Investor Jim Rogers Advocates Stability

Economist Tim Iacono comments on CNBC’s interview of CEO of Rogers Holdings, Jim Rogers, on his unwavering investment technique despite radical changes in the global economy and unpredictable events from severe weather to nuclear meltdowns. Rogers explains his longstanding faith in commodities investment and belief that holding onto the U.S. dollar is still a safe investment play, at least in the short term. For more on this continue reading the following article from Tim Iacono.

On CNBC, Jim Rogers talks about the latest economic data, the next round of quantitative easing, and his investment outlook which, for the most part, hasn’t changed much over the years. Surprisingly, he’s long the U.S. dollar at the moment, but only as a short-term trade.

There’s more here with additional video here (on regulation) and here (on silver). His basic argument about owning commodities is pretty simple and unchanged for years now – “If the world economy gets better, I earn money on commodities. If the global economy gets worse then they will print more money and I will make money in commodities”.

This post was republished with permission from Tim Iacono.

EURUSD and USDJPY Could Be Affected by U.S. Government Shutdown

As budget negotiations continue between Democrats and Republicans, there is fear that a government shutdown may be inevitable. This leads some to wonder how currency will be impacted. Read more about this in the full post by Kathy Lien.

There has been a lot of talk about the possibility of a U.S. government shutdown. Republicans and Democrats in Washington continue to clash on budget negotiations, raising the risk of the first government shutdown since 1995 during the Clinton Administration. Congressional leaders are in deep discussions and a shutdown could be avoided, but with the U.S. government telling federal agencies to be prepared to implement contingency plans, it is important for currency traders to be prepared as well by knowing how the U.S. dollar could react to the shutdown.

We have been down this road before 15 years ago and based upon the price action of the EUR/USD and USD/JPY at the time, investors are not too worried about the implications of a government shutdown on the economy. When the government was shut down in Nov 1995, both the EUR/USD and USD/JPY barely budged. When a second shutdown occurred during the Clinton Administration in December of that year, the dollar actually rallied against the Japanese Yen before normal government operations were resumed. The main reason is because any shutdown is expected to be so temporary that it will pose no risk to the U.S. sovereign debt rating. It will also not scare investors away from buying U.S. debt. The only major economic implication is that Federal workers won’t be paid during the period that the government is shut down. If an agreement isn’t reached by midnight on Friday, the government will shut down all non-essential government services.



This blog was republished with permission from Kathy Lien.

Foreign Economies Could Distance Themselves From The Dollar

It is no secret that many countries would like to decrease their dependency on the dollar. For instance, BusinessWeek says China owns $2 trillion in dollar assets and could be a big loser if the dollar was weakened. According to foreign exchange currency expert Kathy Lien, several nations may take action to distance themselves from the dollar in the coming months.

The U.S. dollar has weakened significantly driving many of the major currencies to the highest level in months. Here’s a table illustrating the significance of today’s moves. I expect at least another 2 percent decline in the U.S. dollar against the key currencies (Short and Long Term Outlook for U.S. Dollar).

The fact that USD/JPY is not participating in today’s rally indicates that investors’ distaste for dollars rather than their risk appetite is driving the dollar lower. The modest gains in Dow futures and the sharp rise in gold prices confirm that investors are bailing out of dollars. In my interview with Fox Business 2 days ago, I talked about how the one takeaway from the concern about the credit worthiness of the U.S. is the need for diversification.











Yesterday, a Brazilian official said that the BRIC nations (Brazil, Russia, India and China) could take unilateral action to reduce their dependency of dollars at their summit next month. Brazil has already begun to replace the dollar bilaterally in their trade with China and unfortunately this trend could continue with other nations following suit in the coming weeks and months. The one thing that the financial crisis has taught investors large and small is need for diversification and no one wants to sit with baskets full of dollars waiting for S&P to make an announcement. Sovereign Wealth Funds are taking this to heart which could create a fresh supply of dollars.

This post can also be viewed on kathylien.com.

Could The Yuan Become The World's Next Reserve Currency?

