Combined with some easing in the Ukraine, the stronger dollar fared well against the euro, the GBP and yen and soared against the weaker CAD. Easing of the Ukrainian crisis is based on statements by Russia’s Putin that he would contain his invasion to Crimea even as Russian soldiers stormed Crimean outposts.

The European Union and the US have been measured in their response to Putin’s aggression, a strategy that has been hailed by Russians but questioned by the rest of the world. The atmosphere can only be described as Cold War tension with Russia once again playing the aggressor’s role.

Bernanke Milestones

Under Bernanke, the Federal Reserve committed to scaling down and ending the stimulus package that has added more than $3 trillion in debt to the Fed’s books. The cutoff was to be when unemployment lowered to 6.5 percent. Bernanke did not anticipate that so many workers would leave the workforce and play a major role in reducing the rate so while the rate has lowered, new job creation has not been strong enough.

Bernanke’s Fed was also committed to historically low interest rates until the inflation rate approached 2 percent. Yellen made it clear that her Federal Reserve is likely to keep interest rates low even after the inflation rate reaches the 2 percent mark and beyond. Investors were surprised that Yellen projected a rate increase as early as 2015 and that rates would remain low well after unemployment fell below the 6.5 percent mark.

In a continuation of Bernanke’s tapering agenda, Yellen confirmed the government would reduce its bond purchase program by another $10 billion per month to $55 billion. Of the 18 Fred board members, only Minneapolis Fed President, Narayano Kocherlakota, dissented.

The Fed also suggested that unemployment would shrink to between 5.9 percent and 5.6 percent by the end of 2015. Yellen attributed disappointing economic data to weather-related issues and said she expected the setbacks to be short-term.

Forex Markets Respond

The USD responded favorably to the news even as equities turned down from what was fairly predictable news.

Against the yen, the dollar gained more than 1 percent and 0.89 percent against a basket of currencies. Against British sterling, the dollar finally gained some momentum, despite good employment data and personal income improvements.

The Canadian dollar slumped to a 4.5 year low against the USD. Yellen’s strong support for the dollar and the Royal Bank of Canada’s weak support for the Loonie sent the CAD plummeting.

Analysts projected the Loonie’s decline will continue, likely touch $0.85 against the USD by June.

• Euro – USD – 1.3821, down 0.07 percent
• GBP – USD – 1.6533, down 0.05 percent
• USD – Yen – 102.43, up 0.13 percent
• USD – CAD – 1.1246, up 0.08 percent
• AUD – USD – .90290, up 0.13 percent
• USD – Ruble – 36.1727

With Russian troops poised on the Ukrainian border and in the Crimean peninsula, Chancellor Merkel warned of the potential for disastrous consequences. At the same time, Kerry promised severe economic penalties for Russia if it continued to violate international law by occupying a foreign land. Kerry, the US Senate and the European Union appear ready to take a hard economic line against President Putin and Russia. In a return to cold war mentality, Putin seems to relish in the spotlight of controversy, flexing his ego and muscle in the Ukraine without abandon.

Mario Draghi Euro Zone Comments

European Central Bank president Mario Draghi hinted that the lingering threat of deflation and the relative strength of the euro were matters of concern. The strong euro puts the Euro Zone partners at a trade disadvantage and the deflation has lingered longer than expected. The signal is clear. The ECB will have to counter with monetary measure to soften the euro and raise inflation.

The euro lost 0.4 percent against the USD after reaching a two-year high earlier in the session. The euro lost 1.3 percent against the yen. The yen was a big winner on the day, gaining 1 percent against the USD.

Other safe haven currencies also fared well. The Swiss franc achieved a two-year high against the USD and gained 0.2 percent against the nervous euro.  

Crisis in Ukraine

Secretary Kerry promised the US and European Union would take serious and punitive steps against Russia on Monday if interference in Ukraine’s sovereign rights continues. Ukrainian acting president Oleksander Turchinov told S media that Russian forces were preparing to invade.

Kerry spoke to Congress on Thursday in a briefing that underscored the perilous nature of Russia’s aggression.

