Taiwan may open forex business to brokers as yuan looms

Taiwan is considering allowing brokerages into the tightly controlled foreign exchange business in a possible loosening of the island's decades-old currency controls as it eyes a bigger role in the international expansion of China's yuan currency.
Taiwan's cabinet is studying the proposal in response to requests from brokers to help them expand in the yuan business, chairman Chen Yuh-Chang of the Financial Supervisory Commission (FSC) told reporters at a briefing on Tuesday.
"This is a completely new business, especially when they start to do underwriting for yuan products in future," he said, adding no timetable or details were yet available.
Taiwan's central bank maintains strict control over the convertibility of the island's dollar, limiting foreign exchange business to banks under a strict reporting regime designed to keep the currency stable for the island's exporters and discourage speculation.
However with China's currency becoming more international and with China now Taiwan's top trading partner, the island's financial institutions are clamouring for an entry into the yuan business, mindful of how their Hong Kong rivals have a head start.
After some three years of talks, Taiwan and China are close to signing a memorandum of understanding on a first step: allowing settlement of trade transactions directly in each other's currency, avoiding the current system of first having to convert either currency into U.S. dollars.
Such an agreement would give a boost to Taiwan's financial institutions in their dealings with China, helping them into a growing market to offset a mature, slow growing one at home.
Last month the Taiwan head of China's Bank of Communications (BoComm), one of only two mainland banks with branch status in Taiwan, said he thought the island was in a good position to become a centre for offshore trading in the yuan. .

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Australian Dollar Gains Against Majors After RBA Minutes

The Australian dollar rose after the release of minutes showing the central bank saw domestic economic growth overshadowing a “fragile” global outlook at its Aug. 7 policy meeting.

The so-called Aussie added to yesterday’s gains against most of its major peers as the Reserve Bank of Australia made no mention of intervening to curb the currency’s strength, which has persisted despite a decline in the terms of trade. The Australian and New Zealand currencies were also buoyed by speculation talks among European leaders this week will lead to stronger measures to counter the region’s debt crisis, boosting risk demand.

“The market was looking for a fair bit more commentary on the Aussie dollar itself following the monetary policy statement a week and a half ago as well as the statement accompanying the policy decision where the RBA seemed to ramp up its rhetoric about the currency,” said David Forrester, senior vice- president for Group-of-10 foreign-exchange strategy at Macquarie Bank Ltd. in Singapore.

The Australian dollar climbed 0.5 percent to $1.0499 as of 5:20 p.m. in Sydney after rising 0.2 percent yesterday. New Zealand’s currency, nicknamed the kiwi, rose 0.5 percent to 81.27 U.S. cents.

Policy ‘Appropriate’

The RBA’s decision to leave its benchmark rate unchanged at 3.5 percent was “appropriate” given the outlook for domestic inflation and growth even though “the global economic environment remained fragile,” according to the minutes released today.

The bank also said that the Australian dollar exchange rate “had remained at a relatively high level notwithstanding the weakening in the global outlook and decline in commodity prices.”

The Australian dollar has risen 2.8 percent so far this year even as the ratio of export prices to import prices has fallen by 17 percent, according to a Citigroup Inc. index.

“The sense that we’re getting across our trading desk is that a number of investors were short heading into these minutes, expecting some sort of comment possibly on intervention, and we’re just seeing those positions unwound,” said Andrew Salter, a strategist in Sydney at Australia & New Zealand Banking Group Ltd. (ANZ) A short position is a bet that a currency or asset will decline in value.

Stevens Testimony

RBA Governor Glenn Stevens is scheduled to testify before the House of Representatives Standing Committee on Economics in Canberra on Aug. 24.

“You will get a bit more color out of the governor on Friday,” said Peter Dragicevich, a Sydney-based foreign- exchange economist at Commonwealth Bank of Australia. (CBA) “I’m sure he’ll be pressed on the usual topics such as bank funding, and also probably pressed on the currency and its impact on the economy,”

Appetite for higher-yielding assets was also supported ahead of meetings between political leaders in Europe which may lead to stronger measures to counter the region’s debt crisis.