The U.S. dollar has faced some serious attacks lately, and our economy here in the U.S. is struggling, but have things really gotten so bad that the USD could lose its place as the world's reserve currency? And even if it did, wouldn't the Euro be next in line to take its place? According to Nouriel Roubini, the next world reserve currency could in fact be the Chinese Yuan, and the transition could happen sooner than we think. For more on this, read the following blog post from Mark Thoma which looks at Roubini's recent article on the subject.

Nouriel Roubini is worried that the dollar will lose its status as a reserve currency if we don't change our ways:

The Almighty Renminbi?, by Nouriel Roubini, Commentary, NY Times: ...While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear. ...

The... downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. ...

At the moment,... the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. ...

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. ...

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. ... For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

This post can also be viewed on economistsview.typepad.com.

What Is The Likelihood Of The U.S. Losing Its AAA Credit Rating?

A few months back — after Moody's issued a warning — there was a lot of talk about the possibility of America losing it's AAA credit rating. Of course that never materialized. Now after a recent report on the health of Social Security and Medicare, the talk is resuming. The question still remains though of whether all this talk, is just talk, or if there is any merit to it. Kathy Lien looks closer at the question in her blog post below.

In today’s Financial Times, there is an op-ed article by David Walker, the CEO of the Peter G. Peterson Foundation pondering the possibility of the U.S. losing its prized AAA credit rating. The paper focuses on a warning that was issued by rating agency Moody’s months ago. Moody’s has not issued a new warning, yet Walker and in turn, the FT has decided to re-inject uncertainty into the financial markets by resurrecting this fear. What has prompted this article is most likely the recent comments about the insolvency of the Social Security and Medicare systems. According to the trustees for the systems, the Social Security trust fund could be depleted by 2037 while Medicare could be insolvent by 2017. These dates of insolvency have been pushed up as the weak labor market reduces contributions. The Obama Administration has pressed the importance of gaining control of the growth in Medicare costs and their desire to tackle Social Security insolvency once health care reform is passed.

According to Walker, if the health care reforms strains finances further or if the federal government fails to monitor spending, tax or budget control, rating agencies could strip the U.S. of its credit rating.

Is Losing AAA Rating that Big of a Deal?

But is losing the AAA rating that big of a deal? Yes. A credit rating reflects the risk of default. Therefore a lower credit rating means that a country is at greater risk of defaulting on their debt. Some global funds are mandated to invest only in AAA debt and therefore if the U.S. loses its AAA rating, we could see a massive outflow of foreign investment. Also, a credit rating downgrade is the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds like China that have been buying dollars to prop up the U.S. economy. Yes, investors will still buy U.S. Treasuries, but their purchases will be less. It could also have a spillover effect on corporate debt and will raise the cost of borrowing for the U.S. government.

How Real is the Risk?

Now with the risk in mind, I think that ratings agencies talk a good game but they will face problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations.

This post can also be viewed on kathylien.com.

Japanese Yen Could Be In For A Significant Slide

The Japanese Yen has performed well the past few days, but the USD/JPY could be approaching a wall. Currency expert Kathy Lien warns that the USD/JPY is trading at a critical level and could be in for a significant slide. For more on this, read her blog post below.

The U.S. dollar has sold off significantly against the Japanese Yen over the past 2 trading days. It is nearing a very important support level. If it breaks that level, we could see a test and potential break of 95. Given that equities are pressuring USD/JPY lower, a “break” of the 95 level would be contingent upon a top in equities. In my special report on FX360, I talk about the fundamental reasons behind the sell-off in USD/JPY.

On a technical basis, the chart below illustrates how USD/JPY is approaching very critical levels. We have a major head and shoulders pattern in place, the currency pair is attempting to enter the sell zone according to our Bollinger Bands and is approaching trend line support. For those of you that like Ichimoku clouds, it has also entered the cloud. Therefore a close below 96.80 would open the door for a significant slide.

Click on Chart to see Larger Version

This post can also be viewed on kathylien.com.

