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Monday, 31 October 2016

Asia stocks shaky as FBI review of Clinton emails rattles markets


Most Asian stocks struggled higher on Monday but investors were rattled by news that the FBI is planning to review more emails related to Democratic presidential candidate Hillary Clinton's private server, just a week before the election.

European markets also looked set for a shaky start, with financial spreadbetter CMC Markets expecting Britain's FTSE 100 .FTSE, France's CAC 40 .FCHI and Germany's DAX  to all open down 0.1 percent.

Federal investigators have secured a warrant to examine newly discovered emails, a source familiar with the matter said on Sunday.

Clinton had opened a recent lead over her unpredictable Republican rival Donald Trump in national polls, but it had been narrowing even before the email controversy resurfaced. An ABC News/Washington Post poll released on Sunday showed Clinton with a statistically insignificant 1-point national lead.

The Mexican peso, which strengthens along with the chances for a Clinton win, remained weak, while the U.S. dollar edged up against other major currencies.

"There seems little doubt that a Trump victory would trigger selling in stock markets from current levels," Rick Spooner, chief market analyst at CMC Markets in Sydney, wrote in a note.

"This has traders nervous as they start the week assimilating fresh news on Hillary Clinton’s email problems."

MSCI's broadest index of Asia-Pacific shares outside Japan hit a six-week low on Monday before recovering 0.3 percent. It is set to end the month down 1.6 percent.

Japan's Nikkei .N225, which touched a six-month high on Friday, closed 0.1 percent lower on Monday, but is up 5.9 percent in October.

Hong Kong's Hang Seng .HSI slid to a two-month low but revived to gain 0.2 percent, on track for a 1.35 percent loss in October. China's Shanghai Composite index .SSEC fell 0.1 percent, paring gains this month to 3.2 percent.

On Friday, Wall Street and the dollar closed lower, after Federal Bureau of Investigation Director James Comey sent a letter to the U.S. Congress informing it that the agency is again reviewing emails related to the private server Clinton used when she was secretary of state.

Markets have tended to see Clinton as a candidate who will largely maintain the status quo, while there is greater uncertainty over what a victory for Trump might mean for U.S. foreign policy, international trade deals and the domestic economy.

Comey had decided in July that the FBI was not going to seek prosecution of Clinton for her handling of classified materials.

DOLLAR DIPS

The dollar hit a three-week high against the Mexican peso on Friday before closing up 0.7 percent. It retreated 0.1 percent to 18.9322 peso on Monday.

A Trump victory has been viewed as a key risk for the Mexican currency given his promises to clamp down on immigration and redraw trade relations with the country.

The dollar was little changed at 104.76 yen on Monday, and remains up 3.3 percent for the month.

On Friday, it hit a three-month peak after third-quarter U.S. economic growth beat expectations, before ending the day down 0.4 percent on the news about the Clinton email investigation.


The dollar index .DXY, which tracks the greenback against a basket of six global peers, added 0.1 percent to 93.43, shrinking Friday's 0.6 percent loss. It is set to end October with a 3.1 percent gain.

The eu retreated 0.2 percent to $1.09655 after jumping 0.9 percent on Friday. It is poised to end October with a 2.5 percent loss.

Adding to the list of potential market-moving events this week is a raft of factory activity surveys on Tuesday for many economies; central bank policy meetings, including Japan and Australia on Tuesday, the U.S. Federal Reserve on Wednesday and the Bank of England on Thursday; and U.S. October non-farm payrolls on Friday.

Oil prices extended their slide - driven by renewed oversupply concerns - and have surrendered most of the gains made in the first half of October. They are set to end the month with meagre gains.

The latest oil woes came after non-OPEC producers failed to make any specific commitment to join the Organization of Petroleum Exporting Countries in limiting output to support prices on Saturday.

U.S. crude CLc1 slid 0.4 percent to $48.52 a barrel on Monday, but looked set to edge up 0.6 percent for the month, while global benchmark Brent also retreated 0.4 percent to $49.50, up 0.9 percent in October.

"There was a lot of talk and nobody managed to agree on anything. That has been pushing the market down," said Jeffrey Halley, senior market analyst at OANDA brokerage in Singapore.


Reference: Nichola Saminather

Global funds raise cash to 16-month highs, cut bonds


Global investors raised their cash levels to 16-month highs in October at the expense of bonds, reflecting a turbulent month in debt markets beset by fears the multi-decade bond bull run was coming to an end, a Reuters monthly poll showed on Friday.

A sell-off in UK gilts, U.S. and European government bonds in October encouraged global funds to pare back their bond holdings to 39.9 percent of their balanced portfolios, the lowest level since June, and raise cash to 6.6 percent, the highest since June 2015.

With the U.S. Federal Reserve expected to raise rates in December, some cash deposit rates now look attractive relative to bonds, with three-month Libor  rising since late June to seven-year highs.

The poll of 58 fund managers and chief investment officers in the United States, Europe, Britain and Japan was carried out between October 14 and 26.

During this period investors became increasingly focused on when central banks would step back from their ultra-accommodative stance, pushing bond yields higher and bringing bond bears out of hibernation.

The concerns have grown since September when the Bank of Japan changed its focus from money printing to targeting government bond yields, and were exacerbated by rumours that the European Central Bank (ECB) might reduce the scale of its asset-purchase programme.

ECB President Mario Draghi shot down any talk of tapering at the bank's Oct. 20 meeting, so the majority of survey respondents who answered a specific question on the ECB did not expect it to end its massive bond-buying programme in March. But some investors expressed growing qualms.

Mark Robinson, chief investment officer of Bordier & Cie (UK), identified a number of risks, such as the waning efficacy of central bank policy, uncertainty around Brexit and anaemic global growth.

"Complacency surrounding these issues appears to be quite high," he said, suggesting the need to proceed with caution.

"Central bank policy may, of course, continue to drive asset prices higher and bond yields lower, and a more cautionary stance may prove unnecessary ... but the longer this period of central bank intervention goes on, the greater some of the market risks are likely to become."

Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum, added that whilst central bank buying would act as a cushion against any rout in the bond markets over coming months, bonds still remained unattractive from a valuation and yield perspective.

STERLING BATTERED

UK gilts and sterling have had a particularly turbulent month, with the pound revisiting its 'flash crash' lows of Oct.7 later in October after Prime Minister Theresa May raised the spectre of a "hard" Brexit.

A hard Brexit is one in which Britain leaves the European Union's single market in order to impose controls on immigration, disrupting access to its main trading partner.

The pound has shed nearly 18 percent against the dollar since Britain's June vote to leave the EU, but the majority of poll participants who answered a specific question on sterling did not see it reaching parity by the end of 2017, with several saying a "hard" Brexit was not their central scenario.

However, Frank Haertel, head of asset allocation at Bank J Safra Sarasin, said the current account deficit and high debt levels posed some risk for the pound longer term. This could trigger a further decline of sterling in 2017, especially if the Brexit negotiations between the EU and Britain got tough.

Trevor Greetham, head of multi-asset at Royal London Asset Management, also saw further downside risk, but added that economic data had been surprising positively, which could limit the amount of downside.

LITTLE RELIEF

Investors raised their equity allocation slightly to 44.2 percent, the highest level since June, with some pointing to improvements in China and Europe. However, the general mood was one of caution, with the upcoming U.S. presidential elections looming on Nov. 8.

Survey respondents who answered a specific question on the elections were evenly split over whether a victory for Democratic candidate Hillary Clinton would trigger a relief rally. Several said much of the move was already priced in.

Whilst most investors who expressed a view thought a win for Republican Donald Trump would trigger a fall in global markets, a Clinton administration would be seen as the status quo.

"Some sectors will probably benefit from Clinton's victory – healthcare, alternative energy, infrastructure," said Matteo Germano, global head of multi-asset investments at Pioneer Investments, adding that higher taxes, more regulation and increased social spending could be a drag on economic growth.

Investors continued to favour emerging market assets, raising their exposure to Asia ex-Japan equities to 7.1 percent from September's 6.9 percent.

"The outlook for Chinese growth remains solid with money supply growth strong," said RLAM's Greetham. "This suggests upside to emerging market equities."

