates lower without help from the Fed, still we have an economy which fails to thrive.

The Fed can introduce all of the liquidity into the economy it likes, but it cannot force banks to lend or people to borrow. The central bank has tripled the monetary base since 2008, but the speed at which money circulates through the economy has slowed, a sure sign that higher doses of the same medicine won't be fully effective.

"We think that the global forces behind deleveraging have more firepower than all of the world's central banks and governments together, and that deflation is a much more likely outcome than a major inflation," fund managers Comstock Partners wrote in a June note to clients.

That's because debt is being repaid and destroyed rather than created, as companies, individuals and states try to cut risk. Household debt levels in the U.S. have fallen for a remarkable 16 straight quarters, and still have far to go to reach historic norms. In addition the shadow banking system's assets continue to contract.

Even if politics allowed for stimulus, which it probably won't, the Fed would have a difficult time using the tools it has to reverse this process.

None of this is to say that the Fed and other central banks won't try, especially as the weeks go by and the negative data points collect. That could well drive financial markets higher. The response among investors is still to trust in a rescue from on high.

The disconnect between financial markets and the economy cannot last forever, a reality that may even be dawning among policymakers.

In the meantime, look for the words "deflation" and "recession" to pop up with increasing regularity, and with them, expectations for one more round of extraordinary monetary policy.

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Techical Analysis For The Week

Key Points:

Can The Cable[British Pound] Hold or Breakout? Will the Common Currency[Euro] hold above the 1.25 level?

See Charts Below:

Nigeria's Balance of Trade as of September 2012



Nigeria reported a trade surplus equivalent to 10.5 Billion USD in March of 2012. Historically, from 2002 until 2012, Nigeria Balance of Trade averaged 2.69 Billion USD reaching an all time high of 14.59 Billion USD in October of 2011 and a record low of -3.82 Billion USD in March of 2011. Exports of commodities (oil and natural gas) is the main factor behind Nigeria's growth and accounts for more than 95% of total exports. Nigeria's main exports partners are: USA (30% of total in 2009), Equatorial Guinea (8%), Brazil (6.6%), France (6%) and India (6%). Nigeria imports mainly: industrial supplies (32% of total), transport equipment and parts (23%), capital goods (24%), food and beverage (11%) and consumer goods. Main import partners are: China (17% of total), Albania (11.3%), United States (7.5%), France and Belgium. This page includes a chart with historical data for Nigeria Balance of Trade.

Nigeria isn't doing badly. Are we?

Balance of Trade Definition


The balance of trade is the difference between the monetary value of exports and imports in an economy over a certain period of time. A positive balance of trade is known as a trade surplus and consists of exporting more than is imported; a negative balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade forms part of the current account, which also includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position. The Balance of Trade is identical to the difference between a country's output and its domestic demand - the difference between what goods a country produces and how many goods it buys from abroad; this does not include money respent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market.