Forex: US Empire State manufacturing index not as gloomy as numbers suggest – Capital Economics

FXstreet.com (Barcelona) - The fall in the US Empire State manufacturing index in September to a 3.5 year low of -10.4, from -5.9 in August, is probably overdoing some of the gloom. Nonetheless, industry is clearly struggling to cope with the overseas slowdown.

The headline index is derived from a separate question on general business conditions and is prone to swings in optimism/pessimism. A weighted average of the sub-indices, which mimics the way the ISM index is calculated, is a more robust indicator of actual trends. This average did fall, however, though from only from 0.0 to -1.0. That was largely due to a plunge in the new orders index, to -14.0 from -5.5, and a fall in the employment index, to +4.3 from +16.5.

According to the Analyst Team at Capital Economics, "That leaves this survey broadly consistent with the national ISM manufacturing index nudging down a touch in September, from August's 49.6. In other words, industrial output is hardly growing at all, but it is not plunging, as the headline index of the Empire State survey would appear to suggest."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

TABLE - Pakistan economic indicators - Sept 17

DAILY INDICATORS
    
                                 FRIDAY        PREVIOUS
 Floating Interbank Rate (Rs/$)  94.56/94.61   94.57/94.62
 Rupee/US$ (kerb market)         94.70/94.90   94.60/94.85
 Karachi 100-share index         15,449.60     15,306.51
 Gold (Karachi) Rs/10 gm         53,314        52,114
    
                CENTRAL BANK AUCTIONS
 
 Treasury bill auction results:                      
 Cut-off yield (pct) at auction on       Sept 5      Aug 17
 Three-months bills                      10.2748     10.4115
 Six-month bills                         10.3111     10.4442
 12-month bills                          10.3549     10.4894
 Pakistan Investment Bond (PIB) auction              
 results                                             
 Cut-off yield (pct) at auction on       Aug 15      July 18
 11.25 percent coupon, three-year PIB    11.2994     12.6680
 11.50 percent coupon, five-year PIB     11.6990     13.0717
 11.75 percent coupon, seven-year PIB    -------     -------
 12.00 percent coupon, 10-year PIB       12.0487     13.3296
 12.50 percent coupon, 15-year PIB       -------     -------
 13.00 percent coupon, 20-Year PIB       No Bids     13.3503
                                         Received    
 13.75 percent coupon, 30-year PIB       -------     -------
    
                  WEEKLY INDICATORS
     
 Week ending                       Sept 7       Aug 31
 Total liquid frx reserves        $14.828 bln  $14.821 bln
 Forex held by central bank       $10.432 bln  $10.394 bln
 Forex held by commercial banks    $4.396 bln   $4.427 bln
    
                  MONTHLY INDICATORS
     
                                LAST          PVS
 Consumer price index   Aug     n/a           n/a
 Change mth/mth (pct)   Aug     0.9           0.2
 Change yr/yr (pct)     Aug     9.1           9.60
 Wholesale price index  Aug     n/a           n/a
 Change mth/mth (pct)   Aug     1.0           0.4
 Change yr/yr (pct)     Aug     7.7           7.2
 Trade Balance          July    $-1.605 bln   $-1.838 bln
 Exports                July    $2.057 bln    $2.141 bln
 Imports                July    $3.662 bln    $3.979 bln
    
                  ANNUAL INDICATORS
 
 FISCAL YEAR                         2011/12       2010/11
 Population (millions)               *178.91       175.31
 Per capita income                   $1,372        $1,258
 External debt (billion dlr)         *$65.753      $66.457
 Total F.debt as pct of GDP          n/a           n/a
 Domestic debt (billion rupees)      *7,880        *7.726
 Total domestic debt as pct of GDP   n/a           n/a
 Gross domestic product growth       *3.7 pct      3.0 pct
 Manufacturing sector growth         *3.6 pct      3.1 pct
 Services sector growth              *4.0 pct      4.4 pct
 Agricultural sector growth          *3.1 pct      2.4 pct
 Commodity producing sector growth   *3.3 pct      1.5 pct
 Average consumer price inflation    *10.8 pct     n/a
 Fiscal deficit (pct of GDP)         *5.0 pct      5.5 pct
 Trade balance (FBS July-June)       $-21.271 bln  $-15.604 bln
 Exports                             $23.641 bln   $24.810 bln
 Imports                             $44.912 bln   $40.414 bln
 Current a/c balance                 $4.52 bln     $214 mln    
                                                   
  * = provisional
  SBP = State (central) Bank of Pakistan
  FBS = Federal Bureau of Statistics

FOREX-U.S. dollar hovers near 7-month low; euro gains

NEW YORK, Sept 17 (Reuters) - The dollar hovered near a seven-month low against major currencies o n M onday after the Federal Reserve's announcement of aggressive monetary easing last week dampened the outlook for the U.S. currency.

