Looking for directions

A week of optimism and good news. Things looked alright. USD also played to the gallaries, strengthening against most currencies. Look at the flip side and you find that there is a spate of not so encouraging signals from economies elsewhere. UK housing stats ate disappointing, the German consumer confidence is low. ANZ reports not so encouraging results and forecast, Inflation is sky high in Japan, South East Asia, and climbing still all over. So, if the US is not coming out with comparative disappointing numbers, is it all OK? Maybe for the dollar. It has strengthened to the 1.57 mark against the Euro and has infact gone below briefly last week, probably triggering some of the stop losses. Against the Yen too, it has toyed with the 108 mark before settling in the vicinity.

My outlook for the two.....should stick to their resistances .....1.57 and 108 respectively while testing them time and again as I believe the worst is not yet over and for the fact that the implications of the sub prime will take some time to be erased globally.

Optimism rising

The positive vibes have started coming now. Oil has consolidated itself in the 128 area (Though one bad news and you can still see a 135 or odds). Financials are hoping now of scraping through with the small injuries of the past year. And as I had last stated, the chances of a Fed rate hike have really improved.

To quote one news article "Philadelphia Federal Reserve president Charles Plosser warned in a speech that a hike in US interest rates was unavoidable in the short-term in the face of inflation pressures. While Plosser is seen as one of the most hawkish members of the Fed's rate-setting committee, his remarks rekindled speculation about possible US rate hikes that could boost the dollar. The dollar also found support from US Treasury Secretary Henry Paulson, who reiterated Washington's preference for a strong currency and renewed his backing for troubled US mortgage finance giants Fannie Mae and Freddie Mac." Unquote.

That both the Yen and the Euro are still stuck in the ranges I mentioned yesterday, is to do with the fact that though the things have improved, market is still not overtly sure as to how long it will last. Remind yourself of the negative sentiments in the markets in the past one year, and you know why. Thus, expectations on the Yen doing a 108 plus seem bleak in the short run (by weekend) , though remaining weak near the 107 mark against the dollar seems a given. A similar story for the Euro, where chances of a rate hike in the near future are markedely lower than in the US. Expect the Euro to range in the 1.57 to 1.59 with a weak outlook against the greenback.

Looking Ahead

The Yen and the Euro marched yesterday towards my projections ( the Yen seems poised to test the 107 level again. A 105.50 to 107.50 range is in again with a bias on 107 plus later today. The Euro should try weakening to 1.5825 or so by the same time before losing some of its steam).

That the greenback lost the momentum is a story we have been seeing very often now. With not much development expected today, the forex market may also tend to be in a flux, oscillating in a narrow range. Fresh news from the US may be a precursor to a new trend, but I do not expect the Yen to do a 108 plus in the leftover portion of the week (and dare I say "month"). It may however range in a 104.5-107.5 with a bias towards strengthening to its comfort zone of 104-106 against the greenback. The euro should similarily keep to the 1.5750-1.5900 for most parts with a bias on 1.60 on occassions. The only blot in this picture may be talks of a rate hike in the US, which, with the current market sentiments, looks more real now.

The forex markets over the past six months that I have been noticing, are taking a cue mostly from the stock markets for their movements. Though there can be another school of thought that may say that forex is an offshoot of trade and as such, should be necessarily be taking cues from the stock markets, I would prefer more views on the same before further comments.

As of now, my view, forex is following the stock markets (more precisely, the US). And that is where I flunked on the Yen, cause if the US is on an upswing, the Yen should weaken. But then, so should the Euro. And herein comes my theory that the currency movements do not necessarily follow ONLY the stock market. There are other factors such as the interest rate, political, economic, BoP and such issues not only of the home country of the currency in question but also with respect to the trade with the base currency country.

Any ways, what is the past is the past. Looking ahead, the Yen seems poised to test the 107 level again. A 105.50 to 107.50 range is in again with a bias on 107 plus later today. The Euro should try weakening to 1.5825 or so by the same time before losing some of its steam.

