Waters Uncharted

Written by Jeff Thredgold, CSP, President, Thredgold Economic Associates

Developments of the past few days (and hours) continue to fall into the “never been done before” and “uncharted waters” file of the Federal Reserve and other central banks around the world. The same could be said of the U.S. Treasury Department and its counterparts around the globe.

globeFor the first time EVER, the Federal Reserve participated in a coordinated and near-simultaneous interest rate cutting action with other major central banks. The Federal Reserve cut its key federal funds rate target to 1.50% from the 2.00% rate in effect since April 30.

Action vs. Inaction

Whether these aggressive monetary policy actions will be effective in curtailing what is now a global financial panic is unclear. However, these actions, combined with other aggressive moves by central banks and the U.S. Treasury (and equivalents) around the globe is a far cry better than simply sitting back (as some would strongly suggest) and letting financial markets work things out.

We have been there before when the fledgling Fed and other central banks largely sat back and did nothing…it is known to us as the Great Depression.

As noted previously, Federal Reserve Chair Ben Bernanke and U.S. Treasury Secretary Paulson have taken steps and implemented aggressive strategies in recent days, weeks, and months that are nowhere to be found in their operating manuals. Similar moves are now perhaps belatedly being undertaken by their counterparts around the world.

Two Markets

We have two distinct financial markets in the world today. The equity, or stock market, is one where the typical U.S. or foreign consumer can look at the Dow average (the U.S.) or the Nikkei 225 index (Japan) or the Hang Seng index (Hong Kong) or the DAX index (Germany) or FTSE 100 (United Kingdom) and get a “feel” as to how stocks are performing.

Such a simple measure is not available in the credit markets. The typical consumer doesn’t really understand how commercial paper issuance provides the funding for thousands of global companies, or how the issuance of BANs and RANs and TANs might be used by municipalities to temporarily fund their operations.

Consumers many times “see” problems in credit markets when they can’t get a mortgage or an auto loan or have a long-standing loan for their small business suddenly curtailed by their lender. They “see” problems when they can’t get funding to add to inventory for the Holiday season. They “see” problems when the required down payment or documentation for a home loan is much more challenging than before.

Credit markets are all about confidence…confidence that if you lend or invest money with the investment bank across the street or “across the pond” you will get your money back…confidence that if you put money into a money market fund or other short-term investment that you will be able to get your money back…confidence that if you buy a bond issued by a major corporation or government entity that you will be able to sell that investment later should you choose to in a viable and liquid marketplace…

…It is that lack of confidence that is a grave and major threat to the global community today.

World Finance Chiefs Back Action Plan to Combat Crisis

IMFC Chairman Youssef Boutros-Ghali (r) confers with IMF Managing Director Dominique Strauss-Kahn at panel's meeting in Washington, D.C. (IMF photo)

World Finance Chiefs Back Action Plan to Combat Crisis
IMF Survey online
October 11, 2008

World financial leaders endorsed an action plan announced by the seven leading advanced economies to combat the international financial crisis in what IMF Managing Director Dominique Strauss-Kahn called the "first big success in coordination" to halt the downward spiral in world markets and support the global financial system.

The International Monetary and Financial Committee (IMFC), the policy-setting body representing the IMF's 185 member countries, met on October 11 amid increasing strains in the global financial system caused by the spreading credit crisis triggered by the U.S. subprime meltdown.

At the end of a hectic day of discussions, the IMFC endorsed a plan of action announced on October 10 by the Group of Seven (G-7) advanced economies. IMFC chairman Youssef Boutros-Ghali said the meeting showed the "resolve, unity, and focus" of the world community to address the crisis and that "no tools will be spared" in addressing it .

Need for bold action

The IMFC, convened as part of the IMF-World Bank Annual Meetings in Washington DC, said that the depth and systemic nature of the crisis called for "exceptional vigilance, coordination, and readiness to take bold action."

The 24-member ministerial committee, representing advanced, emerging market, and developing economies, said the IMF had a critical mandate to foster the multilateral cooperation needed to restore and safeguard international monetary and financial stability.