Some near-term recovery could be likely, however, given the dollar's 3 percent drop so far this month, which may have been too far, too fast. The move pushed the euro to a four-month high against the dollar and the yen to a seven-month high.

The Fed pledged last week to continue buying mortgage bonds until unemployment falls significantly. The aggressive move came a week after the European Central Bank unveiled a new bond-buying program to address the region's debt crisis.

"The outlook for the dollar has definitely been damaged by the policy actions by both central banks -- the Fed and the ECB," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The dollar index, which measures the U.S. unit's value against a basket of currencies, stood at 78.789, not far from the 78.601 set on Fr iday, a level last seen in late February.

The euro rose 0.2 percent to $1.3151 in volatile trading, having hit $1.3169 on Reuters data, the highest since early May and rebounding from a session low of $1.3082.

The common currency has gained 9 percent since hitting a two-year low around $1.2040 in July. Traders said some investors may be tempted to book some profits at current higher levels, though any pullback is expected to be limited.

"The euro is still likely to move a bit higher. The momentum is not over yet," said Steve Barrow, head of G10 currency research at Standard Bank.


"It may see a dip down toward $1.30 again but it won't go much below that," he said. "I would be more inclined to buy on dips than to sell on strength." He expects the euro to rise toward $1.3250-$1.3300 over the next week or so.

The euro also hit an eight-month high against the safe-haven Swiss franc at 1.21849 francs on EBS.
Markets are waiting to see if Spain will ask for help to tackle its debt. Some analysts said Madrid appeared to be paving the way for requesting such assistance after it said it would set clear deadlines for structural reforms by month-end.

The yen weakened broadly, with the euro rising 0.7 percent to 103.65 yen and the dollar gaining 0.6 percent to 78.84 yen, a one-week high.

The Japanese government last week lowered its growth outlook for the second month in a row, putting pressure on the central bank to ease monetary policy again, not least to weaken the yen. The Bank of Japan ends a two-day meeting on Wednesday.

The yen was hurt by the downgrade of Japan's economic outlook and "the view that the BOJ's next move could be further quantitative easing," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

"After the weekend, traders are beginning to position themselves for what might happen later this week."
Investors are also watching how Japanese authorities might respond to the yen's latest rise versus the dollar, sparked by the Fed's action. Market jitters about the potential for yen-selling intervention by Japanese authorities helped limit the dollar's drop last week.

US Session: Orders and Options Watch

EUR: Although the single currency rose again around New York opening and some offers at 1.3165-70 were filled, defensive offers are still noted at 1.3175-80 (related to 1.3180 barrier) and also ahead of next barrier at 1.3200 with more buy stop orders above there but fresh offers should emerge further out at 1.3240-50. On the downside, bids from various parties are lined up at 1.3080-90 with stops building up below 1.3075, more buying interests are tipped at 1.3050 and further out at 1.3020-30 with more stop orders building up below 1.2990-00.

GBP: The British pound moved higher again in New York morning and offers at 1.6255-60 were filled, however, offers from UK clearer are still noted at 1.6265-70 (for protection of 1.6275 barrier) and more defensive sell orders are likely to emerge ahead of 1.6300 with buy stop orders expected above there. On the downside, renewed buying interests should emerge around 1.6215-25 and further out at 1.6185-95, followed by larger buy orders located at 1.6145-55 with stops building up below 1.6130 and 1.6100.

CHF: The greenback met renewed selling interests just below indicated offers at 0.9300 and more selling interests are expected around 0.9340-50 with more stops placed above latter level, standing offers are tipped further out at 0.9390-00 and also at 0.9420-30 with stops building up above 0.9430 and 0.9450, followed by combination of offers and stops at 0.9480-90. On the downside, some light bids from Swiss names are reported at 0.9245-50 with some stops from short-term specs placed below 0.9240 but fresh demand from same names should emerge around 0.9220-30 with more stops placed below 0.9200.

JPY: Dollar has rallied after breaking 78.50 in part due to market rumors of possible monetary action by BOJ and offers at 78.65-70 were filled, however, selling interests from exporters are still noted at 78.95-00 with stop building up above 79.05-10 but more offers are tipped further out at 79.30-40. On the downside, bids are raised to 78.50 and also at 78.20-25 with some stops placed below 78.10-15, more bids are reported at 78.00 with some stops placed below 77.90-95 but fresh bids are tipped at 77.70-80 and also at 77.50, option defensive buy orders from semi-official names remain at 77.05-15 with stops placed below sizeable barrier at 77.00.

Rupee trims gains after RBI keeps rates on hold

MUMBAI: The rupee retreated from a four-month high hit earlier in the session on Monday after the central bank kept interest rates on hold, dashing some of the positive impact from the government's big bang reforms.

The Reserve Bank of India disappointed investors by keeping its key repo rate on hold, choosing instead to inject more liquidity by lowering the banks' cash reserve ratio by 25 basis points.