Boris Willems, a strategist at UBS Asset Management, added that market concerns about China had remained subdued of late as stimulus measures such as fiscal loosening and interest rate cuts had helped drive an improvement in the data.

Emerging market debt holdings increased to 10.9 percent of global bond portfolios, up from 10.5 percent in September. Asia ex-Japan bond exposure rose almost two percentage points to 4.5 percent, a near one-year high.

Reference: Claire Milhench

Saturday, 29 October 2016

Central Banking: How They Influence The Forex market


The role of Central Banks


Central banks are at the heart of the financial system of any given country in that they are the authorities controlling the supply of money, and therefore control how a region’s economy functions. They evolved from the lack of stability in financial market that ruined a lot of economies during the 19th century. The first central bank was the Swedish Riksbank, which was created in the 17th century, with many following in the 18th and 19 century. The U.S. Federal Reserve appeared at the beginning of the 20th century. Over time, the roles of central banks in different countries have developed differently.

The European Central Bank's main duty is to assure price stability, by keeping "inflation rates below, but close to, 2% over the medium term" as measured in their CPI.

The Federal Reserve of the United States has four responsibilities: 1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates 2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers. 3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. 4.Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

The Bank of Japan states: "currency and monetary control shall be aimed at contributing to the sound development of the national economy, through the pursuit of price stability."

The Bank of England's mission is to assure stable prices and confidence in the currency through monetary policy and to detect and reduce threats to the financial system as a whole through financial policy
Even if in practice, central banks roles may sound different and even complicated, in pure theory their role is to increase the expansion phase of business cycle and reduce the contraction phase while still assuring future and prospective growth. These targets can be affected through monetary policy conducted by central banks via economic levers like interest rates, open market operations and reserve requirements. In order to conduct them, central banks must hold foreign reserves and gold reserves.

Interest rates are the most important economic lever that a central bank can control. In a classic economy, interest rates are viewed as "the price of money". A high interest rate will attract foreign capital and a low interest rate will tend to force capital to move outside the country in a search for a better income source (higher yields). Forex traders experience this by carry trading. We borrow in Yen, paying a 0.5% annual interest rate and buy, or go long in GBP, EUR, AUD or NZD because those currencies have higher rate of interest, or yield. Lower interest rates will boost lending because it makes the price of borrowing cheaper, giving corporations the ability to grow and giving consumers the "free hand" for spending. Over time this will create inflation and tend to cause interest rates to go up.

The central banks choose their desired interest rate in organized meetings, through voting on the short term interest rate. There are two types of interest rate that we should be aware of, they are; the nominal interest rate, and the discount interest rate from which central banks offer lending to commercial banks. Open market operations (OMO's) are one way a Central Bank controls interest rates. OMO's are simply a buying and selling operation that raises or lowers the money supply, which has an immediate effect on the interest rate and on currency valuation. Each central bank has its favourite way of influencing the interest rate through open market operations, but because of being the simplest and the most influential, we will focus on the Fed's method.

The Fed choose nominal interest rate (named fed fund target rate) through lending and borrowing for collateral securities from 22 banks and bonds dealers (called primary dealers). These operations are nicknamed "Repo" (repurchase operations). Traders should check the open market operations from time to time; they have a significant influence over forex. Most major central banks, including the FED, ECB, BoE, BoC and others use the 'corridor system' to stabilize the intraday money market conditions. In its simplest form, the 'corridor system' allows central banks to attract deposits and provide liquidity in an unlimited amount for overnight operations. This system allows banks to achieve the target overnight rate without creating volatility by channelling (a corridor) those deposits and withdrawals in a very controlled fashion. The discount window is for short-term Institutional lending, normally week-to-week.

Open market operations are the buying and selling of US Treasuries. These daily transactions control the supply of money. Treasuries are Government Debt that is sold to investors at a set rate of return. About half of the US debt is held by the Federal Reserve, a fact that seems strange to some; the Central Bank owns half the Country's debt. The reason is that the Fed can then control the flow of available Dollars. When Rates are required to go up the Fed buys back the Debt. When Rates need to go down the Fed sells Debt with the $ reserves, money that then goes into the banking system. Rates going up creates a squeeze on the Money Supply and the $ strengthens. Rates going down therefore increases the Money Supply and the $ weakens.

Minimal Reserves are another way of influencing the money supply used by central banks. Commercial banks are required to hold a percent of their liabilities in central banks, in order to avoid over-levering themselves. This is a good measure of reducing money supply or trying to increase money demand. This is arguably the most ineffective and definitely the least used monetary tool. Reserve requirements are the percentage of deposited money that a bank must keep on hand to satisfy withdrawal demands, and was more popular in the early part of the 20th century when the US banking system was far less stable, but that challenge may be coming back to be addressed. In theory raising reserve requirements limits a bank's ability to lend out deposited money, and likely increase the cost of borrowing.

Paying no interest on Reserves, as is the Fed policy, makes U.S. Banks hold no more than they are legally required to do, and with any and all cash surplus then lent to other Banks in times of need, usually underneath the Fed Funds rate (Discount Window), it puts additional and unwanted pressure on the system. This pressure can be very negative, especially when the Central Bank, in this case the Fed, is in a rate changing cycle. Banks borrowing under the Fed Funds sends rates down, at a time that the Fed needs them up to be able to fight inflation. We have witnessed the volatility in the Treasury yields, in the Libor rates, and seen it reflected in the intra-day volatility in the USD/CHF.
That is the problem when the Central Bank has a dual mandate, in reality you can either fight inflation, or you can have growth- but growth at a dear price, as we can see in the Commodity Bubble; the value of any growth produced is stripped away in inflationary costs.

A good example of the reserve Requirement has been seen in how the People's Bank of China tried to reduce inflation by increasing bank minimal reserves requirements nine times. The central bank has also moved five times in five months to increase the reserve requirements. They stepped up the rate of increase with two extra moves in late June that increased the mandatory holdings of dollar reserves, from 15% to 17.5%, of anything that is lent out by commercial banks. The impact has been to peg the Yuan lower, and in that in effect has eased the burden of Chinese exporters struggling with a global economic slow-down.
It is estimated that just under $50B was moved in that year in June alone, and will be added to by the cuts to the amount of foreign debt Chinese banks can hold, once again forcing those banks to be net buyers of dollars. China’s foreign reserves stand at close to $1,800B, and moves in that market will have knock-on effects to all global forex markets.

Monetary policy controls the supply and cost of money and credit. A central bank will increase the supply of money and decrease the cost of borrowing to stimulate an economy and vice versa to slow down an economy. While measuring the cost of borrowing is fairly easy (yield on Treasury bonds), measuring the money supply can be a more daunting task. Most central banks release information on the amount of money currently in circulation. M1 measures the amount of currency, deposits in central banks, and checking deposits. M2 includes M1 and all money in CD's and savings and money market accounts. M3 includes M1 and M2 as well as US denominated Bonds held outside the US. M3 is the broadest measure of the supply of money. Recently the Federal Reserve decided to stop publishing M3 data, citing the large cost of computing the figure. The move has been widely criticized, as many believe it was initiated to hide the large amount of money the Federal Reserve has been printing in recent years.

Even though a central bank needs to be as independent as possible, governments and politicians still have influence in its aims and targets. Depending on the country, a central bank's president or commission is set by the government which sometimes may have influence on bank's decisions at turning points, like at the peak of business cycle or during elections. The Finance Ministry of Japan is an example of a dominant government body influencing the central bank.
One of the major requirements of the European Union for proposed countries for acceptance, is that the Central Banks are independent from politics. With all this, central banks and government must choose their real economic targets, by trying to choose the best way for their own national economy, and as we have seen recently that can create some huge swings in perceived currency valuations.

Reference: The LFB Trade Team

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Friday, 28 October 2016

Dollar clings near three-month high vs. yen before U.S. GDP data


The dollar traded near a three-month high versus the yen on Friday, on track for monthly gains against most rivals as investors waited for U.S. third quarter growth data later in the day.

Positive growth numbers would reinforce expectations that the U.S. Federal Reserve is gearing up to hike interest rates.

A disappointing result, however, could trigger a fall in the dollar, a scenario that played out in late July when U.S. second-quarter GDP data came in weak.