In China, industrial output missed market targets and retail sales also came up short.  It is a tense world and safety is the key for many investors.

• Euro – USD – (0.02 %) – 1.3863
• GBP – USD – (0.2%) – 1.6619
• USD – JPY – (0.4%) – 101.79 
• USD – CAD – + 0.5% – 1.1074
• AUD – USD – +0.01% –   0.90300
• USD – RUB  – 36.5725

In Russia, equity markets mounted a mild rally on Tuesday only to turn down on Wednesday. After striking a new low against the USD on Monday, the Russian rouble posted modest, fragile gains against the dollar on Wednesday.

Russian Rouble Down 9 Percent vs. USD in 2014

Betting against the rouble has been a winning strategy in 2014. The currency has lost 9 percent against the USD and investors suggest volatility is likely to persist through the March 30^th elections in the Ukraine.

The central bank was called to action on Tuesday as foreign investors fled the currency and Russian equity markets. The bank invested $11.4 billion in foreign currency reserves in support of the rouble. The threat of US and western sanctions weighs heavily on Russian markets.

Russian equities fell 12 percent on Monday but picked up some forward momentum on Tuesday, up 5 percent, before sliding back on Wednesday. Sparked by a flight to relative safety, there exists an uneasy downward trend in Russian equity markets.

Heated European and American sanction discussions can only weaken Russia’s currency and equity shares. Russia’s targeted inflation rate is 5 percent in 2014.

Bank of Canada Holds Rates

Citing stronger than expected revisions to early 2013 growth data, the Bank of Canada opted to hold the line on its 1 percent benchmark interest rate. The prevailing rate has not flinched for three years. Speculation about low inflation seems a secondary concern to bolstering the country’s export balance.

The threat of a trade sanctions might bolster Canada energy exports to Europe. The soft CAD should improve the demand in the event of a continued diplomatic stalemate.

Canada’s target inflation rate is 2 percent and while January tipped in at 1.5 percent in January, much of the rise is credited to increased energy demand. The softer CAD has been a boon to exports.

The Bank of Canada projected growth of 2.5 percent in 2013 although 1^st quarter projections are guarded.

European Commission Singles Out Italy and France

In a report released in Brussels on March 5, the European Commission added Italy and France to elevated watch list status while lowering its risk assessment on Spain’s debt. The Commission identified several countries, including Germany and the UK, with significant imbalances, but admonished Italy and France, repeat offenders in missing targets. Croatia and Slovenia joined France and Italy in the Commission’s endangered status.

The Commission called for “decisive” action by the at-risk economies. France is the second largest economy in the EU and Italy the third largest.

Italy responded that the agenda of new Prime Minister Matteo Renzi, which was to be released on Wednesday, would meet Italy’s targets and more. Renzi’s platform is expected to address abnormally high unemployment, offer more affordable housing and a reduction in borrowing costs. The European Commission stressed the importance of tighter constraints to bring debt under reasonable limits, a policy admonished by Renzi.

The performance of France seemed to draw the ire of the Commission. Given two additional years to reduce its budget deficit below the 3 percent of GDP ceiling, France has failed to impress the Commission.

Citing high labor costs undisciplined spending and a general lack of competitiveness, the Commission described France as “an unfavorable business environment.”

France responded that the bulk of its budget cutting initiatives were scheduled between 2015 and 2017. Finance Minister Pierre Moscovici indicated that improvements to France’s competitive capabilities were “in the pipeline” but failed to elaborate.

Meanwhile investors continue to flee emerging economies in favor of established economies.

Euro – USD – Down 0.08 percent to 1.3731 

USD – GBP – Up 0.35 percent to 1.6722 

USD – CAD – Down 0.38 percent to  1.1046 

USD – Rouble – 36.0265

USD – Yen – Up 0.15 percent to 102.35

DJI –  Down 24.43 points (0.15 percent) to 16,371.45

SPX –  Up 0.97 points (0.05 percent) to 1,874.88

Nasdaq Composite – Up 5.379 points (0.12 percent) to 4,357.351

Experienced traders deploy strategies to hedge their bets, but for today we will consider the key economic, financial and political indicators that traders use to evaluate the relative strength or weakness of a currency opposed to a paired partner.