The decision cut some of the rupee's gains, although investors still greeted with optimism the measures announced by India on Thursday and Friday, which included raising diesel prices and steps to attract foreign direct investment.

"Overall there may be some disappointment after today's RBI announcement but I would still expect any rupee bounce to be sold into, particularly after the positive reforms announced around FDI and diesel prices etc," said Jonathan Cavenagh, currency strategist at Westpac Banking Corp.

"The market has been starved of good domestic news out of India for a long time, hence the positive sentiment in recent session can run further in our view."

At 1.25 p.m. local time, the rupee was at 54.03/04 per dollar, weakening sharply from a session high of 53.66 hit earlier in the session that had marked its strongest level since May 15.

Despite higher-than-expected August inflation data on Friday, some investors had hoped the RBI could cut rates as early as Monday given the central bank was believed to be on hold until the government acted on fiscal reforms.

Last week's actions failed to spur the RBI to act to boost India's flagging economic growth, but analysts still remained optimistic about the rupee's outlook.

The government's big bang reforms, including opening up the retail and aviation sectors to foreign direct investment, are expected to usher in flows from overseas, which should help narrow down the country's current account deficit, which hit a record $21.7 billion in the March quarter.

India's benchmark stock index rose to a new 14-monnth high earlier in the session before also giving up some of its gains.

Provisional exchange data showed foreign investors bought a net Rs 28.3 billion($520.08 million) in domestic stocks on Friday, their biggest single day purchase since July 3.

The government's long-awaited action comes shortly after the Federal Reserve announced a new asset purchase programme that could usher a period of global liquidity.

Analysts say both actions together could provide a major push to the beleaguered rupee, which has rallied as much as 3.2 percent against the dollar since its Thursday close but is still down around 12 per cent from levels seen last September.

"These reform moves are necessary to help reverse the drastic FDI contraction seen thus far this year into India," Nizam Idris and Teresa Lam, strategists at Macquarie Bank, said in a research note.

Macquarie advised investors to go long on the rupee versus the dollar, while HSBC BSE 0.24 % raised its rupee forecast to 52 to the dollar by-end December from 57 previously.

FOREX-Euro advances to 4-mth highs vs dollar on German ruling

* Dollar index falls to new four-month low * German court verdict underpins demand for riskier assets
*
More gains expected in anticipation of further Fed easing

The euro climbed to a four-month peak against the dollar on Wednesday after Germany's Constitutional Court approved the euro zone's new rescue fund and budget pact, mitigating concerns about the region's three-year-old debt crisis.

While the court approval was made under certain conditions, it was enough to lift market sentiment, boosting global stocks and reducing borrowing costs for Spain and Italy.

The euro climbed to $1.2936, its highest since mid-May, blowing past reported option barriers at $1.2900. The single euro zone currency has risen more than 7 percent since it hit a two-year low of around $1.2040 in July, boosted after the European Central Bank's pledge to do whatever it takes to preserve the currency.

More gains are expected if the Federal Reserve opts to implement further monetary easing on Thursday, leaving the euro with the potential to test the $1.30 level.

"The euro continues to be in steady favor as a series of events have proven to be supportive, including today's ruling by Germany's top constitutional court," said Samarjit Shankar, managing director of global strategy at BNY Mellon in Boston.

Germany's Constitutional court said on Wednesday the European Stability Mechanism could go ahead but with the condition that any German contribution above 190 billion euros would require prior approval by the lower house of parliament.

Positive momentum continued for the euro as well as higher-yielding currencies following the European Central Bank's unveiling of plans last week to lower the borrowing costs of indebted euro zone countries via bond purchases.

But analysts and traders still worried that the depth of the euro zone's debt problems could temper the euro's rise.

"It is now time to take stock. How much further can the Euro rally?," asked Jens Nordvig, head of G10 FX strategy at Nomura Securities in New York.

He believed that there would be fewer positive European catalysts from here on and said "the short-squeeze on the euro is now in its final phase, and we will be looking for fresh short opportunities."

Traders reported another options barrier at $1.2950 and cited chart resistance at the May 11 high of $1.2958. The euro traded well above a low of $1.2815 hit on caution just ahead of the court decision.

The euro was last up 0.4 percent versus the dollar at $1.2904.

It also rose to its highest in more than two months against the Japanese yen of 100.64 yen. In midday New York trading, it was at 100.44, yen, up 0.5 percent.

Currency markets showed little reaction to the killing of the U.S. ambassador to Libya and three other embassy staff on Wednesday, which pressured crude oil futures.

A potential source of disruption for the euro, however, is a general election in the Netherlands on Wednesday, though polls indicate radical anti-euro parties have lost the momentum they had just a month ago.

DOLLAR FALLS BEFORE FED The dollar fell to a four-month low against a basket of currencies before Thursday's Federal Reserve decision, with the dollar index dropping to 79.522.

BNY Mellon's flows data showed that the dollar was the most sold sold currency across the board on Wednesday, with sterling and the Canadian and New Zealand dollars the most bought.