The dollar eased 0.1 percent to 105.16 yen , holding near Thursday's high of 105.35 yen, which was the greenback's strongest level since late July.

Third-quarter GDP growth of around 2 percent that is unlikely to be a big game-changer, said Roy Teo, senior FX strategist for ABN AMRO Bank in Singapore.

"Obviously if we see a material downside risk of say 1.5 percent, that's a different ball game," Teo said, adding that such an outcome could cool expectations for the Fed to raise interest rates this year - denting the greenback.

An upside surprise could open the way for the dollar to rise toward 107 to 108 yen over the next month, he added.

The median forecast in a Reuters poll is for the U.S. advance third-quarter GDP data to show growth of 2.5 percent.

U.S. interest rate futures are implying a more than 78 percent chance of the Fed raising interest rates by December, according to the CME Group's FedWatch tool.

A rise in U.S. bond yields has helped bolster the dollar in recent weeks, with the greenback having risen 3.7 percent against the yen so far this month, its biggest monthly gain since May.

The euro EUR= edged up 0.1 percent to $1.0909, but was down nearly 3 percent for the month.

U.S. Treasury yields climbed to roughly five-month peaks on Thursday, tracking rises in German and British bond yields as investors speculated that the Bank of England and the European Central Bank would both hold off on further easing measures.

Investors trimmed bets that the Bank of England will cut interest rates next week, after data on Thursday showed that Britain's economy grew faster than expected in the three months after the Brexit vote.


Bond yields up, stocks sag on enhanced U.S. rate hike prospects

Sterling last traded at $1.2180 , up 0.2 percent on the day, but down from Thursday's one-week high of $1.2273, set immediately after the UK GDP data.

"The UK GDP was higher than expected, which boosted yields, and then higher U.S. yields in turn helped lift the dollar," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.

The dollar traded around a 7-1/2 year high against the Swedish crown after Sweden's Riksbank said the chances of another interest rate cut had increased and it was ready to expand its quantitative easing program.

The greenback last stood at 9.0572 crowns  after climbing to 9.0890 crowns on Thursday, its highest level since March 2009.


Reference: Lisa Twaronite

Stocks flat as earnings roll in, Comcast drags Nasdaq


U.S. stocks were little changed in a choppy session after the latest round of earnings reports, while a decline in Comcast shares pushed the Nasdaq into negative territory.

The S&P 500 healthcare index  rose 0.73 percent to help keep the S&P 500 near the unchanged mark, buoyed by strong results and forecasts from Bristol-Myers, up 5.5 percent and Celgene , up 6.6 percent. The two drugmakers were the top boosts to the S&P 500.

Profits at S&P 500 companies have largely exceeded analysts' estimates for the third quarter so far, setting up the first profit growth since the second quarter of 2015. Thomson Reuters I/B/E/S data shows third-quarter earnings are now expected grow 2.6 percent, up from the 0.5 percent decline anticipated at the start of October.

Sectors linked to interest rates weighed, however, as yields on benchmark 10-year Treasury notes touched a five-month high of 1.87 percent.

The S&P real estate sector was down 2.4 percent and on track for its worst decline in five weeks, while utilities  shed 0.4 percent.

"Essentially we’ve seen earnings, there are pockets of strength and weakness, but on the whole earnings have come in better than expected," David Lefkowitz, senior equity strategist at UBS Wealth Management Americas in New York.

"But on top of that today, some of the yield-sensitive parts of the market are contending with this backup in interest rates, so that is putting a little bit of a depressant on some parts of the market."

Comcast  was among the top drags on the S&P 500 and Nasdaq, falling 1.9 percent after Barclays and Deutsche Bank cut their price targets and cited increased competition from AT&T-owned DirecTV Now. The stock is down nearly 6 percent over the past three sessions.

Comcast, along with O'Reilly Auto , whose quarterly earnings missed expectations, were the primary drags on the consumer discretionary index, which lost 0.7 percent. O'Reilly shares touched a five-month low and were on pace for their worst day in over four years.

The Dow Jones industrial average .DJI rose 16.85 points, or 0.09 percent, to 18,216.18, the S&P 500 .SPX lost 0.44 points, or 0.02 percent, to 2,138.99 and the Nasdaq Composite .IXIC dropped 18.51 points, or 0.35 percent, to 5,231.76.

Google parent Alphabet was down 0.6 percent, while online retailer Amazon.com shed 0.3 percent ahead of their quarterly earnings scheduled for after the market close on Thursday.


Declining issues outnumbered advancing ones on the NYSE by a 2.22-to-1 ratio; on Nasdaq, a 1.74-to-1 ratio favored decliners.

The S&P 500 posted 16 new 52-week highs and 10 new lows; the Nasdaq Composite recorded 63 new highs and 97 new lows.


Reference: Chuck Mikolajczak

Thursday, 27 October 2016

Asia shares extend losses, dollar off highs


Asian shares extended losses on Thursday after disappointing earnings from technology giant Apple dragged on Wall Street, while the dollar remained shy of this week's nearly nine-month highs.

MSCI's broadest index of Asia-Pacific shares outside Japan  was down 0.9 percent in afternoon trade.

Adding to the already subdued mood, data showed profit growth in China's industrial firms slowed last month from the previous month's rapid pace as several sectors showed weak activity, suggesting the world's second-biggest economy remains underpowered.

"Although industrial profits have gone back on track with more stable growth, unfavouring factors still exist," He Ping, a NBS official said in a note accompanying the data, noting weak market demand from both home and aboard, and fast-rising receivables that weigh on firms' cash flow.

The Hang Seng index .HSI fell 1.2 percent, while the China Enterprises Index .HSCE lost 1.6 percent.

Besides Apple (AAPL.O), results and forecasts from some other major U.S. companies also weighed on U.S. markets overnight. The S&P 500 .SPX and the Nasdaq Composite .IXIC both skidded, though a standout performance by Boeing (BA.N) lifted the Dow Jones industrial average .DJI.

Tokyo's Nikkei stock index .N225 percent slumped 0.5 percent, though a weaker yen underpinned shares.

"Market participants welcome recent yen weakness, and this supports Tokyo stock prices today," said Hiroki Allen, chief representative of Superfund Japan in Tokyo.

"Investors appear to be taking profits in the afternoon, selling stocks that have risen in recent days," he said.

Later on Thursday, market participants will parse the latest data on U.S. durable goods, jobless claims and pending home sales.

"These reports are not expected to have a dramatic impact on the dollar but with USD/JPY eyeing 105, stronger reports could give the pair the push that it needs to make a run for this key level," wrote Kathy Lien, managing director at BK Asset Management.

The dollar edged down 0.1 percent to 104.41 yen JPY=, moving away from this week's high of 104.87 yen touched on Tuesday, its highest level since late July.

The euro inched down slightly to $1.0901 EUR=, while the dollar index stood at 98.675 .DXY, within sight of Tuesday's nearly nine-month high of 99.119.

Expectations for a year-end rate hike by the Federal Reserve remained intact, and have bolstered the greenback. In recent weeks, market participants have been pricing in more than a 70 percent chance that the U.S. central bank would hike interest rates in December, according to CME Group's FedWatch program.


U.S. growth figures scheduled for release on Friday could reinforce or temper Fed hike expectations.

Crude oil futures nursed losses after settling down more than 1 percent on Wednesday even after a surprise drawdown in U.S. crude inventories, as traders remained cautious that OPEC would be able to cut production come late November. [O/R]

U.S. crude CLc1 edged up 0.1 percent to $49.23 a barrel, while Brent crude LCOc1 added 0.1 percent to $50.05.

Reference:

BOJ set to hold fire, Kuroda may miss price goal during his tenure


The Bank of Japan is likely to hold off on expanding stimulus next week despite an expected downgrade in its price forecast that may show Governor Haruhiko Kuroda won't see inflation hit his 2 percent target before his tenure ends in 2018.

With policy on hold, the nine-member board may also debate some operational details of its new policy framework adopted last month, such as to what extent the central bank could slow its bond purchases if yields fall below target.

In a quarterly evaluation of its forecasts due at the rate meeting, the central bank will cut next fiscal year's inflation forecast slightly, reflecting weak consumption and falling import costs from a strong yen, sources have told Reuters.

