Wednesday, July 11, 2007

Hammer of the Gods?


The Japanese Yen has become extremely volatile overnight, due to a variety of factors.

1) Risk Aversion. Moody's Investors Service cut ratings on $5.2 billion of bonds backed by U.S. subprime mortgages, and S&P announced that it may downgrade $12 billion worth of subprime sludge. If hedge funds and other investors are forced to meet margin calls, they will liquidate their profitable carry trade positions.

2) Bank of Japan. The BoJ will announce its decision on interest rates this evening. While no change is expected, we may hear hawkish comments from BoJ officials, who are expected to raise rates in August.

All of this volatility has created some wicked looking potential hammers (potential because we never assume that we know how an open candle will close!), like the one on the daily GBP/JPY

Tuesday, July 10, 2007

Harsh!

From the Wall St Journal...

China Executes Former Safety Regulator
Death Penalty Comes
After Food, Drug Woes
Attract Global Notice
By NICHOLAS ZAMISKA in Hong Kong and JASON LEOW in Beijing
July 11, 2007

China's swift execution of a top food and drug regulator convicted of bribery comes as concerns at home and abroad are mounting over the safety of Chinese products. Zheng Xiaoyu, the 62-year-old former head of the State Food and Drug Administration, was executed yesterday after he was sentenced to death on May 29 for taking bribes from drug companies and dereliction of duty.

The execution of such a high-ranking Chinese official is a rare event. Government officials charged with corruption often manage to negotiate lesser sentences given their stature and connections. Mr. Zheng appealed the verdict last month, but a higher court upheld it and the execution was approved by China's Supreme People's Court, according to Xinhua news agency.

Mr. Zheng's death follows a string of food- and drug-safety lapses -- ranging from tainted toothpaste and pet food to suspended anticancer drugs -- that have cast an unflattering light on China's regulatory standards.

Ordinarily, a case such as Mr. Zheng's wouldn't have merited the death penalty, given that the sums involved weren't extraordinary and that he confessed, said Fu Hualing, an associate professor on the faculty of law at the University of Hong Kong.

"But China is not in an ordinary time," Mr. Fu added. The widespread scale of the food- and drug-safety scandals and the international attention they have drawn put pressure on China's judges to impose the death penalty, he says. "It takes a courageous court to do the opposite."

One of Mr. Zheng's former deputies who was also convicted on corruption charges was given a suspended death sentence Friday. A second deputy was sentenced in November to 15 years in prison on similar charges.

An assistant at the law firm that had been handling Mr. Zheng's defense said the firm wouldn't comment.

Also yesterday, representatives of five Chinese state agencies that oversee food and drug safety appeared jointly for the first time to explain how they work together, an apparent effort to show that China is taking the issue seriously.

Commenting on the recent scandals, Yan Jiangying, a spokeswoman for the State Food and Drug Administration, said, "These cases have brought shame to my agency and revealed serious problems. We need to seriously reflect on what lessons we can draw from such cases and how we can carry out effective supervision and ensure the safety of our food and drugs."

Chinese officials who spoke at yesterday's briefing emphasized that China's safety problems stem from the fact that it is still a developing country.

Zhang Yanqiu, a vice director at the Ministry of Agriculture, said many farmers still work on small plots of land, and they vary greatly in their skills and how much they understand about food safety. Just six to seven years ago, their job was to produce enough food to feed the population, so food safety wouldn't have been a priority and the concept remains new to them, he said.

Also yesterday, China's quality-supervision authorities said they blacklisted 14 companies for planning to export substandard food products, according to Xinhua.

"They will be banned from exporting food products," said Lin Wei, an official with the General Administration of Quality Supervision, Inspection and Quarantine.

The substandard products, which included preserved seafood and fruit, were set to be exported to Japan, Canada, the U.S. and the European Union, according to the administration.

Some of the products were found to be contaminated by bacteria or contain additives such as sulphur dioxide in excess of levels set by the importing countries.

Authorities said that most of the severe problems occurred at small factories with fewer than 10 employees and that the government was working to cut the number of such operations in half by 2010.

US Housing On Shaky Foundation

NEW YORK (Reuters) - Credit Suisse analysts estimated banks could lose up to $52 billion over time due to their exposure to collateralized debt obligations that invested in U.S. subprime mortgages.

Most of the losses would stem from loans to hedge funds, compared with an expected $5 billion to $10 billion from banks' direct investment in subprime CDOs, the Credit Suisse analysts said in a report dated July 6.

In June, fears of hedge fund losses in subprime mortgages, or home loans made to borrowers with blemished credit histories, rattled financial markets after news of hefty losses at two funds managed by Bear Stearns

Troubles at several other hedge funds have came to light since Bear Stearns' fund problems: Cheyne Capital's Queens' Walk, Cambridge Place Investment's Caliber Global Investment, and United Capital's Horizon Funds.

Japanese Yen Roars

Strength in the Japanese Yen may be attributed to comments by Japan's Minister of Finance earlier today. Courtesy of Dow Jones Newswire:

08:00 GMT Japan Tsuda: Want BOJ To Support Econ Via Monetary Policy
08:00 GMT Japan MOF Tsuda: No Plans To Change FX Makeup Of Reserves
08:00 GMT Japan MOF Tsuda: No Comment On If Tokyo To Intervene In FX
08:00 GMT Japan MOF Vice Fin Min Tsuda: Monitoring FX Mkts Carefully

Still, to me its just a pullback within an uptrend. Looking for support levels and oversold readings on EUR/JPY, GBP/JPY, ect.

USD hammered; US home buyers stop buying hammers

Problems at Home Depot, the world's largest home-improvement retailer and a proxy for the US housing market, are helping to bring down the buck as well as US stocks.

Revenue may fall 2 percent this year, the first annual decrease in Home Depot's history. The sale of HD's contractor division, which is less tied to home building, means the company will lose a buffer against the biggest housing slump in 16 years.

Event risk - Bernanke speaks at 1pm New York time.

More on the BoC

GREAT REUTERS ARTICLE on BoC rate hike...

"Some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term," the central bank said in a statement explaining its first rate hike since May 2006.

Question from a Reader II

Originally Posted by Technocrat
Hi again Ed,

I'm used to the term 'breakout' applied to range trading. How does it apply to trend trading? Are you referring to breaking out of a channel or do you mean horizontal support and resistance levels? Sorry if this is too basic, I'm still wet behind the ears and this stuff is pearls, so I don't want to get it wrong.

Thanx again.



Hi T,

Great point - try to think of it this way. Trends often pause and consolidate, and this creates support and resistance levels. So many times, when you are looking at a range-bound currency pair, it is actually range-bound within a longer term trend. Hope this helps!

Ed