Over the past few months, the focus in the FX space alternated between a likely Fed rate hike to a possible Grexit to the woes in China. Justifiably, all of those matters will undoubtedly shape the dynamics and future trends of FX. But while the FX market has been busy focusing on the major currencies, opportunities might be passing by.
It may be that FX investors are missing some long-term value trends that could be rewarding if one exercises patience. One of those trends is the Indian Rupee. The Rupee's been hidden from center stage but is gradually being positioned into a long-term bullish trend. Now while that does pose some risk, it could become worthwhile for those willing to engage. So why now is the Indian Rupee on the verge of becoming interesting? Continue reading "Indian Rupee: In It For The Long Haul?"→
Over the past two years, it seems, Brazil has remained in the headlines for the very worst of reasons – corruption. In fact, the very latest scandal at Petrobras, the state owned petroleum giant, reached all the way to its upper echelon. Long gone are the days when the Brazilian government was praised for its fiscal discipline; the situation there has become so notorious that the name Brazil, it seems, has become synonymous with corruption. And as if this were not bad enough the country's main exports, which range from iron ore to agricultural goods, have tumbled in crisis. Yet, as investors, we always seem to intuitively look at the bright side of even the worst situation; in this case, we have thoughts of buying because when the situation is as bad as it is, we think, from here on out, that the situation can only get better. The Brazilian economy is basically at a standstill with a weak government at the helm, and there is one corruption scandal seemingly after another, and given the softness in commodities' prices the question that investors want an answer to is this: is the collapse in the Brazilian Real over?
A Broken Banking System
While many see corruption as the core problem in Brazil, this writer thinks the true core and the basis of the problem is, in fact, rooted in the country's banking system and at its heart, with Brazil's central bank, the Banco Central do Brasil. While reforms in the country are key for future growth it is the credibility of its central bank that is key for the Real, and as the chart below reveals, credibility is sorely lacking.
The central bank has marked the 4.5% as the desired target for inflation. Yet the Brazilian central bank, generally amid political pressure to spur growth, has always eased policy prematurely and too aggressively. However, when it comes to tightening, the fact is the central bank doesn't apply those same standards. When in 2009 inflation peaked, rates were cut quickly, to as low as 8.75%, and left unchanged for several months. Soon after, though, inflation spiraled out of control once again, above 7%. And yet again, the Brazilian central bank was behind the curve, tightening too slowly and allowing inflation to move outside its targeted range. Once inflation slowed to 4.91% the central bank once again cut rates, this time even more aggressively than before, and the results were not pretty. As seen in the chart, inflation was soon out of control, to the extent that the latest reading on inflation hit 8.13%, once again spurred on by a central bank that hands out rate cuts much too easily. Continue reading "The Brazilian Real: From Bad To Ugly"→
In forex trading, trade with the trend. Trends last a long time and tend to go further than people expect. Those who bought the EURUSD above 1.39 less than a year ago can attest to that, with the pair having traded as low as 1.0462 in March.
The U.S. Dollar (USD) isn't just strong against the Euro; it's strong against nearly all currencies, major and minor. For trades lasing longer than a few weeks, trading on USD strength--in alignment with the trend--is still the main play.
The USDCAD, NZDUSD and USDCHF are in a slightly different position though. Trading in the direction of USD strength is still a possibility, yet it's wise to have a few pairs to trade if the USD reverses. If the USD reverses, or even sees a deeper pullback, it is likely to be showcased in these pairs first. In fact, it has already begun.
Last week, the Fed released its FOMC minutes, the protocol of the Fed's decision makers, and already it seems to have backfired. While the minutes thoroughly described how FOMC committee members have gradually shifted their projections on inflation and a lower Fed Funds Rate, comments that were supposed to gently assist in tilting the dollar lower have done the exact opposite.
FOMC Minutes Backfire
The Fed's statement contained two comments that were combined or written in such a way that investors immediately became wary of shorting the dollar. The first, was the remark on the fact that excess capacity and downward pressure in commodities was seen as winding down gradually thus keeping the Fed's long-term inflation target of 2% (or close to it) still intact. So far so good, yet the Fed also added a statement on what is holding back the possible rate hike and that is low energy prices and a strong dollar. In other words, the Fed outlined that a lower dollar would increase the chances of a rate Continue reading "The Dollar Breaking Point"→
Yemen, a country south of Saudi Arabia, and with an economic output roughly the equivalent to that of say, San Antonio, Texas, is sinking deeper into chaos. Though in the grand scheme of things in the Middle East, that chaos stems from a relatively small country, it is likely to have widespread ripples that could affect market sentiment, in general, and specifically, in the FX market. One might ask how on earth Yemen, a small country that is primarily desert and which is categorized as among the world’s poorest, could affect trends in the Dollar, the Euro and other currencies?
Yes, it’s Oil Again
The answer, as you might have guessed, and the only way that trouble in a small Middle Eastern country could have repercussions on global markets, is through Oil. Despite the fact that Yemen produces less Oil than Denmark and its direct effect on Oil supply is marginal, its location is critical. Yemen is situated on the banks of the Gulf of Aden, the 4th largest passage for Oil in the world and a key passage for seaborne Oil and gas from the Middle East. Analysts point out that with the country deteriorating into chaos, the risk of Oil tankers being hijacked by pirates grows much higher and thus heightens Oil supply risks. Now, while this might be a plausible risk scenario, it is not the real Continue reading "Chaos in Yemen Could Undermine Dollar"→