The Fed looks set to launch a third round of bond purchases this week to try to drive borrowing costs lower and boost a flagging economy, especially after weak jobs data last week.

However, analysts said expectations for more QE were already high which may limit the currency's drop.

The dollar extended losses following a warning from Moody's on Tuesday that the United States could lose its triple-A debt rating if next year's government budget talks do not produce policies that gradually cut the country's debt.

The dollar also fell to a four-month low against the Swiss franc of 0.9337 franc, while the higher-yielding Australian dollar hit a three-week high of US$1.0507.

The Swiss National Bank is expected to keep its target range for the Swiss franc LIBOR unchanged and retain its cap on the euro/Swiss franc currency pair at 1.20 francs when it announces its monetary policy decision on Thursday.

The yen held near a 3-1/2-month high against the broadly weak dollar, trading at 77.88 per dollar. Focus on potential Fed action this week compared to a Bank of Japan viewed to be on the sidelines should keep pressure on the dollar for now.

MONEY MARKETS-European dlr funding costs cheapest in 15 months

A barometer of dollar funding risk reached its best levels in more than a year helped by the prospect of European Central Bank intervention but was seen stabilising from current levels.

The ECB's promise to buy bonds of struggling euro zone states, as well as expectations the Federal Reserve may soon embark in a third round of quantitative easing, has improved sentiment towards riskier assets generally, underpinning European stock markets and Italian and Spanish sovereign debt.

That backdrop has driven the STOXX Europe 600 banking index to its highest in nearly 6 months, reduced the perceived risk attached to owning debt issued by certain European banks and made it less costly for euro zone banks to access dollar funding.

The three-month euro/dollar currency basis swap , which shows the rate charged when swapping euro interest payments on an underlying asset into dollars, was at its tightest since June 2011.

"That is a proxy of European risk appetite and the narrowing in basis is a reflection of decreased tail risks following the ECB's new support measures " Simon Peck, rate strategist at RBS said.

"Today we have seen three-month euro/dollar cross currency basis move a further two basis points tighter as we have successfully navigated the German constitutional court vote on the legality of the ESM and ... another tail risk."

Spanish and Italian bonds rallied and German debt prices fell on Wednesday after Germany's top court gave the green light to the euro zone's new bailout fund, prompting relief the bloc's rescue plans remained on track..
The three-month euro/dollar currency basis swap narrowed to minus 25 basis points from minus 27 bps the day prior, having reached minus 160 bps in November last year when the euro zone debt crisis escalated.
RBS's Peck said there was limited scope for further tightening.

"The narrow levels at the moment are really (based) on happy outcomes for the likes of Spain and Greece but there remain very sizeable risks that we will not see such good outcomes," Ciaran O'Hagan, strategist at Societe Generale said.

Analysts say intervention will not provide a quick fix and some flag the inherent contradictions in the ECB's strategy.

For the central bank to intervene in the market, countries have to ask for a bailout first. But for Spain to seek financial help, it would have to be losing access to financial markets, meaning its borrowing costs would have to be at prohibitive levels, analysts say.

Spain's Prime Minister Mariano Rajoy suggested as much when he earlier said his government continues to study the price of seeking assistance but improved market conditions may make aid unnecessary.

The one-year euro/dollar currency basis swap was also at its narrowest since July 2011 at minus 29 bps, but one money market trader said he expected it to stabilise at around -25 bps given potential risks ahead.

"The whole feel-good factor has come back to markets," the trader said. "How long it will last, I am not 100 percent sure."

