Treasury Department report goes easy on Chinese flexibility policy for the renminbi; Breaking up [the euro zone] may not be so hard to do, says Capital Economics

Treasury will keep close surveillance over renminbi – The recent move by China to add more flexibility to the renminbi exchange rate regime was a “significant development,” the U.S. Treasury Department said in a July 8 report to Congress. However, the key issue is how much and how quickly the currency appreciates, the report said. This observation comes as no news to online forex traders. A number of factors suggest the renminbi remains undervalued, according to the Treasury report. These include China’s continuing accumulation of foreign reserves and the paltry growth of the effective exchange rate when taking into account the accelerated growth in China’s traded goods sector. The Obama administration will keep a close eye on the appreciation of the renminbi and enhance its efforts to expand U.S. export opportunities in China, Treasury Secretary Timothy Geithner said. The report was published almost two months after its originally scheduled release date, a move attributed in the forex trading community and elsewhere to the administration’s desire not to ruffle Chinese feathers before the recent G-20 meeting.

A world without the euro – A highly respected economic analysis firm has joined the ranks of those suggesting a break-up of the euro zone could have beneficial effects. News of the report has been received with particular interest among forex traders. Renewed economic growth in weaker European countries could be the previously unforeseen outcome of a break-up, Capital Economics, a London-based firm, said in a report released on July 11. Analysts have suggested that euro-zone weaklings, such as Greece, Ireland and Portugal, must resort to dramatic cost cutting measures and slashing prices in order to compete with the bigwigs like Germany. If these countries were to revert to their former national currencies they would be equipped to let the currencies depreciate as a way to make their exports less expensive, the report said. According to its website, Capital Economics is a leading worldwide independent macro economic research consultant that provides research on the U.S., Europe, Asia, Latin America and the U.K.

Key U.S. senators irked by Chinese renminbi exchange rate games; E.U. bank regulators are now stressing out over bank stress test

Congress may act if White House ignores the renminbi issue – The top two members on the Senate Finance Committee have expressed their dissatisfaction with the recent Treasury Department report that failed to criticize China’s foreign exchange rate games. The legislators hail from Montana and Kansas which have important exporting sectors where foreign exchange rate fluctuations are a serious business concern. The Chinese currency practices harm ranchers, farmers, and exporters across America, said Sen. Max Baucus (D-MT), chairman of the Senate panel. The Chinese action was a small step in the right direction, but small steps are insufficient, he said. China must take significant steps to appreciate its currency and these should happen soon, Baucus said, adding that he is urging the Obama administration to be vigilant in pushing China on the exchange rate issue. Sen. Charles Grassley (R-IA), the ranking member of the committee, was not so diplomatic. The administration has again failed to identify China as a currency manipulator, he said. Overall, the Chinese currency is tightly controlled and mostly removed from market forces, Grassley said, adding that he wants the administration to bring a case against China’s currency manipulation at the World Trade Organization under article 15 of the General Agreement on Tariffs and Trade (GATT). “If the President continues to avoid acknowledging China’s currency manipulation and fails to address it in a meaningful way, Congress will have to act,” Grassley threatened.

Forex traders look for more details on E.U. bank stress test transparency – All the ballyhoo about the importance of the current European Union bank stress test and the transparency of test results may prove to be nothing but lofty rhetoric. July 23 is the test-result release date set by the Committee of European Banking Supervisors which said that 91 banks in various E.U. countries were under the microscope. The committee previously announced that test results would be released on an individual and aggregate basis. However, there has been ongoing bickering among national regulators about what information to release and when. To borrow a phrase, if regulators hold bank on transparency, online forex traders may wind up asking – “Where’s the beef?”

