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EUR/USD Stabilizes at 1.12 Following US Data Deluge

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Dollar , USD

The EUR/USD stabilizes to an intraday high of 1.1249 before falling sharply back toward the 1.12 handle. The pair was stabilized around 1.1208, advancing 0.1 percent. The EUR/USD faces initial support at 1.1127. A break below that level would lead to 1.1057. On the upside, resistance is ascending from 1.1324.

In economic data, German inflation showed signs of recovery in February after prices fell for the first time since 2009, a sign Europe’s largest economy was gradually regaining its footing amid rebounding oil prices.

Germany’s consumer price index rose at an annualized rate of 0.1 percent in February after plunging 0.4 percent at the start of the year, preliminary estimates revealed on Friday. However, the country’s harmonized index of consumer spending – the gauge used by the European Central Bank – remained in negative territory, declining 0.1 percent annually. The harmonized index had fallen at an annual rate of 0.5 percent in January.

Friday’s figures offer little hope that the broader euro area, comprising of 19 states including Germany, could avoid falling into a vicious cycle of deflation. Eurozone consumer prices fell 0.6 percent annually in January, the European Commission confirmed earlier this week, edging further away from the ECB’s target of just below 2 percent.

Plunging oil prices have squashed inflationary pressures throughout the advanced industrialized world, including the United States, which posted an annual inflation rate of -0.1 percent in January. That was the first time since October 2009 inflation had declined.

On Friday the Commerce Department said the US economy slowed more than initially estimated in the fourth quarter, stemming from a wider trade deficit and smaller inventory buildup. Gross domestic product expanded 2.2 percent annually in the fourth quarter, down from the “advance” estimate of 2.6 percent. However, the data set pointed to sustained growth in consumer spending, offering hope that the fourth quarter slowdown was only temporary.

Separately, US consumer confidence slipped in February, but remained close to January’s 11-year high. The Thomson Reuters/University of Michigan consumer sentiment index eased to 95.4 in February from 98.1 the previous month.

Rounding out Friday’s data releases was a housing report from the National Association of Realtors. Pending home sales, a forward looking indicator of US home sales, increased 1.7 percent in January to the highest level since August 2013, then EUR/USD stabilizes. The NAR expects existing home sales to reach a total of 5.26 million this year, up 6.4 percent from 2014.

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EUR/USD Little Changed as Goldman Sachs Lowers Forecast

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Trading and exchange analysis

The euro posted modest gains against the US dollar on Wednesday, although upside was limited after international investment bank Goldman Sachs lowered the common currency’s near-term forecast.

The EUR/USD advanced 0.15 percent to 1.1360, stopping well short of the 1.14 level. The pair faces near-term support at 1.1301 and resistance at 1.1372. The EUR/USD has plunged more than 17 percent year-on-year. The pair was trading closer to 1.40 last spring.

The euro was also trading near seven-year lows against the British pound. The EUR/GBP fell 0.11 percent to 0.7331, rebounding from an intraday low to 0.7314.

The common currency has been mired in economic and political turmoil stemming from plunging inflation, violence in Ukraine and a deepening Greek crisis.

As Athens struggles to make whole on its campaign promise that Greeks could have the euro without the “cruel” austerity tied to bailout reforms, the newly elected Syriza party could face a political backlash. While the European Commission accepted the validity of Greece’s recently proposed reforms, the European Central Bank and International Monetary Fund publicly disclosed their displeasure with the lack of details in the plans.

“The commitments outlined by the authorities differ from existing program commitments in a number of areas,” ECB President Mario Draghi said in a letter to Eurogroup head Jeroen Dijsselbloem.

Greece slipped back into contraction in the fourth quarter, as the country’s deteriorating climate has added another layer of complication to ongoing bailout talks.

The ongoing Greek bailout crisis likely factored into Goldman Sachs’ latest forecast for the euro. Goldman now sees the common currency at 1.12-1.13 US over the next three months, down from a previous forecast of 1.14. The euro is expected to fall to 1.10 in the next six months, down from a previous forecast of 1.11. The euro will then plunge to 1.08 in a year’s time.

A plunging euro boosted Germany in the fourth quarter, as the bedrock of the Eurozone economy expanded more than twice the rate of forecast. Germany’s GDP expanded 0.7 percent in the final three months of 2014, up from 0.1 percent the previous month. Year-on-year, this translated into an annualized gain of 1.6 percent. Euro area growth averaged 0.3 percent in the fourth quarter, official data revealed earlier this month.

Eurozone consumer prices declined at an annual rate of 0.6 percent in January. Deflation was steepest in Greece, while almost all Eurozone countries experienced negative rates. The European Commission next week is expected to report an even steeper fall for February.

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Fed’s Yellen Hints Rate Hike, but Stresses Patience

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Financila Market, Frankfurt

The Federal Reserve could begin normalizing interest rates this year, but won’t rush to do so amid tepid wage growth and tame inflation, central bank Chairwoman Janet Yellen said on Tuesday.

Testifying before Congress, Yellen sought to lay the groundwork for how the Federal Reserve would begin raising interest rates after more than six years. She continued to stress patience in normalizing monetary policy, echoing the Federal Open Market Committee’s January rate statement.

The Federal Reserve “will at some point begin considering an increase in the target range for the federal funds rate on a meeting-by-meeting basis,” Yellen told Congress on Tuesday. However, Yelllen was careful to manage expectations, stressing that the Fed’s eventual change in language would not necessarily translate into a shift in policy.