How The European Central Bank Is Different

The European Central Bank (ECB) made several important announcements today, and the reaction from currency traders was much different than how they have reacted to similar moves from other central banks. Currency expert Kathy Lien looks closer at the recent announcements, and talks a bit about what sets the ECB apart from the Bank of England and Federal Reserve, in her blog post below.

Both the European Central Bank and the Bank of England announced asset purchases today, but the Euro skyrocketed while the British pound fell, leading many currency traders to wonder What Sets the ECB Apart from Fed and BoE?

Read Boris’ take on the Bank of England Rate Decision

Before talking about why the euro recovered, here are the 4 key announcements made by the ECB today:

1. Cut Repo Rate from 1.25 to 1.00%
2. Narrow Rate Corridor by 50bp (Marginal Lending Rate Cut by 50bp to 1.75%)
3. Extend maturity of refinancings to 12 months
4. Announced purchases of up to EU60 billion in euro-denominated covered bonds

There is no question that these are unprecedented measures for the European Central Bank. Everyone expected the quarter point rate cut to a record low of 1.00 percent, the decision to increase the maturity of refinancings to 12 months and also the narrowing of the rate corridor by 50bp, but the chance of purchasing euro-denominated covered bonds was low.

Nonetheless, Trichet has resorted to what many consider Quantitative Easing (even though he explicitly denied that this is QE) and rather than punishing the euro, currency traders are applauding the ECB for being flexible and realizing that there is no longer a stigma attached to asset purchases. Also, the amount of bonds that the ECB is purchasing is nominal compared to the rest of the central banks. The ECB plans on buying up to EU60 billion, which is less than half of the BoE’s Quantitative Easing program. More importantly however, Trichet suggested that they may sterilize the liquidity impact of bond purchases, which would limit the impact on the money supply and the pressure on the euro. The Fed and the BoE’s purchases are unsterilized. Finally, this is only an initial announcement. Further details on the bond plan will be released in June. Although rates are appropriate for the current time, the central bank could still take interest rates below 1 percent based upon Trichet’s comment that they have decided if rates have hit their lowest point.

This post can also be viewed on kathylien.com.

Expectations Of A Dollar Collapse

So far — despite the huge run up in U.S. debt — the U.S. dollar has held strong during the financial crisis, however, Andy Xie expects a major collapse to come. He feels that pressures from China, and an overall loss of faith in the U.S. financial policy, will destroy the greenback. For more on this, read the following blog post from Mark Thoma.

Andy Xie expects the dollar to collapse:

If China loses faith the dollar will collapse, by Andy Xie, Commentary, Financial Times: Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. ...[T]he Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn in foreign exchange reserves, mostly in dollar assets. ...[T]he US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse. ...

The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese ... may account for half of the foreign holdings of dollar assets. ...

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. ... The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out. ...

Other currencies are not safe havens either. ... Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. ...

America’s policy is pushing China towards developing an alternative financial system. ... Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote... However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

Barry Eichengreen explains why using SDRs as a reserve currency, as has been suggested by the governor of the People's Bank of China, is not as easy as it might seem:

Commercialize the SDR now, by Barry Eichengreen, Commentary, Project Syndicate: Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency. ...

Sympathizers acknowledged the contradictions... Central banks understandably seek more reserves as their economies grow. But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost. In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash. ...

But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency. It is a composite accounting unit in which the IMF issues credits to its members. Those credits ... cannot be used in the other transactions in which central banks and governments engage. ... This means that the SDR is not an attractive unit for official reserves.

This would not be easy to change. Despite the trials and tribulations of the American economy, dollar securities remain the dominant form of reserves because of the unparalleled depth and liquidity of US markets. Central banks can buy and sell dollar securities without moving those markets. There is also the convenience factor: dollars are widely used in a variety of other transactions. As a result, not even the euro has seriously challenged the dollar as the dominant reserve currency. ...

If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDR claims. It could issue its own SDR-denominated bonds. ... Of course, an earlier attempt was made to create a commercial market in SDR-denominated claims ... in the 1970’s... But these efforts ultimately went nowhere. The dollar being more liquid, its first-mover advantage proved impossible to surmount.