Dollar Gains Ground On Stronger US Economic Data

NEW YORK (Dow Jones)--The dollar's rally picked up steam Wednesday morning in New York, hitting a two-week high against the yen, after stronger U.S. economic data fueled bets the Federal Reserve will tighten monetary policy sooner than previously anticipated.
The dollar jumped to the highest level since Feb. 3 against the yen, rising as high as Y91.12. Demand for the greenback pushed the euro well below the $1.37 level, on the back of data that showed that U.S. housing starts in January climbed to the strongest level since July 2009, while industrial production beat analysts' estimates.
"The data show that the economy will rebound in the U.S. before it does in Europe and Japan," said Sebastien Galy, currency strategist at BNP Paribas in New York. Based on that stronger U.S. economic data, "the market is also making a bet that the Fed will tighten [monetary] policy before the [central banks] in Europe and Japan."
Rising U.S. Treasury yields, in the wake of the economic data, is also adding more pressure on the yen and the euro, making dollar-denominated assets more attractive, traders said. Yields on the 10-year U.S. Treasury notes rose 3.8 basis points to yield 3.706%.
Wednesday morning in New York, the euro was at $1.3707 from $1.3772 late Tuesday, according to EBS via CQG. The dollar was at Y90.98 from Y90.11, while the euro was at Y124.70 from Y124.08. The U.K. pound was at $1.5780 from $1.5787. The dollar was at CHF1.0708 from CHF1.0660.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 79.952 from 79.630.
U.S. January industrial production came in slightly better than expected as the factory sector paces the recovery. Production last month increased by 0.9%, with manufacturing up 1.0%. Economists had expected a 0.8% increase. December output was revised to 0.7%; originally, production was reported rising 0.6%.
Earlier, data showed U.S. housing starts climbed 2.8% to a seasonally adjusted 591,000 annual rate compared to the prior month, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires forecast a 5.9% increase in January housing starts, to an annual rate of 590,000. The pace of 591,000 was the strongest since July 2009.
Investors are now eyeing the release of the minutes from the last Federal Open Market Committee meeting, scheduled to be released at 2 p.m. EST.
The dissent vote in the last FOMC's rate-setting meeting "will be the focus" of investors' attention, said Kasper Kirkegaard, a currency analyst at Danske Bank in Copenhagen. However, Kirkegaard said it was unlikely to be "a market mover" event.
"We've already seen [Federal Reserve's chairman] Ben Bernanke outlining some of the Fed's thoughts about exit strategy, hence we do not expect many surprises from the minutes," he said.
Meanwhile, the Bank of England's Monetary Policy Committee was unanimous in its decision to suspend its bond-buying program in February, but for some members it was a close call, meeting minutes released Wednesday showed.
The MPC judged that "a case could be made" for extending its GBP200 billion quantitative easing policy of buying gilts with freshly created central bank money, and said it could extend it in future, if conditions warranted it.

Canada Morning 

The Canadian dollar was slightly lower Wednesday morning after stronger U.S. economic data triggered demand for the greenback.
"We do not think for one moment that the recent uncertainties that have spooked risk assets have disappeared permanently, but, for the moment, the lull in risk aversion should allow the Canadian dollar more room to explore the lower end of the recent trading range against the dollar," TD Securities strategists wrote in a note to clients. "The low 1.04 area has proven to be a source of support for the U.S. dollar in previous phases of softness."

FACTBOX-China, the U.S. Treasury's top foreign creditor

WASHINGTON, Feb 10 (Reuters) - Senior Chinese military officers have recommended Beijing "dump" some U.S. Treasury bonds to punish the Obama administration for Washington's latest round of planned arms sales to Taiwan.

Luo Yuan, a major general in the People's liberation Army, was quoted in an official publication saying bond sales could be part of a package of economic "counter punches" over the arms sales.
Speculation of how China might use its position as America's top foreign creditor to influence Washington has risen steadily as U.S. deficits have swelled and tensions grow over the restricted valuation of the yuan. Following are some key facts about China's Treasury and dollar asset holdings:
* China's holdings of U.S. Treasury debt dipped to $789.6 billion in November from $798.9 billion, a month-on-month decline of $9.3 billion or 1.1 percent. It remains the largest holder of Treasuries, ahead of Japan, which held $757.3 billion in November.
* China's holdings of Treasuries has nearly doubled in the last two years. Beijing held $421.1 billion in Treasuries in March 2007, before the financial crisis emerged, compared to Japan's $611.2 billion, which made it the largest Treasury debt holder at that time. China's Treasury holdings peaked at $801.5 billion in May 2009.
* China's foreign exchange reserves, the world's largest, rose $453 billion in 2009 to $2.4 trillion. While China does not provide a breakdown of its reserves holdings, analysts believe about two thirds is held in dollar assets. A move to punish the United States by selling Treasuries or other holdings would undoubtedly hurt the value of this stockpile.
* China has attributed about $71 billion of the 2009 reserve gains to changes in foreign exchange rates and rises in asset values, citing in particular gains in non-dollar assets. The State Administration of Foreign Exchange has said the appreciation of its non-dollar holdings "has definitely led to growth in outstanding foreign exchange reserves calculated in dollars." Chinese officials also had expressed concerns the dollar's decline last year was hurting its reserves value.
* China held $1.205 trillion worth of U.S. long-term and short term securities, including Treasuries, as of June 2008, according to the Treasury's latest annual data on foreign portfolio holdings. At the end of June 2008, China's forex reserves stood at $1.809 trillion, so the dollar portion stood at almost exactly two thirds at that time.
* China's first purchase of long-term U.S. Treasury bonds and notes from U.S. sources was recorded in March 1985, with gross purchases of $29 million and gross sales to U.S. investors of $11 million that month. China's monthly gross purchases topped $1 billion for the first time in May 1992 and topped $5 billion in September 1996. They exceeded $10 billion in January 2000 and $20 billion in August 2002, peaking at $40.47 billion in June 2009. That same month, China sold $13.85 billion in long-term Treasuries to U.S. investors.
* In November, China's gross long-term Treasury purchases were $28.45 billion with gross sales of $13.51 billion to U.S. investors. Total November purchases of U.S. Treasuries by all foreigners from U.S. sources totaled $1.194 trillion, while sales to U.S. residents were $1.076 trillion.