“It is important to emphasize that a modification of the forward guidance should not be read as indicating that the [Federal Reserve] will necessarily increase the target rate in a couple of meetings,” she added. “The modification should be understood as reflecting the [Federal Reserve’s] judgment that conditions have improved to the point where it will soon be the case that a change in the target range could be warranted at any meeting,”

The data-driven Fed has relied on the economic indicators to adjust monetary policy, having closed the books on a record bond-buying program only last October. Yellen said on Tuesday that unemployment was still too high, despite acknowledging broad improvements “on many dimensions.” Unemployment edged up slightly to 5.7 percent in January as workforce participation increased. Employers added 257,000 jobs in January and have added an average of 336,000 jobs per month over the last three months.

While several Fed officials have indicated they would like to have the option to raise interest rates in June, the minutes of the January FOMC meetings revealed growing concerns about tame inflation and a volatile global economy. For its part, the Fed has remained consistent in its messaging since December, when it first started using the word patience to describe interest rate adjustments.

The FOMC’s next meetings will be held in Washington on March 17-18. They will be accompanied by revised GDP, inflation and employment forecasts, as well as the closely followed “dot-plot” chart of interest rate expectations. The Fed’s December forecast showed policymakers anticipated interest rates to rise to 1.125 percent by the end of the year.

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EUR/GBP at 7-Year Lows Ahead of Carney, Draghi Remarks

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Pounds, GBP

The EUR/GBP sunk to fresh seven-year lows on Tuesday, as the beleaguered euro continued to struggle amid ongoing talks between Greece and its EU paymasters about Athens’ proposed four-month loan extension.

The EUR/GBP hit 0.7316 in Tuesday’s European session, a new seven-year low. The pair rebounded slightly in Wednesday’s Asian session and was trading at 0.7333. The pair’s next lifeline is at 0.7319. A break below that level would expose the 0.7300 handle. On the upside, initial resistance is likely found at 0.7354.

On Wednesday Bank of England Governor Mark Carney will testify before parliament’s Treasury Committee. Britain’s top central banker is expected to highlight the country’s steady economic growth over the past year, despite plunging inflation. Carney has stated before that inflation could fall below zero by the spring and that the BOE could cut interest rates further to prevent long-term deflation. According to the Bank’s latest inflation report, the consumer price index will average around zero in the middle of the year before rebounding toward the end of 2015.

Last year investors appeared certain that the BOE would be the first major central bank to begin lifting interest rates. Given Britain’s currency macroeconomic realities, analysts expect the BOE to hold off on raising interest rates until at least the beginning of 2016.

Meanwhile, European Central Bank President Mario Draghi will visit the European Parliament in Brussels on Wednesday, where he will participate in a Plenary Debate on the ECB’s 2013 Annual Report.

Eurozone inflation is forecast to fall at a near-record pace in February, stoking concerns about the long-term health of the currency region and whether quantitative easing would be enough to kick start the recovery. While Germany posted stronger than forecast GDP growth in the fourth quarter of last year, the bulk of the gains were attributed to a weakening euro and plunging energy prices.

The European Commission will release preliminary euro area CPI figures next Monday. The ECB’s Governing Council will coalesce next Wednesday and Thursday to discuss monetary policy and unveil new economic projections.

In January the ECB announced it would pump up to €1 trillion into the currency region over the next year-and-a-half to stave off deflation. The €60 trillion-a-month bond buying program was much larger than analysts had expected. The announcement brought the ECB closer into line with Bank of England and United States Federal Reserve, which unleashed their own bond buying programs following the 2008 financial crisis.

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A Trader’s Guide to Futures – Part 2

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Stocks Chart

In the first section of this guide we took a look at what a futures contract actually is, and how it works at a basic level. The second part of the guide will describe why exactly investors find them so useful and when they should be considered as an instrument worth investing in.

This part of the guide will give an overview of how the futures market works in aggregate, and why investors bother with it, leading on to Part 3 which will show how to assess and value futures contracts.

Why buy futures?
In part one the parties involved had their own goals. The farmer was looking to get some cash up front for his grain, the investor was looking to make a profit off of a prediction that the price of grain was set to rise. It’s important to remain on the safe side and avoid debt management by working with a professional like these insolvency practitioners London. This is one type of futures contract, but there are many different objectives and uses for such contracts. Below we list the two basic uses of a futures contract:

Hedging risks: Futures contracts allow companies and investors to stabilize the price of a volatile asset in the long term, reducing pricing risk. The airline industry is the most famous partaker of these type of contracts, with aircraft fuel constantly being fixed by various futures contracts.

In an industry highly cost sensitive to changes in a volatile asset this makes sense, though the recent drop in oil prices has many airlines stuck to contracts buying fuel way above current market price.

Instead of trying to guarantee the price of oil, some investors try to limit their downside from the bond market by investing in instruments like interest rate swaps. This means that, instead of fixing a price, the risk of losses on certain investments is lowered. This principle can be applied all over the capital markets.

Speculation: In order to take advantage of predictions about future prices, futures are often the best way to get exposure to a commodity and increase exposure using the leverage discussed in Part 1. Speculators, like our grain investor, try to make money all the time by betting on the futures markets.