Overcoming that advantage now would require someone to act as market-maker ... and subsidise the market in its start-up phase. The obvious someone is the IMF. The Fund could stand ready to buy and sell SDR claims to all comers, ... at narrow bid/ask spreads competitive with those for dollars. ...

Transforming the SDR into a true international currency would require surmounting other obstacles. The IMF would have to be able to issue additional SDRs in periods of shortage... The IMF’s management would also have to be empowered to decide on SDR issuance, just as the Fed can decide to offer currency swaps. For the SDR to become a true international currency, in other words, the IMF would have to become more like a global central bank and international lender of last resort.

For worries about inflation, see Inflation Nation by Alan Meltzer (and also see Krugman's response, A History Lesson for Alan Meltzer).

[Note: A lot of people have noted the apparent contradiction in the concern from Krugman over deflation, and from Meltzer over inflation, e.g. Mankiw for one, but here's an example of this from Mankiw's colleague, Martin Feldstein, within the same article. It's simply a short-run, long-run distinction.]

This post can also be found on economistsview.typepad.com.

Treasury Yield: What Does The Future Have In Store?

A lot of people have been turning to Treasuries as the investment of choice in these unpredictable and rough economic times, but will it ultimately prove to be a good move? While widely considered "risk free" investments, that is far from the truth. There are many things that perspective Treasury investors need to keep in mind when weighing their investment options. The following blog post from James Picerno offers some insight into what is going on right now in the Treasury market, and hopefully will help investors make an a better informed decision.

It's hard to dismiss the ongoing news about China's anxiety over its massive holdings of American debt. What's worrisome for China is ultimately a concern for the U.S., with fallout that may come sooner than we think.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," Chinese prime minister, Wen Jiabao, said last month. It was a rare public admission of apprehension by a high-ranking Chinese official on the delicate and increasingly precarious lender-borrower relationship that describes the U.S. and China.

Yesterday came word that China's purchases of U.S. bonds slowed in the first two months of this year, according to new data from China's central bank, The New York Times reports. "Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend," the Times notes. The trend may now be reversing, although the notion that a pivotal point in the U.S.-China financial relationship may be near remains intact.

The fear is that China will slow (cease?) buying new Treasuries, a decision that's likely to force up interest rates in the U.S. For the moment, there's no reason to dismiss that scenario, at least when it comes to the recent trend in the yield on the benchmark 10-year Treasury Note. As the chart below shows, the march upward to the 3% mark is alive and well.

What makes the rising yield in the 10-year so striking is that it comes in the wake of the Federal Reserve's announcement last month that it would directly target lowering rates on long Treasuries. The market's initial reaction was to buy Treasuries, which resulted in one of the biggest one-day drops in interest rates on record. For a time it looked like Bernanke and company had struck gold. But confidence that the central bank has complete control over the long end of the curve has been evaporating in recent weeks.

As the above chart shows, the 10-year yield collapsed by around 50 basis points on March 18, down to around 2.5%. As of April 9, the 10-year's yield had climbed by to roughly 2.9%, just under the level where when the Fed made its bombshell announcement last month.

High interest rates in the U.S. necessarily make the dollar more attractive, at least for a time. No wonder, then, that the buck's value is rising in forex markets in recent weeks, in sympathy with higher interest rates on the 10-year. The U.S. Dollar Index is just about at the highest level since the Fed's March 18 disclosure, a news event that had initially sent the buck tumbling. Meanwhile, commodity prices generally have been inching higher as well, as per the CRB Index. Commodities are generally priced in dollars, so it's no surprise that a strong dollar equates with higher commodity prices.

Higher interest rates are almost surely the path of least resistance in the years ahead, in part because the U.S. deficits are sure to be large in the wake of all the monetary and fiscal stimulus of late. The problem is that the arrival higher interest rates now, this week, next month, next quarter come at an especially inopportune time: before the economy has sufficiently recovered. The Fed surely seeks to keep long rates below 3% for the rest of the year, or so one might speculate. But it's not clear that the markets are willing to go along for the ride.