Understanding the Forex Marketplace

The Forex marketplace is active and volatile The market is open 24 hours a day for five days every week. The market has no central exchange and currency values can change round the clock as events unfold around the world.

In terms of daily trading volume, the Forex market is the largest and busiest market in the world. The market is global. Currency values are subject to a range of compelling factors that influence traders and therefore the value of a given currency. Like all markets, currency values are measures of supply versus demand.

When the demand exceeds the available supply of a specific currency, the value of the currency rises. Likewise, when supply outweighs demand, the value will lower. When you invest in a pair, you are betting that the value of one currency will rise or decline against a paired partner because demand for that currency will increases or subside compared to demand for the paired partner.

Factors Influencing Demand For Currencies

In an era where central bankers have been needed to keep credit markets open and cash flowing, the relationship between a currency’s central bank and the currency value cannot be overlooked. As the Federal Reserve extends its tapering initiative, the value of the dollar should appreciate.

But, central banks have other concerns than quantitative easing (stimulus). The primary function of central banks is to control inflation. When deflation fears run rampant through Europe, the European Central Bank may be forced to take action and increase interest rates, which would affect the euro.

If the central bank feels the value of the currency is putting its export trade at risk, it may be inclined to flood the market with its domestic currency as Japan has done for the past year. Pouring money into the economy (quantitative easing) has a chilling effect on the currency’s value.

Market Sentiment

Although many Forex traders closely monitor global equity markets, it is usually easier to gauge market sentiment for equities than it is for Forex pairs. We wake up in the morning to national coverage about equity markets, which are covered throughout the day and night.

There is no denying the existence and brute force of market sentiment. Sometimes, it can seem that market sentiment defies logic but there can be a host of unforeseen events at work that drive market sentiment. At best, market sentiment is fickle and can change at a moment’s notice.

Political Events

Forex traders cannot afford to be in the dark about political events. Civil wars, terrorist attacks, election results, budget impasses, debt ceiling controversies, government shutdowns, credit rating activity, Congressional stalemates and new government policies all affect a currency’s value. The ability to stay ahead of political events can positively impact the trader’s experience.

Macroeconomics and Forex Trading

Macroeconomics remain the guiding force in currency trades. Gauging and understanding a country’s economic position is the principle that most influences Forex traders, large and small. Macroeconomic reports are strong indicators of a nation’s economic and fiscal well-being.

For example, when true unemployment in the US improves, this is a positive dynamic. However, when the US had two sour non-farm payroll reports in succession, market sentiment attributed the downtrend as weather related and not a reflection of the economy.

In Canada there is concern about household debt and the world’s most overpriced housing market. We have all seen the affect that can have! Economists are watching these troubling trends that have already tuned the CAD lower.

Britain recovery has been partially fueled by the Help to Buy program, an aggressive accommodation for new and existing homebuyers. There are already concerns that this is creating an inflationary force in the UK. Hence, one of the key drivers in the UK’s recovery may well take a toll before long.

At the same time, many national economies are sector driven. Canada relies heavily on its strong energy export trade. When oil prices rally, the CAD adds value. Understanding the factors that drive the economy and are key contributors to GDP is important for Forex traders.

Another key driver of the Forex market is bond markets. The bond market and the Forex market are closely related. Understanding the effect of bond rates upon currency values offers good insight into pairs trading.

The Forex trader need not know about all currencies and countries in order to succeed.  Many successful traders concentrate on a few currencies and the economies affecting those currencies.

When trading currency pairs, the trader’s ability to gauge a nation’s economic strength is the most important determination. Forex traders read and study macroeconomic reports and draw unemotional opinions as to the future of a nation and its currency. That is when the Forex trader is ready to trade.   