In fact, all short contracts on stocks and bonds are a kind of future that work in this way. An agreement is made to sell stock of United Company Group at $10 in six months. If the price at that date is $8, the seller is able to make $2. Famous short sellers, like hedge fund managers, do this with millions of dollars at a time.

Who buys futures?
Because of the immense variety of markets that futures are available in, a vast cross section of market players are involved in buying and selling them. From companies that want to fix the price of commodities to hedge fund managers that want to short a company, to a bank that has taken on too much risk in a certain market.

Because of this, basically everyone but specialists trade futures. Commodity producers sell them in order to secure cashflow; market makers buy and sell them en masse in order to take a margin by selling them on, maintaining market liquidity; hedge fund managers buy and sell them against each other; companies hedge their costs on them; financial firms manage their risks based on them; the list goes on and on.

The whole futures market works together in this way in order to set prices for the foreseeable future, and gives a huge economic incentive to analyzing market trends in order to predict the future price of assets.

This means, because of the arbitrage dynamics, that today’s price is more representative of the market’s expectations for the future of a certain asset. The market can, of course, be wrong, but it offers a kind of price stability and predictability that allows both investors and normal companies to operate.

The next section of this guide will concentrate on how exactly you can trade futures, and what the steps are to set up your first trade.

 

Related Posts:

A Traders’s Guide to Futures – Part 1

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German Business Confidence Rises in February: Ifo

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Trading and exchange analysis

 

 

German business confidence improved again in February, rising for the fourth consecutive month in the latest sign Europe’s largest economy was recovering from last year’s third quarter slump.

The business climate index, which is derived from a monthly survey of 7,000 companies, rose to 106.8 from 106.7 in February, the Munich-based Ifo Institute reported on Monday. Economists forecast a bigger rise to 107.7.

The assessment of the current business climate improved further in February, rising to 102.5 from 102.0. The current assessment index declined slightly to 111.3 from 112.7.

“Satisfaction with the current business situation decreased somewhat, but companies expressed greater confidence in future business developments,” said Ifo president Hans-Werner Sinn in a press release. “The German economy is proving robust in the face of geopolitical uncertainty.”

Business conditions improved somewhat in manufacturing, with the six-month business outlook reaching its highest level since August 2014. Business conditions in wholesaling and construction deteriorated slightly this month, Ifo data showed.

The figures provided added assurance that Europe’s largest economy was regaining momentum despite geopolitical uncertainties, euro area deflation and the growing threat of a Greek default.

Germany’s gross domestic product rebounded sharply in the fourth quarter of last year, growing 0.7 percent. That was more than double the rate of forecasts and well above the Q3 rate of just 0.1 percent. Year-on-year, Germany’s economy grew 1.6 percent. The Federal Statistics Office will release updated fourth quarter GDP figures on Tuesday.

According to analysts, Germany is on pace for around 0.4 percent quarterly growth in the first three months of 2015, having benefited from cheap oil and a weaker euro. However, the German economy is expected to remain subdued this year, according to a January forecast by the International Monetary Fund. The international lending institution said it expects Germany to grow only 1.3 percent in all of 2015, followed by a 1.5 percent growth pace next year. By comparison, euro area growth will average only 1.2 percent this year and 1.4 percent next year.

Eurozone GDP disappointed in the fourth quarter, growing only 0.3 percent quarter-on-quarter. France expanded only 0.1 percent, while Italy stagnated and Greece slipped back into contraction.

The euro was back on its heels Monday, touching an intraday low of 1.1294 US. It would subsequently consolidate at 1.1323 US, declining 0.5 percent.

The euro also declined against the British pound, falling 0.65 percent to 0.7348 GBP.

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EUR/USD Weekly Outlook

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Dollar , USD

The euro was trading cautiously on Monday, following a week of uncertainty that ended with Greece securing a short-term loan extension in exchange for further oversight from its creditors and other reforms that squashed Athens’ “anti-austerity” pledge. The attention this week shifts back to the economic data, although the threat of an eventual Greek exit from the Eurozone remains in the background.

The EUR/USD was trading at 1.1368 in the early Asian session, down 0.13 percent. The pair faces initial support at 1.1294 and resistance at 1.1445. The euro advanced slightly against its US counterpart last week, but ended on a sour note following the details of the Greek loan extension. The pair briefly fell below 1.13 on Friday before recovering.

Several batches of high profile data are on the docket this week, headlined by Germany. On Monday the IFO Institute will release the business climate index, a closely followed indicator for economic development in Germany. The business climate index is forecast to rise to 107.7 from 106.7, adding further evidence the German economy was regaining momentum following a midyear slump.

On Tuesday the Federal Statistics Office is expected to confirm Germany’s Q4 GDP growth at 0.7 percent, unchanged from the preliminary estimate. Year-on-year, this translates into an annualized gain of 1.6 percent. Fourth quarter growth more than doubled forecast and was a significant improvement over the third quarter’s 0.1 percent uptick.

Separately, Eurostat will post final Eurozone CPI figures for January. Eurozone consumer prices plunged 0.6 percent annually in January, the sharpest decline since July 2009, Eurostat reported last month in a preliminary estimate.

On Thursday Germany will publish official employment figures for February. The number of workers unemployed is forecast to drop by another 10,000 in February. The unemployment rate is forecast to hold at 6.5 percent.