The review may also extend the timeframe for hitting its ambitious inflation target beyond Kuroda's five-year term that ends in April 2018. At present, the BOJ projects inflation to reach 2 percent during the fiscal year ending in March 2018.

The BOJ is expected at the two-day meeting ending on Tuesday to maintain its minus 0.1 percent short-term interest rate target and a pledge to guide 10-year government bond yields around zero percent, after having modified its policy framework to one better suited for a long-term battle against deflation.

While global uncertainties such as the outcome of the U.S. presidential election loom, the central bank sees few imminent risks that could derail Japan's moderate economic recovery.

"A downgrade in the BOJ's inflation forecast won't automatically lead to additional easing," said a source familiar with its thinking, a view echoed by two other sources.

SMOOTH FOR NOW

The BOJ last month switched to a policy of targetting interest rates rather than the pace of its money printing, after years of massive asset purchases failed to jolt the economy out of stagnation.

Under a new "yield curve control" (YCC) framework, the BOJ's main easing mechanism would be to deepen negative rates, accompanied if needed by a cut in its 10-year yield target.

BOJ officials believe the yield curve control is working smoothly for now. Bond markets have remained stable even as the bank slightly trimmed its purchases of super-long bonds this month.


Officials are hardly complacent and stress the BOJ won't sharply cut bond purchases for the time being - particularly to avoid markets jumping to the conclusion that the BOJ was getting ready to taper its massive stimulus programme.

Some officials say the biggest challenge for the board would be to agree at each rate review what a desirable yield curve should look like, particularly if bond yields spike on external factors beyond the BOJ's control, or slump on gloomy projections of Japan's economic outlook.

"Just because things are going smoothly so far does not mean they will remain so in the future," another source said.

At the usual post-meeting news conference, Kuroda may reiterate that the BOJ could accelerate or slow bond purchases any time in the future with interest rates - not the amount of buying - now the main policy target.


Reference: Leika Kihara

Wednesday, 26 October 2016

Aussie shines after inflation data, dollar retreats from highs


The Australian dollar was an outperformer on Wednesday, bucking a broad risk averse environment in global markets, helped by a better-than-expected inflation reading that dented chances of an interest rate cut in the near term.

Consumer prices rebounded by more than forecast last quarter in Australia, while the annual pace of core inflation edged up for the first time in over a year, leading investors to price out almost any chance of a cut in rates next week.

The Reserve Bank of Australia holds its monthly policy meeting early next week and is expected to keep rates at a record low 1.5 percent.

The Aussie jumped to $0.7709 AUD=D4 from $0.7645 before the data. It was last up 0.7 percent on the day at $0.77 and rose to a three-month high against the lower-yielding yen. The safe-haven yen performs well during weakness in stock markets as is the case on Wednesday, but the momentum was clearly in favor of the higher-yielding Australian dollar.

"The headline inflation was stronger than expected and it looks like a November rate cut is off the table," said Yujiro Goto, currency strategist at Nomura.

"While there are expectations lurking of further rate cuts early in the next year, at the moment we could see some more upside in the Aussie."

DOLLAR RETREATS

Meanwhile, the dollar index, which tracks the greenback against six major rivals, slipped to 98.606 .DXY after rising as high as 99.119 on Tuesday, its highest level since Feb. 1.

The U.S. currency has been bolstered by expectations the Fed is on track to raise rates by the year-end. The market was pricing in a greater than 78 percent chance that the Fed would raise rates in December, according to CME Group's FedWatch.

The focus will be on third-quarter growth data to be released on Friday but traders expect the dollar to trade in a range ahead of a key jobs report next week and the U.S. Presidential vote in early November.


"With November Fed meeting and Presidential election approaching, we would not be surprised to see the dollar settling into the more neutral pattern in the coming days," analysts at Credit Agricole said in a note.

"This is particularly the case since historically the greenback tends to weaken around one-two weeks ahead of the Presidential vote."

The euro EUR= was 0.2 percent higher at $1.09075, after slipping to an almost eight-month low of $1.0848 on Tuesday. Against the yen, the dollar stood at 104.14 JPY=, slightly lower on the day but not far from a roughly three-month high of 104.87 yen struck on Tuesday.

Reference: Anirban Nag

Wall St. slips on earnings; Procter jumps


U.S. stocks slipped from two-week highs on Tuesday as results and outlooks from companies in various sectors, including housing and consumer products, failed to live up to expectations.

Whirlpool (WHR.N) cited soft demand as it posted lower-than- expected earnings and gave an underwhelming guidance, while Sherwin Williams' outlook was also a disappointment for Wall Street, an indication to some analysts that the housing sector may be cooling.

"Lackluster results from Whirlpool and Sherwin Williams may indicate a slowing in the housing cycle," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

She said those results could be weighing on Home Depot, which was down 3.3 percent at $123.60 as the largest points decliner on the S&P 500.

3M  fell 3 percent to $166.14 after the maker of Scotch tape and Post-it notes trimmed its full-year revenue and earnings forecasts for the second time.

But overall, annualized third-quarter earnings from S&P 500 companies are expected to have risen 1.7 percent, effectively putting an end to an earnings recession, according to Thomson Reuters I/B/E/S.

Of the 150 companies that have reported so far, 75.3 percent have beaten analyst expectations, above the long-term average of 63.5 percent.

The Dow Jones industrial average .DJI was off 45.71 points, or 0.25 percent, to 18,177.32, the S&P 500 .SPX lost 7.49 points, or 0.35 percent, to 2,143.84 and the Nasdaq Composite .IXIC dropped 28.13 points, or 0.53 percent, to 5,281.70.

Caterpillar (CAT.N) slipped 1.7 percent after giving a downbeat forecast, while General Motors  fell 4.3 percent amid fears regarding future profits.

Consumer products company Procter & Gamble (PG.N) rose 3.9 percent to $87.35 after reporting a better-than-expected quarterly profit, while sportswear maker Under Armour  fell 13.1 percent to $32.94 after it reported its slowest quarterly sales growth in six years.


Declining issues outnumbered advancing ones on the NYSE by a 1.51-to-1 ratio; on Nasdaq, a 2.16-to-1 ratio favored decliners.

The S&P 500 posted 11 new 52-week highs and 8 new lows; the Nasdaq Composite recorded 57 new highs and 71 new lows.


Reference: Rodrigo Campos

Tuesday, 25 October 2016

Japan shares hit six-month top, U.S. dollar in demand


Japanese shares hit a six-month top on Tuesday as the dollar advanced on the yen, while risk sentiment got a lift after factory surveys in the United States and Europe boasted the best readings of the year so far.

There were also tentative hopes rising prices for steel and some industrial commodities - zinc surged to a five-year peak and iron ore reached its highest since mid-2014 - could pick up the pulse of inflation globally.

Japan's Nikkei .N225 rose 0.7 percent to levels last seen in April as a softening yen burnished the outlook for the country's exporters. Australian stocks added 0.6 percent and Taiwan .TWII 0.7 percent.

MSCI's broadest index of Asia-Pacific shares outside Japan  ticked 0.1 percent firmer, as did EMini futures for the S&P 500 Spread betters tipped moderate opening gains for European bourses.

South Korea's main index .KS11 slipped 0.5 percent after data showed Samsung Electronics' (005930.KS) decision to scrap its Galaxy Note 7 dragged on the entire economy in the third quarter, though growth still pipped forecasts.

Wall Street had taken encouragement from upbeat corporate results and the Dow .DJI ended Monday up 0.46 percent, while the S&P 500 .SPX gained 0.47 percent and the Nasdaq  0.91 percent.

Over one third of U.S. companies have now reported and 80 percent have beaten market expectations. Another third of the S&P 500 components are scheduled to report earnings this week, including heavyweights Apple, Alphabet, Amazon  and Boeing.

Merger and acquisition activity added extra fizz in the wake of AT&T Inc's  $85.4 billion bid for Time Warner Inc (TWX.N), though the deal seemed destined to face stringent scrutiny from regulators.

DOLLAR IN DEMAND

Aiding risk sentiment was the Markit survey of U.S. manufacturing which climbed to a one-year top of 53.2.

Business activity in the euro zone expanded at the fastest pace this year so far in October and firms raised prices at the sharpest rate in more than five years.

