The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Fed voting member Janet Yellen and her dovish comments gave little support to her domestic currency yesterday. She stated the obvious when committing the Fed to a tighter monetary mandate ‘at some point’ in the future. She highlighted that US unemployment could stay elevated ‘for years to come’, and that the countries recovery will ‘be gradual and vulnerable’ to shocks. The Fed expects the commercial real estate sector to weigh down this recovery as their prospects are rather ‘worrisome’ to the committee. Despite the equity rally going some ways to rebuild household wealth, ‘strength, durability of expansion are in question’, as prospects for ‘consumer spending remain cloudy’. Not a strong endorsement to wear a train driver’s hat Buffett style.

The USD$ is currently lower against the EUR +0.35%, GBP +0.18%, CHF +0.35% and JPY +0.00%. The commodity currencies are stronger this morning, CAD +0.35% and AUD +0.22%. At 96c or 1.0417 expect the BOC to be drawing ‘their’ line in the sand. Governor Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. The BOC believes that a strong currency is detrimental to economic growth. In the O/N session, the loonie has appreciated to its strongest level in 2-weeks vs. its southern trading partner on the back of the G20 maintaining their economic stimulus measures. Keeping the status quo is boosting speculators risk appetite for the higher yielding asset classes and commodity based currencies. Last week the Canadian economy managed to pare -43k jobs in Oct. (the market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession, but, the data will make it easier for Governor Carney to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise or commodity prices start to fall off a cliff!

The AUD near its strongest level in over a year as China, their largest trading partner, said that their industrial production (+16.1%) and retail sales (+16.2) accelerated last month. The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. It’s the same story, but at a different pace! Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9308).

Crude is higher in the O/N session ($79.54 up +49c). Crude prices have remained close to home after ‘Ida’ weakened in the Gulf of Mexico on its way to the US coast, thus reducing the potential of further supply disruptions. Initially, she dragged prices from their one week lows as she entered the Gulf and forced both BP and Chevron to cut production and evacuate some staff for safety reasons. It’s worth noting that the Gulf of Mexico produces 27% of the domestic US Oil production and 15% of its gas output! Earlier in yesterday’s session, prices declined after an official from OPEC said the group is unlikely to change production levels in Dec. Its does not help the commodity that the IEA cut its long-term forecast for global oil demand yesterday on the back of this economic crisis sapping consumption in developed economies and the uptick in alternative energy use. Last week the black-stuff prices plummeted after the 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. To date, it has not been able to retrace all of its 3% losses from Friday. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report has provided little support. Weekly inventory reports appear tomorrow due to the Memorial Day holiday today.

Gold rose to a record in London this morning as the greenback is struggling for a 3rd consecutive day, thus boosting demand for the yellow metal as a hedge against further currency depreciation. The holiday shortened week had some speculators booking well earned profits earlier, however, disappointing US employment numbers along with the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF has speculators wanting to buy on pull backs push commodity higher ($1,115).

The Nikkei closed at 9,871 up +1. The DAX index in Europe was at 5,695 up +82; the FTSE (UK) currently is 5,289 up +60. The early call for the open of key US indices is higher. The US 10-year bonds eased 2bp yesterday (3.47%) and are little changed in the O/N session. Treasuries prices rallied yesterday despite the market setting itself up to absorb another $41b’s worth of US debt this week. Dealers managed to take down $25b 10-year product with another record of indirect bids. Dovish comments from the Fed’s Lockhart and Yellen gave way to risk reduction strategies being implemented. Money is being taken off the side-lines and been put to work in the FI asset class. The US treasury will issue $16b 30-year bonds tomorrow. One would have expected dealers to cheapen the curve a wee bit more, however, demand is there!

No, a “Tobin Tax” is not a new fee for those with the Tobin surname; rather, it is a proposed tax on all transactions involving the movement of currencies across borders, and is named after the man who devised it – James Tobin. Even though many are hearing this for the first time, Tobin initially suggested the tax way back in the early 1970s when US President Richard Nixon brought about the end of the Bretton Woods system by taking the US off the gold standard. ¹

The collapse of Bretton Woods in 1971 allowed currencies to “float” for the first time in nearly thirty years, and Tobin recognized that exchange rate fluctuations would give rise to exchange rate speculation. Tobin suggested the idea of implementing a tax on each foreign currency transaction to add to the cost of the trade, thereby penalizing short-term speculation. Here are Tobin’s own words on the goal of his tax as he explained in an interview with the German news magazine Der Spiegel in 2001 – many years after he first proposed the idea:

The idea is very simple: at each exchange of a currency into another a small tax would be levied – let’s say, 0.1% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties’ crises in Mexico, South East Asia and Russia have proven. My tax would return some margin of maneuver to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.