From international juggernauts like Boeing and General Electric to Mom & Pop beauty product manufacturers like Dana Point-based Envyderm, recipient of a seven-year $84 million export contract with a Middle East pharmacy chain, export is lifting US manufacturers and rewarding innovative entrepreneurs. The exploits of America’s biggest corporations are well publicized but small businesses that have a tough time competing for retail space in the US are turning to overseas buyers.

International consumers like Made in USA. From music to movies, from jetliners to turbines, from personal cosmetics to prescription drugs and tech, Made in USA carries weight in international markets.

The US Commerce for Economic Affairs recently announced that 2012 exports topped $2.2 trillion, a new high. Since 2009, US exports have raised the bar every year with the 2012 volume ($2.1 trillion) representing an 11% increase over exports in 2009. Expect more of the same in 2014.   

Commerce.gov reported that US exports have contributed 6.1 million new jobs to the economy since 2009. Much of the credit for this resurgence has to go to President Obama’s National Export Initiative. Politics aside, this one is a winner.

During the Obama Administration, the US has forged 20 new trade partnerships. In 2013, trade to these 20 partners was 200 percent higher than trade with the rest of the world. Especially productive has been trade relations with Panama and Colombia.

What We Export

In the US, if we build it, we probably export it. US services are also in big demand. In 2013, the US exported $632 billion in services, an increase of $26.4 billion over 2012.  

Manufacturing remains the staple of our export trade. Aerospace and defense, Agribusiness, Industrial equipment, Automotive and ground and so much more contributed to the rising demand. The relative softness of the USD certainly did not hurt.

• The export of electrical equipment topped $40 billion.
• Shipments of fabricated metals products surged over $42 billion.
• Computer and Electronic Product exports reached $130 billion.
• Transportation equipment topped $175.8 billion.
• Exports of Chemicals accounted for 18% of US manufacturing exports of $171.2 billion.

Effects of this stellar and aggressive export initiative began to pay dividends in the third quarter 2013 when exports significantly closed the gap in the import-export balance. The US consumer is a formidable force, composing about 67% the country’s GDP. The simple fact is that our labor standards diminish our competitive edge in certain sectors, especially several that the masses tend to enjoy. That’s the way it is.

In other areas, American ingenuity and innovation reigns supreme. This is where our manufacturing base must focus. There is much merit to being first and being the best.

International Trade Data System (ITDS)

Obama used Executive Privilege to pass his International Trade Data System (ITDS), also called the Single Window, mandate. Implementation of this program will make export of goods and services easier, faster and more accommodative.

Currently, there are 100 federal agencies with a hand in international trade. With ITDS, traders will submit standard electronic data for imports and exports into a Single Window. This information will be filtered and distributed to the agencies that have a hand in the particular product.

The relevant agencies will then have an opportunity to review the transaction and approve or reject the transaction. The process will take a few hours. With the current system, this clearance usually takes days.

The system is expected to be operational during 2016. By reducing the government’s footprint on international trade, the American consumer and the American manufacturer both benefit. Win-win is still the best scenario, right?

And, why not? A negative report from the Markit’s Composite Purchasing Managers’ Index, that includes data from thousands of businesses, turned sour in February, falling to 52.7, 0.2 points below January’s 31-month high. Analysts had expected a jump to 53.1.

Disappointing German manufacturing PMI weighs heavily on the euro and combined with soft inflation data from France pressured the euro, which just two days ago reached a 7-week high against the USD. French flash February Service indicate surprising weakness undermining PMI. In early trading, the euro was down 0.3 percent against the dollar but also edged down against British sterling, the yen and most major currencies.

The weak core euro zone data bodes badly for emerging economies where flights to safety have dominated the marketplace. Surprisingly, investors are moving to Italy, Ireland and Spain where returns are good despite some underlying weakness.

Emerging markets also soured in the face of the outbreaks in Ukraine and the dismissal of Nigeria’s Central Bank chair. Euro zone peripherals look better all the time. Spain is the main beneficiary but Portugal, Italy, Greece and Ireland, the PIIGS, are on the mend.

GDP in Ireland is projected to grow 2 percent this year. The PIIGS have garnered $12 billion in net cash flows in a little over one year. Yields have lowered but offer just enough security to attract former emerging economy investors.