In the old days, the Fed's powers were such that it had more control over keeping interest rates low and thereby providing the economy with ample monetary stimulus until the forces of growth rose anew. Engineering that scenario this time may be tougher, much tougher. One reason is that much of the control over future rates has been transferred to foreigners, courtesy of holding large quantities of U.S. debt. That may not be fate that rates will rise. Indeed, China surely wants to keep U.S. rates low in order to boost growth here, which will promote imports of Chinese goods. But no one really knows how these forces will play out.

Perhaps the cycle will be salvaged if the economy rebounds quicker than the crowd expects. Alternatively, the Chinese and other foreigners decide to buy large quantities of Treasuries in the months and quarters ahead. There are solutions to the current dilemma, but no one should expect that they're a forgone conclusion.

This post can also be viewed on capitalspectator.com.

Geithner's Comments Are Moving The Currency Markets

Timothy Geithner should quickly learn that currency traders take everything he says literally. Recent comments he made caused the dollar to take a nose dive. Geithner quickly followed those comments up with a retraction of sort, which left the markets unsure of his true intent. Currency expert Kathy Lien address this matter further in her blog post below.

How long will it take for Treasury Secretary Tim Geithner to realize that his comments move markets? When he first took office, he mistakenly threatened to brand China as a currency manipulator. This caused a wave of volatility in the currency market and sharp criticism about the experience of the new Administration. And now, Geithner has done it once again (Geithner Comments send Dollar for a Ride).

Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”

These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.

Why has the dollar had such a big reaction to these comments? Because if the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean less demand for U.S. dollars.

source: eSignal

This post can also be viewed on kathylien.com.

China Beginning To Use Monetary Leverage On U.S.

While the U.S. has racked up trillions in debt, China has been buying up this U.S. debt. Now China owns more U.S. debt than any other country on the planet, and of course with that comes a great deal of political power over the U.S. China owns so much of our debt that if they were to start selling it off in mass quantity it could collapse our entire financial system. China has not said that they have any intention of doing so, nor would it be financially wise for them to, however, the threat alone carries a lot of weight. One of Obama's campaign claims was that he intended to fight China's monetary manipulation, but with little surprise — after urging from China — the U.S. backed down. Now China is urging the U.S. to be more prudent with their stimulus spending — in order to protect the value of their investment. Kathy Lien dives more into this story in her blog post below.

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

CNBC VIDEO: Is US Debt Still Desirable to China?

This post can also be viewed on KathyLien.com.

The Most Indebted Countries By Percentage Of GDP

When you take a look at the list of the most indebted countries, you would assume that the U.S. would be tops on the list. That would certainly be the case if you just looked at the total amount owed, however, a better measurement of a country's debt load is to compare it to their GDP. When you do that the U.S. still looks bad, but we are no where near as bad as Japan — who runs away with the top spot. Kathy Lien looks at these numbers, and discusses some possible implications, in her blog post below.

The Economist has a great image on which countries have the most debt as a percentage of GDP. Japan tops the list followed by Italy and the United States. Japan actually has 2x more debt than the U.S. which I find particularly scary and leads me to wonder if Japan could face a ratings downgrade.

Source: Economist

This post can also be viewed on kathylien.com.

Switzerland Cuts Interest Rates: Swiss Franc To Fall Hard

Switzerland has decided to match the U.S. Central Bank's near zero interest rate policy and as a result the Swiss Franc is set to take a beating. Currency expert Kathy Lien explains the impact of Switzerland's decision on their currency, and even throws out some potentially profitable trades for currency investors in her blog post below:

Switzerland has officially adopted a beggar thy neighbor policy approach by intervening in the currency market. This morning, they cut interest rates by 25bp to 0.25 percent matching U.S. levels. They have officially embarked on Quantitative easing and will be buying domestic and foreign bonds (fully synopsis of SNB rate decision) .

Source: FX360.com

For currency traders, this means that a BIG seller of Swiss Francs have just entered the market. They have deep pockets and will probably be in the market for a while. Therefore, expect more losses in EUR/CHF and USD/CHF, both of which have hit 2 month highs. Such a strong move begs a correction but ultimately, I believe that EUR/CHF will hit 1.55 and USD/CHF will break 1.20.