Separately, Eurostat will release several economic indicators on Thursday, including business confidence, industrial confidence and economic sentiment.

Germany and other Eurozone member states will close out the week with preliminary estimates of February CPI. Germany’s harmonized index of consumer prices declined 0.5 percent in January, the first time in more than five years inflation turned negative for Europe’s largest economy.

Eurozone inflation will probably remain negative in the first half of the year before gradually recovering later on, aggravating concerns about the currency bloc’s nascent recovery. Persistently weak inflation also raises concerns about the ECB’s €1 trillion bond buying program, which has designed to shore up consumer prices and promote economic growth.

The ECB will hold its next monetary policy meetings in early March.

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Canadian Dollar Retreats on Declining Energy Prices

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Market Place
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Dollar, USD and American Market

The Canadian dollar declined against its US counterpart on Wednesday, as tumbling energy prices outweighed stronger than forecast growth in Canadian wholesale sales.

The loonie tumbled to 0.8036 US after climbing to a daily high of 0.8089 US on Tuesday. The USDCAD exchange rate advanced 0.6 percent to 1.2445 and is testing initial resistance at 1.2449. On the downside, initial support is likely found at 1.2329.

In economic data, Canadian wholesale trade rebounded sharply in December, led by widespread gains in all sectors. Wholesale sales rose 2.5 percent to $55.4 billion in December, surpassing forecasts calling for a 0.3 percent gain. Wholesale sales had declined 0.3 percent in November.

Six of seven subsectors representing 80 percent of wholesale trade increased in December, led by motor vehicles and parts as well as miscellaneous goods. The motor vehicle industry posted its third consecutive monthly increase, official data showed.

Solid wholesale trade figures weren’t enough to lift the commodity-sensitive loonie after energy prices declined on Wednesday. US crude declined 1.27 percent to $52.85 a barrel. Global benchmark Brent crude dipped 1.55 percent to $61.56 a barrel.

Canada is home to the world’s third-largest known oil reserves and relies heavily on energy exports to fuel its domestic economy. The energy sector accounts for about one-third of Canada’s total export sales. Oil’s seven-month plunge is weighing heavily on the Canadian economy. Alberta, which is home to the country’s oil and gas industry, is expected to sink into a mild recession this year, according to the latest forecast by the Canadian Imperial Bank of Commerce (CIBC).

The US dollar was broadly supported on Wednesday, as investors disregarded weaker than forecast housing and industrial production data following news that Greece officially submitted a loan request to its EU paymasters.

The US dollar index, which measures the dollar’s performance against a basket of six currencies, rose 0.3 percent to 94.33.

US housing starts declined 2 percent in January, but remained above the important one-million mark for the fifth month running. Single-family starts eased off six-and-a-half year highs, slipping 6.7 percent to 678,000.

Building permits, a gauge of residential construction intentions, declined 0.7 percent to a seasonally adjusted annual pace of 1.05 million, official data showed.

Separately, US industrial production rose less than forecast in January, the Board of Governors of the Federal Reserve System confirmed today. Industrial production rose 0.2 percent in January after declining 0.3 percent the month before. The capacity utilization rate, which measures how fully companies are using their resources, declined 0.3 percentage points to 79.4 percent.

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Bank of England Votes Unanimously to Keeping Interest Rates Low

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Lawmakers at the Bank of England voted unanimously to keep interest rates at a record low at this month’s policy meetings, although signs of division re-emerged about the outlook on monetary policy.

The BOE voted 9-0 in favour of keeping interest rates at a record-low of 0.5 percent and the size of the asset purchase facility at £375 billion, the minutes of the February 4-5 Committee policy meetings revealed today.

“In the light of that aim, and the Committee’s latest set of economic projections, all Committee members agreed that it was appropriate to leave the stance of monetary policy unchanged at this meeting,” the minutes revealed. “Given the outlook for inflation beyond the short term, there could well be a case for an increase in Bank Rate later this year.”

Although policymakers did not rule out a rate increase this year, one member did indicate that the Bank’s next move could be to loosen monetary policy rather than tighten it. Those sentiments were reflected last week after the BOE raised the possibility of cutting interest rates in light of plunging inflation.

BOE Governor Mark Carney expects inflation to fall below zero in the short term before rebounding in the next two years. Britain’s annual inflation rate fell to 0.3 percent in January, the lowest level since record keeping began in 1989, stemming from lower gasoline and food prices. This is a welcome sign for cash-strapped consumers, who have struggled with stubbornly low earnings growth for much of the recovery.

Signs of wage growth have reappeared in recent months. Average earnings including bonus rose 2.1 percent annually in the three months through December, outstripping inflation by the widest margin since 2008, the Office for National Statistics reported today. Economists forecast an increase of 1.7 percent after wage growth averaged 1.8 percent in the three months through November.

Excluding bonuses, average earnings rose 1.7 percent annually between October and December, slightly below November’s 1.7 percent pace.

The UK labour market continued to improve at the end of last year, with the unemployment rate falling from 5.8 percent to 5.7 percent in the three months through December. Jobless benefits, which are a narrower measure of unemployment, declined by 38,600 to 823,000 in January, compared to a median estimate calling for a 25,000 drop.

The BOE expects unemployment to fall further over the forecast period, as the labour market gradually returns to full capacity.

