Profitsee – Future Economic Surivival

Divinations in Forex, Commodities and Economic Patterns

Eastern European Insolvency Risk & Treasury Purchases

From Scotia Capital Global Research

The signs of easing tensions in markets yesterday have followed through today and shown an even greater propensity in that direction as the USD is being sold against not only the European currencies, but all majors. Equities are firmer and we should get a good positive open once North America comes online. The worry over Eastern European financial stability has constituted the major force driving trading patterns of late, and yesterday’s rebound has continued into today, bolstered by the increased sentiment in the market that support from either the West, international organizations, or both will come should it be required. This has provided
the backdrop justification for the across the board USD selling, however, the cost of insuring against the sovereign default of Hungary, the Czech Republic, Poland or Slovakia still remain extremely elevated. This shows that even though we see some definite improvement in sentiment, we still remain in a high risk period for these countries (and currencies) and an event driven reversal in the easing of market
pressures on HUF, CZK and PLN could easily ensue before the West has an opportunity to put in place emergency support mechanisms for their Eastern neighbours.
In the US, President Obama’s aid to struggling homeowners is also helping market sentiment via announced measures to lighten the burden of mortgages through reductions in monthly payments and more favourable refinancing opportunities.
This should help to put a floor under prices somewhat as it eases the amount of liquidations of foreclosed properties, and the lighter burden of monthly costs may also help to do something to prevent consumption from slipping into a worst case scenario.

The release of yesterday’s minutes from the last FOMC meeting proved to be interesting but not all that market moving as the details were revealed in the lead up to the release. The Fed lowered its growth outlook, with the “central tendency” for real GDP growth now at -1.3% to -0.5% this year and rebounding to 2.5% to 3.3% in 2010. Employment is expected to peak out around somewhere just south of 8%, but not return to 5% until at least 2012. As we know, the Fed is concerned with the potential that inflation stays subdued for much longer than is consistent with their goals (hence the extensive and extreme monetary policy measures up to this point), which may be why Mr. Bernanke has decided to introduce longer
run forecasts for inflation (as well as growth and unemployment). This is to be interpreted as the FOMC’s views on the longer term rate of price increase that is consistent with the Fed’s dual mandate and is something of a substitute for an official inflation target. These forecasts should serve to help anchor inflation expectations in the economy, and fight deflationary expectations as well, though being
somewhat weaker than an official target because they remain only forecasts and not an official goal. This is evident as we see the variation on the central tendency for the longer run inflation forecast running from 1.7% to 2.0%, with the lowest forecast at 1.5%. This will however help to ease worries that the Fed is not concerned with the longer term monetary implications of their measures, a worry amongst the market
that could eventually spur significant USD selling. As expected, the potential for purchases of Treasury securities still remains a debated topic at the Fed and we will have to wait and see what future communications bring as to the ultimate likelihood of this policy being enacted.USDCAD is moving to the downside as general USD selling has helped the Canadian dollar gain ground, up 0.8% at the moment. However, outside of JPY and CHF, CAD is behind the rest of the majors, despite its gain against the dollar. The price action has turned much more neutral on the pair, but some downward pressure is becoming evident after a failure to break January highs. Still, one may suspect that in the absence of the current general USD selling, we would see more sideways price action in the pair, rather than the stronger downward tendency being exhibited over the past 24 hours. While we see Canadian leading indicators today, more focus will be on tomorrow’s January CPI data as expectations are for monthly declines in core and headline, to bring the y/y pace of decline to 2.2% and 1.1% respectively. Unless we see some kind of strong upside surprise (which is pretty unthinkable at this point), it is likely that Mr. Carney’s focus for monetary policy is going to be much more geared to the dim unemployment and growth outlook.


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