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US shutdown boosts RBI chance to shore up forex cover: BofA-ML
MUMBAI: Brokerage firm Bank of America Merrill Lynch (BofA-ML) today said the ongoing US government shutdown is positive for the country, as it gives additional time to recoup the forex reserves.
"Our base case is that the US shut down persisting for a fortnight to push Fed tapering into January. RBI Governor Raghuram Rajan should get more time to raise forex reserves if the tapering is deferred to January," it said in a note.
"We expect the RBI to capitalise on the postponement of Fed tapering to recoup forex reserves," it said, noting that it is necessary as the import cover has dwindled to seven months, last seen in 1998.
A two-week shutdown, however, will have little impact on the country's growth, it said, holding on to its earlier estimate of 4.6 per cent GDP growth for FY'14.
The postponement of the taper should provide the Reserve Bank necessary time to ease the debt limits for foreign institutional investors to list government bonds in emerging market bond indices to attract more benchmark funds, it added.
If the ongoing FCNR(B) deposit mobilisation scheme is successful, investor confidence will get boosted and assuming that the country gets a 10 per cent weighting in the indices, the RBI can mop-up up to USD 25 billion in reserves through the route.
The RBI will most likely start buying dollars once rupee stabilises at the 62 level against the dollar, it said. It can be noted that the Reserve Bank took a series of unconventional moves in face of the heavy depreciation in the rupee, which touched a lifetime low of 68.85 to the dollar late August.
Among the steps it announced were liquidity tightening measures and also a special window to banks for swapping fresh dollar deposits of over three years at a concessional rate.
Governor Rajan last Friday said USD 5.6 billion had been collected through the aforesaid swap window, while analysts expect it to touch around USD 10 billion by November, till when the window is open.
The liquidity tightening measures announced in July will be reversed by December, the note added.
USD/CAD Still Supported on Dips
Trading Strategy: Flat
LEVELS: 1.0181 1.0232 1.0264 | 1.0336 1.0355 1.0409
The Lifeblood of the US Economy: The Consumer
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Non-Farm Payrolls
One of the best aspects of the Forex market is that is so accurately reflects how globalization has changed the world. If you view economics solely from the position of an equity trader, you’re bound to view the world through rose-colored glasses; focusing on just one of the many economies that make up the world financial system.
But in the forex market, a data print in one continent can send a currency across the world flying to the moon, or dropping through the floor. Price action can tell us where prices have moved in the past, but fundamental analysis is what molds future price movements.
The reason for this is rational. In the Forex market, everything is traded in pairs, unless a system like a currency basket is being used. But, more to that point is the fact that what benefits one economy may benefit another.
Nowhere are these impacts more evident than during the release of Non-Farm Payrolls each month. This is simply the number of jobs added to American payrolls in the previous month. There is a litany of criticisms of the statistic, but this is often the first glimpse the marketplace receives of employment data for the month prior. NFP is usually issued on the first Friday of every month, and the data pertains to the most recent month.
But volatility can be seen all over the place, not just in USD-related pairings. Take, for example, the EURJPY during the release of the August 2013 NFP report.
So, the number of new jobs added in the United States can be used as somewhat of a barometer for global economic health. After all, if employment is improving in the United States that means more people will have money to buy goods and services. Many of those goods and services are being imported from foreign countries, and the proceeds of those sales can go into the pockets of the workers in those foreign countries to spend on other goods and services.
You can probably tell from this relationship, that there is another important factor in the function of economics: The consumer.
While employment can be a great gauge of economic health and a fantastic pre-cursor of future economic growth - consumer activity plays an equally vital role in the global economy. Consumer spending makes up over 2/3rds of all US economic activity!
And this is a good thing, because consumers spending money means that business make more profits; profits which can be re-invested in the business by hiring more workers, expanding operations, and increasing investments; all of which serve to create a synergistic effect of more consumer activity, more spending, and more growth.
Much like the number of jobs added in the largest national economy in the world can be used to gauge global economic health, consumer activity in the United States can tell economists quite a bit about what might be expected in quarters to come.
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Advance Retail Sales
This is the report probably closest to Non-Farm Payrolls regarding amount of volatility that it may produce, and impact that it may have.
Like NFP, Advance Retail Sales is an early look at the most recent month passed, and this is both a blessing and a curse for the indicator. On the upside, the timeliness of this information is what makes it so important, and so widely awaited for by traders. However, because it is so timely, that leads to the one downside: volatility. This number is often met with numerous revisions in future months (also like NFP), and those revisions could potentially be massive. In some cases, revisions can cause a firmly positive number to become a negative number.