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Eurozone Finance Ministers Resume Greece Bailout Talks as EU Deadline Approaches

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The financial markets were on edge on Tuesday, as the pressure mounted on Eurozone finance ministers to reach an agreement over Greece’s loan program.

Greek and Eurozone finance ministers resumed talks in Brussels on Tuesday, where a war of words between Greece and Germany escalated, stoking concerns both sides were still far apart on a settlement. The European Union has given Greece until the end of the week to extend its current bailout program or risk losing financial aid. Athens has vowed not to extend the current bailout program and is seeking a six-month bridging loan to finance essential government activities. Greece’s €240 billion bailout program is due to expire on February 28.
Greece’s newly elected Prime Minister Alexis Tsipras said on Tuesday his government would give in to “blackmail” and would instead begin to enact new laws to reverse the bailout conditions. Tsipras told his Syriza party that the government would not compromise with Greece’s troika of lenders.

“We are not in a hurry and we will not compromise,” Tsipras told his far-left party’s lawmakers.

He added, “We are working hard for an honest and mutually beneficial deal, a deal without austerity, without the bailout which has destroyed Greece in recent years, a deal without the toxic presence of the troika.”

German finance minister Wolfgang Schaeuble reiterated his take-it-or-leave-it message, putting the pressure squarely on Athens to extend the troika’s loan program.

“The question still remains if Greece wants a program at all or not,” Schaeuble told reporters in Brussels after a second day of meetings.

Dutch finance minister and Eurogroup president Joroen Dijsselbloem echoed Shaeuble’s words and insisted that Athens seek an extension.

“It’s really up to the Greeks. We cannot make them or ask them,” he stated.

While the prospects of an agreement remain dim, the European Central Bank is not expected to cut off funding to cash-strapped Greek banks this week, according to sources. The ECB insists that Greece will remain part of the euro.

The euro rebounded on Tuesday, as investors disregarded the latest collapse in Greece bailout talks after German investor sentiment reached a 12-month high in February. ZEW’s economic sentiment index climbed 4.6 points to 53.0, as the current situation sub-index more than doubled to 45.5.

The EUR/USD climbed to an intraday high of 1.1445 on Tuesday. It would subsequently consolidate at 1.1394, advancing 0.45 percent.

The euro also rebounded against the British pound, as the EUR/GBP rose 0.54 percent to 0.7426.

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GBP/USD Edges Lower amid Plunging UK Inflation

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Cross Rates, currencies and Exchange

The British pound edged lower against the US dollar on Tuesday, as UK inflation fell to its lowest level since 1989, although core inflation reassured investors Britain was not facing any systemic price collapse.

The GBP/USD tumbled 0.25 percent to 1.5321. The pair is testing initial support at 1.5320. A break below this level exposes 1.5277, followed by 1.5216. On the upside, initial resistance is likely found at 1.5424, followed by 1.5485 and 1.5528.

In economic data, UK consumer prices declined more than forecast in January, stemming from cheaper energy and food costs. Monthly CPI plunged 0.9 percent, the Office for National Statistics said on Tuesday. In annual terms, UK inflation was 0.3 percent in January, the lowest level since record keeping began in 1989.

Core inflation, which strips away volatile goods such as food and energy, advanced at an annual rate of 1.4 percent, the highest level in three months and reassuring investors Britain was not succumbing to Japan-style deflation. The steady rise in core inflation also removed doubts the Bank of England would delay raising interest rates this year. The latest fall in consumer prices is in line with the BOE’s forecast. According to central bank Governor Mark Carney, consumer prices will probably fall below zero before making their long climb back to target levels in the next two years.

In US data, homebuilder confidence weakened unexpectedly in February, as heavy snowfall throughout much of the United States weighed on home sales and buyer traffic. The National Association of Home Builders’ housing market index declined two points to 55 in February, compared with forecasts calling for a one point increase. A reading above 50 means home builders are generally optimistic about housing market conditions.

Despite the downtick, housing market conditions are likely to improve in the coming months, as more plentiful jobs and declining mortgage rates boost home sales. The US economy added 257,000 nonfarm payrolls in January, marking the 12th consecutive month employers added more than 200,000 jobs.

“For the past eight months, confidence levels have held in the mid- to upper 50s range, which is consistent with a modest, ongoing recovery,” said NAHB chief economist David Crowe. “Solid job growth, affordable home prices and historically low mortgage rates should help unleash growing pent-up demand and keep the housing market moving forward in the year ahead.”

The Department of Commerce will report on US housing starts and building permits on Wednesday.

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EUR/USD Loses 1.14 Handle as Eurogroup Talks Yield No Results

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The euro declined against its US counterpart Monday after Greek and Eurozone finance ministers were unable to reach an agreement about Greece’s bailout program, fuelling concerns the Hellenic republic was edging closer to exiting the currency zone.

The EUR/USD tumbled nearly 80 pips to an intraday low of 1.1319. It would subsequently consolidate at 1.1342, declining 0.45 percent. The pair is testing the initial support at 1.1344. A break below that level would send the pair below the 1.13 mark. On the upside, initial resistance is likely found at 1.1435.

European finance ministers met in Brussels on Monday to negotiate Greece’s debt obligations. Negotiations fell through last week after both sides failed to reach common ground. Under the authority of newly elected Prime Minister Alexis Tsipras, Athens is seeking to restructure its massive €240 billion bailout package, which includes a bridging loan to fund the cash-strapped government over the next six months. Greek finance minister Yanis Varoufakis has stated that, unlike the existing bailout program, Greece would not accept demands for economic reforms attached to any bridging loan, and would only negotiate these terms after Greece’s public finances got some relief.