Despite occasional renewed interest in the concept of a currency exchange tax, no formal implementation ever took place. This was due largely no doubt, to the challenge presented in enforcing and managing the initiative as it would likely require an international institution such as the United Nations to effectively administer the tax.

So Why is the Tobin Tax Back in the News?

The main reason the tax is back in the headlines is simple – the recent banking crisis forced many governments to inject billions of dollars into the banking system to keep individual firms afloat. Advocates for the tax suggest that the money generated though the tax could be used to payback taxpayers and make the financial system more responsible for its actions. I would suggest that the idea of “punishing” the financial system plays more than just a passing role in the recent push towards an international currency tax.

Another, more recent phenomenon is the rise of – for lack of a better term – special interest groups that see a tax on the financial system as a convenient means to fund a wide range of projects. This seemingly includes everything from funding climate change initiatives, to providing additional money for developing nations. Interestingly, neither of these fits Tobin’s original vision for the tax as he noted with remarkable candor in the Der Spiegel interview:

I have absolutely nothing in common with those anti-globalization rebels. Of course I am pleased (with the renewed interest in his idea); but the loudest applause is coming from the wrong side. Look, I am an economist and, like most economists, I support free trade. Furthermore, I am in favor of the International Monetary Fund, the World Bank, the World Trade Organization. They’ve hijacked my name … The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations.

What Will a Tobin Tax Cost Me?

The actual cost should international authorities decide to impose some form of Tobin’s transactional tax, is still unknown. Tobin originally suggested a rate of 1 percent but later modified it to a range of 0.1 to 0.25 percent of the trade’s total volume (10 to 25 cents per hundred dollars). At this point, this is the range that is most commonly reported, but there is no official word yet as to what the actual cost might be should the tax become a reality.

So why is the forex market singled out in this manner? James Tobin talks about “cushioning” exchange rate fluctuations to help stabilize individual economies, but I believe the discussion today has far more to do with opportunity. With current daily totals exceeding $3 trillion a day, and with most G7 countries in a deficit situation, the temptation to scalp a few pips off each transaction for themselves is just too great for many governments to ignore.

I mean after all, would a 0.25 percent tax on each forex transaction have prevented the current economic crisis? Of course not – governments already had the means to thwart the actions that led to the credit crunch through existing regulatory bodies – they just failed to do so. So let’s be honest and call this for what it is – a means to raise money disguised as a move to protect markets.

What Does This Mean for Me as a Forex Trader?

Assuming that some form of a transaction-based tax goes through – and I have to say, I believe it will as the support right now is unprecedented – the cost to trade forex will inevitably increase. A new tax could also lead to a decline in overall trading levels but with the depth of liquidity in the currency markets, I don’t see this as a major concern.

¹ Bretton Woods was the name of the small town in New Hampshire that hosted an international summit shortly after the Second World War. The goal of the meeting was to help Europe recover from the devastation of the war and established two major economic policies:

1. Most European currencies were “pegged” to the US dollar to help maintain their value
2. The US dollar as itself tied to the price of gold which at the time, was $35 an ounce

This meant that as the value of gold increased, so too did the value of the US dollar and other than buying and selling gold directly on the market, there was little the Federal Reserve could do to influence the dollar.

In the late 1960s and early 70s, the price of gold rose very quickly pulling the dollar along with it and according to the government, was responsible for the increase in inflation in the American economy. For this reason, President Nixon eliminated the gold standard requirement, thus allowing the dollar to fluctuate based on market conditions.

BBC News

Prices are currently 4.1 percent lower than they were a year ago, but rose 1.2 percent in September – the fourth straight month of increases putting the average house price at £199,303, or $333,414 USD.

“Although the supply of property is beginning to pick-up, it is still insufficient to keep pace with the increase in demand which points to further prices gains in the near term,” said Jeremy Leaf of RICS.

“Cheap money remains a critical prop for the market and this is being reflected in the continuing appetite for finance from first-time buyers despite the large deposits still being demanded by lenders,” he added.

BBC News

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday was an intraday snooze for the North American trading session. All the damage to the greenback occurred in the O/N session. True too form, the day after NFP is historically the quietest trading session of the month. This week is also a shortened holiday week, with less staff creating liquidity concerns. In fact, this week marks the beginning of the holiday ‘volatile liquidity premium scenario’. It does not matter that US employment is at 10.2% or higher. The markets psyche wants to push the current risk-rally, equity rally and the ‘mother of all carry-trades’ (USD), into the year end. After G20, investors, speculators and dealers are convinced that cash-cow-Ben and his foreign counterparts will provide the necessary liquidity at low cost well into 2010 or beyond!