Eyes on the Citi

Seems finally the good and the bad news are evening out. So for each bad news, you have a corresponding good one squaring it. Oil is below the psychological 130. JP Morgan has beat forecasts. Google on the other hand didnt have a good show. Merrill Lynch has reported a $9.7 billion of writedowns (including $3.5 billion in CDOs) for the quarter and a net loss of $4.65 billion. This on the back of news of Goldman Sachs, the biggest U.S. securities firm, reporting earnings of almost $2.1 billion for the three months ended May 30. Morgan Stanley, the industry's second-largest company, posting $1 billion of net income for the same period.

And now the whole world awaits the results of Citi. That any bad showing by Citi will not have much of an impact on the markets as it is already assumed so, any positives out of Citi's results will definately help the markets resurrect. Citigroup reports its quarterly results today.

The impact on the forex markets have been swift. Dollar suddenly seems to have come alive. But not for the long haul. Expect it to just readjust a little. Play between 1.57 to 1.59 with a bias on 1.59 for the Euro. W.r.t. Yen, It may move a little into the 105 to 107 range, with a bias on 105.50. The good news on Citi might give better clues to the market and the forex side too. Till then. Bye.

Correction? Resurrection? or Just another Day?

Before I start today, I must confess I went overboard with my expected lows on the Dow. In the hindsight, I believe it should have been 10,500 instead of 11,000. And I base myself on my other assumption on the Indian stock market where I believe the lows maybe around 11,600 (with a remote possibility of 10,500). Considering that in the recent past, our markets have shown a penchent to scale up or retreat at approximately twice the rate of the Dow, a figure of 10,500 (with a remote possibility of 10,000) is perhaps more appropriate. Though as I have said for the BSE, and so also for the Dow I would say, my personal belief at this point is that it may be difficult breaking 10,500 if at all.

So now, Oil is down (10% in four days - is it a correction as they say?), Intel has scored a comfortable home run and Wells Fargo, one of the most troubled financial of the mortgage road shows of the past year has done well. Bodes well for the markets on the whole. The Dow was up 276 points. But is it sustainable?

Just yesterday, news was in that the greenback was on the decline on the back of speculation of a little more fallout of the sub prime saga. There has been no denial of that speculation so far. And there is no denial that inflation is denting pockets everywhere. Also, I hear today that the U.S. `Misery Index' (created by one gentleman named Arthur Okun) has Climbed to a 15-Year High. There is no certainity that Oil will not jump back (and I harbour the same view) though one of those macromenspeakmore comment from a very influential investor (Mr. Soros, was it you?) was that it may stabilise near 120 by early next year. 120?? Ummmmm, I disagree Sir. Firstly, demand for oil is always uphill (never mind the temporary slump in demand currently, we all wish to use more and more -don't we?), the supplies are limited (with a spike up every now and then - thanks OPEC, but still Mother Nature can't prepare even a percentage more in the time we would have depleted it by 90 percent), and early next year would be the peak of winter in most of the oil guzzling world. A mini peak time for oil demand as well (not as much as the summers though, I agree).

Doesn't bode too well for the US I would say. My outlook on the EUR and the Yen......remains more or less same as yesterday. Eur 1.57 to 1.59 with a bias on 1.59 and JPY levels upping to the 105 mark with a range of 104 to 106 .

Weaker Still......and going down further

People following my blogs may remember one of my blogs in January ( http://forexpredictionstoday.blogspot.com/2008/03/quite-in-line-with-what-was-being-said.html%20) )where I had placed my suspicions on the state of affairs in the US.
I quote " I have reasons to believe so..... Remember Mr Bernanke saying something on some Banks failing......Watch out for that. I believe he was not saying out of turn. Also watch out for the 12,000 mark on the Dow. If it slips, and slips convincingly even for a week, then new market realignments may take place not only on the forex side, but also in other markets worldwide." Unquote.