Strauss-Kahn, who said the meeting had a sense of gravity and determination, characterized the IMFC endorsement of the G-7 plan as the first concrete step in coordinated global action by emerging markets, low-income countries, and the advanced economies to combat the crisis.

The IMFC called for "further intensive Fund engagement across the membership to discuss and develop robust policy responses to the crisis." Both Boutros-Ghali and Strauss-Kahn acknowledged that actions taken by individual governments would vary, depending on their situation and structure of the financial system.

In a speech on October 10, ahead of the G-7 announcement, Strauss-Kahn had proposed a four-point action plan to help stem the downward spiral in world markets and begin to rebuild confidence. The proposal included a temporary government guarantee of liabilities, government action to take out troubled assets and force the recognition of losses, government provision of capital to the financial system, and a high degree of international cooperation.

IMF ready to lend quickly

The former French Finance Minister, who took over as Managing Director of the IMF almost a year ago, has stressed that the Fund stands ready to lend quickly through its emergency financing mechanism to any member country in financial difficulty. "The IMF has the resources and we are ready," he said.

The IMF's Emergency Financing Mechanism was set up in 1995 and has been used on six occasions—in 1997 during the Asian crisis for the Philippines, Thailand, Indonesia, and Korea; in 2001 for Turkey; and this year for Georgia.

The IMF has more than $200 billion of loanable funds and can draw on additional resources through two standing borrowing arrangements.

The difficult global financial environment, including elevated food and fuel prices, adds to the challenges for emerging market and developing countries to preserve macroeconomic stability, sustain growth, and make progress on poverty reduction. For these reasons, it is critically important that collaborative action be coordinated between advanced and emerging economies.

IMF lead role

The IMFC asked the IMF to take the lead in drawing the necessary policy lessons from the current crisis and recommending effective actions to restore confidence and stability.

The IMF should focus discussion, and enhance cooperation, with a wide range of perspectives with the Financial Stability Forum, the Group of Twenty, and others on this issue in an inclusive setting. "The Committee asks the IMF to start this initiative immediately and to report to the IMFC at the latest at its next meeting," which will be in April.

Food and fuel crisis

Strauss-Kahn emphasized at the press conference that the world should not forget what he called the "other" crisis facing developing economies—the problem of high food and energy prices.

He urged donor countries not to abandon promises of aid to the developing world because of the financial crisis otherwise many of the world's poorest would starve or suffer from malnutrition. "We are in a big crisis, but don't forget the other one," he said.

source

World Economic Update

Government of Canada Responds to Global Financial Turmoil With Support for Canadian Credit Markets

Jim Flaherty, Minister of Finance announces funding for the busway that will improve travel to and from York University in Toronto. Minister Flaherty also announced $100 million for the City of Toronto, one of the largest one-time reimbursements for federal public transit funding ever made by the Government of Canada.


Minister of Finance, Jim Flaherty, emphasized sound Canadian economic fundamentals during a media availability held in Toronto, on August 29, 2008. He made his comments after Statistics Canada reported that real gross domestic product was up slightly in the second quarter.


Government of Canada Responds to Global Financial Turmoil With Support for Canadian Credit Markets
Ottawa, October 10, 2008.

Backgrounder

The Honourable Jim Flaherty, Minister of Finance, today announced the Government will take steps to maintain the availability of longer-term credit in Canada by purchasing up to $25 billion in insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC). This action will help Canadian financial institutions raise longer-term funds and make them available to consumers, homebuyers and businesses in Canada.

This relief to Canadian homebuyers and consumers comes at no fiscal cost to the taxpayer. Indeed, these securities will earn a rate of return for the Government that is well above the Government’s own cost of borrowing. Moreover, as insured mortgage pools in Canada already carry Government backing, there is no additional risk to the taxpayer.

"It is important to underline that Canada’s banks and other financial institutions are sound, well capitalized and less leveraged than their international peers," said Minister Flaherty. "Our mortgage system is sound. Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S."

"However, it is becoming increasingly clear that the continuing disruption of global credit markets, which has been severe and protracted, is making it difficult for our financial institutions to raise long-term funding. This is beginning to affect the availability of mortgage loans and other types of credit in Canada.