Advance Retail Sales is usually reported on the 13th of each month, for data pertaining to the month prior. The release of Advance Retail Sales can see massive volatility enter the Forex market; case in point, the AUDUSD during the release of August Advance Retail Sales:
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US Consumer Confidence
This is a figure that is produced by the independent economic research organization, The Conference Board. The data is produced through mail-in surveys of 5,000 respondents, and asks for opinions on current business conditions, as well as expectations for future economic outlook.
The survey asks respondents to rate ‘positive,’ ‘neutral,’ or ‘negative,’ regarding their outlooks on 5 topics. And like Advance Retail Sales, releases of the Consumer Confidence Index can see massive volatility enter markets. For example, during the release of last month’s Consumer Confidence number, the GBPJPY saw movement of 50 pips right after the release, only to see a 120 pip retracement shortly in its wake.
Consumer Confidence can produce massive volatility :
2013-10-08 06:00 GMT (or 08:00 MQ MT5 time| [EUR - German Trade Balance]
if actual > forecast = good for currency (for EUR in our case)
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German Exports Recover In August
Germany's overall exports recovered in August from July, while the growth in imports increased marginally, data from the Federal Statistical Office showed Tuesday.
Exports advanced 1 percent month-on-month, offsetting July's 0.8 percent fall. Meanwhile, imports rose 0.4 percent, slightly faster than the 0.3 percent increase seen in July.
Despite an increase in exports, the foreign trade surplus declined to EUR 13.1 billion in August from EUR 16.2 billion in July. On a seasonally and calendar adjusted basis, the surplus totaled EUR 15.6 billion.
Likewise, the current account surplus decreased to EUR 9.4 billion from EUR 14.2 billion in July.
On a yearly basis, exports decreased 5.4 percent and imports dropped 2.2 percent in August.
2013-10-08 06:00 GMT (or 08:00 MQ MT5 time| [CAD - Trade Balance]
if actual > forecast = good for currency (for CAD in our case)
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USD/CAD slightly higher in early trade
The U.S. dollar was slightly higher against the Canadian dollar in early trade on Tuesday, but the pair looked likely to remain locked in recent ranges as concerns over political deadlock in Washington continued.
USD/CAD hit 1.0334 during early U.S. trade, the session high; the pair subsequently consolidated at 1.0322, easing up 0.11%.
The pair was likely to find support at 1.0290, Monday’s low and resistance at 1.0355, the high of October 2.
The greenback found some support after President Barack Obama repeated Monday that he is willing to negotiate with congressional Republicans on a range of topics, including healthcare and energy policy, but only after the government is reopened.
President Obama also called on Congress to raise the government borrowing limit ahead of the October 17 deadline, when the Treasury Department has estimated the U.S. government will not have enough cash to pay its bills.
The Canadian dollar showed little reaction after official data showed that the country’s trade deficit widened unexpectedly in August, expanding to CAD1.31 billion from a deficit of CAD1.19 billion in July. Analysts had expected the deficit to narrow to CAD1.0 billion.
A separate report showed that Canadian housing starts rose to 193,600 units last month from 184,000 units in August. Analysts had expected housing starts to increase to 185,000 units in September.
The loonie, as the Canadian dollar is also known, was slightly lower against the euro, with EUR/CAD easing up 0.12% to 1.4020.
International Monetary Fund Chief Economist Olivier Blanchard said Tuesday that a prolonged failure to raise the U.S. debt ceiling would "almost certainly derail the recovery", and warned the U.S. to slow the pace of its deficit reduction program.
The IMF downgraded its forecasts for the global economy, saying it now expects growth of 2.9% this year, down from 3.1%. It expects growth of 3.6% in 2014, down from 3.8%.
IMF Cuts Global Growth Forecast On Rising Risks
The International Monetary Fund on Tuesday trimmed its global growth forecasts for this year and next, given the policy challenges in the U.S. and slowing growth in the emerging markets.
In its latest World Economic Report, the lender cut its growth forecast for this year to 2.9 percent from 3.1 percent seen in July. The outlook for 2014 was lowered to 3.6 percent from 3.8 percent.
The IMF trimmed its growth forecast for the sixth time in a row. The improvement next year is expected to be driven largely by advanced economies.
"Global growth is in low gear, the drivers of activity are changing, and downside risks persist," the IMF report said.
The weakness in emerging markets was partly attributed to a natural cooling in growth following the stimulus-driven surge in activity after the Great Recession, the IMF report said.
"This transition is leading to tensions, with emerging market economies facing both the challenge of slowing growth and changing global financial conditions," IMF Chief Economist Olivier Blanchard said.
