>CURRENCY UPDATE(March 2012): Dollar, Yen rise as risk appetite abates

“This low growth target with relatively high inflation suggests monetary policy will be relatively relaxed. This in turn will help increase bank lending and boost investment.”


Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, on China’s revised growth target, 05/03/2012


“Discipline is necessary on a European level; each state needs to make an effort to improve its accounts. But it will be impossible to meet these goals if there isn’t growth and jobs and activity.”


Francois Hollande, the Socialist candidate in France’s presidential election, 04/03/2012


Currencies – Dollar, Yen rise as risk appetite abates
• China Lowers GDP Growth Target to 7.5% as Export Gains Slow
• China’s February Non-manufacturing PMI Fell to 48.4 in February
• Asia Stocks Fall Most in Two Weeks on China as Yen Strengthens
• China Car Sales Seen Having Worst Start Since 2005 on Growth
• Asia Currencies Drop on Concern Global Slowdown to Hurt Exports
• India Rupee Touches 1-Month Low as Costly Oil Deters Risk-Taking
• Osborne Must Boost Business Aid as Recovery Weakens, BCC Says
• Hollande Repeats EU Treaty Change Call; Rival Doubts Credibility
• Greek Private Investors Are Slow to Commit to Debt Swap, FT Says
• Greece Debt-Swap Deadline This Week to Show If Europe Moving Past Crisis
• EC PMI services at 48.8 from the exp of 49.4
• Euro-Zone Jan Composite PMI Was 50.4, Forecast 49.70 • Utsumi Says ‘Quicksand’ of BOJ Bond Purchases Adds to Japan Fiscal Risks
• Intervention Sought on Strong Asia Currencies
• Hollande Repeats EU Treaty Change Call; Rival Doubts


Credibility
Risk appetite has taken a hit today with China cutting its growth target forecast to the slowest pace since 2004. Markets are jittery ahead of the Greece bond swap deadline. The success of the 106 billion-euro ($140 billion) debt swap, confirmed on the eve of last week’s European Union summit, depends on how many investors agree to the write down by the March 8 deadline. Euro-area finance ministers will hold
a teleconference on March 9 to review the deal’s outcome. Anecdotal evidence suggests participation might fall short of expectations. Such a development would be very bearish for the Euro and risk assets.


European PMI services data released today has been disappointing, though European Composite PMI data came in better than forecast. European Zone Sentix investors’ confidence data trailed the forecast too.


Markets are concerned with the upcoming elections in Greece and France. Francois Hollande, the Socialist
candidate in France’s presidential election, repeated his promise to renegotiate Europe’s latest fiscal treaty, saying it puts undue emphasis on austerity and offers little about the need for growth measures.


India’s GDP data released Friday showed that India’s economy grew at the slowest pace in more than two years last quarter. Gross domestic product rose 6.1 percent in the three months through December following the previous quarter’s 6.9 percent climb. The data was lower than the median of 29 estimates in a Bloomberg News survey was for a 6.3 percent advance.


Elsewhere, China’s car sales are having the worst start in last seven years on slowing economy and record gasoline price.



Thus we see that the headlines are not very encouraging today. Some profit booking has always been expected before the Greece debt swap deadline and the coming FOMC meeting on 13th of this month.


We think the correction has got more to do with the headlines pouring out of Europe rather China. The US Dollar and Japanese Yen should do well on their safe haven appeal, however we look for limited upside in both the currencies.


While the risk assets are likely to correct lower, the downside is likely to be limited ahead of the US Fed meeting.


Asia Watch - China Targets GDP Growth at 7.5% in 2012, Premier Wen Jiabao Says


China pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders are determined to reduce reliance on exports and capital spending in favor of consumption.


China will also aim for inflation of about 4 percent this year, unchanged from the 2011 goal, according to a state of- the-nation speech that Premier Wen Jiabao delivered at the annual meeting of the National People’s Congress in Beijing today. China’s GDP grew 8.9% in 2011.


Officials are targeting money-supply growth of 14 percent, according to the report, in line with the median forecast of 15 analysts for the rise in M2, the broadest measure. China has a goal of increasing fixed-asset investment by 16 percent this year, the National Development and Reform Commission said in a report. That’s below the 18 percent median estimate of 12 economists.


The growth target matched the median forecast of 15 economists surveyed by Bloomberg News last month.
Twelve of 15 economists forecast a 4 percent inflation goal, while the median estimate of 13 respondents was for a budget deficit of 1 trillion Yuan.



