Strategy Report

Gold ETF Holdings Tumble

We have written extensively about the extremely strong relationship between gold ETF holdings and gold prices. For much of this year, that relationship benefited gold, as both holdings and prices relentlessly increased. The trend has obviously reversed over the past month, but interestingly, prices led the decline in holdings.

2Q Earnings Season Underway as Market Moving Releases Begin Next Week

Perspective on Greece

Topics from IMF, G20 Meetings

World financial leaders spent the weekend in Washington D.C. holding discussions regarding different issues facing the global economy. Joining the talks were members of the International Monetary Fund, the World Bank, and the Group of Twenty nations. Among the many topics that were discussed were:
•FAT levy (Financial Activities Tax)
IMF and G-20 propose a tax on non-insured liabilities in the hopes that the tax would decrease the likelihood of another financial crisis.
•Chinese Yuan Revaluation
Although the undervalued Yuan got no formal reference in the official G-20 communiqué, leaders of the U.S. and Europe attempted to artfully pressure Beijing into revaluing its currency.
•Oil Speculation
The Organization of the Petroleum Exporting Countries (OPEC) blamed speculators—not supply and demand fundamentals—for the rapidly increasing price of oil.
•IMF Mandate and Governance
The IMF deliberated about the future role of the fund in light of the crisis. The organization also aims to complete governance reform that will reflect the shift in world economic power by January 2011.
•Greek Aid
The big elephant in the room was the Greek financing package. The IMF mentioned that it was accelerating discussions with Greece but IMF head Strauss-Kahn declined to answer any specific questions about the negotiations.

Quotes:

On Bank Tax:
“There are clearly some common goals. Surely, among the instruments, there was a clear preference for a sort of bank levy.”
-German Deputy Finance Minister Joerg Asmussen
“The fact that the G20 didn’t endorse a bank levy today is good news. However, the idea is still alive and we have more work to do to make sure other options are considered. There are plenty of important issues that the G20 needs to focus on – capital and liquidity and supervision. Let’s hope they roll up their sleeves and get to work on these as quickly as possible.”
-Canadian Bankers Association President Nancy Hughes Anthony
On Yuan:
“There wasn’t any talk about the Yuan … I know everyone is interested. But it wasn’t discussed openly at the G7 or G20 probably because everyone there knew that China won’t like that very much. There might have been discussions in other places, but at least in the official meetings it wasn’t discussed.”
-Japanese Finance Minister Naoto Kan
“In large emerging economies, we have seen encouraging signs of a shift toward more rapid consumption growth that needs to be sustained and reinforced by a return to market-oriented exchange rates, where appropriate.”
-U .S. Treasury Secretary Tim Geithner
On Oil:
“The bullish economic news has increased interest for investing in all commodity markets, including oil.”
-OPEC Head of Petroleum Studies Muhammad Alipour-Jeddi
“This [volatility] represents a significant impediment to market stability and to ensuring adequate and timely investment flows into the energy sector.”
-OPEC Head of Petroleum Studies Muhammad Alipour-Jeddi
On IMF:
“If the clarification and refocusing of the mandate of the IMF is to have legitimacy, it should follow and not precede a change in the governance structure, including quota shares reflecting the present and emerging global economic realities measured in the most appropriate manner rather than on the basis of an improved but still flawed formula.”
-Reserve Bank of India Governor Duvvuri Subbarao
On Greece:
“Does this destabilize the euro? No. It doesn’t destabilize the euro at all. Variations in exchange rates are what they are. I note by the way that the euro is an extremely strong currency today. The euro is fundamentally a very solid currency with a central bank which has total credibility.”
-European Central Bank Gov. Council Member Christian Noyer
“If the house of your neighbor is on fire, even if it is a small house and, maybe, it is your neighbor’s fault, you’d better not ignore the fire. You’d better use a fire extinguisher, if you have it, and we have it…Otherwise the fire will reach your house as well, even if it is a beautiful and big house…I am talking about Germany.”
-Italian Economy Minister Giulio Tremonti
“I think the most important thing is that the IMF has clearly said that Spain is not in the same situation as Greece.”
-Spanish Economy Minister Elena Salgado
“Germany will help if the appropriate conditions are met.”
-German Chancellor Angela Merkel

Are Commodities Set to Once Again Take Off?