After posting strong gains that could be related to various M&A flows GBP plummeted this morning after the rating agency Fitch warned over the UK’s AAA status. In its review on major economies it said ‘the U.K. was most at risk of losing this status’. The comments have triggered broad based sterling selling in thin conditions. Illiquid markets will be the order of the day in this holiday shortened week.

The USD$ is currently lower against the EUR +0.01%, CHF +0.02%, JPY +0.27% and higher against GBP -0.58%. The commodity currencies are weaker this morning, CAD -0.09% and AUD -0.23%. At 96c or 1.0417 expect the BOC to be drawing ‘their’ line in the sand. Governor Carney has insisted that they will use a combination of currency intervention, credit and quantitative easing options to influence the loonies’ value. The BOC believes that a strong currency is detrimental to economic growth. Yesterday, the loonie appreciated just under +2% (the largest one day gain in 4-months), to its strongest level in 2-weeks vs. its southern trading partner on the back of the G20 maintaining their economic stimulus measures. Keeping the status quo is boosting speculators risk appetite for the higher yielding asset classes and commodity based currencies. Last week the Canadian economy managed to pare -43k jobs in Oct. (the market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession, but, the data will make it easier for Governor Carney to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise.

The AUD has managed to take the foot temporarily of the gas pedal last night, on speculation that the pace of the rally to its yearly highs may have been somewhat overdone. After commodities rabid rally of late, especially gold, investors are comfortable to withdraw some of their well eared profits. The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. It’s the same story, but at a different pace! Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9290).

Crude is higher in the O/N session ($79.09 up +34c). Good old Ida! Hurricane Ida dragged crude prices from the one week lows as she entered the Gulf of Mexico and forced both BP and Chevron to cut production and evacuate some staff for safety reasons. With the G20 ignoring the USD weakness has also pushed the greenback to new 15-month lows vs. its largest trading partners and promoting commodities as another alternative for investment. It’s worth noting that the Gulf of Mexico produces 27% of the domestic US Oil production and 15% of its gas output! Last week the black-stuff prices plummeted after the 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. To date, it has not been able to retrace all of its 3% losses from Friday. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report provided little support. The EIA showed a surprise decline in US crude stocks. Crude inventories fell -4m barrels last week vs. expectations that stocks were to rise by +1.4m barrels. Imports of crude fell -764k barrels, or -8.6%, to +8.13m barrels a day (the lowest level in 3-months). Refineries surprisingly are operating at +80.6% of capacity, down -1.2% from the previous week and the lowest rate in 6-months. A similar story for gas, where gas inventories fell -287k barrels to +208.3m, w/w, vs. an expected increase of +400k barrels. A tad better news from distillates (includes heating oil and diesel), stocks fell -378k barrels to +167.4m. The market had been expecting a decline of around -1m barrels. Bear in mind one week does not make a trend! Inventory reports appear this Thursday due to the Memorial Day holiday tomorrow. Speculators have had their ‘fun in the sun’, let fundamentals drive the market short term.

Gold remains better bid this morning and on course to leave the $1,100 an ounce resistance level in its wake, as a questionable greenback continues to support the ‘yellow metals’ appeal as a hedge against currency depreciation. Disappointing US employment numbers along with the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF has speculators wanting to push this commodity higher. Year-to-date, gold has climbed +25% ($1,109).

The Nikkei closed at 9,870up +62. The DAX index in Europe was at 5,621 up +2; the FTSE (UK) currently is 5,244 up +10. The early call for the open of key US indices is higher. The US 10-year bonds eased 2bp yesterday (3.49%) and are little changed in the O/N session. Treasuries prices were little changed yesterday despite the market setting itself up to absorb another $81b’s worth of US debt this week. Yesterday, dealers took down $40b 3-year product with a record of indirect bids (68.5% vs. a prior record of 62.5%, bid/cover was 3.33%). Now that the G20 has held the status quo last weekend, has given consumer confidence a boost, pushing them to embrace riskier trading strategies. Money is being taken off the side-lines and been put to work in both equities and FI asset classes. The US treasury will issue $25b 10’s later day and resume after the memorial holiday to sell $16b 30-year bonds on Thursday. One would have expected dealers to cheapen the curve a wee bit more, however, demand is there!

“Asset markets have taken comfort from the continued coordinated pro-growth plans of the G-20, with equity markets remaining supported,” said Hans Redeker, an analyst at BNP Paribas.

Associated Press

BBC News

The official jobless rate excludes millions of people who have given up looking for work and part-time workers who want to be working full time.