China’s lower growth targeting is not necessarily a negative development as this strives at improving domestic consumption while making the growth more sustainable. Moreover, markets have been expecting this for quite sometime.


China Car Sales Seen Having Worst Start Since 2005 on Growth - Deliveries of passenger autos, including sportutility vehicles and light-goods vans, in the first two months of 2012 fell 3 percent from a year earlier, based on the median estimate of five analysts surveyed by Bloomberg. That would be the biggest drop since 2005, when they fell 8.9 percent, according to the China Association of Automobile Manufacturers, which will release industry data later this month.


Utsumi Says ‘Quicksand’ of BOJ Bond Purchases Adds to Japan Fiscal Risks - The Bank of Japan is locked into purchasing more government bonds and may contribute to a loosening of fiscal discipline in the world’s largest public debt market, a former top Japanese currency official said. “Since they have come this far, if the BOJ stops purchasing bonds, there will be a fall in bond prices and huge valuation losses” for banks, said Makoto Utsumi, former vice finance minister for international affairs and now president of Japan
Credit Rating Agency Ltd. “They’re damned if they do and they’re damned if they don’t,” he said in an interview in Tokyo on March 1.


The central bank last month boosted bond purchases through its asset fund by 10 trillion yen ($123 billion) as part of easing measures to counter deflation and spur growth. That means the BOJ is poised to buy a record 25 percent of bonds sold by the government in the fiscal year starting in April. In the long term, the nation risks a loss of fiscal discipline, said Utsumi, 77, who led the nation’s currency policy from 1989 to 1991. “It looks to me like the BOJ is increasingly stepping into quicksand.”

Europe Watch—ECB Says Greece May Not Get Enough PSI Participation, Der Spiegel Reports Greece may fail to garner enough investors to participate in a voluntary writedown of its debt, Der Spiegel magazine reported, citing unnamed officials at the European Central Bank.


Private holders of Greek debt are being slow to take up the government’s planned debt swap offer, and even Greek creditors aren’t committing promptly to the deal, the Financial Times reported, citing unidentified people familiar with the situation.


The Institute of International Finance, representing private bondholders in the negotiations over the debt swap, said yesterday that it endorsed the final terms of the deal, while leaving it up to individual investors to decide whether or not to participate in the deal.


A second Greek bailout is partly tied to investors’ agreeing to the writedown by a March 8 deadline.


Hollande Repeats EU Treaty Change Call; Rival Doubts Credibility - Francois Hollande, the Socialist candidate in France’s presidential election, yesterday repeated his promise to renegotiate Europe’s latest fiscal treaty, saying it puts undue emphasis on austerity and offers little about the need for growth measures.


“If tomorrow I’m president, I’ll say there are parts of this treaty we can accept, but we won’t accept sanctions that are against countries’ interests and, second, we’ll add growth, activity, big industrial projects, Eurobonds to pull the economy ahead.”


Pound Declines Versus Dollar as Business Lobby Cuts Growth U.K. Forecast - The pound weakened for a second day against the dollar after the British Chambers of Commerce cut its growth forecast for the U.K. economy. Sterling declined for the first time in five days versus the yen after the London-based business lobby lowered its 2012 growth projection to 0.6 percent from 0.8 percent in
December. The group also pushed back its forecast for a Bank of England interest-rate increase to the end of 2013, from the first quarter of that year. U.K. 10-year gilts were little changed.



US Watch - Obama Assures Israel of Resolve on Iran
President Barack Obama and Israeli Prime Minister Benjamin Netanyahu, heading into their meeting today at the White House, are emphasizing agreement over how to confront Iran’s nuclear program, even as Obama asked Israel to help dial back “too much loose talk of war.” Addressing the American Israel Public Affairs Committee, the biggest pro-Israel organization in the U.S., Obama said yesterday that he takes “no options off the table” including a “military effort” to stop Iran from having a nuclear weapon.


Israel has a “sovereign right to make its own decisions,” Mr Obama also said, and “I will not hesitate to use force when it is necessary to defend the United States and its interests.”


Market watch – US Treasuries Snap Advance Before Data
Reports on U.S. Service Industry, Jobs US Treasuries snapped a gain before a private report that analysts said will show the U.S. services industry, which makes up almost 90 percent of the economy, grew at almost
the fastest pace in a year.