It appears that commodities, a highly regarded asset class for 2009, have disappointed investors thus far in 2010.  Gold remains well off its torrid 2009 pace where the yellow metal eclipsed the $1200 mark, while crude oil was caught in the $70-$80 range for most of the year’s first quarter.  In the past few weeks, however, oil has rallied as high as $87 a barrel, a level not breached since 2008, and has found comfortable support at the $80 level.  Gold, on the other hand, has found strong support above $1120 an ounce and eclipsed $1160 in recent weeks.  Is this a signal that commodities are set to once again take off, or is this a last gasp for the bulls before bearish sentiment returns?

When evaluating movement in the commodity markets, it is important to dissect the fundamental indicators that may drive the nominal price of these assets.  For crude oil, global industrial demand is an obvious fundamental driver of price and was often cited as the reason for rising oil prices over the last decade.  Many analysts believe that strong growth in emerging markets, such as China, India, and Brazil has been pumping up demand for the world’s limited supply of natural resources.  Another factor at play, especially in the recent oil rally beginning in March 2009, has been fundamental weakness in paper currencies due to quantitative easing from central banks around the world and an explosion in government debt.  Since both oil and gold are traded mostly in U.S. dollar terms, the strength or weakness of the greenback can have as big an impact on the price as industrial supply and demand factors.  The market’s general view of paper currencies is especially evident in the price of gold, which historically has a uniquely high negative correlation with the U.S. dollar and in itself has very little industrial use.

Thus far in 2010, there has been a major reversal in sentiment towards the U.S. Dollar in comparison to other currencies.  In the first three months of the year, the Dollar gained 4%- posting a strong rally against the euro and sterling amid concerns over fiscal issues abroad.  While a dollar rally would generally reflect confidence in the U.S. currency, the greenback’s current stature may be more attributable to weakness in Europe than stronger fundamentals in the U.S.  Alarming budget deficits in Greece, Portugal, and Ireland have greatly deteriorated confidence in the euro-zone and have raised questions regarding the currency union’s sustainability long-term.  Although a recent bailout package for Greece has alleviated short-term concerns, questions remain over a longer time horizon which bodes well for the dollar.  Despite the recent greenback strength and possibility of continuance, commodities have held steady and in the past few weeks have begun to break out to the upside.  Oil sits 9% higher for the year thanks to a recent rally in the last week, while gold is up nearly 2 percent for the year.  The gold story going forward may be the most telling of our current situation and provide evidence that the dollar “strength” is not really strength at all.

With instability in the financial markets and broader economy, ballooning public debts, and high unemployment, it appears that government policy makers and central bankers will find it preferable to continue the easy money policies and big spending that have characterized the last two years.  However, due to great distress in government balance sheets, loose monetary policy through low interest rates may be the only tool available to ward off high unemployment and weak consumer spending.  Such low interest rate policy measures would remain a disincentive to savers, causing increased speculation and yield seeking through both paper and hard assets.  Overall, commodities appear to be a strong bet going forward, especially in a continued low-rate environment.

U.S. Dollar Index Chart (Daily)

Crude Oil Chart (Daily)

Gold Chart (Daily)

Written by James Russell, CFDTrading Research
Please send any comments about this report to JRussell@fxcm.com

Employ Caution in Emerging Markets As Sharp Pullbacks Are the Norm

In light of the recent over-performance of the MSCI Emerging Markets index, a gauge for Emerging Market equities, it seems necessary to analyze what led to this over performance, the current risks to continued growth of the EM space, and what this activity could mean for the industrial markets.  Throughout the market recovery from March to January, investors underwent a “flight to risk.”  Investors sought out assets with the highest yields and sold-off low-yielding treasuries that they had accumulated during the span of the recession.  Yields on 10-Yr US Treasuries went from as low as 2.53 percent in March to as high as 3.84 percent in January.  With that much outflow of capital from T-bills, and the riskiest assets residing in the EM space, emerging market equities were primed for a sharp break.

As the market rally quiets, the correlation between risk and emerging market equities has began to unwind and fundamentals have come into play.  Nowhere is that more true than in China, which is at the forefront of all emerging market talk.  China’s benchmark equity index, the Hang Seng, had a 120-day correlation of 0.97 with the S&P 500 at the height of the recovery, a sign of risk appetite’s overall influence.  That correlation has now dropped to 0.05, which means the two are barely related at all.