FACTBOX-China, the U.S. Treasury's top foreign creditor

WASHINGTON, Feb 10 (Reuters) - Senior Chinese military officers have recommended Beijing "dump" some U.S. Treasury bonds to punish the Obama administration for Washington's latest round of planned arms sales to Taiwan.
Luo Yuan, a major general in the People's liberation Army, was quoted in an official publication saying bond sales could be part of a package of economic "counter punches" over the arms sales.
Speculation of how China might use its position as America's top foreign creditor to influence Washington has risen steadily as U.S. deficits have swelled and tensions grow over the restricted valuation of the yuan. Following are some key facts about China's Treasury and dollar asset holdings:
* China's holdings of U.S. Treasury debt dipped to $789.6 billion in November from $798.9 billion, a month-on-month decline of $9.3 billion or 1.1 percent. It remains the largest holder of Treasuries, ahead of Japan, which held $757.3 billion in November.
* China's holdings of Treasuries has nearly doubled in the last two years. Beijing held $421.1 billion in Treasuries in March 2007, before the financial crisis emerged, compared to Japan's $611.2 billion, which made it the largest Treasury debt holder at that time. China's Treasury holdings peaked at $801.5 billion in May 2009.
* China's foreign exchange reserves, the world's largest, rose $453 billion in 2009 to $2.4 trillion. While China does not provide a breakdown of its reserves holdings, analysts believe about two thirds is held in dollar assets. A move to punish the United States by selling Treasuries or other holdings would undoubtedly hurt the value of this stockpile.
* China has attributed about $71 billion of the 2009 reserve gains to changes in foreign exchange rates and rises in asset values, citing in particular gains in non-dollar assets. The State Administration of Foreign Exchange has said the appreciation of its non-dollar holdings "has definitely led to growth in outstanding foreign exchange reserves calculated in dollars." Chinese officials also had expressed concerns the dollar's decline last year was hurting its reserves value.
* China held $1.205 trillion worth of U.S. long-term and short term securities, including Treasuries, as of June 2008, according to the Treasury's latest annual data on foreign portfolio holdings. At the end of June 2008, China's forex reserves stood at $1.809 trillion, so the dollar portion stood at almost exactly two thirds at that time.
* China's first purchase of long-term U.S. Treasury bonds and notes from U.S. sources was recorded in March 1985, with gross purchases of $29 million and gross sales to U.S. investors of $11 million that month. China's monthly gross purchases topped $1 billion for the first time in May 1992 and topped $5 billion in September 1996. They exceeded $10 billion in January 2000 and $20 billion in August 2002, peaking at $40.47 billion in June 2009. That same month, China sold $13.85 billion in long-term Treasuries to U.S. investors.
* In November, China's gross long-term Treasury purchases were $28.45 billion with gross sales of $13.51 billion to U.S. investors. Total November purchases of U.S. Treasuries by all foreigners from U.S. sources totaled $1.194 trillion, while sales to U.S. residents were $1.076 trillion.

Canada Bonds End Lower; Short End Underperforms Longer Issues

TORONTO (Dow Jones)--Canadian bonds ended lower Wednesday, with the short end of the yield curve selling off sharply along with U.S. Treasurys as comments from U.S. Federal Reserve Chairman Ben Bernanke incited speculation that the Fed could embark on monetary tightening earlier than previously expected.

1.50s 2012   100.33     dn     0.13  1.34% vs 1.28% 
   2.00s 2014    97.67     dn     0.33  2.52% vs 2.45% 
   3.75s 2019   102.50     dn     0.46  3.43% vs 3.38% 
   5.00s 2037   115.74     dn     0.68  4.04% vs 4.01% 
   10-Yr Spread to U.S. 10-Yr:    -27 vs -26 

"I would say all the action is Fed related today," said James Price, senior vice-president and director of fixed-income at MacQuarie Private Wealth.
In prepared testimony before the House Financial Services Committee, Bernanke suggested the rate paid to banks on excess reserves held at the central bank may for a time replace the Fed funds rate as the main operating target for policy.
As part of the Fed's plans to end its liquidity programs, Bernanke also said the central bank could "before long" increase the spread, or difference, between the discount rate it charges banks for emergency loans and the Fed funds rate.
"We initially had Bernanke speaking, saying there's a chance we might see the discount rate start to move higher, as opposed to the fed funds rate," said MacQuarie's Price.
"He almost immediately backtracked by saying this doesn't mean we're going to be in all-out-tightening mode. Nonetheless, he said it, and that had the short end underperforming right off the bat and the curve flattening," Price said.
A tepidly received auction of $25 billion of 10-year U.S. Treasury notes also weighed on North American bond markets Wednesday.
The Bank of Canada reported an average yield of 1.875% at an auction of C$3.2 billion (US$3.0 billion) of 1.75% non-callable government bonds due March 1, 2013.
With the issue of the new bonds, the outstanding total of 1.75% bonds due March 1, 2013, will be C$6.4 billion.
"To be honest, I think most people were watching the Treasury side of the equation more than the homegrown," said MacQuarie's Price. "Our supply is still relatively constricted compared to theirs, so the bearish talk we hear on the Street because of excessive Treasury supply doesn't necessarily apply to us."
The weakness in the front end of the yield curve resulted in significant flattening of the Canadian yield curve Wednesday, with the spread between two-year and 30-year bonds moving to 270 basis points from 274 Tuesday.
Price said he expects further flattening of the yield curve in response to the prospect of central bank tightening. The Bank of Canada, and, to a lesser extent, the U.S. Federal Reserve both have some room to tighten interest rates in the coming months, he said.
"I think they've got room to start lifting the short-term rates, or at least hinting that they're going to lift, and still be very accommodative," he said.
In domestic data on Wednesday, Canada's trade deficit widened to C$246 million (US$230 million) in December from an upwardly revised C$201 million the previous month. The market had expected a C$100 million deficit.
On Thursday, the new housing price index for December will be released.

