FX Primus Ltd.

FX Primus Ltd.

April 17, 2013 02:41 ET

Market Brief of the Week-Misconception Always Fools Market: Mario Sant Singh

SINGAPORE, SINGAPORE--(Marketwired - April 17, 2013) - In his Market Brief of The Week for 15 April, leading global foreign exchange trader, educator and author Mario Sant Singh - whose views are widely sought after in the Forex industry, focuses on USD losses and economic seasonality fears, and a stronger Yen. China's GDP unexpectedly slowed in the first quarter to a 7.7% YoY growth, indicating that the nation's recovery from 4Q last year lost momentum.

Key Events to Focus On This Week

  • China's Gross Domestic Product (GDP)
  • BoJ Haruhiko Kuroda's speech
  • German ZEW Economic Sentiment
  • Mario Draghi speaks

Key Events Last Week

  • China's CPI lowered to 2.1% in March, from 3.2% in previous month
  • China's Trade balance unexpectedly shows deficits, due to lower exports last month
  • China's exports rose 10% YoY, imports rose 14.1%
  • China's New Yuan Loan and total aggregate financing nearly doubled last month, at CNY1060 billion and CNY2540 billion
  • Australia's employment decreased 36.1k jobs, unemployment rose to 5.6% from previous 5.4%
  • U.S. Retail Sales dipped 0.4%
  • Cyprus may sell its gold reserve for extra bail out

Economic Insights

Turning point for the U.S. Dollar?

To view figure 1 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Currencies-performance-vs-USD-last-week1.png.

The Dollar index extended losses last week, instead of investors looking for havens,

  1. The stronger Yen dragged the entire index lower
  2. There were no shining releases from the United States, only some better-than-expected earnings from big banks
  3. Seasonality fears since the U.S. economy tends to fade in 2Q

To view figure 2 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/US-Economic-or-Financial-Condition.png.

In the post Lehman crisis, the theory "USD weakened on the QE (Quantitative Easing) program" is a ridiculous misconception!

To view figure 3 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Dollar-Index-A-clear-uptrend-since-3-years-ago-before-Fed-launched-the-QE2.png.

Elements that bolster the U.S. Dollar:

  • QE accelerated inflation fears or real inflation. It scared away some portfolios in private sectors with the lack of the Federal Reserve's (Fed) guidance.
  • The stimulus supports growth as well, echoing fundamentals that "a strong growth comes with a strong domestic currency."
  • As long as the German yield stays low, there is no reason for the typical "risk free" bond to have different treatment, thanks to the Euro Zone sovereign crisis.

To view figure 4 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/German-10year-yield-vs-US-10year-yield.png.

In the longer-period macro currencies approach, the USD could remain attractive for traders of different asset classes before China fully liberates its financial system.

  • The Euro and Sterling seem to be "out of the game" due to weak fundamentals and indebted status. The "safe haven status" is non-existent today.
  • CNY denominated assets are not easily assessable for non-residents, and the financial market tends to have very high volatilities.
  • In short, the USD status of being the "top reserve currency" remains unshakeable.

Basic criteria to become the reserve currency:

  • A developed and stable economy
  • Large amount of assets dominated in the currency
  • Free-flow capital

To view figure 5 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/China-equities-usually-hold-the-high-volatilities-and-have-little-correlation-with-its-economy.png.

To view figure 6 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/The-country-has-large-surplus-most-of-the-time-as-the-economy-still-largely-depends-on-the-exports.png.

To view figure 7 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/The-prolonged-low-PE-ratio-distracts-the-stable-inflow-to-the-local-equities.png.

Qualified Foreign Institutional Investor (QFII) growth has very little impact on the overall Chinese financial system

To view figure 8 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/China-FDI-lacks-of-the-resillient-growth-over-a-sustainable-period.png.

Capital outflows still can't be well-managed

To view figure 9 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Shanghai-Net-outflows-of-goods-and-capitals.png.

Bank of Japan (BoJ) - Crossing the Rubicon

The battle starts, no leeway at this juncture

In my Market Brief of the Week for 8 April 2013 and Webinar, I introduced monetary guidance and illustrated "pros and cons". The market quickly reacted to these "cons" late last week, since more investors realized that the BoJ now stands at the edge of a mountain with no leeway.

The Group of Twenty Finance Ministers and Central Bank Governors (G-20) will hold its meeting this weekend. I believe the BoJ will be under the spotlight (or on the chopping board) for a second time this year. The U.S. Treasury stated they are ready to press Japan for competitive devaluation, and European governments are urging it to not become too reliant on fiscal and monetary stimulus. Does that make sense? Or is there a problem in the Japanese financial system or economy? The answer might be "yes".

Does fiscal policy allow "whatever it takes?"

  • When the EU excises fiscal reform and the U.S. implements "sequestration", both relate to "fiscal policies".
  • In order to prevent a collapse in the Japanese economy, the BoJ cannot rule out fiscal policy.
  • Given the confirmed debt rise in upcoming years, "whatever it takes" could lead into "to be hurt by the whatever".
  • The chart below doubts "whatever"

To view figure 10 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Japan-debts-GDP-vs-Japan-lending-GDP.png.

Two-year effort to change a "15-year deflation"?

  • If there were a single thing that would solve all problems, Japan would not have been in this situation for 15 years - it also remained the second largest economy for most of the 15 years.
  • European Central Bank's (ECB) Mario Draghi highlighted what can and cannot be done by a central bank.
  • They tried before but failed in the end. The bottom line is that they did not get the effect they wanted.

To view figure 11 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Japan-CPI-YoY1.png.

The efficiency of the Japanese money base

There are no effective channels to distribute the increasing money base. The financial system and real economy will not benefit.

To view figure 12 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Japan-velocity-of-money-has-no-improvement-in-the-past-2-decades.png.

Once again, the chance of a collapse is present

  • The debts-to-GDP ratio stands at an extremely high level (214.30%), which is already risky.

To view figure 13 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/Japan-debts-vs-GDP-ratio1.png.

  • Once the interest rate rises in the future (5 or 10 years), higher obligations could lead to a default risk, along with "banks balance sheet shrinks".

China's 1Q growth misses forecast

China's 1Q GDP unexpectedly slowed in the first quarter to a 7.7% YoY growth, indicating that the nation's recovery from 4Q last year lost momentum.

To view figure 14 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/China-GDP-YoY.png.

Industrial Production grew to 8.9% YoY, also missing the earlier forecast, indicating a weak manufacturing environment and uncertain external demand. Meanwhile, Retail Sales rose 20.9%.

To view figure 15 (Source: Bloomberg, FXPRIMUS), please visit the following link: http://www.askmariosingh.com/wp-content/uploads/2013/04/China-IP-vs-China-RS.png.

ABOUT MARIO SANT SINGH

Mario Singh is the Director of Training & Education at global retail Forex brokerage FXPRIMUS. He has appeared as a guest expert on CNBC more than 35 times to talk about foreign exchange markets, and is a regular contributor to top investment publications and online portals. Known as a brilliant and intense communicator with a unique ability to 'keep Forex simple' and a mission to help every man-in-the-street to trade profitably and responsibly in the Forex market, more than 20,000 people have attended his Forex trading programs. He is the only Forex trader in Asia invited to train Julius Baer Private Bankers - the third largest Swiss Bank, and ICBC, China's largest commercial bank. Mario is also author of the best-selling book, 17 Proven Currency Trading Strategies: How to Profit in the Forex Market. (Wiley Publishing).

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