China, which at the height of the recovery looked to be in shape to challenge the world’s economic superpowers, now seems like it may be in the midst of “the greatest bubble in history” to quote James Rickards, former general counsel of hedge fund LTCM.  In part, that is due to the 4 trillion yuan ($586 billion) stimulus plan that China adopted during the crisis.  The plan allowed the country’s economy to grow 10.7 percent in Q4 2009, a rate that many experts believe to be unsustainable.  Even China’s central bank recently said that it sees new asset bubbles emerging in certain parts of the world that were brought on by “ultra-loose” monetary policies.  Unless the PBoC heeds its own advice and takes significant steps to reel in inflation caused by the stimulus, steps that would include raising rates or allowing a free floating exchange rate, China’s growing asset bubble is likely to burst and those skeptical of risk should be ready for the inevitable reversal.

In order to position for a turnaround in the emerging market space, it would be beneficial to know where investors are storing their money after selling emerging market assets.  If world equities are any indication, the answer would seem to be developed nations.  The chart below shows the relationship between the US’s World Market Share compared to that of the four leading emerging market countries, known collectively as the “BRIC” nations.  Most recently, that relationship has turned negative, especially among Brazil and China.  In other words, investors selling EM equities are using the proceeds to buy US equities leading to an increase in the US’s World Market Share and a decrease in the respective EM nation.  In the case of China, if an asset bubble were to lead to an economic downturn and the aforementioned relationship were to hold, there would be a mass “flight to safety” in the form of selling of Chinese assets across the equity, bond, and real-estate space and buying of safe U.S. assets like treasuries and Consumer Staples.  Besides the “flight to safety,” the general lack of liquidity for emerging market securities will put added pressure on prices, providing more than enough incentive for emerging market investors to tread carefully in the coming months and to take precautions in case the worst were to happen.

Written by Gary Chalik, CFDTrading Research
Please send any comments about this report to GChalik@fxcm.com

The Fundamentals of Crude Trading

It would seem that the normal laws of supply and demand would be the foundation for establishing the current market price for commodities like crude; and to some extent this is the case. However, when speculative interests are taken into account, the picture becomes fuzzy. While millions of barrels of crude oil are bought and sold each day, consumers and producers look to hedge the risk of a change in price for the raw material before they make the purchase. This is where the futures market comes into play and subsequently where trading conditions become distorted. How does the market come to its fair value price of crude? What is the most influential driver for this specific commodity? What factors are best to watch to determine the direction and intensity of a crude oil trend? Let’s take a look.

Risk Appetite Invites an Unpredictable Element to Price Action

As is the case for most growth-sensitive assets, crude oil’s general pace is the product of two distinct drivers: market-wide risk appetite and the prevailing balance of supply and demand. Investor sentiment is an exogenous catalyst that falls outside of the normal scope of the energy market. The flow of capital is a market-wide concern; and its motivations are unpredictable. A particularly influential and accessible economic release or general shift in the crowd’s mood can be equally influential for price action. It simply depends on the predisposition of the market at the time. But, why does something as subjective as risk appetite have such a prominent effect on price action? Through futures markets, the normal function of hedging unfavorable price fluctuations by commercial users is exacerbated by purely speculative motives. The inclusion of a speculative element in the market increases liquidity and price discovery; but it also exposes the commodity to a segment of the market that has no interest in dealing in the physical. What’s more, the rise of commodity-backed Exchange Traded Funds has further drawn in investor interest. Regardless of what particular reasoning for risk appetite to influence the asset, the impact of speculation can be seen through notable correlations. Below is a graph of the active crude futures contract (the grey line) and the Dow Jones Industrial Average (the orange line). Since the reversal from record highs for the latter, the relationship between the two has been distinct. However, the day-to-day volatility and swings between the two holds going much further back.

Despite its being a prominent driver, investor sentiment’s influence over oil can wax and wane depending on broader market conditions and the quality of risk trends themselves. If, for example, sentiment has leveled off or is progressing at a slow pace; it will invite a greater reaction to more tangible drivers (like supply-and-demand). On the other hand, this asset class is highly sensitivity to a change in optimism. Therefore, an otherwise lax correlation can suddenly return for a short period and disrupt a trend or spark a meaningful technical development.