Treasuries have “considerable risk,” a report by Charles Schwab Corp. said. Analysts raised their year-end forecast for 10-year rates by four basis points last week to 2.52 percent, according to responses from banks and securities companies surveyed by Bloomberg, with the most recent forecasts given the heaviest weightings. It was the largest increase since Bloomberg began compiling the predictions in July 2011.


USD-INR – Up on week
The USD-INR pair closed with a gain of 0.48% at Rs 49.78. The pair was up 0.90% on the week.
The pair can rise to Rs 51 level this month. Immediate resistance is seen at Rs 50.29. Support is at Rs 49.78.


Euro-INR – Slightly lower
The Euro closed with a minor loss of 7 Paise at Rs 65.94. The single currency was down 0.15% last week. The US Dollar Index surged 1.34% last week as the Euro dropped 1.87%.



The Euro-USD pair has a strong support at 1.3150 that is likely to hold in short-term.


LTRO impact has been taken as mostly positive by the markets, however the operation is being considered negative for the Euro on increased liquidity.


Euro-USD pair faces a strong resistance at 1.3290. GBP-INR – Up 0.35%
The GBP closed with a gain of Rs 0.35% at 79.22. The pair was up 1.71% last week. The GBP-INR pair could test the resistance around Rs 80.35 should the BoE refrains from signaling possibility of further easing at its upcoming meeting this week.



Support is at Rs 78.50.
JPY-INR – Slightly down
The JPY closed with a loss of 0.09% at Rs 61.0925. The Pair was down 0.20% last week. The USD-JPY pair was up 0.76% last week as the USD hit a new cycle high at 81.87 Friday. The pair is highly volatile. We look for USD-JPY rising to 82.20-82.50 level in near term. Support is at 81/ 80.60.

RISH TRADER

>Regional Implications of Renminbi (RMB) appreciation

■ The economic impact of nominal RMB appreciation likely very limited… — There are three major reasons why: 1) Expected pace of RMB appreciation will be very gradual; 2) Other Asian currencies are expected to appreciate alongside it; and, 3) Intra-Asia production linkages would mitigate the impact on China’s export prices, and reduce substitution gains on Asia’s exports.

■ …but medium term RMB real appreciation may be increasingly important — Real appreciation can be realized via combination of nominal appreciation and higher inflation. China’s faster wage growth vis-à-vis productivity is expected to lift China’s trend inflation to above 4% in the coming decade vs. 2% in the previous decade, with further upside inflation risk from future price reforms.

■ Export substitution gains may be highest in India, Pakistan & Thailand — While net export similarity with China is highest for Taiwan and Philippines, this likely exaggerates substitution gains from RMB appreciation given concentration of similarity in electronics where disproportionate amount are exported to China for processing/re-export. Meanwhile, exports of India, Pakistan and Thailand overlap with China across a broader set of export items that are less likely to be vertically integrated, and could thus marginally benefit more from substitution
gains from third party markets via RMB appreciation.

■ Import gains highest for Australia, Indonesia and Vietnam — Relatively stronger RMB vis-à-vis the region would boost China’s purchasing power of imports. We think the impact will be stronger for Chinese imports that are for final demand than for processing/re-exporting, benefiting commodity exporters and low cost manufacturers.

■ Inflation impact to Asia – Hong Kong looks relatively more vulnerable — Rising imported costs on a REER appreciation of RMB is likely to impact inflation of HK more than others in Asia given the HKD peg and sizeable amount of goods comprising HK’s CPI basket that are imported from China.

■ Capital flow impact– Exacerbating inflows? China’s overseas investment — A gradual appreciation of RMB could exacerbate capital inflows to China and rest of Asia, making liquidity management increasingly complicated. We think RMB’s REER appreciation over the longer term will support China’s increased overseas investment, including to Asia, for two reasons: 1) Makes overseas assets cheaper; and 2) Re-configuration of manufacturing production and ancillary investment flows, with lower end manufacturing potentially relocating to South and parts of Southeast Asia (ex-Singapore, Malaysia) – capital deficient countries like Vietnam, India, Pakistan, Sri Lanka and Indonesia should increasingly welcome capital inflows.

To read the full report: RENMINBI APPRECIATION

>FX Rates Outlook for Q1 FY11: Global and Indian Rates

The economic data releases for the last quarter of 2009 gave hope of a solid global economic recovery. USA, the largest economy of the world grown at a pace of 5.9% in the fourth quarter with significant improvement in the domestic private investment. Consumption expenditure has been improving with stabilization of the labor market. China and India- leading members of the BRIC nations gave a solid force to the global rebalancing and most of the emerging economies are poised for a better growth in the latter half of the 2010.