Citi verified the “flight to relative quality” in a report that indicated a 300 percent increase in PIIGS investments in the last 3 days. Spain’s benchmark 10-year bonds are at their lowest since 2008 but still offer a 5 percent. Irish and Portuguese yields are 10 percent lower than their 2011 levels.

The USD Rebounds

Euro zone weakness and some encouraging economic data helped the USD rebound against the euro and a basket of currencies. The .DXY edged up 0.2 percent to 80.314 with assists from an improved new claims report from the US Labor Department and surprisingly string manufacturing data, the best in 4 years.

There remain concerns about the economic impact of the bitter weather across the US. High energy consumption has spiked a rise in natural gas and will surely affect household budgets but the American consumer is unusually durable. Natural gas surged 3.6 percent and electricity rose 1.8 percent in January, the largest increase since January 2010.

Consumer prices climbed 1.6 percent in te 12 month period through January after posting 1.5 percent gains through December 2013.

Weak data from China boosted the yen and soured investors against emerging economies. Japan posted strikingly high import numbers for January as economists suggest a pullback is in the future. Japan’s trade imbalance is imposing.

Dow Jones – Up 30.57 (0.19%) to 16,071.13

Nasdaq – Up 11.55 points (0.27 percent) to 4,249.50

S&P 500 – Up 4.19 points (0.23 percent) to 1,832.94.

Euro – USD – Down 0.18 percent to 1.3707

GBP – USD – Down 0.14 percent to 1.6655

USD – CAD – Down 0.05 percent to 1.1073  

AUD – USD – Down 0.18 percent to 0.89830 

USD – Ruble  – 35.680

Analysts and investors found other reasons to support equities. Many expect that solid data will not be available until at least April. There was investor support for Janet Yellen’s first appearance on The Hill as the new Fed chief indicated continuance of support for the economy.

Yellen’s performance was complimented by House approval of the debt ceiling increase through April 2015, well after the 2014 elections. The House bill is expected to fly through the Senate eliminating the last minute crisis that marked 2013 and took a heavy toll on the electorate and the economy.

Yellen and the debt ceiling assisted the Thursday equity market turnaround after overnight trading weakened amidst concerns in Europe. US equities by noon:

• Dow Jones – up 0.15 percent to 15,98.71
• S&P 500 – up 0.22 percent to 1,819.19
• Nasdaq Composite – up 0.4 percent to 4,218.08

Global Equities Struggle

After six winning days, world shares turned sour on Thursday. Economic uncertainty in Europe was compounded by unsettling political news from Italy when current Prime Minister Enrico Letta resisted leadership efforts by center-left head Matteo Renzi. Italian equities lost 1.1 percent.

But, aside from Europe, Europe’s blue chip sector failed to meet expectations again. Support for equities has been fueled by ongoing statements of support from central banks. Investors were not listening after European blue chip after blue chip data fell by the wayside.

Asia did not receive the shortcomings well. MSCI Asia Pacific shares not including Japan lost 0.7 percent. After posting 4.5 percent gains in 5 prior sessions. In Japan, the Nikkei shed 1.8 percent after strong recent gains.

British Sterling Performing With Strength

As predicted, British sterling is moving solidly forward. Date from the Bank of England (BoE) confirms an upbeat economic outlook with an especially vibrant housing market. Fueled by the creative Help To Buy housing programs, the UK’s approach to housing can only be described as the most aggressive program on the planet.

In the wake of equity weakness, the euro attracted investors as a flight to safety. The euro received a boost when ECB Executive Brad member Benoit Coeure told media there was committee support for lowering rates and charging banks to park cash at the ECB. A decisions is likely at the March meeting of ECB executives.

As Asia goes, so goes the Australia dollar. The AUD slumped 1 percent to $0.8934 against the USD.