Back to the Basics

Though risk appetite can often commandeer crude oil price action, the underlying trend is almost always influenced by the natural level of demand amongst commercial interests. The influence that such a driver has on price action is textbook economics. Consistent demand met with a reduction in supply makes the available oil more valuable. Alternatively, a constant level of supply that meets a sudden rise in demand will also increase the value of the existing inventory. However, while the theoretical balance is easy to identify, the influence behind equilibrium is oftentimes not so clear. For example, in the lead up to the record-breaking run in crude prices towards $150 per barrel in the summer of 2008, there was a notable drawdown on inventories in the US (the largest consumer of fuel in the world); but the decline was not unprecedented. More than likely, the advance was the combination of a strong global economy and an abundance of credit and investment capital. In the subsequent plunge that pulled the market down nearly 75 percent from its highs, the global economy fell into a recession (demand dried up) while supply held relatively constant. During these two periods, tolerance for risk and demand for energy would come hand-in-hand. This is often the case when it comes to the larger trends in the commodity market.

However, it is not always easy to gauge the longer bearings on demand or its influence on the market. On the other hand, regular reports on inventory change, demand forecasts and production figures from different regions of the world offer a very accessible driver to an otherwise vague concept. While there are different regional readings for this data, the most influential data comes from the largest producers and consumers (especially the United States and China for consumers and OPEC producers). For accessibility, there is no other reading that is as accurate or timely as the Department of Energy (DoE) Inventory figures for the US. This week-to-week reading of stockpiles for the world’s largest economy is frequently the impetus for substantial volatility; but not always. Depending on the market’s preexisting level of volatility and the interest in risk appetite trends; significant changes in inventory figures can lead to significant moves in the commodity itself. Below is a chart of the DoE’s Crude Oil Inventory report (in grey) and the industry-based American Petroleum Institute’s (API) reading of the same thing.

Over time, these two measures move in the same direction much of the time; but the weekly changes can differ substantially. Yet, there is very often little response to the API figures, while the DoE numbers receive far greater attention. Given the considerable correlation over time, the difference in market response to the readings is somewhat surprising and a source of potential exploitation.

Further keeping with the supply and demand picture, demand for crude does not typically come from the consumer. Oil is a raw material that is further refined into gasoline and heating oil – which are themselves heavily used by consumers and businesses. Therefore, the consumption of crude is heavily influenced by the changes in demand for the processed energy products. To illustrate this relationship, we can highlight the seasonality effect of the driving season in the United States. During the warmer months of the year and coinciding with a number of holidays, Americans generally travel more and in turn reduce the stocks of available gas reserves. To replenish the supplies, refiners require more crude to process. So, while gasoline inventories are not historically market moving on their own, they play a role in defining ‘pull-through’ demand for crude for a leading read for more market-friendly numbers. In the chart below, we see the DoE’s gasoline stockpile change (gray line) and API’s own reading of the same thing (orange line).

Altogether, trading oil from a fundamental approach is not as simple as economic theory would imply. However, being able to recognize the primary drivers for price action (sentiment trends and the true supply-and-demand balance) – and gauging which is the dominant catalyst for the market at any given time – can significantly clear the picture for a trader and put them back in tune with the market.

Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com

Investors Mixed After Cryptic Start to 4Q Earnings Season

Those investors, who entered this round of earnings season expecting good news, received it. On the other hand, those investors who were expecting abysmal indicators saw their prediction come to fruition as well. Why has this occurred? Various blue chip and financial sector earning reports released over the last week have provided anything but solid insight into what’s on the horizon for 2010. Even as companies show robust changes in their bottom lines and balance sheets, trepidation continues to linger and has proven to weigh on investor sentiment since last Monday. On the surface, much-improved earnings-per-share data suggests that equity markets are ready to continue their bull run from last March. Upon a second review, however, excitement building over a so-called “end” to the recession appears to be a bit premature.

Two trends are dominating the analysis of earnings thus far: the equity market response and the bond market response. Better-than-expected earnings-per-share data from banks have offered equity securities investors hope that profitability is resuming and earnings growth will become a positive trend going forward; yet, at the same time, the loan losses disclosed by other institutions indicates that consumers are still struggling. JPMorgan Chase & Co. exhibited both sides in their most recent earnings: while revenues surged to over $3.3 billion dollars on strong investment banking results, and thus pushing fourth quarter EPS to $0.40 (against $0.30 expected), it suffered tremendous losses on mortgage and credit card loans. Even as non-financial sector companies begin to show steady revenue growth and solid earnings data – Intel Corp and IBM come to mind first, as both outperformed analysts’ expectations – the bank data offers the most telling insight into the future of the market. Sizeable losses at banks indicates that consumer credit isn’t mending as quick as desired or forecasted, and, going forward, could remained depressed should unemployment continue to hover around ten percent for some time. If consumers and business struggle to find footing in a market about to have stimulus withdrawn from it as an asset bubble begins to build, it’s not evidently clear who will seek loans in order to trigger profit growth for banks down the line.