The US retail sales report was much stronger than the market expected and this should add to the gains in USD/CHF, which has already outperformed EUR/CHF this morning.

There are still unanswered questions such as how much Swiss Franc the SNB will sell, the scale of bond purchases and additional liquidity. Their announcement today is aimed at accomplishing 2 goals at their expense of their neighbors which is protect their export sector and prevent the economy from falling into a deflation trap.

This post can also be viewed on kathylien.com.

The Pound And Euro Are Taking A Beating

The recent interest rate cuts by the Bank of England and the European Central Bank have lead to major selling of the Pound and Euro. Currency expert Kathy Lien talks about the recent development and offers her insight into the situation in her blog post below.

The Euro and British pound have come under severe selling pressure after the ECB and BoE cut interest rates by 50bp. Interest rates are now at historic lows for both central banks and even though the rate announcements were negative for both currencies, the Euro has sold off more aggressively than the British pound because ECB President Trichet warned that growth will be signicantly reduced in 2009 and 2010 while inflation will remain well below 2 percent.

More importantly, he admitted that the ECB is studying non-standard measures which include quantitative easing. However, Trichet prefers to use the Fed’s label of credit easing over quantitative easing (What is the Difference Between Credit and Quantitative Easing?). The mere possibility that the ECB could consider Quantitative Easing was enough to drive the EUR/USD below 1.25. With the third highest interest rate of the G10 nations, further interest rate cuts are still possible. By saying that they have not made a decision about whether 1.5 percent is the lowest level makes 1 percent interest rates a real possibility for the Eurozone. In fact, Trichet may opt for another rate cut before credit easing. For the US dollar, British pound and Japanese Yen, no surprises are expected from future rate decisions. However for the Euro, the prospect of lower interest rates and the uncertainty of if and when the ECB will adopt credit easing should keep the EUR/USD under pressure.

Bank of England: Rates May Have Hit Rock Bottom

As for the Bank of England, I believe today’s 50bp rate cut to 0.5 percent is their last. The central bank has been worried that excessively low interest rates would erode profitability of banks, reducing their incentive to lend. Now that they have been given the authorization to begin Quantitative Easing, it will be their new focus. UK Gilts have soared on the announcement that the government will purchase up to £100bn in Gilts and £50bn in private sector assets (syndicated loans and ABS). As we indicated in our ECB and BoE preview, Quantitative Easing is negative for a currency, but if the BoE is done cutting interest rates, further weakness in the British pound may be limited.

This post can also be viewed on kathylien.com.

Currency Market Update: Look To The Australian Dollar

Yesterday's market rally got a lot of investors excited, but the rally was short lived. Currency expert Kathy Lien points out 3 reasons why investors should have been suspicious of the rally in her blog post below. In addition Lien offers some insight into the future of currencies, and suggests that the Australian Dollar might be a great investment opportunity right now.

The currency and equity markets are turning lower after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious. None of the reasons for Tuesday’s jump delivered real solutions. The market only rallied because Bernanke delivered no surprises. President Obama’s attempt at reassuring Americans also failed to comfort investors.

Instead we are faced with a weakening economy that is only confirmed by this morning’s plunge in existing home sales. Sales of existing homes plunged 5.3 percent to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. The median price of a home sold dropped 14.8 percent compared to the year prior. Such disappointing numbers are not much of a surprise given the big decline in housing starts and building permits. With banks and mortgage lenders reluctant to lend, even potential homeowners with sufficient capital have found difficulty attaining loans.

The British pound has been hit the most because Bank of England member Barker said that the weak sterling is helpful. UK officials have taken every opportunity to talk down the currency.

USD/JPY on the other hand remains an animal. Despite weak economic data and a turn in equities, the currency pair continues to rise.

My favorite is still the Australian dollar because of strong M&A flow, higher gold prices and the prospect of the country remaining recession free. The AUD/USD is also prime for a breakout.

