Forex Trader Top 3: BoE, IMF, and Joblessness
1. European Central Bank Holds Rates Steady, Bank of England Cuts
The News
This morning, the European Cental Bank (ECB) left the Main Refi Rate steady at 4.00%, while the Bank of England (BOE) cut the Official Bank Rate 25 basis points to 5.00%.
The Breakdown
The rate cuts from banks came in as the market expected.
The cut from the BOE was needed, as recent news of a housing market slowdown is pressuring the country to increase liquidity. The ECB held rates steady (also anticipated), as the bank is seemingly more concerned about increased inflation from a rate cut, than inflation from the euro trading near all-time highs.
The Bottom Line
The euro popped up to a quick new high against the dollar on Thursday morning. However, unlike many had been expecting, the currency did not rip through the roof. In fact, just a few moments after the new high, the euro fell back into the two-month trading range. If the euro cannot come up with a new high quickly, traders may want to start thinking ‘reversal.’
2. IMF Warns of Global GDP Slowdown
The News:
On Wednesday, the International Monetary Fund (IMF) released the 2008 Economic Outlook April update. The IMF stated, “Global growth is projected to slow to 3.7 percent in 2008, 1/2 percentage point lower than at the time of the January World Economic Outlook Update and 1 1/4 percentage points lower than the growth recorded in 2007. Moreover, growth is projected to remain broadly unchanged in 2009. The divergence in growth performance between the advanced and emerging economies is expected to continue, with growth in the advanced economies generally expected to fall well below potential.”
The Breakdown
Overall, the IMF now sees that the United States economic problems are spilling over into the rest of the world. At present, there’s no question whether the United States’ GDP is contracting, or whether the issues will trigger global slowing. The question now is, “How low will it go.”
Please take a moment to read and understand the severity of these comments from the IMF:
“In addition to serious problems at the intersection of credit and the real economy, the United States remains plagued by profound errors in risk management among its leading financial institutions. Problems that were once thought to be limited to issues surrounding liquidity in short-term money markets-and in our view, the continuing deep correction in the U.S. housing market and the unresolved financial sector problems have led the U.S. economy to the verge of recession. In fact, we are now anticipating that the United States will indeed slip into recession-meaning that it will experience two or more quarters of negative growth-during the course of 2008, before starting a moderate recovery at some point during 2009.
The effects on the rest of the world are likely to be significant. We have already reduced our expectations for growth in Europe and much of the emerging world. Our revised global growth forecast is 3.7 percent, down from 4.9 percent in 2007, which represents a pronounced slowdown. However, I would stress that achieving growth even at this level will require that most advanced economies experience only mild slowdowns and that many emerging economies be able to keep their rapid pace of growth largely on track.”
The Bottom Line:
One thing many people are not quite grasping yet is that while the United States may experience a “mild recession”, we may already be halfway through the storm. What’s more, the IMF also concedes that a stronger U.S. dollar from here would be beneficial to the larger global economic environment. Moreover, the IMF seems completely at ease with the FOMC’s actions of late and concedes that the ECB should now start lowering rates.
On page 16 of the report, the IMF says, “In the United States, rising downside risks to output, amid considerable uncertainty about the extent, duration, and impact of financial turbulence and the deterioration in labor market conditions, justifies the Federal Reserve’s recent deep interest rate cuts and a continuing bias toward monetary easing until the economy moves to a firmer footing. In the euro area, although current inflation is uncomfortably high, prospects point to its falling back below 2 percent during 2009, in the context of an increasingly negative outlook for activity. Accordingly, the European Central Bank can afford some easing of the policy stance.”
While we can’t completely rule out a capitulatory move (meaning the EUR/USD could still stage a last surprise spike higher), if you’re wondering why the U.S. dollar could actually stage a reversal, the aforementioned statement is the reason.
3. Massive Decline in Jobless Claims Last Week
The News:
After topping out at 410,000 two weeks ago, Friday’s report shows a large decline in claims for the week of April 5. The market had expected jobless claims of 386,000, however, actual jobless claims came in at 357,000.
The Breakdown:
Last week’s gigantic jobless claims number of 410,000 scared the market and triggered ‘recession’ squawking across the board. However, the claims probably had more to do with seasonal factors than with true economic weakness. Jobless claims under 400,000 paints a much brighter picture for American workers, as many believe constant weekly claims above 400,000 will make a recession certain.
The Bottom Line:
The sky is never falling. Yes, economic conditions are difficult and a ‘mild recession’ may ensue, however, the FOMC is taking appropriate actions to improve liquidity. Those seeking more guidance should look towards the LIBOR rate, which is the rate banks loan money to one another. When LIBOR rates decline, banks loan money to one another. When banks have access to cash, so do businesses and consumers. What’s more, the IMF report above (see #2) shows that Sovereign Funds have already loaned banks $95 billion and there will be more on the way.
Mark Whistler is the founder of www.WallStreetRockStar.com and is the author of multiple books on trading. Mark’s newest book, The Swing Trader’s Bible – co-authored with CNBC/Fox News regular guest Matt McCall – will be on shelves in late summer, 2008. In addition, Mark also writes regularly for TraderDaily.com and Investopedia.com.
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