New York times

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Loose fiscal and monetary policies will only weaker the USD further, hence the O/N move. Yes, we have a 26-year high unemployment rate of +10.2% in the US, even a broader measure pegs it at +17.7%, but it’s the ‘stimulus actions’ that are causing the ill effects to the USD again. On Friday, just after the US employment headline release, Obama, signed into law, two elements of fiscal stimulus worth many billions, firstly, first time home buyers tax credit was extended and secondly, the emergency employment benefit will run for an extra for another 20-week’s. With Bernanke determined to keep rates low and no-out cry from G20 members will only result in a weaker greenback.

The USD$ is currently lower against the EUR +0.53%, GBP +0.67%, CHF +0.49% and higher against JPY -0.16%. The commodity currencies are stronger this morning, CAD +0.75% and AUD +0.45%. When it comes to Canadian unemployment numbers over the last 3 months, no analyst’s prediction is in the same ball park! The Canadian economy managed to pare -43k jobs last month (market was expecting a gain of +10k) and push the unemployment rate up 2-ticks to an unexpected +8.6%. The data provides much stronger evidence that Canada has some ways to go to exit this recession. The report will make it easier for Governor Carney at the BOC to follow through on his pledge to keep borrowing costs at record lows until June of next year to promote growth unless of course the inflation outlook changes materially. The loonie managed to do an about turn and weaken on the back of softer oil prices due to the US numbers. However, in the O/N session commodities has found their lost traction and provided the loonie support. Governor Carney will not have to worry about using in the short term a combination of currency intervention, credit and quantitative easing options to influence the loonie value. The currency had been strengthening like most major currencies vs. the USD. The BOC believes that a strong currency is detrimental to economic growth. For now the loonie remains in a tight 3cent trading range with dealers continuing to play the support and resistance levels until fundamentally or technically told otherwise.

In the O/N session the AUD rallied for a 4th-consecutive day after a home-loan approvals report advanced the most in 6-months (+5.1% vs. +3.1%). The currency has also climbed on speculation that the Fed will now have to keep its O/N borrowing costs low for a considerable period of time after Friday’s disappointing headlines, thus boosting demand for higher-yielding assets. Last week, Governor Stevens indicated that the Aussi economy will expand at more than three times the pace forecasted in Aug., and signaled he and his policy makers will continue to lead the world in raising borrowing costs. The currency is well supported by commodity prices and expects dealers to remain better buyers on pullbacks (0.9284).

Crude is higher in the O/N session ($78.54 up +100c). Oil prices plummeted on Friday after the disappointing 26-year high US unemployment rate conjured up fears that future fuel demand will once again weaken. The black stuff managed to pare close to 3% of its value after the report. But, in the O/N session has found some legs. The commodity is contained within this $7 trading range for the time being, however, support levels are questionable as demand destruction remains strong and healthy in the US. Even last weeks bullish inventory report provided little support. The EIA report showed a surprise decline in US crude stocks. Crude inventories fell -4m barrels last week vs. expectations that stocks were to rise by +1.4m barrels. Imports of crude fell -764k barrels, or -8.6%, to +8.13m barrels a day (the lowest level in 3-months). Refineries surprisingly are operating at +80.6% of capacity, down -1.2% from the previous week and the lowest rate in 6-months. A similar story for gas, where gas inventories fell -287k barrels to +208.3m, w/w, vs. an expected increase of +400k barrels. A tad better news from distillates (includes heating oil and diesel), stocks fell -378k barrels to +167.4m. The market had been expecting a decline of around -1m barrels. Bear in mind one week does not make a trend! Speculators have had their ‘fun in the sun’, let fundamentals drive the market short term.

After another winning week last week, gold remains better bid this morning and on course to leave the $1,100 an ounce resistance level in its wake, as a questionable greenback continues to support the ‘yellow metals’ appeal as a hedge against currency depreciation. Disappointing US employment numbers along with the RBI purchase of 200 metric tons or $6.7b of the yellow metal from the IMF has speculators wanting to push this commodity higher. Year-to-date, gold has climbed +25% ($1,109).

The Nikkei closed at 9,808 up +19. The DAX index in Europe was at 5,558 up +70; the FTSE (UK) currently is 5,192 up +49. The early call for the open of key US indices is higher. The US 10-year bonds eased 1bp on Friday (3.51%) and are little changed in the O/N session. Treasuries climbed after the US unemployment rate managed to break that psychological 10% barrier. The short end of the yield curve touched their lowest yields in 5-month. However, supply remains an issue this week and should provide some resistance. The US treasury plans to sell a record $81b in its quarterly auctions of long-term debt and replace its inflation-protected 20-year bond (TIPS) with a reintroduction of the 30-year security. They will issue $40b 3-year notes today, $25b 10’s tomorrow and $16b 30-year bonds on Nov. 12th.