This post can also be viewed on kathylien.com.

Geithner's Financial Stability Plan

This morning the new plan to rescue the financial system was unveiled by Treasury Secretary Timothy Geithner, but so far the markets have not reacted very positively to the news. It is still early, but it appears investors are not sold on the proposed government actions. In his speech Geithner threw around numbers as high as $1 tillion, which represents the expansion of a key Federal Reserve lending program, according to the Associated Press. But even that failed to impress investors. Kathy Lien talks more about the new rescue plan and the impact to currency and financial markets in her blog post below.

The Treasury Secretary has finally spoken and the markets are disappointed!

The price action in the currency markets suggests that investors are disappointed by the lack of details from the Treasury’s new Financial Stability Plan and are skeptical about the effectiveness of getting the private sector involved. Furthermore, investors are not happy about being apart of an experiment (although I think this is the only way to go because all of the old measures have proven effective).

Geithner announced a cocktail of initiatives using “things we haven’t tried before” and warned “that we will make mistakes.” If the Treasury Secretary is not 100 percent confident in his own plan, how could investors be?

Traders have plowed right back into the US dollar on the fear that the US government is rolling the dice once again. Equities have also fallen as much as 300 points.

The Treasury’s Super TARP plan, which is now renamed as the Financial Stability Plan has 3 core components:

1. More Capital for Healthy Banks

2. New Financing for as Much as $1 trillion of Consumer and Business loans

3. Public Financing for Private Investors Willing to Buy Distressed Debt (details of private/public investment fund have not been released)

Read the rest of this analysis on FX360.com

This post can also be viewed on kathylien.com.

EU Leaves Interest Rates Unchanged In Risky Move

All over the world central banks are dropping key interest rates in an attempt to stimulate lagging economies. Why then would the head of the European Central Bank leave interest rates unchanged despite wide spread economic turmoil among EU countries? Kathy Lien shares her thoughts on Trichet's controversial decision, along with the potential impact to currency markets, in her blog post below.

Here is a snippet of my comments about this morning’s price action on FX360.com:

There has been a lot of action in the currency market this morning, mostly centered on the British pound and Euro.

ECB President Trichet is not buckling under pressure. After leaving interest rates unchanged at 2.00 percent, he refused to make any decisive comments on where interest rates are headed in March. Trichet is still buying time to see how the economy and price pressures respond to their recent rate cuts. The Euro has held steady because Trichet said he is not pre-committing or excluding anything. The zero interest rates that Prof Roubini is calling for is out of the question especially for a central bank that remains obsessed with inflationary pressures. Trichet acknowledged that inflation will continue to fall but he expects it pick up in the second half of the year and if oil prices rebound, the acceleration of price pressures could exacerbate. Rather than being completely downbeat about growth, Trichet said that even though the risks are clearly to the downside, there are signs of stabilization. By postponing rate cuts, Trichet is putting his credibility and reputation on the line.

The ECB cannot stop cutting interest rates at this time especially as we continue to see very weak economic data. German factory orders fell 6.9 percent in the month of December, more than double the market’s forecast. Trichet who is known for his candor has already admitted that 2 percent will not be the lowest level for Eurozone interest rates and the market may be right to bet on a 50bp rate cut in March. If he doesn’t plan to cut interest rates to 1.5 percent next month, he would not comment on the market’s expectations. Although zero interest rates is off the table, we do not think that the ECB will stop at 1.50 percent. Interest rates could fall as low as 1 percent, which is why we could see more weakness in the Euro.

EUR/GBP Crushed After BoE Rate Decision

EUR/GBP collapsed following the Bank of England’s decision to cut interest rates to 1 percent. Even though the yield advantage in EUR/GBP has increased from 50bp to 100bp in the Euro’s favor, the market is less focused on interest rate differentials and more focused on recovery. The pound is trading higher because the Bank of England and the UK are being rewarded for their aggressive monetary and fiscal stimulus. The Euro on the other hand is being punished for implementing sluggish monetary policy.

This post can also be viewed on kathylien.com.

Should The Fed Be Abolished? Ron Paul Thinks So...