Forex Review - Greece Again Rattles the Euro

written by: Ron Finberg , Trading Analyst

Today’s Action

Well, so much for yesterday’s rally. Once again Greece hits the headlines, as yesterday’s denial of a German assisted bailout is finally registered by the market. Nonetheless, some of the losses were pared after new French reports signaled help was on the way.
First, a recap of the numbers: (as of 20:30 GMT)
EURUSD : 1.3740 (-40 pips)
GBPUSD : 1.5588 (-116 pips)
AUDUSD : 0.8758 (-20 pips)
USDCAD : 1.0620 (-62 pips)
GOLD : 1070.00 (- $5.50)
CRUDE OIL : 74.50 (+ $0.50)
S&P 500 :1065 (-2.75 points)
What’s really going on?
Yesterday, we questioned whether yesterday’s risk appetite rally was anything more than a bounce combined with short covering. The answer came quickly as Forex traders wasted no time in a return to selling the euro. What today’s trading reveals is that Forex traders aren’t ready to move on, and are worried about the fallout that would occur if Greece would go bankrupt. On a side note, a CNBC interviewee had a grat quote about yesterday saying that Greece has been on the brink of economic collapse for the past 100 years, and they have always seemed to roll along.
Also occurring today were Trade Balance numbers from China, the US, and Canada. The US numbers showed a greater than expected deficit, but also revealed export growth. Dollar bulls used the growing export numbers as an excuse to buy dollars. As a result, the EURUSD traded down to a low of 1.3680, after being above 1.3800 yesterday.

Pound hit by BoE Inflation Report

The big loser today was the pound. The GBPUSD is down over 100 pips on the day to 1.5585, as the BoE’s inflation report appears to have convinced Forex traders that the BoE may reinstate its QE policies. The BoE’s outlook was for worse than expected UK growth in 2011 and low inflation levels. On the positive side (and this initially led to gains in the pound), BoE Governor Mervyn King believed that the UK will continue its gradual recovery and risks of another economic contraction appeared limited.
In the past, the BoE has had a habit of being conservative and attempting to lower market expectations. If so, the pound could be in line for an upside move, if we do in fact see better than expected economic numbers released.

Using Fibs in the Direction of the Daily Trend

Students Question:
I would enter at 1.3600, place a stop at 1.3400 and sell at 1.4000. Does this seem reasonable?


Instructor's Response:
Good work on the 1:2 Risk Reward Ratio.

While your understanding of Fibs is good and the Fib line that you have drawn is valid, the first point we as traders must take into consideration is the direction of the Daily trend and how to use Fib levels to get us into a trade in that direction.

The higher probability trade will be to wait for the current downtrend to bottom out and stall. Then draw a Fib line from the Swing High to the Swing low so we can identify a potential fib retracement level for a short entry on the pair.

Take a look at the second chart below for a visual...




After this current bearish move ends, using Fib levels, we would wait for the pair to retrace into the "sell zone" and stall at one of the Fib levels. Then a short position could be taken with a stop above the highest penetration of a Fib level by price.

Read more: DailyFX - Using Fibs in the Direction of the Daily Trend http://www.dailyfx.com/forex/education/trading_tips/post_of_the_day/2010-02-08-2354-Using_Fibs_in_the_Direction.html#ixzz0eznw2WNB

The Trend Trader For Forex Trading on Tuesday, February 9, 2010

The Trend Trader helps to identify the current trend status of your favorite forex markets. It not only helps us to stay on the right side of market direction, but also helps us avoid those without a trend. You can even use the grid as a spread matrix too - buying strength and selling weakness. Before you place your next trade, be sure to consult the Trend Trader.