The better news led investors to nudge up the probability of a December rate hike from the Federal Reserve to around 74 percent <0#FF:> and pressured Treasury prices.

It also lifted the U.S. dollar to a nine-month high against a basket of major currencies at 98.846 .DXY. The dollar firmed on the yen to 104.43 JPY=, threatening the month's peak at 104.62, while the euro struggled at $1.0878 EUR=.

One mover was the Canadian dollar which rebounded from a seven-month low after Bank of Canada Governor Stephen Poloz said the decision on whether to cut interest rates again was not one to take lightly.


In commodities, oil prices dipped on news of the impending restart of Britain's Buzzard oilfield and Iraq's wish to be exempted from OPEC production cuts.

Brent LCOc1 was down 9 cents at $51.37 a barrel, while U.S. crude CLc1 also lost 2 cents to $50.50.

Going the other way was iron ore, with Chinese iron ore futures reaching their highest since August 2014.

Coal prices also reached new peaks after weeks of gains, a prop for the Australian dollar AUD=D4 as the two commodities are the country's biggest export earners.


Reference: Wayne Cole

It's lonely at the top for Britain's FTSE 100 index



As sterling plumbs the depths, foreign investors are withdrawing from British stocks and leaving domestic funds to push the benchmark bluechip index to record highs - for now.

But some investors are growing nervous about how long the sterling-based funds, insulated from the pound's slide and drawn by healthy dividend yields, will continue to fill the gap.

The FTSE 100's sharp recovery from lows after Britons voted to leave the European Union in June stands in stark contrast to a darkening outlook for the pound and the domestic economy.

In sterling terms, London-listed stocks have raced to their highest ever levels even though investment funds have continued to bleed money, share valuations are near multi-year highs and the outlook for earnings remains muted.

Data from Thomson Reuters Lipper shows that from June to September, UK-focused equity funds suffered outflows of more than 3 billion pounds ($3.73 billion).

Much of this appears to have been pulled by investors based in dollars or euros. While the FTSE is up nine percent from the EU referendum day of June 23, the pound has lost 18 and 15 percent respectively against their home currencies - wiping out their notional gains.

At its latest policy meeting, the Bank of England noted estimates from S&P Global Market Intelligence suggesting that net purchases of FTSE 100 shares by non-residents in July and August were about half of the average monthly inflows last year.

Still, the FTSE 100 rose 13 percent from June to September and is up by more than fifth since its lows in July following the shock referendum result.

The composition of the UK index along with the kind of investors active in the market helps to shed some light on what is underpinning stocks.

Dominated by large, dividend-paying, global companies - many of which receive a big earnings boost when they bring offshore revenues home thanks to the weak pound - the FTSE 100 hit the sweet spot in a world where yields on investments are scarce.

With yields on British government bonds near rock-bottom, this is particularly the case for domestic investors for whom currency is less of a factor.

"The UK remains an attractive place for investors seeking dividends; there are 15 companies with an indicative dividend yield of over five percent, which is significant when compared to the one percent yield on 10-year gilts," said Matthew Beesley, a portfolio manager and Head of Global Equities at Henderson Global Investors.

Less than 10 percent of the roughly 600 UK-focused equity funds tracked by Lipper have enjoyed net inflows since June. Inflows are heavily skewed towards so-called income funds, which aim to pay their unit holders dividends, and tracker funds, which passively buy stocks in a given index.

Nick Train's $3 billion UK equity fund, which had a fifth of the fund in shares of drinks group Diageo and consumer goods giant Unilever at the end of September, attracted the most inflows with more than $440 million.

LOP-SIDED

Both Diageo and Unilever exemplify the kinds of major stocks that investors have increasingly gravitated to since the Brexit vote, drawn by their dividends, relatively low reliance on the British economy and the boost from offshore revenues.

British fund supermarket Hargreaves Landsdown, which caters largely to domestic retail investors, on Thursday posted record profits and assets under management for its latest quarter, but said investors' confidence had fallen and this could weigh on future business.

Equity income funds were in demand in a low interest rate environment, chief executive Ian Gorham told Reuters.

The large dividend payers are also among the biggest listed firms in the UK and with the FTSE 100 weighted by market-capitalisation, the larger a firm the more influence its wields on the index's moves.

Just 10 large stocks make up nearly half the market-cap of the FTSE 100. Exchange-traded funds (ETFs) based on the index, which overwhelmingly favour bigger stocks, are the only other group to have seen inflows since June.

Oil majors BP and Royal Dutch Shell and emerging markets-focused banks HSBC and drugs group AstraZeneca, are all big outperformers and have been key in lifting the broader index.

Eric Moore, a portfolio manager of the Miton UK Income fund who holds AstraZeneca shares, says the company is one among a handful that pays out dividends in appreciating U.S. dollars, making them even more attractive to British investors.

"It may be a one-off mechanical adjustment but right here, right now the impact is real. It's money in the bank," said Moore, who adds, however, that the sustainability of dividends are a concern as payouts have grown faster than a recovery in corporate profits.

FOREIGN VIEW


Offshore investors are less enthusiastic about investing in UK assets due to the growing likelihood of a "hard" Brexit - in which Britain leaves the EU’s single market in order to impose controls on immigration, disrupting access to its main trading partner.

More than half of UK stocks are held by overseas investors, according to the latest data from Britain's Office for National Statistics. Foreign holdings were less than 10 percent in the 1970s and 1980s, and stood at around 35 percent at the turn of the century.

Cumberland Advisors, a Florida-based investment firm that uses mostly ETFs, points out that the main UK ETF used by U.S. investors, the iShares MSCI United Kingdom ETF, has lost money this year. A currency-hedged version is up, though the fund's assets under management are considerably smaller.

Bill Witherell, chief global economist at Cumberland Advisors, said a weaker pound is positive for UK multinational firms only as long as single-market access continues.

"The prospect of a weaker domestic economy and heightened policy uncertainty lead us to maintain our maximum underweight of the UK in our International, Global, and Tactical Trend ETF Portfolios," said Witherell.

The FTSE 100's climb above the 7,000 point level has taken valuations to 16 times forward earnings, close to the highest in a decade.

It has brought back some uncomfortable memories. The three instances when the index was around these levels were just before the dotcom bust in 1999-2000, the collapse of the Northern Rock bank in 2007 and during last year's Greek debt crisis.

"After 20 years in the business, I can't help but feel a little jittery about the FTSE around here," said Moore.


Reference: Vikram Subhedar

Monday, 24 October 2016

Asian stocks eke out gains, dollar nears a nine-month high



Asian stocks eked out gains but lacked clear direction on Monday after Wall Street's sluggish performance late last week, while the dollar hit a near nine-month high as comments from a Federal Reserve official boosted bets of a rate hike by year-end.

Spreadbetters expected Britain's FTSE .FTSE, Germany's DAX .GDAXI and France's CAC .FCHI to open slightly higher.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS inched up 0.2 percent.

South Korea's Kospi .KS11 gained 0.4 percent. Australian stocks lost 0.5 percent, hurt by a decline in energy shares.

Japan's Nikkei .N225 moved in a tight range and was last up 0.2 percent.

"There are few investors who want to chase the market higher until they see more news from overseas, especially those regarding a U.S. rate hike," said Yutaka Miura, senior technical analyst at Mizuho Securities in Tokyo.

Shanghai .SSEC outperformed, rising over 1 percent as energy and raw material stocks jumped on indications that government measures to slash production capacity had shown signs of some success.

The optimism spread to Hong Kong, but gains in the Hang Sang .HSI were limited by concerns over continued yuan weakness, as well as a possible U.S. rate hike.

On Friday in Wall Street, the S&P 500 .SPX and the Dow .DJI were little changed and the Nasdaq . advanced as a record day for Microsoft  and earnings from McDonald's  helped offset a fall in energy and healthcare shares. [

"It will be something of a hiatus week, given that next week brings the BoJ, Fed and BoE meetings...however there is a heavily back-loaded run of data in the U.S., Japan and euro zone, and there will be a deluge of U.S. and indeed European and Asian corporate earnings," wrote Marc Ostwald, strategist at ADM Investor Services International.