This isn't the first time that Ron Paul has brought this measure to abolish the Federal Reserve before Congress, and it probably won't be the last. While most politicians, and Americans for that matter, write Paul off as crazy because of proposals just like this, is he really that offbeat? His arguments seem a lot more powerful now that the economy is struggling so mightily, however, there is still no chance that his legislation will be accepted, at least in his life time. Tim Iacano from The Mess That Greenspan Made talks more about Paul, and his new legislation, in his blog post below.

Earlier this week, Rep. Ron Paul (R-Texas) reintroduced legislation to abolish the Federal Reserve. While it's not likely to go any further than it did last time, efforts like this are an important first step toward making substantive changes in the future:

Madame Speaker, I rise to introduce legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts.

How can you argue with any of this?

While the "lender of last resort" function of the Fed makes a good deal of sense, the "master of the economy" and "master of the money" roles do not.

They never did (unless you're a banker or a politician).

With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America's exports or the low rate of savings should be enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress' constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation's founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true freemarket economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans' standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

What Does February Have In Store For Currencies?

January was a great month for the USD, and even better for the Japanese Yen, but what does February have in store for the currency market? Investors should pay close attention as currency expert Kathy Lien attempts to answer that question in her blog post below. Investors should know that past performance doesn't necessarily represent future performance, but it certainly can help investors make educated decisions.

In the beginning of January, I highlighted the effect of seasonality on the EUR/USD. At that time, I talked about how the EUR/USD has a natural bias to sell-off in the first month of the year as investors reverse their year end flows. Since 1997, the EUR/USD has sold off in the month of January 72.7 percent of the time. If we include the currency pair’s price action in 2009, the EUR/USD has now sold off 75 percent of the time in January. The combination of falling interest rates in the Eurozone, recession and a flight to safety into US dollars has led to the strongest January sell-off in the EUR/USD in more than a decade.

February Performance

Now that January is behind us, many forex traders may be wondering if there are any unique characteristics in the currency market for the month of February. Taking a look at more than 30 years worth of data, we have found that on average the trading range in USD/JPY tends to compress in the second month of the year. In fact, of all 12 months, the average trading range in USD/JPY is lowest in February. Lower volatility could mean stability for USD/JPY because high volatility hurts Yen crosses (A Turn in USD/JPY?).

Currency Performance Since January

The final chart (after jump) illustrates how all of the major currencies have performed against the US dollar in January. So far, the Japanese Yen has been the only currency to outperform the greenback.

This post can also be viewed on kathylien.com.

Low Consumer Confidence Pushes Dollar Higher

Consumer confidence fell again, this time to the lowest level on record. Consumers fear the worst, and as a result they are losing all appetite for risk. That means they will be heading for the relative safety of US dollars according to currency expert Kathy Lien. For more insight into how currencies should perform based on the latest report, read Kathy Lien's blog post below.

In more than 40 years, we have never seen US consumers this pessimistic. The Conference Board’s report on consumer confidence fell to 37.7, the lowest level on record. The disappointing consumer confidence report will drag down risk appetite and drive investors into the safety of US dollars. The rally in the US dollar is a reflection of more panic selling and not optimism about US economy. On the heels of the report, we have already seen the EUR/USD and equities turn negative. We may not see a recovery in confidence Until job security is no longer a major concern. Unfortunately with headlines in national papers touting the 74k jobs axed in one day this morning, consumers will not turn optimistic anytime soon. The one silver lining in the report is that we have seen an increase in plans to buy automobiles within the next 6 months. Major discounts are enticing consumers to buy new cars. Looking ahead, discounts and incentives will be the only for businesses to push inventory. Fourth quarter GDP is due for release on Friday and weak consumer confidence supports the market’s belief that growth was the weakest in 26 years.

Earlier this morning, S&P/CaseShiller reported that house prices fell 18.18 percent in the month of November, the largest decline on record. Unfortunately house prices still have room to fall as the labor market remains weak and more inventory floods the market over the next few months.

This post can also be viewed on kathylien.com.