Written by Christopher Vecchio, CFDTrading Research
Please send any comments about this report to Cvecchio@fxcm.com

4Q Earnings Season Leaves Investors Guessing Ahead of Releases

With Alcoa posting a $227 million dollar loss, the fourth quarter earnings season has gotten off to a rough start.  However, according to analysts’ forecasts, earnings for the companies in the S&P 500 Index are expected to more than double the levels measured through the end of 2008.  Companies have seen their revenues handicapped by a tepid recovery from the worst recession in modern history. As a reflection of what is considered ‘good’ data in current conditions, government labor data recently reported the unemployment rate held near a 26-year high at 10%,  while net payrolls fell by 85K jobs in December.   Considering consumer spending accounts for an estimated 80 percent of economic activity, the outlook for business income remains challenging. However, considering the marked recovery in the financial markets through the end of the year and expectations of a robust holiday shopping season; there may be more to work with for bulls than underlying fundamentals suggest.  To garner a sense of what the 4Q earnings season may hold, we will draw comparison to the previous quarter and look at analyst expectations for the upcoming numbers.

Third quarter earnings were well ahead of analysts’ expectations, as over eighty percent of S&P companies reported earnings that surprised to the upside.  This was a record high for companies beating estimates according to Bloomberg which has tracked the data back to 1993.  The results were not all positive, however, as most sectors were unable to post year-over-year growth and revenues failed to keep pace with earnings.  The latter was attributable to weak consumer spending and it forced companies to cut costs to maintain an acceptable profit margin.  For perspective, this was the third consecutive quarter of better-than-expected results for the broader market.  However, this can be partially attributed to especially low forecasts founded on concerns related to the weak pace of recovery and anemic consumer spending in the U.S and abroad.

Looking ahead, this round of earnings figures could have a profound effect on market sentiment. Expectations for fourth quarter results are high; but this time around investors will no doubt be more judicious in their assessments of the sector’s health. Ultimately, the source of earnings will be the take away for investors: whether or not companies were able to move beyond the cost-cutting schemes of early 2009 and fill in with a steady revenue stream, as the United States and other countries around the world recommenced growth. Although the markets are likely to remain relatively quiet ahead of next week, volatility should pick up as traders adjust their expectations heading into the dense round of reports. However, depending on how these corporations performed as a whole, lingering cynicism regarding a double-dip recession in 2010 could be amplified or dispelled.

Written by Rab Jafri, James Russell, and Christopher Vecchio, CFDTrading Research

Central Bank Rate Decisions Outlook

Federal Reserve Rate Decision Outlook:
Rate hike expectations for the Federal Reserve remain muted as commentary by Chairman Bernanke and others alluded to a prolonged period of “exceptionally low levels of the federal funds rate for an extended period.” Prior to raising the target rate, Fed officials are likely to wait until after programs meant to boost credit and liquidity reach their end in Q1 2010. This includes $1.25 trillion in agency mortgage-backed securities and approximately $175 billion in agency debt, as well as other initiatives including funding and lending facilities. Trading action in Fed Funds futures imply that June 2010 may be the first meeting in which an increase of any sort is foreseen by a majority of investors. Despite speculation, a decision to raise rates will be contingent on whether the FOMC revises higher its expectations on growth and inflation. Certainly, inflation fear remains suppressed although the core CPI, a commonly used gauge for price growth, has crept up to 1.7% in October from a low of 1.4% in August.

Bank of Canada Rate Decision Outlook:
Bank of Canada officials have maintained borrowing costs at 0.25% on concerns that the appreciation of the Canadian dollar may offset the recent rebound in economic activity.  After the central bank’s October policy meeting, forecasts were adjusted slightly higher for economic growth through 2009 and expansion for 2010 was forecast at 3.0 percent.  Price levels, however, are expected to remain below the 2% inflation target into 2010 so hawkish policy is unlikely at this time.  Investors are not pricing in any chance of a rate hike according to Credit Suisse overnight index swaps and Governor Mark Carney remains committed to the current low rate through the second quarter of 2010.