Luxembourg Prime Minister Jean-Claude Juncker, the head of the euro group of finance ministers, will visit Greece tomorrow for talks on the indebted nation’s fiscal adjustment program. German Chancellor Angela Merkel and French President Francois Hollande meet in Berlin on Aug. 23 to discuss the debt crisis, and both are set to talk separately with Greek Prime Minister Antonis Samaras later in the week.

ECB Purchases

The South Pacific currencies pared their gains yesterday after Germany’s Bundesbank stepped up its criticism of the European Central Bank’s plan for government bond buying and the ECB denied a report by Der Spiegel magazine that it had discussed a plan to set yield limits on euro-bloc bonds.

In the U.S., the Federal Reserve is due to publish minutes tomorrow of its two-day meeting that ended on Aug. 1. The central bank, which has pledged to keep its benchmark rate near zero through 2014, refrained from adding to the $2.3 trillion in asset purchases it has already made to support the economy. Its next decision is on Sept. 13.

The yield on 10-year Australian government notes was little changed at 3.45 percent today. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 2.76 percent.

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Optimism on Greece, ECB, lifts shares, euro

LONDON (Reuters) - European shares and the euro edged higher on Tuesday on optimism that meetings on Greece's future and a strategy being drawn up by the European Central Bank will lead to progress in solving the euro zone debt crisis.

European shares (.FTEU3) , which have risen 16 percent since June, opened up 0.2 percent, with the main indexes in London (.FTSE) Paris (.FCHI) and Frankfurt (.GDAXI) safely in positive territory.

After modest rises in Asia and a flat finish on Wall Street, the MSCI global share index <.MIWD00000PUS> was up 0.14 percent at 0715 GMT. (.EU) (.L) (.N) while the euro rose 0.15 percent versus the dollar with smaller gains also against the yen and sterling.

"The dollar is weaker versus the euro ahead of the key meetings this week that may provide clarity on both the immediate outlook for Greece and the outlook in regard to the ECB's plan to buy sovereign bonds," Derek Halpenny Bank of Tokyo Mitsubishi.

"That optimism is persisting today."

Greek Prime Minister Antonis Samaras will meet German Chancellor Angela Merkel, French President Francois Hollande and Eurogroup chief Jean-Claude Juncker this week to try and secure more funding from the European Union, International Monetary Fund and ECB, despite falling behind on its debt cut targets.

Investors are also looking for any clues on the ECB's plans for tackling the crisis after it poured cold water on a report suggesting it was considering buying bonds of euro zone countries if their borrowing costs breached a certain level.

Bond markets remained in a cautious mood ahead of an auction of shorter-term 12-18 month debt by Spain, one of the countries now at the centre of the euro zone crisis, later in the morning.

German government bonds, traditionally favored by risk adverse investors, waned slightly in early trading but kept to its tight recent range.

"We expect Spain to continue outperforming Italy especially in the short end on continued expectations of...(the) EFSF (bailout fund) and ECB support," RBS strategists said in a note.

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Euro hits near 2-week high versus dollar

The euro rose to its highest in nearly two weeks against the dollar on Tuesday, with traders citing Asian central bank demand and saying it extended gains after breaking through technical levels, triggering stop loss buy orders.

The euro rose to $1.24149, its highest since Aug. 7. It broke above the Aug. 14 high of $1.2386 and the 55-day moving average at $1.2390 to trigger stop loss buy orders on the break above $1.2400.

Its gains also helped sterling rise to a three-week high of $1.5757 while the euro also rose to a six-week high against the yen of 98.55 yen on EBS trading platform.

The euro's gains came as talk of European Central Bank action to ease Spanish and Italian borrowing costs resurfaced after a weekeend report that it would target specific yield levels as part of any bond-buying programme, despite the ECB trying to quash that speculation on Monday.

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Euro zone drifts towards another recession as economies contract.

THE EURO zone edged closer to its second recession in three years after a resilient economic performance from Germany and France failed to prevent the single currency bloc from contracting in the second quarter.

Gross domestic product in the euro area shrank 0.2 per cent in the three months to June, compared with the previous three months when there was no growth, as the economies of Greece, Italy, Spain and Finland contracted sharply.

“ confirmed that the euro zone is, to all intents and purposes, in recession, even if it has avoided the technical definition of two successive quarters of negative quarter-on-quarter GDP,” said Howard Archer, chief European economist at IHS Global Insight.