The U.S. economy is expected to grow 1.6 percent this year and 2.6 percent in 2014. In July, the IMF had predicted growth of 1.7 percent and 2.8 percent, respectively.
While the IMF expects the federal government shutdown in the world's largest economy to be short, it warned that "a failure to promptly raise the debt ceiling, leading to a U.S. selective default, could seriously damage the global economy."
The forecast for Eurozone was raised to 0.4 percent contraction this year from 0.6 percent seen earlier. In 2014, the 17-nation economy will likely exit recession and grow 1 percent, the IMF said, which is slightly better than the 0.9 percent expansion seen in July.
Growth forecasts for Germany and France were also upgraded. Spain is expected to contract less this year compared to the earlier projection and grow slightly faster in 2014. Forecasts for Italy were left unchanged.
Japan's growth outlook for this year was trimmed slightly to 2 percent from 2.1 percent. Next year, the economy is expected to grow 1.2 percent.
Indexes continue to sputter on news out of Washington
While the indexes continue to sputter on news out of Washington, we continue to focus on the charts and trade with the trend and what we see.
As usual, the media is playing with human emotions – Fear. As talked about before, fear in my opinion the most powerful emotion and force in the financial market. So when true fear hits the country it will be clear to see, but right now, investors are in no rush to sell their positions in stocks just yet.
If our leaders fail to come to some agreement in the next couple weeks the question many want to
know is
How Will We Trade This Event/News?
The answer: we ignore it. Though we could reduce position sizes to be safe when the time comes on Oct 17th.
During most bull markets, there is typically a “wall of worry” to traders and investors climb. The details are different every time, but there are usually one or two major “risk factors” that investors worry about when the broad market is trending higher.
Traders and investors who focus on doom and gloom headlines are more than likely to be shaken out of their long positions…especially those who lack conviction in their trading system.
Conversely, I focus on individual price and volume action of leading sectors and ETFs.
Holding long positions through market corrections is never easy, but it is NOT our job to decide when a trend is over.
If we approach trading with a clear and objective mindset, the stock market will always tell us what to do, based on the price, cycles and volume action. If our ETF positions sell off to trigger our protective stops, we will simply be forced into 100% cash position.
The beauty of such a rule-based trading is that it removes some human emotion and guesswork from trading.
This increases our long-term trading success, and the added benefit of being calmer and stress-free, regardless of what is happening in the stock market.
Trading Plans …
If you are new to swing trading, or have had little success in the past with trading, it is a great idea to get in the habit of planning your trades (trading rules) and trading your plan.
You must continually try to identify all potential outcomes before entering a trade.
If you do, then you should not be surprised when price moves because you realize that anything is possible, and you have already accounted for it and used proper position management to protect capital and lock in partial gains.
Trading with rules allows you to prepare and worry before the trade takes place, so that you can focus on executing the plan when the time comes.
Above all, focus on the price, momentum and volume action, rather than the amount of profit or loss a trade is showing in your account.
If you focus on proven trading rules and execution, consistent trading profits will eventually and inevitably follow.
2013-10-09 08:30 GMT (or 10:30 MQ MT5 time| [GBP - Industrial Production]
if actual > forecast = good for currency (for GBP in our case)
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U.K. Industrial Output Logs Unexpected Fall; Visible Trade Gap Narrows
U.K. industrial production declined unexpectedly in August and at the fastest pace since September 2012, driven by downward contributions from all main sectors, especially the dominant manufacturing activity, official data showed.
In the same month, the visible trade gap narrowed from July, but the shortfall for the three months to August increased, raising concerns about the third quarter growth.
Industrial production declined unexpectedly by 1.1 percent in August from July, the sharpest fall in 11 months, following a modest 0.1 percent rise in July, data from the Office for National Statistics showed Wednesday.
There was a 1.2 percent fall in manufacturing output after two consecutive increases of 0.2 percent and 2 percent in July and June, respectively. Economists had forecast industrial and manufacturing output to grow 0.4 percent each in August.
The latest data put a dent into hopes that the British economy may have grown by as much as 1 percent quarter-on-quarter in the third quarter, IHS Global Insight's Chief UK economist Howard Archer said.
The British Chambers of Commerce yesterday said economic growth will be around 0.9 percent to 1 percent in the third quarter and signaled hopes of upward revisions to the whole-year forecast.
The International Monetary Fund on Tuesday upgraded the outlook for the U.K. growth to 1.4 percent this year from 0.9 percent. In 2014, growth is seen accelerating to 1.9 percent.
Samuel Tombs at Capital Economics also pointed out that today's figure dampen hopes that the recovery picked up much more pace in the third quarter as well as undermines hopes that the economy is finally rebalancing.