The One Trillion Dollar EU/IMF fund (more on that below), Gold at record highs, violent moves in stocks, and where Lebron James will be playing next year... those were pretty much the big stories US traders were talking about last week. The fact that the NBA playoffs and Lebron James' future became more important to traders than the EU/IMF news illustrates just how little faith traders have in the EU and that they pretty much are in sell Euro mode.
This sentiment has greatly benefitted the dollar, as with any seemingly negative news, Forex traders are jumping into the dollar first and asking questions later. The result is a Dollar Index which is at its highest levels since April of 2009. Also helping the dollar are US economic numbers that continue to show a steady recovery taking place. Last week, traders were enthused by the Trade Balance figure which showed a 3.4% rise in exports.
Looking ahead, traders will be awaiting Wednesday's CPI and FOMC Minutes results. If there is anything that could derail the current move in the dollar, it will be worries of rising US inflation and passive monetary comments from the FOMC. Nonetheless, until traders become more comfortable with the EU and UK, the dollar may continue to rally, and new records in Gold will be hit.
One Trillion Dollars! No, that wasn't Doctor Evil and Mini Me's financial demand for holding the world hostage, but the sum total of a new EU and IMF plan to bring stability back to the Euro zone and the euro. It was the largest plan that the IMF has ever been involved with, and unlike previous IMF packages that centered on stabilizing a country's economy after its currency devalued, this time their aim is much more ambitious as they hope to support the euro.
On the news, the EURUSD opened much higher last week, but then traded back down to the 1.2500 level. Although the plan, along with a coordinated effort form worldwide central banks to buy bonds, did stabilize Euro zone debt yields, Forex traders remain unimpressed. The consensus view is that the plan is more of a band-aid than a solution and fails to deal with the big issue - cutting government spending. Also, with so many euros slated to be entered into the market, inflation may be inevitable. Nonetheless, proponents of the plan cite the fact that Greece, Spain and Portugal are implementing austerity measures. Also, without the overhang of rising sovereign debt yields, Eurozone countries will be able to spend more time managing their economies.
In only five days, the Conservative party was able to put together a coalition and the UK now has a new Prime Minister in David Cameron. This was great news and the pound was expected to rally all week. However, a small wrinkle in the plan surfaced... the Bank of England's Inflation Report. The report laid out a negative outlook towards the UK's economic recovery and was even accompanied by BoE Governor Mervyn King stating that the central bank may resume quantitative easing.
AHH Not Again! screamed the market, and down went the pound to new 2010 lows. So what was supposed to be a week of optimism for the UK following the creation of a new government has become an atmosphere of worry and fear in the Forex markets.
Nonetheless, we start a new week and a fresh slate of economic reports. Topping the list are Tuesday's CPI and Thursday's Retail Sales numbers. If CPI results are better than expected, it may indicate that traders overreacted to last week's Inflation Report (and could boost the pound). Also, the Retail Sales numbers may lead to further pound buying if they reveal that the consumer spending growth is taking place.
For such a volatile week in trading the moves in the yen were surprisingly mild. The USDJPY spent most of last week range-bound between 92.50 and 93.50. The yen hasn't been able to fully capitalize on its safe haven status of late, which has limited its moves higher. This may be due to the fact that Forex traders are becoming increasingly worried about countries with rising debt levels.
Japan has had recent success managing their debt, but it is in no way a guarantee that they won't be spared from the wrath of a credit rating downgrade.
Looking ahead, the Bank of Japan is holding their monthly MPC meeting. No changes are expected but Forex traders will be keying in on any statements about intervention, as the EURJPY has traded to multi-year lows.