Robust investment and domestic consumption helped the German economy expand 0.3 per cent in the second quarter, beating expectations of 0.1 per cent growth, while French GDP remained unchanged, avoiding an expected contraction.

The Netherlands also outperformed forecasts, growing 0.2 per cent.

But a 1 per cent fall in economic output in Finland, an ally of Germany in the battle for greater austerity in Europe, showed how the sovereign debt crisis troubling southern Europe is spreading to economically stronger northern states.

Economists warned that the resilience displayed by Germany and France was not sustainable and said that output was likely to drop sharply in the coming months.

“Against a backdrop of high tensions in financial markets, weak domestic demand among almost all euro zone members, output may fall over the next quarter,” said Catherine Stephan of BNP Paribas.

Nonetheless, better preliminary data than expected from Germany and France gave a boost to stock markets with the FTSE Eurofirst 300 gaining 0.5 per cent.

Pierre Moscovici, France’s finance minister, welcomed the news that the euro zone’s second-largest economy had avoided recession, despite warnings last week from the Bank of France that it would contract.

However, he said three successive quarters of zero growth was “not excellent . . . it’s zero growth so therefore it’s too weak”.

Mr Moscovici also acknowledged that meeting the 2013 growth target of 1.2 per cent would require a huge effort in fixing the economy and restarting growth.

Flat or slight growth in the core economies has accentuated the north-south divide in the euro zone, which could be a preoccupation for the European Central Bank as it considers more monetary easing.

Portugal recorded a contraction of 1.2 per cent while Italy and Spain had already confirmed they were stuck in double-dip recession with negative growth of 0.7 per cent and 0.4 per cent respectively.

Greece continued to be the worst hit with an economy shrinking at an annualised pace of 6.2 per cent.

“However, even in the countries still displaying positive GDP growth the momentum is clearly unfavourable and the output gap still firmly in negative territory,” said Gilles Moec of Deutsche Bank.

Finland, which regards itself as closer to the zone’s core than its periphery, reported that its economy shrank 1 per cent in the second quarter compared with the first: the only euro zone countries that fared worse were Greece and Portugal.

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EURUSD: Trading the U.S. Consumer Price Report.

Trading the News: U.S. Consumer Price Index

What’s Expected:

Time of release: 08/15/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURUSD

Expected: 1.5%

Previous: 1.7%

DailyFX Forecast: 1.5% to 1.7%

Why Is This Event Important:

Consumer prices in the U.S. are expected to expand 1.5% in July after climbing 1.7% the month prior, and easing price pressures may heighten expectations for additional monetary support as the Fed maintains a cautious outlook for the world’s largest economy. At the same time, the core rate of inflation is expected to hold steady at 2.2% for the second consecutive month, and the stickiness in underlying inflation may instill a bullish outlook for the U.S. dollar as it limits the Fed’s scope to expand its balance sheet further. In turn, an in-line print across the CPI figures may produce whipsaw-like price action in the greenback, but we will be keeping a close eye on the core reading as it continues to hold above the 2% target for inflation.

Recent Economic Developments

The Upside

Release	Expected	Actual
Advance Retail Sales (JUL)	0.3%	0.8%
Produce Price Index ex Food & Energy (YoY) (JUL)	2.3%	2.5%
Personal Income (JUN)	0.4%	0.5%

The Downside

Release	Expected	Actual
NFIB Small Business Optimism (JUL)	91.6	91.2
Wholesale Inventories (JUN)	0.3%	-0.2%
Unemployment Rate (JUL)	8.2%	8.3%

The rebound in household spending paired with the uptick in wage growth may encourage businesses to pass on higher costs onto consumers, and a strong inflation print may encourage the Fed to soften its dovish tone for monetary policy as the recovery gradually gathers pace. However, as high unemployment along with the ongoing slack within the real economy dampens the outlook for private sector consumption, firms may continue to conduct heavy discounting to draw demands, and easing price pressures may weigh on the greenback as it fuels speculation for more quantitative easing.