Cut back to the present. The Dow has made a convincing retreat in the sub 12,000. Freddie and Fannie are near collapse. And to add salt to wound, there comes the news of a dollar beating in the light of speculation of further loss reporting by several US banks. The Bernanke statement the other day also indicated that things may not even out so soon and may take a year or two to resurrect.

Oil though seems on a rollor coaster….from 132 to 140, then back to 133, move ahead to 142 onwards to 146 and now 138. Phew! What a ride. But wait! Its still not over. And I am not eating my words too (remember my last blog?). Wait for a scaling up in the 145-150 region in the coming weeks. And a further leveling at 150-158 in the next few months.

So, where does it all lead us at?? Economic powerhouse in tatters, weakened world markets, and no good news. Expect the Dow to keep testing 11,000 every now and then from the top and below it, while managing to slide down towards 10,000 ( the possibilities have arisen, and if it happens, please brace yourselves for a volatile future ahead). The Forex markets, as I had opined in my last blog (“Expect the greenback to weaken against both the Euro and the Yen. Though the Yen remains range bound in 105-108, I would bet on the strengthening of the yen to the narrower 105-106.50 range. The Euro as I have been saying, is difficult to beat below 1.55. The trends now indicate a reigniting of the 1.59 and 1.60 resistance levels.”) remained true to me (current markets – 1.5904 for the Euro and 104.62 for the Yen). I would slightly alter my near future perception on these two currencies. The Euro should now find a cushion within the 1.57 to 1.59 range in the short run with a bias towards 1.59 and beyond. This essentially means that it will in all likelihood march towards the 1.60 mark, but breaking it convincingly to me seems a distant possibility now. The Yen on the other hand is comfortable in the 105 region and should do a 103.5 to 106 in the coming week, with the possibility to stay near the 105 mark mostly.

Koop Mandooks and the Oil saga

Yesterday, the US House of Representatives approved a bill aimed at curbing “excessive energy-market speculation”. The bill, which passed 402-19, would require the Commodity Futures Trading Commission to consider using position limits, or constraints on the size of the stake each speculative investor can own, and raising margin requirements, the money required to trade (Our Finmin has scored a point here. For more on that read my post on http://themarketstoday.blogspot.com/2008/06/happy-beariness-where-is-bottom.html). The vote came after the record market rate of 140.39 to a barrel was set.

While it helped in easing the steam off oil by around a dollar, that it will not rise again and rise up to 150-170 as the OPEC President said, is a scenario only with the “Koop Mandooks ” or the frogs in the well as we say. The demand for oil has been on a rise ever since man can remember. That the speed of price hike may slow down by a mere 10% or odds is a given. But the impact this oil business is having on the world economy is devastating especially when it comes on the back of a back breaking Sub Prime crisis. While we were all watching the markets world over stabilizing post the Sub Prime crisis, the oil bomb hit us all hard and now it seems has taken over the stage from the Sub Prime in eating all the economic growth the world over.

The Dow yesterday fell a whopping 358.41 points, indicating that it is poised to remain sub 12,000 unless and until a wholesome recovery occurs in the economy (p.s. rephrase and read it as oil too). The S&P 500 fell by 2.93% (a higher than DOW fall in a long long while) while the NASDAQ fell by 3.33%.

Expect the greenback to weaken against both the Euro and the Yen. Though the Yen remains range bound in 105-108, I would bet on the strengthening of the yen to the narrower 105-106.50 range. The Euro as I have been saying, is difficult to beat below 1.55. The trends now indicate a reigniting of the 1.59 and 1.60 resistance levels. But wait……..If the whole world is in turmoil, how is the greenback suffering the most?? More on that later.