• Euro – USD – +0.60 percent – 1.3674
• GBP – USD –  + 0.34 percent – 1.6650  
• USD – Yen –  (- 0.23) percent – 102.28
• USD – CAD – (- 0.26) percent – 1.097
• AUD – USD – (- 0.43 percent) –  0.89850      
• USD – Ruble – 35.1280

However, a strong US consumer credit report turned the market around as investors realized the powerful American consumer seems undeterred. The Federal Reserve announced that total consumer credit in December rose $18.8 billion to $3.1 trillion, the biggest gain since February 2013.  

Analysts had projected in increase of about $12 billion. Meanwhile, revolving credit, which measure credit card growth, climbed by $5 billion in December. Both measures point to an engaged consumer, a definite boost to the economy.

Non-revolving credit increased $13.8 billion in December. This includes auto loans and government initiated student loans. Non-revolving credit only expanded by $465 million in November.

A New Course For Yellen?

Speculation immediately arose concerning a new direction by the Federal Reserve. Despite the weak private sector job growth, the nation’s unemployment rate fell 1 percent to 6.6 percent, the lowest rate in five years.

Initially, the Fed set 6.5 percent unemployment as the target to halt bond buying. Most investors and analysts suspect the Fed will fine tune initial goals and tie easing to the broader ranging SEP (Summary of Economic Projections). Investors seemed content that the weak jobs report was a blip in the overall economy, mostly resulting from severe weather that has paralyzed areas of the country in the past two months.

And, February weather has also been difficult. The Fed is scheduled to meet with Janet Yellen at the helm on March 18-19, when revisions to policy could be announced. The February non-farm payroll report will be released before the meeting so Yellen will have three-month composite to review.

Interestingly, the report for February indicated that some 29,000 jobs at all levels of government were lost. The labor participation rate increased to 58 percent, the highest figure since October. In analyzing the unemployment rate reduction, one must not only consider the weather but also the booming number of retirees leaving the workplace as baby boomers move on.

Equities Rally, Dollar Softens

Equities recovered nicely after the disappointing payroll report. The dollar did not fare as well. Investors view the employment glitch as inconsistent with the strong growth in the last quarter of 2013.   

MSCI All-country index – Up 1.09 percent

MSCI Emerging Country Index – Up 0.89 percent

Dow Jones – Up 0.92 percent or 144.4 points to 15,772.99

S&P 500 – Up 1.17 percent or 20.67 points to 1,794.1

NASDAQ – Up 1.56 percent or 63.331 points to 4120.452

Forex pairs

Euro- USD – 1.3633

GPB – USD – 1.649

USD – Yen – 1.0233

USD – CAD – 1.1101

USD – Ruble –  34.7375

US Dollar Index – Down 0.26 percent to 80.694  

In Washington, The Labor Department reported that initial claims for state unemployment benefits dropped by 20,000 to a seasonally adjusted 331,00, below the projected 335,000. Analysts anxiously await Friday’s non-farm payroll report. Early projections indicate gains of 175,000 job after December’s disastrous 74,000 new jobs. A disappointing number could send tremors through equities and weaken the dollar while a favorable number a could lift both arenas.

After the report, the dollar posted gains against the euro, yen and GBP but after weaker than expected export data, the dollar softened. The Commerce Department reported that December exports slumped 1.8 percent to $191.30 billion. Meanwhile, imports edged higher 0.3 percent to $230.0 billion. Including adjustments to inflation, the trade deficit increased to $49.5 billion. December marked the biggest slump in export trade since October 2012.

Previous government reports had cited the strength of the export trade as a key factor in the fourth quarter’s 3.2 percent rise in GDP.

ECB and BOE Policy Statements

The ECB and BoE acknowledged pressure from the emerging market currency crisis but declined to raise interest rates. The BoE is under pressure to raise rates but deferred at this time.

Mario Draghi of the ECB indicated that inflation was within acceptable limits and more data was needed to recommend a rate hike. Draghi maintains that the central bank is prepared to step in with support if needed and will monitor the emerging currencies carefully. It remains unclear what tools Draghi as at his disposal.  

The euro zone recovery is more fragile than the US recovery or the recovery in the UK. However, Draghi suggested that economic data from inside and outside the euro zone in March could influence the bank.