Global markets are bracing for a slew of data this week including consumer price data from Japan and some euro zone countries, third quarter U.S. GDP and a number of purchasing managers' index (PMI) data from developed economies.

In currencies, the dollar index .DXY was up 0.1 percent at 98.780 after touching 98.846, its highest since Feb. 3.

The U.S. currency received a boost last week as the euro slid after the European Central Bank doused talk it was contemplating tapering its monetary easing.

The dollar was also supported by hawkish comments from Fed officials including New York Fed President William Dudley and higher expectations that Hillary Clinton will win the U.S. presidential election, which have increased bets that the Fed will raise rates in December.

The dollar was steady at 103.905 yen JPY=. The euro slipped 0.2 percent to $1.0869 EUR= after falling on Friday to $1.0859, its lowest since March 10.

The Australian dollar was steady at $0.7614


The offshore Chinese yuan  hit a new six-year low against a broadly stronger dollar.

"The PBOC is seen strategically managing the yuan's weakness," said Jeong My-young, Samsung Futures research head in Seoul, referring to the People's Bank of China.

Crude oil prices slipped on concerns supply will outweigh demand, with U.S. crude  down 0.6 percent at $50.55 a barrel.

The contracts had risen about 0.8 percent on Friday on hopes that Russia and OPEC would reach a price agreement, but worries of oversupply have been a persistent drag on the market.

But oil fell Monday after Iraq said it wanted to be exempt from any deal by OPEC to cut production. Latest data also showed that U.S. oil rig count posted the first double-digit rise since August, weighing on the market.

Brent crude  was down 0.5 percent at $51.54 a barrel.


Reference: Shinichi Saoshiro

Second wind for stocks as earnings turn positive


With S&P 500 earnings on track to rise after four consecutive quarters of contraction, U.S. stocks are clearing a major hurdle that puts the record high in sight for the benchmark U.S. stock index.

The S&P 500 hit a record high in mid August even after the long profit slump. The index has trended lower since then, and even closed below its 50-day average for most of the last six weeks. Some analysts have blamed the recent weakness on expectations that earnings would again fail to grow, as estimates showed until early this week.

But stronger-than-expected profit reports from companies such as Microsoft and Bank of America  have turned the tide and the blended earnings growth estimate for the third quarter sits now at 1.1 percent. This would effectively end the earnings recession.

"The magnitude of the beats we’ve had is really important," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

"There’s a much larger chance that we break out of range to the upside than the downside and I think it happens before the end of the year," he said.

The end-of-year seasonality is also on the side of stock bulls.

Data from broker-dealer LPL Financial show that since 1980 the median S&P 500 gain in the last 50 trading days of the year is 3.6 percent, an advance that would see the index end the year near 2,200 and above its current record close of 2,190.15. It closed Friday at 2,141.16.

"With the earnings recession showing signs of ending this quarter, the economy is on firmer footing, which could lead to your typical end of year strength,” said LPL's senior market strategist Ryan Detrick.

The energy sector, which had been a large weight on S&P earnings, is leading the index in terms of the magnitude of upbeat surprises.

Early in the reporting season, profits for the sector are coming in 18 percent above expectations, according to Thomson Reuters I/B/E/S data, ahead of the 11 percent surprise factor in financials and an average of 7 percent for the S&P 500.

The strong beats bode well ahead of a week heavy in energy sector reports including its two largest companies, Exxon Mobil  and Chevron, on Friday.

Some energy companies have been able to profit even amid a steep slump in oil prices, noted Roberto Friedlander, head of energy trading at Seaport Global Securities in New York.


AT&T-Time Warner deal sparks calls for scrutiny in Washington
He said in a Friday email that the magnitude of strong earnings surprises in the energy space was partly because investors had failed "to truly gauge how efficient and quickly the sector has been able to come down the cost curve and lower break-evens."

S&P 500 energy .SPNY is the leading sector in terms of year-to-date gains, up 15.3 percent in 2016. The only two other sectors up double digits are utilities, up 10.8 percent, and technology .SPLRCT, up 11.2 percent.

The change in leadership to energy is "an important transition" and an indication that the economy is in stronger footing, said Wunderlich's Hogan.

"People are getting out of defensives and looking into growth."

Reference: Rodrigo Campos

Friday, 21 October 2016

The Basics of Forex Algorithmic Trading


Nearly thirty years ago, the foreign exchange market (Forex) was characterized by trades conducted via telephone, institutional investors, opaque price information, a clear distinction between interdealer trading and dealer-customer trading and low market concentration. Today, technological advancements have transformed the market. Trades are primarily made via computers, allowing retail traders to enter the market, real-time streaming prices have led to greater transparency and the distinction between dealers and their most sophisticated customers has largely disappeared.

One particularly significant change is the introduction of algorithmic trading, which, while making significant improvements to the functioning of Forex trading, also poses a number of risks. By looking at the basics of the Forex market and algorithmic trading, we will identify some advantages algorithmic trading has brought to currency trading while also pointing out some of the risks.

Forex is the virtual place in which currency pairs are traded in varying volumes according to quoted prices whereby a base currency is given a price in terms of a quote currency. Operating 24 hours a day, five days a week, Forex is considered to be world's largest and most liquid financial market. Per the Bank for International Settlements (BIS) the daily global average volume of trading in April 2013 was $2.0 trillion. The bulk of this trading is done for U.S. dollars, euros and Japanese yen and involves a range of players, including private banks, central banks, pension funds, institutional investors, large corporations, financial companies and individual retail traders.

Although speculative trading may be the main motivation for certain investors, the primary reason for the Forex market’s existence is that people need to trade currencies in order to buy foreign goods and services. Activity in the Forex market affects real exchange rates and can therefore profoundly affect the output, employment, inflation and capital flows of any particular nation. For this reason, policymakers, the public and the media all have a vested interest in what goes on in the Forex market.

Basics of Algorithmic Trading
An algorithm is essentially a set of specific rules designed to complete a clearly defined task. In financial market trading, computers carry out user-defined algorithms characterized by a set of rules consisting of parameters such as timing, price or quantity that structure the trades that will be made.

Four Basic Types of Algorithmic Trading
There are four basic types of algorithmic trading within financial markets: statistical, auto-hedging, algorithmic execution strategies and direct market access. Statistical refers to an algorithmic strategy that looks for profitable trading opportunities based on the statistical analysis of historical time series data. Auto-hedging is a strategy that generates rules to reduce a trader’s exposure to risk. The goal of algorithmic execution strategies is to execute a predefined objective; such as reduce market impact or execute a trade quickly. Finally, direct market access describes the optimal speeds and lower costs at which algorithmic traders can access and connect to multiple trading platforms.

One of the subcategories of algorithmic trading is high frequency trading, which is characterized by the extremely high frequency of trade order executions. High-speed trading can give significant advantages to traders by giving them the ability to make trades within milliseconds of incremental price changes, but it may also carry certain risks.

Much of the growth in algorithmic trading in Forex markets over the past years has been due to algorithms automating certain processes and reducing the hours needed to conduct foreign exchange transactions. The efficiency created by automation leads to lower costs in carrying out these processes. One such process is the execution of trade orders. Automating the trading process with an algorithm that trades based on predetermined criteria, such as executing orders over a specified period of time or at a specific price, is significantly more efficient than manual execution by humans.

Banks have also taken advantage of algorithms that are programmed to update prices of currency pairs on electronic trading platforms. These algorithms increase the speed at which banks can quote market prices while simultaneously reducing the number of manual working hours it takes to quote prices.

Some banks program algorithms to reduce their exposure to risk. The algorithms may be used to sell a particular currency to match a customer’s trade in which the bank bought the equivalent amount in order to maintain a constant quantity of that particular currency. This allows the bank to maintain a pre-specified level of risk exposure for holding that currency.

These processes have been made significantly more efficient by algorithms, leading to lower transaction costs. Yet, these are not the only factors that have been driving the growth in Forex algorithmic trading. Algorithms have increasingly been used for speculative trading as the combination of high frequency and the algorithm’s ability to interpret data and execute orders has allowed traders to exploit arbitrage opportunities arising from small price deviations between currency pairs.

All of these advantages have led to the increased use of algorithms in the Forex market, but let’s look at some of the risks that accompany algorithmic trading.