The near future

The markets went in a tizzy in the last couple of months. The Euro was so near( breaching 1.60) and so far. Ossicilations were the rule for stated period. The US lawmakers and the market stats did all they could to make situations normal. Euro broke the 1.55 convincingly for a brief period but retraced back on the back of some bad cues from the US. Expect the currency to rule in the 1.5450 to 1.5700 range with a bias on 1.57. The expanding oil output and the receeding demand should hold it in the range for a while. Though what intrigues me is .....if oil is christinised petro dollar and if its demand increases, then correspondingly, the demand for USD should also increase. Then why should the greenback weaken in such a scenario. I still dont have an answer. Will search for one.

As for the Yen, after a lot of sress test at 105, it has now gone in the region of 107-108 which I had long ago said is a comfortable range (105-108) for Japan. Expect it to test the 105 again before settling in the near 105 area in the next couple of months.

Till my next .......

Artificial Liquidity Crunch ????

What cues do you draw when a top rung Bank raises capital at a huge premium ?? That :

1. it no longer is the premiere bank that it once was

2. it is in dire straits financially and needs money urgently.

3. there is an (artificially created??) liquidity crunch in the market place that is not enabling financial institutions to raise money with ease.

Take the case of Citigroup. After posting almost $16 billion in writedowns, it has just bolstered its capital by selling $6 billion of preferred shares in the bank's biggest public debt offering. The perpetual hybrid bonds pay interest of 8.4 percent for 10 years. After that, if not called after 10 years, the interest rate will convert to a floating rate and the debt will then begin to float at 4.03 percentage points more than the London interbank offered rate .

The offering adds to New York-based Citigroup's $37 billion of capital raising since November to help compensate for more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed. Citigroup in January sold $3.72 billion of perpetual preferred shares at a yield of 8.125 percent and $3.17 billion of convertible securities, according to data compiled by Bloomberg. The bank sold $3.5 billion of hybrid bonds in December at a rate of 8.3 percent and raised $20 billion in private sales to investors including the governments of Singapore and Abu Dhabi.

The good part though..... Hybrid bonds and preferred shares that have characteristics of both debt and equity count toward capital reserves, allowing the bank to replenish its coffers without diluting equity. Hybrids typically allow issuers to defer interest payments without defaulting, and credit-rating companies usually consider the bulk of the money raised as equity, meaning only a portion is counted as debt on an issuer's balance sheet.

Now look up at points 1. and 2. Citi falls exactly in the same bracket. How about 3. then?? Is there really any artificially created liquidity issue?? You can be a believer or a non believer depending upon your orientation. But just look at what happened to Bear Sterns just a few weeks ago..... The firm was doing well except for the sub prime hiccup that was prevelent across the whole financial system. It did not have any short term liquidity issues. It was sitting on a cash base of $14 billion. The only issue it had....it didnt have any backp other than this cash, save for the lines it had with various banks and FIs out of which it could draw in times of need. And here is where itfell. When it required these lines, it was denied so by the very institutions that had promised it these lines. And when investors began drawing money out of the firm, it had no other option left. And who comes for the bailout?? JP Morgan Chase. One of the institutions that Bear had drawing lines with. That it didnt surface when Bear was in a liquidity crisis was evidently to gain a) indirectly if a competitor falls or b) directly by claiming a stake in a fallen Bear by supporting it financially. After all, Bear had huge Real Estate Assets in addition to its core business assets.

Now draw a parallel on the same arguement with Citi's fate. It was the world's premier bank just a few months back. In a notrmal course, it would have then attracted capital (if it ever needed then) at far attractive rates than the 400 to 500 bp premium that it is paying now. The reason?? CREDIT CRUNCH. No money in the market. Then where did the $170 million come from that all the great Banks of the world have raised in the last few months in the subprime aftermath?? Oh yes, there is money but the market sentiment is so bad that the Investors are shying away from putting it in the market. They would rather sit on it and wait for the market to improve. As if a market with a liquidity crunch, can bounce back on its own!!! (And that is where my argument is....there is money but is being hoarded away so that the investor can extract a BETTER return when the time comes to make a kill. Nothing wrong in the Investor's thinking. But, the point is, this is what qualifies to be called an artificially created liquidity crunch. period.