However, the contagion risk arising in the Euro zone economies and UK’s rising deficit have dampened the recovery sentiment recently. The fresh “risk aversion” created by the EU and the UK economy pushed the US dollar higher and European currencies started depreciating towards the crisis levels.

Greece- the south European economy and a member of the European Monetary Union-16 is facing criticism due to worse fiscal management. Greece’s public debt to gross domestic product ratio is approaching 120 per cent, its budget deficit has swollen to 12.75 per cent of GDP, and it has lost around 30 percentage points of international competitiveness over the past decade. As Latvia and Ireland's recent experience with budget austerity suggests, attempting to bring Greece’s budget deficit down towards the Maastricht criteria's 3 per cent of GDP limit by savage expenditure cuts and without recourse to currency devaluation could result in a cumulative contraction in Greece’s GDP over the next few years.

The Spain and Portugal which were also known for bad fiscal control are creating “contagion risk” in the common currency area. The Euro zone may witness slower growth in the 2010 and may read negative growth in 2nd quarter of 2010. We see a major downside in the Euro in this quarter with heightening risk aversion.

From UK also, the pressure is mounting on rising public debt and risk of the country losing credit rating has mounted. The economy is fighting with fragile growth and rising inflation. It registered a growth of 0.3% in the fourth quarter of the 2009 while inflation is at 3% YoY, above the targeting limit of the BoE.

The recent set of data releases suggests a negative growth in the 1st quarter of 2010. We see the
“stagflation” in the UK to put downside pressure on the pound.

And in Japan, falling prices has raised fear the deferred domestic consumption expenditure. With
deflationary expectations, producers are expected to get hit and the private investment to slow down. The country faces the risk of rating cut which debts are at an alarming level. To increase spending, the BoJ loosed the monetary policy further and this resulted slide in yen against the major currencies. From the domestic point of view, Indian economy has been very strong with sequential upticks in economic indicators. However, rising food prices prompt the central bank to raise the benchmark repo and reverse repo rate by a quarter basis point, in an unexpected move in March. We are expecting further monetary tightening by the authorities in their coming meets. Rate hikes at this point may slowdown the growth level to some extent and impact may be seen in the 1st quarter of FY11. From the currency context, rising price level may reduce the RBI intervention in the market.

We are quite optimistic in the global economic recovery in the Q4, 2010, but see some downside risks for growth in the next two quarter of the calendar year.

We are bullish on the Indian Rupee, but see limited upside against the US dollar. In terms, of the Euro and the GBP further appreciation is expected

To read the full report: FOREX OUTLOOK

>My Goal is to Make 20 Pips a Day (ARTICLE)

You would think something as simple as what I am about to share with you would be widely followed, but you'd be wrong. Even in my own trading this simple concept seems to be beyond comprehension at times.

To survive trading in our beloved forex market, you have to limit your losses to the point they are minor annoyances. And then you have to take more in profits than you give up in losses. Pretty simple concept isn't it.

But why do most traders fail to comprehend this basic truth of trading? Is it all in their heads? Perhaps, but we'll deal with the head case aspect of forex trading in another article.
Right now let’s get to the premise of this article, which is simply this: make it your goal to lock in a 20 pip net gain every day you trade. I know that sounds boring. Its not as sexy as hitting those 100 pip trades. But you are trading to make money not to entertain yourself right?

If not, you are likely to go broke, and sooner than later I’d guess. So lets get into the mindset that this is a Business, and it must eventually make a profit if it is to continue operating.

For starters you should be trading on a mini lot size account, where each trade unit or lot is only 10K. Lets go over the math real quick. First lets discuss leverage, and how to honestly
determine your actual trading leverage. Your brokers most likely tout that you have a 400:1 leverage account. This means nothing to us, other than if you think actually trading at 400:1 leverage is a good idea, you are a fool.

What it does mean is that the required margin deposit per open position is very low. This is a good thing right? Well yes, I suppose so. When it becomes a bad thing is when you decide to start leveraging your trades more than 5:1 per entry.

Remember, leverage magnifies both gains and losses equally. Also remember that the broker is taking the other side of your trade. He wins when you lose. He would love it for you to trade like a fool.

To read the full report: 20 PIPS