The Trend Trader for Forex For Trading On Tuesday, February 9, 2010 Presented by the Pattern Trapper - PatternTrapper.com - 952-892-5550 Trend Trader readings are based on Daily Pivot calculations.  For a detailed explanation Click Here!     THE BIG SIX Close % Change 3x1 7x5 Minor Trend Major Trend Trend Reading  AUDUSD - Aust Dollar / US Dollar 0.8647 − 0.42 0.8672 0.8729 Bearish  EURUSD - Euro / US Dollar 1.3649 − 0.20 1.3704 1.3762 Bearish  GBPUSD - British Pound / US Dollar 1.5584 − 0.35 1.5683 1.5755 Bearish  USDCAD - US Dollar / Canadian Dollar 1.0757 + 0.45 1.0710 1.0678 Bullish  USDCHF - US Dollar / Swiss Franc 1.0732 + 0.08 1.0697 1.0671 Bullish  USDJPY - US Dollar / Japanese Yen 89.253 + 0.02 89.392 89.684 Bearish    ALL OTHERS  AUDCAD - Aust Dollar / Canadian Dollar 0.9299     0.00 0.9292 0.9334 Neutral  AUDCHF - Aust Dollar / Swiss Franc 0.9277 − 0.36 0.9280 0.9311 Bearish  AUDJPY - Aust Dollar / Japanese Yen 77.170 − 0.41 77.490 78.262 Bearish  AUDNZD - Aust Dollar / New Zealand $ 1.2655 + 0.55 1.2600 1.2552 Bullish  CADCHF - Canadian Dollar / Swiss Franc 0.9973 − 0.38 0.9982 0.9985 Bearish  CADJPY - Canadian Dollar / Japanese Yen 82.944 − 0.44 83.434 83.926 Bearish  CHFJPY - Swiss Franc / Japanese Yen 83.147 − 0.08 83.526 83.908 Bearish  EURAUD - Euro / Australian Dollar 1.5782 + 0.22 1.5800 1.5762 Neutral  EURCAD - Euro / Canadian Dollar 1.4679 + 0.24 1.4682 1.4709 Bearish  EURCHF - Euro / Swiss Franc 1.4649 − 0.12 1.4668 1.4678 Bearish  EURDKK - Euro / Danish Krone 7.4441 − 0.01 7.4445 7.4446 Bearish  EURGBP - Euro / British Pound 0.8756 + 0.13 0.8738 0.8731 Bullish  EURJPY - Euro / Japanese Yen 121.819 − 0.20 122.482 123.241 Bearish  EURNOK - Euro / Norwegian Krone 8.1654 − 0.19 8.1799 8.1815 Bearish  EURNZD - Euro / New Zealand Dollar 1.9975 + 0.72 1.9908 1.9815 Bullish  EURSEK - Euro / Swedish Krona 10.1550 − 0.21 10.1721 10.1611 Bearish  GBPAUD - British Pound / Aust Dollar 1.8020 + 0.07 1.8077 1.8055 Bearish  GBPCAD - British Pound / Canadian $ 1.6763 + 0.10 1.6799 1.6839 Bearish  GBPCHF - British Pound / Swiss Franc 1.6725 − 0.27 1.6796 1.6842 Bearish  GBPJPY - British Pound / Japanese Yen 139.094 − 0.35 140.127 141.026 Bearish  GBPNZD - British Pound / New Zealand $ 2.2805 + 0.61 2.2772 2.2673 Bullish  NZDCAD - New Zealand $ / Canadian $ 0.7344 − 0.48 0.7376 0.7417 Bearish  NZDCHF - New Zealand $ / Swiss Franc 0.7327 − 0.84 0.7362 0.7405 Bearish  NZDJPY - New Zealand $ / Japanese Yen 60.940 − 0.87 61.496 62.198 Bearish  NZDUSD - New Zealand $ / US Dollar 0.6828 − 0.94 0.6882 0.6950 Bearish  SGDJPY - Singapore Dollar/Japanese Yen 62.665 − 0.11 62.890 63.223 Bearish  USDDKK - US Dollar / Danish Krone 5.4535 + 0.21 5.4318 5.4097 Bullish  USDHKD - US Dollar / Hong Kong Dollar 7.7708 + 0.01 7.7702 7.7689 Bullish  USDNOK - US Dollar / Norwegian Krone 5.9814 + 0.02 5.9671 5.9439 Bullish  USDSEK - US Dollar / Swedish Krona 7.4405 + 0.01 7.4244 7.3798 Bullish  USDSGD - US Dollar / Singapore Dollar 1.4237 + 0.14 1.4207 1.4171 Bullish

Statement of disclaimer: This information was compiled from sources believed to be reliable, but its accuracy cannot be guaranteed. There is substantial risk of loss in trading futures, forex. ETFs, and stocks. There is no warranty, express or implied, in regards to the fitness of this information for any particular purpose. Past performance is not a guarantee of future results. All materials are copyright © 2010 by Bob Hunt. No part of these resources may be reproduced, stored or transmitted without the prior written permission of the copyright holder.