Inflation and the Repo rate

The effect of inflation for a lay person is the prices of everything going up over the years, or in other words too much money chasing too few goods. For instance the cost of one loaf of bread purchased by my father was 50 paise when he was a kid, now it is worth Rs.10. Thus, inflation makes the worth of money to reduce.

There are two kinds of Inflation indices in use in India;
1. Wholesale Price index (WPI), issued by the Ministry of industry. It is the most commonly discussed index of inflation.
2. Consumer Price index (CPI), issued by the Ministry of Labour.

The composition of these indices is different, with food articles constituting 57% of weightage in CPI for industrial workers, as against 27% in WPI. A more than proportionate rise in prices of food articles leads to a higher rise in CPI as it is happening in the current scenario.

Causes of Inflation
Broadly, there are two categories of inflation:

• Demand-pull Inflation or the Demand side Inflation: caused by increase in aggregate demand due to increased Govt. and individual spending. The propensity to buy increases with an increase in wage rates.

• Cost-push Inflation or the Supply side Inflation: caused by fall in supply due to increase in supply of inputs. For example, due to a crop failure the supply of wheat in the market is reduced, the sellers will respond with a increase in prices of the existing stocks.

Money supply plays an important role in deciding the level of inflation. The Government, in a crises situation (like war) may stimulate demand by printing Currency notes (deficit financing).

Effects of Inflation on the economy
A small amount of inflation is believed to have a positive impact on the growing economy. An attempt to maintain a zero inflation level may lead to falling prices, losses and unemployment. This situation may be accompanied by downward movement in wages and output and is called ‘Deflation’. Moderate inflation also serves as an incentive for the ‘savers’.

Controlling Inflation
Central bank of the country (RBI in our case), have used several monetary policy measures to contain inflation. It is virtually impossible to achieve a zero percent inflation over sustained period of time, because it is impossible to prevent wage earners from demanding higher wages. The most common methods of controlling inflation are:
• Slow growth of money supply
• High interest rates

REPO Rates and Inflation
The hike in REPO rates by the central bank is an indication to lenders to increase their lending rates, thereby reducing the excessive demand. In addition, the central banks indulge in open market operations, ie. buying and selling Govt. securities in the market to influence short term liquidity, on a day to day basis. Sometimes, the reserve requirements are also changed to manage liquidity. In
the recent past, RBI has hiked cash reserve ratio (CRR) on three occasions to suck the excess liquidity from the system.

These are demand side factors of controlling inflation. However, in the longer run, supply side management is more effective in controlling inflation. The govt. tries to augment production, supply of the scarce commodities to have a sobering effect on their prices. For example, if the prices of cement have gone up in the past, the govt. can allow import of the commodity, and at the same time grant new licenses to enhance the capacity to produce cement in the economy.

The G7 Concern

The G7 in their meeting yesterday, raised concern on the dollar's slide and said the global economic slowdown may worsen amid an "entrenched" credit squeeze.

"Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the G-7's finance ministers and central bankers said in a statement after talks in Washington yesterday.

The officials downgraded their outlook for the world economy from that of two months ago, blaming the U.S. housing recession, credit-market turmoil, commodity prices and inflation pressures. The dollar has lost 8 percent against the euro and 6 percent versus the yen since the G-7 last met in Tokyo in February.

The new language was the first significant change in the G- 7's view of currencies since a February 2004 meeting in Boca Raton, Florida.

And now another bit of news.....The International Monetary Fund this week forecast a 25 percent chance of a global recession this year.