"The Government has therefore decided to act to address the current scarcity of private sector lending to Canadian mortgage markets and lending markets overall. This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses."

This action builds on recent steps taken by the Bank of Canada to provide increased volumes of term liquidity across a broader range of collateral. The Bank increased to $20 billion the volume of liquidity that it will provide banks and has widened the range of collateral it will accept, using the expanded statutory authorities provided in the 2008 budget legislation. The Bank also cut its overnight target rate by ½ percentage point to 2½ per cent in a coordinated reduction with five other major central banks.

The actions announced today will also supplement CMHC’s regular Canada Mortgage Bond (CMB) Program, which supports mortgage lending at affordable rates by Canadian banks and other lenders. The CMB Program has recently been expanded, including a record issue in June of this year.

"The mortgages involved in today’s initiative are already guaranteed through government-backed mortgage insurance and are high-quality assets," said Minister Flaherty. "This initiative is an efficient, cost-effective and safe way to support lending in Canada by providing secure, reliable funding at an unprecedented time of global market turmoil."

The first operation is planned for October 16, with a purchase amount of up to $5 billion. The Government will announce a schedule of future purchase dates to take place over the coming weeks. CMHC will shortly announce further details of the competitive auction process that will be used to purchase the insured mortgage pools.

source

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NFP REVIEW OCTOBER 3rd 2008

Another Friday and another NFP report. The jobs number came out fundamentally negative for the Greenback yet the USD gained strength. After a small amount of whipsaw and initial volatility price picked direction. With the help of a price projection and Fibs we were able to scalp over 100 NFP pips. Thanks to FXSTREET.COM for hosting us again, over 400 attendees of the live NFP webinar with Wayne McDonell.

Happy trading .
David Pegler .

Forex Video | New York Session Review | August 6, 2008

FOREX Training Video | London Session October 6, 2008

After last Friday’s $700 billion bailout things were bound to be volatile today. Especially with pairs like the Eur/Usd hitting it’s weekly 200 ema for the first time since Sept 2006. So the USD was a very difficult vehicle to trade tonight. The USD indecision did however allow the Swiss Franc weakness to show itself very nicely. Using this information we then took a look at resistance levels on usd/ch, gbp/chf, and eur/chf. In this video I show how using a Fibonacci retracement along with overlapping support in forms of ema’s mostly, we were able to insert ourselves in a high quality long on the gbp/chf for a decent 100 pip ride. Sadly many of the other opportunities of the night did not work out as well, so it was nice to see something follow through to resistance. Tough night overall, without a doubt.

FXBootcamp London Currency Coach-
Christian Stephens

History Of Forex

The modern foreign exchange market (fx or forex) began to develop in 1973. However, money has been around in one form or another since the time of Pharaohs. The Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers were the first currency traders to exchange coins from one culture to another. During the middle ages, the need for another form of currency besides coins emerged as the method of choice. These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets were relatively stable and without much speculative activity. After WWI, the forex markets became very volatile and speculative activity increased tenfold. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. From 1931 until 1973, the forex market went through a series of changes. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little, if any.

Date Event

1944

Bretton Woods Accord is established to help stabilize the global economy after World War II

1971

Smithsonian Agreement established to allow for greater fluctuation band for currencies

1972

European Joint Float established as the European community tried to move away from its dependency on the U.S. dollar

1973

Smithsonian Agreement and European Joint Float failed and signified the official switch to a free-floating system

1978

Free-floating system officially mandated by the IMF

1993

European Monetary System fails making way for a world-wide free-floating system

The Bretton Woods Accord

The first major transformation, the Bretton Woods Accord, occurred near the end of World War II. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods, N.H., to design a new global economic direction. The location was chosen because, at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. Up until WWII, the British pound was the major currency by which most currencies were compared, but that changed when the Nazi campaign against Britain included a major counterfeiting effort against its currency. In fact, WWII vaulted the U.S. dollar, from a failed currency after the stock market crash of 1929 to benchmark currency, by which most other international currencies would become compared and valued. The Bretton Woods Accord was established to create a stable environment, leading to an onslaught of other global economies restoring themselves and their currencies. In fact, the Brettonn Woods Accord established the pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing the global economic situation.