Monday’s meetings were unsuccessful, according to a Greek government official. Athens reportedly has only three weeks of cash left, placing added pressure on the country’s cash-strapped banks. Additionally, the European Central Bank will continue to offer emergency assistance only if it is tied to the existing bailout deal, which expires at the end of the month.

Varoufakis has remained defiant throughout the negotiations, having recently published a scathing op-ed in The New York Times titled “No Time for Games in Europe.”

“The lines that we have presented as red will not be crossed. Otherwise, they would not be truly red, but merely a bluff,” Varoufakis wrote in an op-ed that was published on February 16.

He added, “No more loans – not until we have a credible plan for growing the economy in order to repay those loans, help the middle class get back on its feet and address the hideous humanitarian crisis.”

Greece’s GDP has declined 25 percent since the Great Recession. The economy contracted in the fourth quarter of last year after posting three consecutive quarters of growth. The unemployment rate remained at 25.8 percent in November, Elstat reported last week. That’s a slight improvement over November 2013 levels, when unemployment was 27.7 percent.

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Housing Data, FOMC Minutes to Drive US Dollar This Week

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Dollar, USD and American Market

The US dollar was little changed against a basket of currencies on Monday, as American traders paused to observe President’s Day. The greenback could face significant action this week, led by a slew of housing data and the minutes of the January 27-8 FOMC policy meetings.

The US dollar index, a weighted average of the greenback against a basket of six currencies, dipped 0.07 percent to 94.14. The dollar index tumbled sharply last Thursday following disappointing US retail sales.

On the economic calendar, housing data take centre stage this week. On Tuesday the National Association of Home Builders will release the monthly housing market index, a gauge of homebuilder confidence. The housing market index is expected to rise one point to 58 in February, nearing September’s nine-year high of 59. A reading above 50 is a general sign of optimism about housing market conditions, whereas a reading below that level denotes pessimism.

On Wednesday the Department of Commerce will report on housing starts and building permits, key indicators of overall housing activity. Housing starts are forecast to decline 1.7 percent to a seasonally adjusted annual rate of 1.07 million in January. Housing starts had rebounded sharply in December, rounding out the strongest year since 2007. Building permits are forecast to rise 2.7 percent in February, according to a median estimate of economists.

In addition to housing figures, the US government will release industrial production and producer inflation data on Wednesday.

Industrial production is forecast to rebound 0.3 percent in January after slipping 0.1 percent in December. The capacity utilization rate is forecast to rise to 79.9 percent from 79.7 percent.

The producer price index, which gauges inflation in primary markets, is forecast to fall 0.4 percent in January following a 0.3 percent drop the previous month. Excluding food and energy, the PPI is forecast to rise 0.1 percent.

The Federal Reserve on Wednesday will also release the minutes of its January Federal Open Market Committee policy meetings. The Federal Reserve announced last month it would be patient in starting to raise interest rates, a sign policymakers would keep monetary policy highly accommodative for longer than initially expected.

“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy,” read the central bank’s January 28 statement.

The Fed added, “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

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Greece, Troika Resume Talks Following Eurogroup Breakdown

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Financila Market, Frankfurt

Greece and its Troika of international lenders resumed talks on Friday after the Hellenic Republic failed to reach an agreement with its European partners at Wednesday’s ministerial meetings.

Talks between Greece and Eurozone finance ministers broke down on Wednesday after both sides failed to reach a political agreement on how to keep Greece financed past February. According to Eurogroup President Jeroen Dijsselbloem, no “common ground” was reached that would allow both sides to move forward.

“We need a political decision before the financial institutions can get to work. We might make the final progress we need at next Monday’s Eurogroup meeting,” Dijsselbloem said after Wednesday’s Eurogroup meetings.

The newly appointed Greek government headed by Alexis Tsipras has vowed to renegotiate his country’s €240 billion bailout plan and put an end to “cruel” austerity. His far-left Syriza party successfully campaigned on the platform of “anti-austerity,” promising its voters to raise the minimum and cut taxes. Syriza secured 149 of 300 seats in the Hellenic Parliament in January’s snap elections.

Monday’s ministerial meetings could be the last moment for the newly elected Greek government to ask for an extension of the current bailout program, which expires February 28. Mr. Tsipras said on Monday his country would not seek an extension of the current bailout, but would instead focus on finding a new agreement. Given the breakdown in talks on Wednesday, the Greek government may seek a “technical” extension to shore up support for broader reforms in the future. Sources close to the talks suggest Greece could ask for a longer bridge loan through August to cover the government’s immediate funding needs.

Despite suffering an immense economic collapse during the Great Recession, Greece is still part of the Eurozone’s long term plan, a sign European lawmakers are willing to consider relaxing some of the bailout terms. Greece’s exit from the Eurozone, it is feared, could trigger a mass exodus from the fledgling currency union.

In economic data, Greece’s economy shrank once again in the fourth quarter, official data revealed today. Greece’s gross domestic product declined 0.2 percent quarter-on-quarter, following an increase of 0.7 percent in the July to September period.