The IMPLICATIONS?? Well for one, the G7 statement itself is enough to strengthen the Dollar by 1 to 2 percent in real terms. On the psychological terms...... don't expect the Euro to break 1.60 that soon. And a similar no to the 100 mark for the Yen. Chances are, the Yen may not be able to be convincing in its march towards 100. The Euro on the other hand, should make up to the 1.60 mark despite the G7 comments, abliet a bit later than the markets were expecting.

The Flip side of the story?? The concern may all be talk and nothing else. The G7 did not move any agenda on the steps to be taken to strengthen the dollar except alleying its concerns and putting in place a timeline of 100 days towards achieving its goal. No concrete proposals nor any concrete policy statements. No willingness. And no visible interest in intervening too.

And why so?? one may ask. For, if the greenback weakens, it makes imports expensive while making exports to other nations cheaper. The net effect should be in propelling the economy up. And for the nations importing from the US, it should be a bonus, importing the same goods at a lower cost. At the same time, a stronger currency is good for a nation when it is trying to fight rising inflation and helps in fighting price hikes (Euro is a great case in point here). Thus the muted concern of the other G7 members.

So where does it lead the world economy?? Nowhere I guess. The U.S. economy it seems is weaker than its counterparts of the G7 and the other members are comfortable for the timebeing in letting it being so for a change. They infact for the first time in decades, are not bothered about the fall of the US. What a twist of fate.....

The Great Indian Tamasha

While lots has been written on the Indian stock market by a lot of people, I invite myself too into the ring. I had written a few weeks ago that the BSE had a bottom near the 14,800 to 15,200 mark (and also on the 12,000 mark nearing breakage on the Dow Jones). And was I correct!!!!!!. It bottomed at 14,803 before reserructing itself by a few hundred points. My new prediction on the BSE..... Wait for a while, maybe tommorow. It should be testing the 15,200 mark again. And in weeks to come, with the turmoil in the world economies....it may even break the bottom I predicted and go on to the 13,400 to 13,800 levels. The Dow on the other hand should take things more maturely before giving way below the 12000 mark again. Its a great psychological barrier you see. And we Indians are a "freakish" (rather than nervous if I may say so) lot when it comes to things tumbling down. You may have witnessed it in the past three months.

Though I had heard/read a few days back of the market moving to 11,000 , in my inimitable style (pun intended dear folks.....on me of course...who else????), I would say it is too premature to predict so, though not dismissing off altogether, given the shaky place the world has come to be.

Now, to test my skills further, I am trying to write a blog. You can access it at http://themarketstoday.blogspot.com/ . Hope to see you all there too. Chao.

Coming of age of the Yen

The Yen has it seems come of age. Belying market predictions of going to 92 and 80 levels(yes its true, some top shot Tokyo trader predicts so) it has sustainably kept itself above the 95 levels and now managed to jump to the 101-103 zone. Though if I were to believe my instincts, it should again test the 100 levels and possibly slide below silently in the next few weeks. Mark my words, "There is more dirt in the subprime closet than we have been told."

About the Euro, I wash my hands off. It has gone and gone and gone on to levels we had never imagined a year ago....rather few months ago too. 1.60!!! what levels to achieveif it does..... I tend to agree with people who say it may keep testing this level for some time now. 1.62 (and perhaps 1.63) is never out of range but 1.50 is history. Amen.

The INR has in the meanwhile kept its head above the 40 levels after the 3rd week surge to 40.80 that I had been talking of, since ages. I still tend to believe it will continue the good work (look out for the footnote) in the wake of the surging oil prices and despite the run on it by the exporter community which I believe may not impact it by more than 10to 20 paise in absolute terms. Though the slumping below 40 convincingly is also a certainity in the coming weeks.

In keeping with my disclosure last month on my personal interest in the Yen and the Rupee, I am glad that I made comfortable moves if not great. My covering of the USD against JPY was at just above 100 (remember I was not expecting the Yen to strengthen so much so soon!). Also, that I did not wait for better rates on the Yen had majorly to do with the fact that I had a rupee leg to cover after I covered the Yen one and the Rupee had Weakened to my desired levels. And I didnt expect it to weaken further and IT REAFFIRMED MY BELIEF IN the pair. Thus my deal on the INR against USD was done near 40.78 . So you see now, I only said (and did) things that I believed in. And in the hindsight now, I feel I got myself a good deal.