Risks Involved in Algorithmic Forex Trading
Although algorithmic trading has made many improvements, there are some downsides that could threaten the stability and liquidity of the Forex market. One such downside relates to imbalances in trading power of market participants. Some participants have the means to acquire sophisticated technology that allows them to obtain information and execute orders at a much quicker speed than others. This imbalance between the haves and have-nots in terms of the most sophisticated algorithmic technology could lead to fragmentation within the market that may lead to liquidity shortages over time.

Furthermore, while there are fundamental differences between stock markets and the Forex market, there are some who fear that the high frequency trading that exacerbated the stock market flash crash on May 6, 2010 could similarly affect the Forex market. As algorithms are programmed for specific market scenarios, they may not respond quickly enough if the market were to drastically change. In order to avoid this scenario markets may need to be monitored and algorithmic trading suspended during market turbulence. However, in such extreme scenarios, a simultaneous suspension of algorithmic trading by numerous market participants could result in high volatility and a drastic reduction in market liquidity.

The Bottom Line
Although algorithmic trading has been able to increase efficiency, therefore reducing the costs of trading currencies, it has also come with some added risks. For currencies to function properly, they must be somewhat stable stores of value and be highly liquid. Thus, it is important that the Forex market remain liquid with low price volatility.

As with all areas of life, new technology introduces many benefits, but it also comes with new risks. The challenge for the future of algorithmic Forex trading will be how to institute changes that maximize the benefits while reducing the risks.


Reference: Matthew Johnston

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Dollar stands tall after dovish Draghi pressures euro


The dollar stood tall in Asian trading on Friday, on track for a weekly gain against a basket of currencies, as the euro wallowed at seven-month lows after the European Central Bank doused speculation that it would taper its stimulus.

The dollar index, which gauges the greenback against six major rivals, was up 0.2 percent at 98.476 .DXY, up 0.5 percent for the week and near a session high of 98.564, its loftiest peak since March 10.

The euro slipped 0.2 percent to $1.0907 EUR=, poised to shed 0.6 percent for the week after plumbing $1.0891 earlier on Friday, its lowest since March 10.

ECB President Mario Draghi left the door open to a wide range of policy options and emphasized that a long-awaited rise in inflation is predicated on "very substantial" monetary accommodation - giving markets no reason to believe the central bank was ready to talk about tapering its 1.7 trillion euro ($1.86 trillion) asset-buying program.

"Draghi didn't clearly say that there would be additional stimulus in December, so even though the euro has sold off, it might not continue falling for long," said Kumiko Ishikawa, senior FX analyst at Gaitame.Com Research Institute in Tokyo.

"But from a technical point, now that the June 24 low has been broken, the euro could have more room on the downside and target the March 10 low," she said.

In contrast with the ECB, U.S. data on Thursday showed that U.S. home resales surged in September after two straight months of declines, giving investors more reason to bet that the U.S. Federal Reserve would hike interest rates as early as its Dec. 13-14 meeting.

Separate data showed that first-time filings for unemployment benefits rose more than expected to 260,000 last week, but the trend suggests the labor market remains strong.

The dollar added 0.1 percent to 104.09 yen JPY=, edging down 0.1 percent for the week.

"Maybe we're just in a holding pattern ahead of the U.S. election," said Bart Wakabayashi, head of Hong Kong FX sales at State Street Global Markets, adding that regional trading was likely a bit thinner than usual on Friday as Typhoon Haima battered Hong Kong, forcing authorities to shut all but essential services in the global financial hub.

Sterling was down 0.1 percent at $1.2238 GBP=, on track to gain 0.4 percent for the week.


Europe:

European Council chief Donald Tusk said EU leaders would not engage in negotiations on Britain's exit from the bloc at Prime Minister Theresa May's first summit in Brussels, ruling out any Brexit negotiations until Britain formally launches the exit process.

The pound shrugged off Tusk's remarks that British Prime Minister Theresa May had confirmed that Brexit talks would be triggered by end-March 2017.

China's offshore yuan , meanwhile, dropped to its lowest level in six years against the broadly stronger greenback.

Reference: Reuters

Dudley, in clear signal, expects Fed rate hike this year


The Federal Reserve will likely raise interest rates later this year if the U.S. economy remains on track, one of the most influential Fed officials said on Wednesday in perhaps the clearest policy signal yet from the central bank.

"If the economy stays on its current trajectory I think ... we'll see an interest rate hike later this year," New York Fed President William Dudley told a modest dinner gathering at the Lotos Club, downplaying any market-related risks of tightening monetary policy in December.

Dudley, a permanent voter on policy and a close ally of Fed Chair Janet Yellen, added that a quarter-point hike this year "is not really that big a deal" given the economy is "reasonably close" to the Fed's goals of 2 percent inflation and maximum sustainable employment.

The Fed left rates unchanged at 0.25-0.5 percent last month, though published forecasts showed that most of its 17 policymakers expected a hike before year end. Economists and traders now expect the Fed to again stand pat at its next meeting, a week before the U.S. election on Nov. 8, but to finally hike in December.

Dudley's comments appeared to reinforce that notion.

Asked about the risk of raising rates in December as investment funds wind down bets and as banks trim balance sheets for year-end, Dudley, who also oversees the Fed's market operations, said he was "definitely not worried about the timing" given the Fed smoothly hiked rates from near zero last December. That was the first time in almost a decade that the Fed raised rates.

"We have made quite good progress towards our objectives ... so clearly as we get closer to our objectives it's likely that we'd want to make monetary policy somewhat less accommodative," he said.


"That's quite different than saying there is this urgency to tighten policy aggressively," he said. "I don't see that urgency," he added, because unemployment has recently remained flat around 5 percent, inflation is still below target and also because of the economy's sub-par growth rate.

Reference: Jonathan Spicer

Thursday, 20 October 2016

Basics of Fundamental Analysis


Traders typically approach financial markets in one of two ways: either through technical analysis or fundamental analysis. The reality is that history is full of traders who have had very successful careers as traders that employed both of these types of analyses.

In fact, in Jack Schwager's best-selling classic, Market Wizards, two of the traders interviewed are Ed Seykota and Jim Rogers. Rogers is quite adamant in his statement that he believes it is impossible to make a living as a technical trader. He goes so far as to say he has never met a rich technician. Seykota actually shares the exact opposite story. According to Seykota's own interview, he was a struggling trader when he traded according to fundamental analysis. It was not until he became a technician that he started to make a living trading financial markets.

As stated, successful traders throughout history have employed both technical and fundamental analysis. In this article we are going to break down the basic principles of fundamental analysis in the forex market.
Fundamental Analysis is commonly defined as a method of evaluating a specific security in order to determine its intrinsic value by analysing a host of economic and financial data. In the foreign-exchange market, a security would be a currency. Market participants are continually analysing the emerging fundamental from a country in order to determine the intrinsic value of the country's currency. There are several key economic indicators that every trader should understand on a basic level. Fluctuations in the data of these key indicators will generally cause the value of a currency to rise and fall.


Interest Rates
These are the single greatest driver of currency value over the long-term. Most Central Banks announce interest rates each month, and these decisions are watched very scrupulously by market participants. Interest rates are manipulated by Central Banks in order to control the money supply in an economy. If a Central Bank wants to increase the money supply, it lowers interest rates, and if it wants to decrease money supply it raises interest rates.

Gross Domestic Product (GDP)
GDP is the most important indicator of economic health in a country. A country's Central Bank has expected growth outlooks each year that determine how fast a country should grow as measured by GDP. When GDP falls below market expectations, currency values tend to fall and when GDP beats market expectations, currency values tend to rise.

Inflation
Inflation destroys the real purchasing power of a currency, and, therefore, inflation is very bad for the economy in most circumstances. Each year a normal rate of inflation between 2-3% is expected, but if inflation begins moving beyond the upward targets set by the Central Bank, a currency value will actually rise due to expectation of an imminent rate hike. Higher interest rates tend to fight off inflation.

Unemployment
We will discuss consumer demand in a moment, but people are basically what drive economic growth; therefore, unemployment is the backbone of economic growth. When unemployment levels increase, it has a devastating effect on economic growth; consequently, when the labour market contracts and unemployment increases, interest rates are often cut in an attempt to increase the money supply in the economy and stimulate economic growth.