Mixed signals regarding strength of euro place forex traders in a quandary; Hypo fails the E.U. bank stress test putting German taxpayers on the hook

Forex traders pulling their hair over the euro – Given the recent steady climb in the value of the euro against the U.S. dollar, the questions being asked are when and where will the appreciation elevator stop? In a report that was released on July 12 when the euro was nudging 1.2600 USD, analysts at the Royal Bank of Scotland (RBS) said the euro was approaching fair value against the dollar. This would suggest a reversal of any significant movements over a period of time, according to RBS. Developments over the past several days suggest the climb may soon be over, or not. Consider the following. Moody’s Investor Service has just downgraded Ireland’s credit rating while Fitch Ratings has just upgraded the credit posture of Estonia, a country poised to become the newest member of the euro-zone on Jan. 1. The latest data from the European Central Bank indicate that the bank’s intervention in European bond markets has been on a significant downward slope in the past weeks. On the other side of the pond, the latest data show weakness in U.S. home construction which has been attributed to the demise of the first-time homebuyer tax credit. In Washington and in financial centers worldwide, all eyes are now focusing on the July 21 appearance of Ben Bernanke, chairman of the Federal Reserve, before the Senate Banking Committee. And in Europe, the forex market has its eyes on the results of the E.U. bank stress tests which are due to be released on July 23. At press time (July 20 – 9:53 a.m. in New York), the euro was trading at 1.2866 USD.

Hypo adds another disappointment to its recent history – Reports began leaking out on July 19 that the first casualty of the E.U. bank stress test is Munich-based Hypo Real Estate Holding. This is already causing some distress among forex traders. There is good reason for such concern. Hypo reportedly has insufficient reserves and has been victimized by its exposure to the real estate market and sovereign debt holdings. It was bailed out in 2008 to the tune of 7.8 billion euros by the German government and is, in effect, nationalized. The bank may now need an additional 2.2 billion euros in recapitalization. Just as in the U.S., bank bailouts are unpopular in Germany and there are fears, perhaps unwarranted, that an infusion of more taxpayer cash for Hypo could fracture Chancellor Angela Merkel’s governing coalition. How that would play out within the euro-zone is unclear but it is a possibility that forex traders should keep in mind. According to its website, Hypo is in the process of realigning its business as a specialist bank for real estate and public finance with its focus always on the eligibility of business for Pfandbrief (mortgage-backed securities) funding.

Forex traders looking for trading clues in the details surrounding E.U. bank stress tests; Germany’s Merkel sees realism in E.U. bank stress test

Analysts point out important considerations regarding bank stress test – As forex traders ponder the real meaning of the E.U. bank stress test for the value of the euro, veterans in the field suggest traders remember the old maxim – the devil is in the details. What is known for sure are the following facts. (1) The test results are to be publicly announced on Friday, July 23, at 6 p.m. Central European Time. (2) There are three scenarios in the stress test – banks must maintain a 6% Tier 1 capital ratio, they must estimate losses on banking business, and they must estimate losses on sovereign debt holdings. So, what should forex traders look for in the run-up to the release of results and in the wake of the release? Here are some suggestions offered by European analysts. What will be the reaction of individual governments and which governments will remain steadfast in supporting their nation’s banks? How much in toxic assets do the banks really hold? What governments already have emergency plans in place (for example, according to various reports, Germany has a rescue fund of 480 billion euros, Spain has a rescue fund of 99 billion euros, and even Greece has a rescue fund of 10 billion euros)? What is the cumulative shortfall among the banks expected to be and how much will it really be (there are suggestions the numbers can range from 30 billion euros to 75 billion euros)? Will the test really prevent some banks from failing? These analysts also see some positive outcomes in the short-term as a result of increased bank transparency. First, it should increase the likelihood of banks being willing to trade with each other. Second, banks will be prompted to put in place contingency plans in the event of an imminent failure. At press time (July 21 at 12:07 p.m. in New York), the euro was down and hovering just above 1.2800 USD.

Optimism is the order of the day in Berlin – German Chancellor Angela Merkel today described the bank stress tests as “very realistic,” while acknowledging that reports of the failure of Hypo Real Estate Holdings (HRE) sound “plausible.” Forex traders and analysts who believe in the euro may find this encouraging since Germany will have to fork over as much as 2 billion euros to recapitalize the nationalized HRE. Morning activity on the Frankfurt Stock Exchange seemed to validate Merkel’s apparent optimism with the value of shares in several top German banks going up.