Quite contrary to what I believed, the Yen has slumped below the 100 mark. And it makes for situations to be quite grim. Though even with the Us economy news being not so great, I believe the Yen may not break the 95 mark and instead try to ascend upto 100 on the back of sustained buying interest in the USD (given the fact that the pair is at a one decade low now if I am correct). I have doubt now that market pressures may be able to hold it to a level above 100 as in the recent past. If that happens though, dont expect it to scale even to levels of 105 or even above 102 and hold thereafter. As for the Rupee, it should keep itself above the 40 mark what with the rising Ooil prices.....Even if there is heavy selling by our exporter friends.

New Levels on the USD

Quite in line with what was being expected of late, The USD has now seems, found a new level vis-a-vis the Yen and the Euro. And most of the blame needs to be picked up by the macromenspeakmore habbit of the current Fed chief who today urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech to bankers in Orlando, Florida, today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''

So it seems the USD JPY pair is now poised to test the 100 levels soon. And quite contrary to what I believed that 103 might be a strong test for the pair, it has very smoothly slid to the sub 103 levels though still testing itself to stay near 103. My outlook for the currency for the weeks to come......... should try for the 100 levels pretty soon enough. Though again getting past 102 may be a bit difficult, but if done, expect a smooth sailing to the sub 101 levels. Though I might be away from the happenings in the markets for more than a week now, I would still shy away from forecasting a sub 100 level for the next week or so. Though I feel the currency may eventually give way in the coming months. And I have reasons to believe so..... Remember Mr Bernanke saying something on some Banks failing......Watch out for that. I believe he was not saying out of turn. Also watch out for the 12,000 mark on the Dow. If it slips, and slips convincingly even for a week, then new market realignments may take place not only on the forex side, but also in other markets worldwide.

Similar is the fate of the EUR USD pair. It has been flirting the 1.52 figure for some time now and after the Fed chief's remarks today, I now tend to believe that it will be more content being near it and more precisely in the 1.53 to 1.5450 range. Though being a new territory the Euro is treading into every now and then, you never know where it may bottom out.

Till I am back again for more on these two pairs, lets say Sayonara but not before my take on the USD INR pair. I have full faith in the currency nearing the 40.80 mark by the 3rd week of March and much further if the world markets keep up with this deceleration and the Indian markets catching up with them (Though I would put a bottom of 14,800 to 15,200 for the BSE to reach before eventually bottoming out). And just to prove that I am not just writing for the sake of writing here, I will reveal a small secret. I have a small personal exposure in The Yen that I need to convert to INR or the USD and am still taking my bets on a further improvement of my small fortune.

And so the Dollar Weeps

I had last written on 29th January 2008, stating that "the green back to maintain a level of 103 to 108 against the Yen (with a bias towards 100 though beating the 103 mark may be difficult) while weakening against the Euro to near 1.49 in the very near future". The basic premise behind that was the fact that the jobless, housing and inflation data and the subprime crisis all were tending to drag the US currency outlook down. Add to it the fact that most US banks declare their balance sheets in Feb end to Mid March and that this time round, they were going to be not so rosy, thanks to the sub prime. One point I refrained from writing here (possibly out of the fear that this might be too big a prediction) but had been discussing with a few colleagues and friends, was a guess of mine that there may be a couple of Banks in the US that may fail.

Quoting now from Bloomberg "Stocks slid yesterday after slower-than-forecast economic growth, rising jobless claims and Federal Reserve Chairman Ben S. Bernanke's warning of possible failures among smaller banks deepened concern that the economy has tipped into a recession.
U.S. equities, as measured by the S&P 500, fared the worst among the world's 10 largest markets in February on concern that a recession is inevitable." Unquote.