The BoE seems to face the greatest resistance to continued low rates but for the time being, no increases are planned.

New European Union – US Trade Agreement in Works

Reuters reports that a new European Union- US trade agreement could be announced early next week. The two sides are scheduled to exchange plans on Monday.

European Commission trade head Karel De Gucht, will meet with US trade head Michael Froman to work out details related to new duty relief in trades between the world trading powers.

Sources told Reuters that 96 percent of existing import duties will be lifted from US goods. Several products will be protected bun the agreement is broad in scale.

The two trading partners already enjoy favorable trade rates but further lowering should benefit both sides. Analysts project gains of about $100 billion per year for both parties.

The news is good for American beef growers as twice the amount of beef exports to Europe will be permitted upon approval of the agreement. This element of the accord is resisted by France and Ireland, two prominent beef raising nations.

The new pact would be particularly well-received well by automakers. Currently, import fees on vehicles amounts to more than $1 billion annually.

Euro – USD – 1.3600 (+0.51%)

GBP – USD – 1.6339 (+ 0.16%)

USD – Yen – 101.84 (+0.40%)

USD – CAD – 1.1101 (+0.17%)

USD – Ruble – 34.6640

In the euro zone, the cost of food, alcohol and tobacco has increased by 1.7 percent in 2014 but is more than offset by significant cost reductions in energy prices, down 1.2 percent. Europe’s biggest economy, Germany, saw consumer prices decline by 0.7 percent in January.

Combined with a report from the European Commission that indicated there remain 19 million euro zone workers unemployed, the currency came under heavy pressure. With the regional unemployment rate exceeding 12 percent for the third consecutive month, prospects for a recovery are limited. The lack of a central stimulus program to incentivize employers has left profitable regional enterprises playing it close to the vest and building capital reservoirs.

Huge Outflows from Markets

Emerging equity and bond markets have fallen prey to large scale outflows, a trend that has momentum. In the last week, more than $9 billion was withdrawn from emerging equity markets putting central banks under extreme pressure. According to EPFR Global, the outflows represent the largest flight to safety in 2.5 years.

Emerging market equity funds suffered losses of more than $6.3 billion in the week ending 01-29-14, marking the largest outflow since August, 2011. Emerging equity funds have seen more than $12.2 billion exit the system in 2014 alone. This compares to $15 billion in all of 2013.

Outflows to debt funds have also been approaching historic highs. Outflows in 2014 have topped $4.6 billion compared to $14.3 billion in all of 2013.

The MSCI global index fund has lost 6 percent in January. Emerging bond yields are under heavy pressure, but the damages are not confined solely to emerging markets. Developed economy debt funds have also shown weakness with $5 billion exiting market in the month.

Political Tensions

The continued and expansive tapering by the Federal Reserve is have an unfavorable response by emerging economies. India, in particular, has blamed the US policy for global currency pressure. While weakness permeates emerging and Asian economies, Europe and Latin America are also fragile.

India has suggested that Ben Bernanke and the Federal Reserve have acted irresponsibly.  The IMF has warned central banks to “remain vigilant over liquidity conditions.”

In Asia, concerns about China are underscoring the fragile regional marketplace. A slowdown in China’s manufacturing could have disastrous effects on the country’s Asian trading partners. The People’s Bank of China may have to intervene to quell concerns.

In Europe, Hungary was forced to halt a T-bill auction after a 67 basis point spike. Poland postponed release of its monthly debt supply report due to revisions to the country’s pension plan. The Polish 10-year bond rose 10 basis points on Thursday.

But, the troubled Russian rouble remained at the centre of a potential crises. After a brief Thursday rally, the rouble fell 1 percent to new five-year lows.

Pairs Worth Noting

• Euro – USD – 1.3501 (-0.40)
• Euro – Yen – 138.1020
• USD – Yen – 102.29 (-0.41)
• GBP – USD – 1.6455 (-0.18)
• USD – CAD – 1.1122 (-0.30)
• USD – RUB – 35.1093
• Euro – RUB –  47.4709