Major currencies were now pegged to the U.S. dollar, fluctuating by one percent on either side of the set standard against the dollar. When a currency's exchange rate would approach the limit on either side of this standard, the respective central bank would intervene to bring the exchange rate back into the accepted range. At the same time, the U.S. dollar was pegged to gold at a price of $35 per ounce, further bringing stability to other currencies and world forex situation. The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but it did accomplish what its charter set out to do, which was to reestablish economic stability in Europe and Japan. The major reason it failed was because it continued to use a set standard to fix a currency against a smaller market, such as gold.

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971. This agreement was similar to the Bretton Woods Accord, but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values.

Both agreements suffered mistakes similar to the Bretton Woods Accord and, in 1973, collapsed. The collapses signified the official switch to the free-floating system. This occurred by default, as there were no new agreements to take their place. Governments were now free to peg their currencies, semi-peg or allow them to freely float. In 1978, the free-floating system was officially mandated.

In a final effort to gain independence from the dollar, Europe created the European Monetary System in July of 1978. Like the previous agreements, it failed in 1993, but what followed was an evolution from a combination of the EMS and the Bretton Woods Accord.

Today, the major currencies, such as the U.S. dollar, Euro, British pound, Swiss franc and the Japanese yen, move independently from other currencies. The currencies are traded by anyone who wishes, including an influx of speculation by banks, hedge funds, brokerage houses and individuals. Only on occasion do some of the central banks intervene to move or attempt to move currencies to their desired levels. The underlying factor that drives today's forex markets, however, is supply and demand. The free-floating system is ideal for today's forex markets. The supply and demand of currencies are driven by three factors, including interest rates and interest rate differentials, commodities and global trade. The forex market is the prime market of the world by all which all others can be considered derivatives (like futures and options).

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Passive Interest Rate Moves May Confine Canadian Dollar, Japanese Yen To Range

As we know it, Japan's economy has been labeled recessionary given its two consecutive quarters of negative strength. July GDP data shows the North American country seeing some relief, expanding 0.7% in that month alone. With these two conditions in minds both monetary authorities are unlikely to react to growth as inflation is only now beginning to retreat. Rate cuts here would only add upward price pressure that these two banks have sought to avoid. As such, yield-gap neutrality may continue for the near future and thus see no changes in relative strength between the Canadian Dollar and the Japanese Yen.

Trading Tip -
Financing the purchase of a currency with the Japanese Yen is generally a riskier endeavor in times of greater volatility. Recent weeks have shown financial market turmoil to be benefiting the Yen as a result. As a precaution, traders may want to wait for volatility before trading this range. In addition to a stop loss, we will look to control risk further by removing any unfilled orders by the end of the week or should spot close above 102.19 prior to our order being filled.
Event Risk for Japan and Canada

Japan - Between Monday and Tuesday the Bank of Japan will announce its decision for their benchmark rate. Consensus forecasts call for no changes as the BoJ continues to find itself in a tight situation where the overnight cost of borrowing is already at 0.50%. Japan's week will be highlighted instead by the minutes from September's central bank meeting. One may see Yen volatility ensue if the minutes reveal a sharper and more urgent tone among the bank's board members. But as oil and goods prices fell through August, we may see that the members had become increasingly dovish on the inflation front. Their monthly report will probably suggest the economy is indeed in a recession and will probably highlight the easing inflation. The country's Leading Index has been generally known to precede large deviations from trending economic activity. The metric which has been on trending decline since May of 2006 might continue to fall as spillover from the US financial crisis continues to impact global financial markets.

Canada - Of the two major events on Canada's calendar this week labor data will be of most concern. With Canada's economy depending so much on export and oil driven growth, the fall in crude may deteriorate the country's overall prospects. Despite commodity decline, GDP in July alone grew 0.7% for the North American country. If it indeed does find itself trending upward through August and September, labor data may come in stronger than expected. The Ivey Purchasing Managers Index, a volatile metric measuring the monthly change in purchases made by corporate executives, is expected to decline for a third straight month in September. Implications in the figure's actual outcome will be limited as Loonie traders take labor data as the paramount concern this week.