Potential Price Targets For The Release

As the EURUSD fails to put in a close above the 50-Day SMA (1.2392), the pair appears to be carving out a lower high in August, and we may see the pair give back the rebound from July (1.2041) as the downward trend carried over from the previous year continues to take shape. However, there appears to be a bullish divergence in the relative strength index as the oscillator continues to move away from oversold territory, and a soft inflation print may produce a meaningful move above the 1.2400 figure as it fuels speculation for QE3. For a complete technical outlook including intra-day scalp targets, refer to yesterday's Winners/Losers report.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades amid the deviation in market expectations, but a stronger headline and core print could pave the way for a long U.S. dollar trade as it dampens the scope for QE3. Therefore, if the inflation report tops forecast, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade hits its mark in an effort to lock-in our gains.

However, the ongoing weakness in the labor market paired with the persist slack within the real economy may continue to drag on price growth, and a soft inflation report may fuel expectations for more quantitative easing as the Fed keeps the door open to expand its balance sheet further. As a result, if price growth tapers off in July, we will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

Impact that the U.S. Consumer Price report has had on USD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
JUN 2012	07/17/2012 12:30 GMT	1.6%	1.7%	+9	+18

June 2012 U.S. Consumer Price Index

Consumer prices in the world’s largest economy increased an annualized 1.7% for the second consecutive month in June, while the core rate of inflation advanced 2.2% during the same period to mark the slowest pace of growth since February. Indeed, the initial reaction was fairly muted, with the EURUSD maintain the narrow range ahead of the release, but the greenback struggled to hold its ground throughout the North American trade as the pair closed at 1.2292.

--- Written by David Song, Currency Analyst

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When will the euro collapse? It’s already dead

Anyone who spends their time analyzing the euro debt crisis will know that there is one question you get asked again and again. When will the single currency finally collapse?

You can have fun giving a spuriously precise answer — July 28th, 2014, is my favorite (look it up on Wikipedia if you are wondering why).

But the truth is no one really knows. The euro EURUSD +0.00%  could stagger on from crisis summit to emergency bailout for another decade. Then again, it could be gone by the end of the month — if Greece is refused its third bailout, the country may be kicked out, and the entire currency could unravel over the course of a few chaotic days.

In reality, whether it is a few months or a decade away does not make as much difference as you might suppose.

Behold the euro zombie.

Why not? Because in most of the ways that actually matter, the euro is already dead.

It no longer meets most of the criteria of a working form of money. There is an important point in that for investors. It is right now — while the currency no longer lives but still staggers on like a zombie — that the euro is wreaking most havoc on the countries of Europe. Once it is finally taken apart, markets in those nations can start to recover — potentially very rapidly.

Of course the euro still looks like a currency. There are notes and coins, and you can still go into a shop in Hamburg, or a café in Naples, and get stuff in return, even if there might be a certain amount of grumbling. There is a central bank, although it doesn’t appear to have much idea what its job is. And there are payment systems and foreign exchange markets that work as if the euro were a viable part of the global capital markets.

And yet if you think about it a little harder, the euro is not a currency in every sense of the word. A currency is only partly about notes and coins. It is also about being a universally accepted medium of exchange, a store of value over time, and a way of facilitating trade over long distances. That was why money evolved. And the euro doesn’t really meet those criteria any more.

Take interest rates, for example. In Germany, the yields on 10-year government bonds are less than 2%. In Spain they are close to 7%, and in Italy just under 6%. And in Greece? Don’t ask. Government bond yields matter — not just in themselves but because they set the benchmark for borrowing costs right across the economy.

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Zero growth ties French President Hollande's hands

French economic growth flatlined for the third time in a row in the second quarter, highlighting the challenge for President François Hollande as he marks his first three months in office. William Horobin reports. Photo: Reuters

Some countries can’t use the euro for imports because of fears that drachmas or lire may suddenly replace euros.

There are already reports that oil traders don’t want to supply clients in Greece. Why not? Because in six months time when payment falls due they may not get paid in the currency the deal was struck in, but one worth much less. Much the same may soon be true of Spain as well.

And who can blame them? Oil is commodity that you can sell pretty easily right around the world. Why sell it to a country where there is a risk of not getting paid when there are so many alternative customers.

Meanwhile, money flees to safe havens.

London real estate agents report that the phones are ringing non-stop with wealthy euro-zone property buyers looking for somewhere to park their cash — and houses in the British capital look a safe bet. Swiss bankers are flush with cash exiting Italy and Germany. Everybody with any significant wealth wants at least part of it outside the euro zone because they are worried the currency might one day implode.

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