Meanwhile, the Eurozone economy expanded 0.3 percent in the fourth quarter, following a 0.2 percent increase in the second quarter. A median estimate of economists called for an increase of 0.2 percent. In annualized terms, Eurozone GDP expanded 0.9 percent, official data showed.

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EUR/USD Edges Higher Amid Greek Bailout Talks, Disappointing US Data

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The EUR/USD advanced for a second consecutive day on Friday as Greece resumed talks with its Troika of creditors, while the US dollar continued to retreat following disappointing retail sales data.

The EUR/USD climbed 0.12 percent to 1.1413, easing off an earlier high of 1.1445. The pair is pacing toward a weekly gain of 0.75 percent. Near-term support is likely found at 1.1325. On the upside, initial resistance is likely found at 1.1461. A break above this level would expose 1.15.

Talks between Greece and its international creditors resumed on Friday in an effort to keep the country financed after February 28, the deadline for the current bailout program. Eurozone finance ministers will hold a second round of talks on Monday. Negotiations broke down earlier this week after Greece and its Eurozone counterparts failed to establish common ground on a new agreement.

Meanwhile, a fresh wave of violence broke out in eastern Ukraine after European leaders agreed to a peace deal in Minsk earlier this week, as rebel forces and Ukrainian troops fought for control over the strategic town of Debaltseve.

Growing instability in Ukraine could dampen near-term support for the euro and other “riskier” assets, as investors opt for the security of safe-haven assets like gold and the Japanese yen.

In economic data, Eurozone GDP rose faster than forecast in the fourth quarter, generating cautious optimism about the region’s nascent recovery. Eurozone GDP rose 0.3 percent quarter-on-quarter and 0.9 percent annually, official data showed. The gains were spearheaded by Germany, which rebounded sharply in the fourth quarter, growing at an annual rate of 1.6 percent.

The struggling Greek economy contracted in the fourth quarter, declining 0.2 percent.

Meanwhile, US data continued to disappoint on Friday, as consumer confidence tumbled from January’s 11-year high. The Thomson Reuters/University of Michigan consumer sentiment index dipped to 93.6 in February from 98.1 in January. A median estimate of economists called for no change.

American consumers are concerned about rising oil prices and were generally less upbeat about the labour market after hearing about layoffs in the oil and gas sector. Consumers’ appraisal of the current situation declined to 103.1 from 109.3, while the barometer of future expectations decreased to 87.5 from 91.

The greenback was generally weaker across the board on Friday. The US dollar index declined further to 94.04, falling 0.05 percent. The index is down 1 point from Wednesday’s high of 95.09.

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A Trader’s Guide to Futures Part 1

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Forex Traders Chart

A future is a derivative contract in which two parties agree to make a specified transaction at a particular date in the future. Buying a futures contract forms an agreement under which the investor agree to buy the underlying asset at a future date. Selling a future means taking the opposite side of that trade.
This guide is written as a general overview of the world of futures for those interested in exploring the market. Likely the most important piece of the derivatives market, the futures market offers a low cost way to bet on price changes, to hedge against those changes and to access asset markets without geographic or chronological limit.

Because of the intense multiplicity of futures contracts, it will be impossible to study any of them in any detail in this guide. Instead, reading on will offer you a broad glimpse of what futures are exactly, how they affect the market and under what circumstances they can be useful, or profitable, for investors.

The first part of the guide will concentrate on what futures are exactly, and why they differ from the more talked about financial instruments.

What are Futures?
Futures are, at their most simple, contracts selling goods that have not yet been produced. A farmer may decide to sell his entire crop production before realizing it, in order to get cash up front. In order to do this, it will have to be sold at a lower value than the expected yield. If a contract is struck, cash changes hands on Day 1, while crops don’t change hands until the agreed delivery date. The buyer of the contract takes on all of the risk of the transaction.

This is, in fact, the exact situation under which the futures contracts of today evolved. A farmer’s cash supply is extremely limited throughout the year, and futures allowed financial planning based on an agreed price for crops, and a way to ensure cash-flow if major expenses should come up.

Grain is still heavily traded through futures contracts, and farmers still face the exact same problems they did a century ago. Many other assets have been added to the market, however, from the obvious commodities, like fruit, vegetables, beef and oil, to the more abstract, like bonds, company stock and other derivatives.

A future is a type of derivative, meaning that it is a contract that refers to an actual asset. Its price moves with the underlying asset, in this case grain, but the actual asset isn’t traded or directly connected to the contract. There is no specific ton of corn that must be delivered on the expiry date.

The important difference between the grain contract struck by the farmer and today’s futures is that today’s instruments can be traded openly. The futures market is very liquid in most cases, allowing you to buy and sell contracts without having to worry about storing a ton of grain.

Leverage and futures
Leverage means debt, and one of the most powerful features of futures contracts is the ability to pay for them in part, leaving the balance of payment outstanding until some future date, often the same as the expiration of the contract. A short example will illuminate the power of leverage while giving an insight into the workings of a futures contract.

Day One: a contract is struck putting the price of a ton of grain at $100. The Buyer, or Investor, agrees to pay the Seller, or Farmer, $10 upfront and the remainder on the Expiry Date, or harvest.

If the weather is worse than expected and the price of grain jumps to $110 per ton a few weeks later, the buyer will be able to sell the contract for that amount, less the $90 outstanding, and make a $10 profit. With the contract sold, he has no more obligation to the farmer so the total investment was $10.