European Central Bank Rate Decision Outlook:
The Governing Council has kept the ECB rate at 1.00% for the past seven months, while President Jean-Claude Trichet has cited recent economic improvements in the euro area.  Real GDP returned to growth in the third quarter following five quarters of contraction, with bank officials projecting positive real GDP growth in 2010 and 2011.  Despite this positive forecast, the market currently prices in no expectation that the ECB may move rates 25 bps at the next meeting.  This is likely due to the ECB declaring that the outlook remains subject to “high uncertainty” and “low inflationary pressure” over the medium term.  However, President Trichet may be preparing for a future rate hike after the ECB’s decision on December 3 to end long-term emergency loans and tighten the terms of its final 12-month tender.

Bank of England Rate Decision Outlook:
BoE officials have maintained the benchmark rate steady at 0.50% for eight consecutive meetings and voted to increase its £175 billion asset purchase program to £200 billion.  The UK’s economic recovery has struggled to gain footing as GDP contracted 0.4% in the third quarter and the jobless rate sits at 7.8%.  According to central bank officials, “financial conditions remain fragile” as lending remains tight and spending still weak.  Market participants currently price in no expectation that the BoE will hike rates by 25 bps at the next meeting as the economic recovery looks to gain traction and price levels remain tepid.  Looking forward, however, the market expects a 69 bps increase in the benchmark rate as the central bank has concerns that inflation will rise in the medium- to long-term.

Swiss National Bank Rate Decision Outlook:
The Swiss National Bank has maintained its target rate at 0.25% (with a range between 0.00% and 0.75%) for a full year as the economy was struggling to recover and price levels remained low.  In the third quarter, however, Swiss GDP grew 0.3% after yearlong contraction.  Investment rose by 3.4% in the third quarter, its largest increase since 2003, and exports climbed 2.6% after falling 2.2% in the second quarter.  Exports, essential to the Swiss economy due to weak domestic demand, rose thanks to improving economic conditions for European trade partners and a stabilized Swiss Franc.  Looking ahead, the SNB will likely be slow to raise rates due to concerns over weak consumer demand and rising unemployment.  There is currently no market expectation of a rate increase at the next meeting and only a 31 bps increase over the next twelve months.

Bank of Japan Rate Decision Outlook:
In an unscheduled move in December, Bank of Japan official decided to ease monetary policy further with the introduction of a new funding operation of three month loans expected to reach a maximum size of ten trillion yen. The key rate has been held at 0.10% since the end of 2008, and given the central bank’s tendency in the past, along with persistent deflation; an increase is not expected in the year ahead. Indeed, core CPI in October posted a fall of 1.1%, the largest contraction in prices since recording began in 1971. Another factor hampering rate hike expectations is economic growth, with GDP up just 1.2% in preliminary third quarter readings while bank lending slowed to a 1.9% annual increase.

Reserve Bank of Australia Rate Decision Outlook:
The RBA shows few signs of slowing down its tightening policy as the central bank raised the cash rate for a third consecutive time in December. The decision to increase the rate by twenty five basis points to 3.75% came amid significant improvements to the economy, one of few major nations that narrowly avoided recession. To their credit, Governor Stevens cites regional financials with lower toxic assets that enable quicker recovery in credit markets. Also supporting growth has been the A$42 billion in fiscal stimulus. The OECD now expects the economy to expand 0.8% in 2009, and while inflation remains a concern, the RBA stated that recent “material adjustments” will consumer prices in check. Consequently, investors’ expectations for rate hikes have declined sharply, from 12-month expectations of 216 basis points increase to 102 basis points early in December.

Reserve Bank of New Zealand Rate Decision Outlook:
Since lowering the official cash rate to 2.5% on April 30, 2009, the RBNZ has refrained from raising the key rate even as GDP climbed for the first time in over a year. The economy grew in the second quarter at a 0.1% pace, with further expansion possible as retail sales climbed for in the third quarter. While neighboring Australia began to tighten rates to avoid an inflation threat, Governor Bollard of New Zealand sees no cause for concern as CPI remained below two percent in the past two quarters. Market participants have pared their bets, expecting 163 basis points of increase in the next twelve months, down from expectations of 235 basis points in late October. Ultimately, the bank has remained adamant in its latest meeting with no intention to change the OCR “until the second half of 2010″.

Written by James Russell and Roman Kadinsky, CFDTrading Research

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