All said and done, although the US seems sliding into recession, I believe Bernanke and his team will make all efforts to keep it low key although with the profile that this man keeps, it is difficult to do so. My personal belief on the USD JPY and the USD EUR pair now......The Yen should now keep itself to the narrower 103 to 106 range with a bias towards 100 (and now looking more possible .... below the 100 mark), though I still believe that breaking the 103 barrier may be a tough nut to crack. There though is a spoke in this story. With the Yen strengthening as it is, and with the huge comforts (I am told) that the traders had in the 105 to 108 range, it should not come as much of a surprise if the yen again climbs to those levels. Though weakening much further may be more of a distant thing. The European economy has not been hampered much in the current market sentiments and should remain to perform like it has been doing in the recent past......Moderately to be more precise. The Euro should be seeing further new highs of near 1.54 and 1.55 but staying consistently above 1.54 may be an issue. I believe the Euro will tend to keep itself happy in the 1.52 to 1.5350 range with a downward bias every now and then. Amen.

Things to Ponder

What exactly moves the markets?? Is it the Trade? or the Interest rates? or flow of money? or is it the other "macroeconomic/macropolitical/macromenspeakmore" factors? Can a stagnant Interest rate really move markets (also read economy)? or should it be flexible to changing world scenarios? Can you exist in isolation? or should you respond to changes elsewhere especially those economies on whom your economy is tilted favourably for signals of change? How do you fight an inflationary scenario? What are the appropriate levels of inflation? Is an inflationary economy essentially good? What happens if your Interest rates are higher than the other economies? What if the Interest rates are higher/lower than the rate of Inflation? What does a Trade Surplus/Deficit have to do with the economy? What are the impacts of recession in an economy? Is growth of economy always good or is recession also an integral part of growth?

I have dozens of such questions. And they say you are no good if you dont have queries. And they also do add that you are no better if you cant find answers to them. So begins my quest for understanding them better. For a start, I will try and understand them in the Indian perspective, with maybe a reference or two to other countries and International scenarios. Wish me luck. And help me understand if you can.

I'm Back

Hi there. Back after a long hitaus. Well, a lot of water has flown under the bridge since I last wrote. The US markets got hit the wrong way and almost every other global bank was hit in the subprime onslaught. Markets world over tumbled and The Fed, worried of its impact on the economy (it has started showing, you see....) has cut the Fed rate in a hurry it may seem. But hold....... here is another news trickling in today and I quote "The Federal Reserve may push interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974." unquote. And this seems more real given the fact that real disposable income grew at a 2.1 percent annual pace in November, the slowest in 16 months, as higher food and energy costs eroded paychecks. Home prices in 20 U.S. metropolitan areas fell 6.1 percent in October from a year earlier, the most in at least six years.

And now another twist in the tale. With the Fed rates spiralling downwards, and others sticking to their Interest rates, is it possible for the US Dollar to become a currency for the carry? I dont think so, given the fact that there is the Yen, still there holding on to the crown. And remember, the USD didnt become the Carry currency even when the Fed cut the rate down to 1% in 2001 . But yes, for all those who are having exposures in the USD, it becomes more and more lucrative now to look up to other currencies like the Pound and the Euro. And therein arises another scenario. With the recent cuts in Interest rates by the Fed and the possibility of it cutting its 3.5 percent target rate for overnight lending between banks by as much as a half-percentage point tomorrow, it is likely that most other economies will follow suit, although at a slower pace. This does offer some disparity but given the high Trade stakes in the USD, the market would definately avoid it from becoming the carry currency.

Given the above, I would presume the green back to maintain a level of 103 to 108 against the Yen (with a bias towards 100 though beating the 103 mark may be difficult) while weakening against the Euro to near 1.49 in the very near future.