Leverage allowed the investor to make a 100% return. The margin on this investment was 10% allowing a multiple of 10 on all returns. If the margin was 5% it would have allowed a multiple of 20, but both buyer and seller would have to agree to the margin. In practice, margins on futures are decided on by the brokerages that sell them for the most part.

Astute observers will have noticed that if the price of grain fell, let’s say to $90, on the above contract, the Investor would have lost his entire investment. If it had fallen even lower, the Investor would have been forced to pay out more than he invested in the first place. This is called a margin call, and it is what makes leverage such a powerful and risky tool for investors.

Futures summary
-A future is a contract whereby the seller agrees to sell some asset to the buyer at a specified date.

-Futures can be traded openly at any time up to the expiration date, at which the difference must be settled.

-Futures can be leveraged, or bought on credit, meaning returns can be magnified and investors can lose more than they initially invested.

 

Related article:

A Trader’s Guide to Futures: Part 2

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Australian Dollar Loses Traction Ahead of Employment Figures

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The Australian dollar declined against its US counterpart Wednesday despite stronger than forecast consumer confidence and home loans figures, as the markets shifted their attention to Thursday’s employment report.

The Aussie fell back toward 77 cents US on Wednesday after attempting a re-test of the 78-cent level in the overnight session. The AUD/USD consolidated at 0.7705, declining 0.86 percent. The pair faces initial support at 0.7690 and resistance at 0.7826.

In economic data, Australia home loans rose faster than forecast in December, raising concern the country’s housing market was overheating. Home loans increased 2.7 percent in December, following a 0.4 percent drop the previous month, the Australian Bureau of Statistics reported Wednesday.

The value of investor loans rose 6 percent to a record AUD $12.56 billion, well above the average monthly increase of 2.6 percent over the last six months.

On Tuesday Westpac said Australian consumer confidence rose briskly in February, as falling energy prices lifted optimism about family finances and the overall economy. The consumer confidence index rose 8 percent to 100.7, a 13-month high.

The ABS will release January employment data on Thursday. The Australian economy added 37,400 total jobs in December, following a gain of 45,000 in November, rounding out the strongest two-month period of job creation in eight years. Full-time employment soared by 41,600 in December, while the unemployment rate dropped to 6.1 percent from 6.2 percent.

Despite a more robust job market, the Reserve Bank of Australia last week cut interest rates for the first time in 18 months, setting the stage for another rate cut in the next several months. The central bank also lowered its 2015 growth and inflation forecasts and said unemployment will rise, underscoring the need for more accommodative monetary policy.

According to the revised forecast, the Australian economy will expand between 1.75 percent and 2.75 percent this year, down from the previous estimate of between 2 percent and 3 percent. Consumer inflation is forecast to slow to 1.25 percent in the year through June.

The RBA has long held that the Australian dollar is overvalued, giving policymakers plenty of scope to drive down interest rates. The AUD/USD has declined nearly 6 percent since the start of the year and is expected to fall below 75 cents in the short-term. According to BlackRock, the world’s largest asset manager, the Aussie will bottom out below 70 cents US in the first half of 2015.

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USD/CAD Loses NFP-Inspired Rally amid Higher Energy Prices

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Dollar, USD and American Market

The North American currency pair back was on its heels Monday, as rebounding energy prices and better than expected Canadian housing starts supported the Canadian dollar.

The USD/CAD declined more than half a percent to 1.2454. Initial support is likely found at 1.2417 and resistance at 1.2589.

The pair rebounded on Friday after the United States Department of Labor said nonfarm payrolls rose by 257,000 in January, following upwardly revised gains of 429,000 and 329,000 in November and December, respectively. The unemployment rate edged up slightly to 5.7 percent from 5.6 percent as more people entered the workforce, while average earnings rose at the fastest rate in six years.

The stronger than forecast report sent the US dollar surging and supported expectations the Federal Reserve could signal for higher interest rates by midyear. Speculation about a midyear rate hike had cooled in recent months amid sluggish domestic growth and global volatility.

The loonie received a boost on Monday after the Canadian Mortgage and Housing Corporation reported stronger than forecast housing starts in January. Canadian housing starts rose to a seasonally adjusted annual rate of 187,300 in January, up from 177,600 in December and compared with expectations for 177,500.

Rebounding energy prices also helped shore up the Canadian dollar. Crude prices advanced for a third day, as West Texas Intermediate for March delivery rose $1.46 to $53.15 a barrel. Global benchmark Brent crude jumped 43 cents to $58.23 a barrel.

The USD/CAD faces further upside in the short- and medium-terms, as the market continue to price in a much lower Canadian dollar. The loonie’s prospects have been shattered over the last seven months, in part by declining commodity prices but also because of a weaker domestic economy. Canada’s gross domestic product is expected to increase just 1.5 percent in the year through June, according to the Bank of Canada’s said last month. That’s nearly 1 full percentage point below the Bank’s previous forecast.

The BOC joined a growing list of central banks to cut interest rates in January. The Bank reduced its target for the overnight rate by 25 basis points to 0.75 percent. That was the first rate adjustment since September 2010. According to analysts, the BOC could slash interest rates by another 25 basis points by midyear to cope with weak energy prices and deflationary pressures.

Canadian consumer prices declined 0.7 percent in January, as annual inflation slowed to 1.5 percent from 2 percent.

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