Consumer Demand
As stated in the previous point, people are what drive economic growth; as a result, healthy consumer demand is essential to the normal, healthy functioning of an economy. When consumers are demanding goods and services, the economy tends to move forward, but when consumers are not demanding goods and services, the economy falters.
Even if you are a technical trader, it can still be very helpful to understand these basic elements of fundamental analysis. The best forex course will oftentimes offer further insight into how the emerging fundamentals drive price behaviour.

Reference: Actionforex

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ECB seen firmly on hold, charting course to more easing in December


The European Central Bank is set to keep policy unchanged on Thursday but is likely to lay the groundwork for more easing in December as it tries to sustain a long-awaited rebound in consumer prices.

Keeping interest rates and an 80-billion-euro per month bond buying program unchanged, ECB President Mario Draghi is likely to emphasize the continued need for monetary stimulus, reinforcing expectations for an extension of the ECB's asset buys beyond its scheduled end next March.

The euro stood near a three-month low against the dollar, at$1.0969 EUR=, ahead of the ECB's interest rate decision at 1145 GMT and Draghi's news conference at 1230 GMT.

The ECB has provided unprecedented stimulus for years with sub-zero rates, free loans to banks and over a trillion euros in bond purchases, all in the hope of reviving growth and lifting inflation back to its target of just below 2 percent after more than three years of misses.

For Draghi, the trick will be to keep the door firmly open to more stimulus without any hint of commitment that could rattle markets and lead to a repeat of turbulence set off last year, when the ECB raised expectations too high and did not fully deliver on them.

Action is far from urgent, however. The euro zone economy is chugging along, inflation is at a two-year high, national budget proposals suggest a bit more fiscal support, and the early impact on euro zone economies of Britain's decision to leave the European Union has been muted. All these suggest that the 19-country bloc is on the path predicted by the ECB in September.

But Draghi and fellow board members have gone to pains in recent weeks to emphasize that this outlook is predicated on "very substantial" monetary support, a hint taken as confirmation that an extension is coming.

Indeed, ECB chief economist Peter Praet has warned that a premature withdrawal of stimulus would stall and reverse the upswing, a further sign any tapering is well into the future.

"Present loose (financial) conditions also reflect expectations of additional ECB action, this suggests that the ECB will have to do more just to preserve the current degree of accommodation," UniCredit economist Marco Valli said.

"Therefore, anything less than quantitative easing extension at 80 billion euros per month risks tightening financial conditions via higher yields, a stronger currency and, possibly, lower risk appetite."

The ECB's 1.74 trillion euro quantitative easing (QE) scheme is now set to expire in March but the bank has always said that it would run until it saw a sustained recovery in inflation.

Analysts polled by Reuters unanimously expect unchanged rates with the vast majority predicting an extension to asset buys in December.

"We believe they will eventually extend the asset purchase program by six to nine months and announce the relaxation of some technical parameters of QE at the December meeting," Barclays economist Philippe Gudin said.

WEAK INFLATION

The root of the problem is that inflation is still too weak and may not hit the target for 2-3 years at the earliest.

Though it rose to 0.4 percent last month and may exceed 1 percent by the spring, the rise is due almost entirely to the fading impact of a drop in oil prices and not a rebound in underlying prices.

Wage growth meanwhile remains weak, core inflation is stuck below 1 percent and unemployment is high, suggesting that the rise is far from the sustained increase the ECB had hoped for.


Lending growth is also showings signs of leveling off, suggesting that banks may be struggling to pass on some of the ECB's ultra loose policy measures.

Indeed, policymakers are increasingly emphasizing the negative side effects of sub zero rates, particularly for banks, suggesting that another rate cut may not be among the options to be discussed in December.

The ECB relies on banks to transmit its policy measures but low rates are hurting margins and depressing share prices, likely leading to a curb on lending.

Any meaningful extension of asset buys will however require the ECB to modify some of the program's technical constraints to counter the scarcity of some assets, like German bonds.

Though the committees working on proposals may present a progress report to Governing Council on Thursday, a decision on technical changes is more likely in December.

"Because markets would infer the shape of the additional quantitative easing from the technical features and given that all options attract some controversy, wet think the ECB will only announce the technical changes in December," Morgan Stanley economist Elga Bartsch said.

"In our view, it is simply too early for the ECB to step away from its long-standing forward guidance on further rate reductions and additional asset purchases," Bartsch added.


Reference: Balazs Koranyi

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Dollar recedes from seven-month peak, lifts oil


The U.S. dollar fell from a seven-month peak on Wednesday, combining with signs of an easing supply glut to help lift oil prices back towards a one-year high.

A weaker dollar boosts crude prices, which gained over 1 percent to top $52 a barrel, since it makes fuel cheaper for countries using other currencies

The bounce in oil pushed a key market gauge of long-term euro zone inflation expectations to a multi-month high, keeping bond yields elevated above record lows seen in the wake of Britain's vote in June to leave the European Union.

Wall Street was set to open a touch higher but neither the rise in commodity prices nor a barrage of data confirming China's economy, the world's second largest, was stabilizing could prevent a dip in euro zone stocks after a series of poor earnings results.

"Oil is a good indicator of expectations for growth next year," said Frederik Ducrozet, a senior European economist at Swiss wealth manager Pictet. "It is comforting for markets that oil is above $50 a barrel and looking stable at those levels."

Against a basket of major currencies, the U.S. dollar fell 0.2 percent to 97.665, off Monday's seven-month high of 98.169, after consumer price data showed underlying inflation had moderated. That prompted markets to trim bets on a Federal Reserve rate hike later this year.

Traders said that had helped lift oil, which was also supported by a report of a drop in U.S. inventories and declining production in China. An upbeat OPEC statement on its planned output cut also supported the market.

International Brent crude futures were at $52.35 a barrel at 1040GMT, up 67 cents, or 1.3 percent, and heading back towards a one-year high of $53.73 seen earlier this month.

U.S. West Texas Intermediate (WTI) crude oil futures were trading at $50.96 per barrel, also up 1.3 percent, having been below $40 a barrel at the start of August.

DISAPPOINTING EARNINGS

European shares fell early on Wednesday after a slew of weak updates weighed on British companies Travis Perkins  and Reckitt Benckiser (RB.L). Akzo Nobel's  results were hit by a weak pound.

The pan-European STOXX 600 index edged down 0.1 percent, following a 1.5 percent rise in the previous session.

Earlier, Asian shares edged up for the second straight day after data showing Chinese gross domestic product expanded 6.7 percent in the year to September, exactly as forecast.

Other data showed retail sales rising 10.7 percent and urban investment 8.2 percent. Industrial output disappointed by growing only 6.1 percent.

"The upshot from today's data is that economic activity seems to be holding up reasonably well, with few signs that a renewed slowdown is just around the corner," said Julian Evans-Pritchard, China economist at Capital Economics.

"Nonetheless, the recent recovery is ultimately on borrowed time given that it has been driven in large part by faster credit growth and a property market boom, both of which policymakers are now working to rein in."

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4 percent on top of Tuesday's 1.4 percent jump.

The recent bounce in oil prices has helped lift a key market gauge of long-term euro zone inflation - the five-year, five-year forward rate - above 1.44 percent, its highest level since early June.

That remains well below the European Central Bank's inflation target of just below 2 percent, but it has taken the heat off the bloc's policymakers - who meet on Thursday - to introduce more easing measures.


DOLLAR RETREAT

The retreat in the dollar came after a report on U.S. consumer prices showed underlying inflation - stripping out food and energy - moderated slightly in September to 2.2 percent, leading the market to slightly pare back bets on a December rate hike.

Fed fund futures imply around a 65 percent probability of a move, down from 70 percent.

Federal Reserve Chair Janet Yellen said last week the U.S. central bank could allow inflation to run above its target.

The euro was slightly higher against the weakening dollar at $1.0985 EUR=.

Sterling, which plunged to a record low on a trade-weighted basis last week =GBP, continued to recover and hit an eight-day high on Wednesday after a UK government lawyer said that parliament would have to ratify any deal to take Britain out of the EU.


Reference: John Geddie