Forex market sees rising euro just hours before the release of E.U. bank stress test data; Forex traders keeping a watchful eye on the USD-Japanese yen exchange rate

Euro is not following the anticipated script – Somewhat unexpectedly, so far today, the euro has been showing strong gains against the U.S. dollar, hovering around 1.2931 USD (up 1.4%) at 6:10 a.m. in New York. This seems to fly in the face of conventional wisdom suggesting there would be a slight drop in the value of the euro in the hours leading up to the release of the results of the E.U. bank stress test later today. However, it does seem to confirm the conviction of one highly respected forex market analyst, Stephen Gallo of London-based Schneider Foreign Exchange, who continues to say the fair value of the euro should be in the range of 1.30 USD to 1.35 USD. News from Germany of rising business confidence, the highest since 2007, is one likely reason for the up-tick. In addition, the transparency coming from the bank stress test is seen as constructive, a view that outweighs concerns the stress test may be a watered-down version of the strenuous tests previously faced by U.S. banks. Things may change if there is surprisingly bad news regarding the sovereign debts holdings of the tested banks, some forex analysts suggest.

Japan may try to reign-in the yen – With most eyes focused on how the results of the E.U. bank stress test will affect the value of the euro against the U.S. dollar, savvy forex traders are busy looking at the numbers on the Japanese yen versus the dollar. The currency has continued to show strength versus the dollar and the euro, and this is making Japanese leaders nervous. The reason is Japanese exports will take a big hit as the nation’s currency appreciates and the cost of Japanese products skyrockets in overseas markets. In some quarters, there are now expectations of government intervention, perhaps imminent intervention, based on the stress test results and the dim outlook for the U.S. economy. According to various news reports, some analysts suggest should the level of the yen reach 85 USD, the likelihood of government intervention is high. Others say the range likely to prompt government action is somewhere between 80 USD to 85 USD. At press time (July 23, at 6:10 a.m in New York), the yen was trading at 87.135 USD.

Euro appears to have weathered the E.U. bank stress test storm; White House estimates budget deficits well above $1 trillion level

Forex traders overcome negative feelings about stress test – The E.U. stress test results have failed to dampen forex traders’ enthusiasm for the euro. At press time (July 26 at 2:20 p.m. in New York), the euro was trading in the neighborhood of 1.30 USD, up approximately 0.72%. Trading sentiment has apparently been influenced by a close look at the latest monthly report on U.S. new housing starts. The Commerce Department reported on July 26 that although annual sales of new homes jumped by 24% in June compared to the previous month, there is no cause for fireworks. The seasonally adjusted June sales figure of 330,000 homes must be seen in relation to the revised figure for May, which was lowered to an annual rate of 267,000. That was the historic low point since recordkeeping began 47 years ago. This did not escape the attention of the forex market.

Continuing U.S. budget deficits seem to be unavoidable – The Obama administration on July 23 released its Mid-Term Review, a revised outlook for the federal budget for both FY 2010 and FY 2011. The newest figures suggest the U.S. economy may, in fact, not escape a double-dip recession, according to some forex traders. The administration is projecting a deficit of $1.47 trillion or 10% of GDP in FY 2010, which ends on Sept. 30. The deficit for FY 2011 is now estimated at $1.42 trillion, which amounts to 9.2% of GDP. Forex market observers believe this admission by the White House is another factor contributing to the July 26 decline of the U.S. dollar versus the euro.

Japanese government is getting jittery about possible intervention

Intervention could be on the horizon – With the Japanese yen edging closer to the level of 85 yen to the U.S. dollar, government officials in Tokyo are beginning to sweat. According to news reports, Foreign Minister Yoshihiko Noda today expressed concern over the impact of a stronger yen on Japanese exports. Prime Minister Naoto Kan said he was keeping a close eye on developments. Experts have suggested the danger level – when some sort of government intervention is likely – is somewhere between 80 to 85 yen against the USD. Some forex analysts think the point of no return, when it comes to government intervention, could come if the dollar sinks to 84.82 yen, a level last seen in November 2009. At press time (10:10 a.m. in New York), the dollar was trading at 85.805 JPY.

Signs of an economic bounce help the euro – Confidence in the European economy has been a driving force in pushing up the euro against the U.S. dollar on the forex market today. The euro has been floating around 1.32 USD during the course of trading. The rising euro is a “sign of the growing strength” of the European economy, Lord Leon Brittan, vice chairman of UBS Investment Bank and a former vice president of the European Commission, said during an interview on Bloomberg News. Volatility of the currency, when compared to its relative levels of strength, is a great deal harder to deal with, he said. Policymakers do not have a target level for the euro that would prompt some sort of action, Brittan said, adding that, in any case, no action would be taken regarding the exchange rate alone.