My Views on Daily FX Market

Tuesday, January 20, 2009

UK Bailout Plans Revealed

The United Kingdom’s second bailout plan came to light yesterday as lawmakers discosed the terms and intentions of this new round of economic life-preservers were thrown at the Pound Sterling. Forex Traders were not impressed as the GBP/USD traded lower towards the 1.43 mark during a session that saw the US markets closed. The pound is trading lower today again in expectation of the British CPI figures for December – which are not expected to be great (expectations are that it will come in down 0.9%). The British economy is showing signs of deflation at this point, the question the Forex Brokers and investors are asking themselves at this point is just how bad is it?

As predicted, the markets are starting to taper off a bit – not certain of which direction it wants to travel in. Many are pointing to the loss of the investing and trading community’s appetite for risk as there are too many uncertainties out there right now and core economic data continues to come in worse than the broker trading conglomerates are expecting. Just look at what happened to the Royal Bank of Scotland yesterday. As we spoke about, they announced a huge loss that was more than expected and as a result the entire London market as well as the Pound Sterling was traded down as fears of what is to come haunt investors. The word nationalization comes up when talking about big government bailouts of financial institutions and no matter how they seem to explain it, this is what it looks like. Forex trading companies and private investors are looking to the future and seeing a constricted and restricted free market system and this is the primary issue keeping the markets in a state of flux.

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Deflationary patterns creeping up on India

I have to keep going back to India. Again, this is not a major player in the Daily FX markets, however what happens in India economically affects the rest of the world significantly, whether it is a psychological factor given the sheer size and status of up-and-coming powerhouse or a tangible problem that affects economies around the world is not important at this point. If the deflationary patterns of this downturn art creeping up on India, the world is in for a long and hard road. Governments need to reshape the way they are going about “fixing” these problems as it is apparent that the way they are going about it is either a) not working or b) scaring the investing community.

The problem started in the US with bad mortgage backed securities and it has spiraled. Not only are the banks not lending to individuals, the money they are getting from their governments which is intended to spur lending is not doing so. The reason for this is simple, if you read between the lines. The money that banks receive under bailout plans are going into their reserves as these banks know that they have much more bad debt and exposure to bad debt – they cannot lend money to people because they are over-exposed and need to make sure they remain solvent – if they loan the money away they run the risk of folding at some point down the road when more of their questionable investments that are not doing too well come to light. Look for continued volatility in the markets in the near term.

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Awaiting Bank of Canada Report on Interest Rate Cut

IT will be important to monitor the Bank of Canada today as they are expected to lower interest rates to 1% today – a drop of 50 basis points. Look not for the rate cut itself, but rather what is said about the future outlook. It is widely believed that the Canadian banks are in better shape than the rest of the world’s. The World Economic Forum declared the Canadian economy to be the “soundest” – so any negative talk by Canadian governors above what we already know could send a shock through the entire FX community. The numbers come in at 2pm GMT – keep a watch.


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