There has been much talk about the decline of the dollar as the world’s favorite currency, but not among hedge fund managers. The greenback remains their favored currency by a wide margin, according to a new survey.

Fifty-seven percent of those responding to the TrimTabs Investment Research/BarclayHedge Currency Survey are bullish on the dollar over the next three months. The Brazilian real was a distant second, favored by 11.5%, followed by the yen and “other” currencies, among them the Australian dollar, with 8.2%.

Former Italian Prime Minister and no stranger to yawning fiscal deficits, Romano Prodi said earlier today that the Greek crisis is over. Having weathered the storm and with less time pressing their own fiscal agenda, the former President of the European Commission said that other lesser indebted Eurozone nations will be spared the Greek-style drama. Signor Prodi sees no reason for other Eurozone members to falter from this point.

Last week, the BoE decided to leave rates unchanged at 0.5% and to forestall expanding on its GBP 200bn asset-purchase program, which was widely anticipated by the whole of economists in the Bloomberg consensus. It was hard to see any reason for the BoE to change the outlook for monetary policy in the short term, having decided to pause the program in February.

The latest economic data confirmed that the wait-and-see stance recently adopted by the BoE is appropriate. Over the last week, GDP growth in Q4 was revised upwards from 0.1% q/q to 0.3% q/q; the CIPS Manufacturing Index remained well above 50 in February (56.6, unchanged from January); and the CIPS Services Index rose from 54.5 in January to 58.4 in February. However, these data confirmed that the UK economy is likely to grow at a moderate pace in the next few quarters and will not recover the pre-crisis growth trend for many years, as BoE’s Governor Mervyn King stressed in the press conference for the presentation of February’s Inflation report.

In a long engagement, Turkey and the IMF have been negotiating a stand-by package for well over a year. Today Turkey announced that there would be no marriage after all--no deal. The impasse appeared to be over municipal expenditures. PM Erdogan's government had previously negotiated two programs with the IMF since coming to power in 2002.

There is disappointment in some quarters of the end of the protracted talks as some suggest the talks themselves had lent support to the lira and the bond market. As noted yesterday, the poor inflation news at the end of last week, coupled with the heightened political anxiety and withholding tax uncertainty have weighed on Turkish bonds. Yields yesterday rose to their highest for the year amid a lukewarm reception to the bond auction and there is follow through selling today.

Bundesbank President Weber has been the most candid to date about what the ECB could do in case Greece is downgraded again, especially by Moody's.

Recall the problem: Prior to the crisis, the ECB would take as collateral only paper rated A- or better. During the crisis they have extended it to BBB-. It is due to revert back at the end of the year. Fitch and S&P rates Greece below A-, leaving only Moody's above the normal threshold.

Word has probably spread that the European Union is now attempting to solve the debt crisis with the creation of a European Monetary Fund (EMF). This shows one more time the fierce commitment of the EU to fight debt with new debt - which has never worked in history - instead of developing a radical banking reform that would curb derivatives and impose strict rules on off-balance sheet risks while tackling soaring budget deficits aggressively.

As with most "important" announcements these days - of which most are vaporizing overnight in a EU where governments begin to mutually shoot broadsides against their Pan-European fellows - the EMF "plan", initiated by German Finance Minister Wolfgang Schaeuble, is maybe a headline-grabber, but lacks among all details the most important one: Where will the money come from?

By Bryan McCormick

US stock index futures are mixed after weak trading in Asia and a virtually flat session in eurozone and UK markets. There was a mix of news as well in Europe, which may have something to do with the performance there.

Ben Bernanke, Chairman of the US Federal Reserve, faces a Sisyphean task because US banks are experiencing debt deflation and, because lending is now at much lower levels, monetary deflation is encumbering the domestic US economy as existing debts continue to be serviced. Government deficit spending can only offset lower consumer spending to a degree, and the mushrooming debt of the US government raises the question of whether the US can repay or roll over its debt obligations, given that tax receipts are likely to fall.

Despite deflationary pressure, the value of the US dollar is in a downtrend trend pointing to higher prices for imported goods and energy. Devaluing the US dollar will reduce the value of debts in real terms, thus it can make debt levels sustainable, but higher prices will exacerbate debt defaults, worsening the condition of US banks. Mr. Bernanke’s dilemma is how to salvage the balance sheets of US banks without sparking high inflation or unleashing hyperinflation.

A year after the weakest close for global equity prices, risk appetite has very much returned to the agenda. Stock prices are 60% or so higher from the bottoms reached in March 2009. Of course at the time no one knew it was the bottom and subsequently investors have climbed that so-called “wall of worry.” As they did they became accustomed to intermittent bouts of risk aversion, which often showed up in two forms. Type A would see stock prices around the world cascade lower as new systemic threats and corporate failures emerged. Type B risk aversion showed up in strengthening values for the dollar and the yen as investors sought safe haven sanctuary. But is it possible that we are now entering a new era? A clearly advancing global stock market, merely punctuated by intermittent and largely minor setbacks, is driving a wedge between risk aversion types A and B. That’s clearly evident in Wednesday’s trading as the dollar advances at the expense of the Japanese currency.

We spend a lot of time reading forecasts. The financial news media is rife with new articles every day that take a position on the near-term future of inflation, interest rates, and stock prices. But are these forecasts of any use? James Montier, an author on the topic of behavioural finance, says no.

He has compiled and aggregated past forecasts for a number of popular financial metrics. The following chart illustrates how well forecasts of inflation have approximated actual inflation over the last several decades: Note that the forecasts of the deflator actually lag the actual deflator! This forecast is telling you what happened, rather than what is about to happen! Next, consider forecasts of the US government 10-year bond yield:

Note that even though concern has eased, for now, about a Greece default in the coming 7 weeks, there has been no sustained improvement in the euro. This makes sense. Note how quickly markets shifted focus to Spain and Portugal as Fitch warned of more credit ratings downgrades, even as both countries attempt to slash spending.

The euro’s behavior over the past days is likely indicative of its fate for the foreseeable future. Here’s why:

In our first edition of Expert Interview, Y&I is very excited to bring you the insights of Puru Saxena, founder of Puru Saxena Wealth Management. Based in Hong Kong, Puru has his finger on the pulse of the East markets, and provides investment advice and asset management for numerous clients. As a highly regarded member of the finance community, Puru is a regular guest on various media such as CNN, BBC, Bloomberg TV, CNBC, RTHK, NDTV, TVB Pearl … need we say more?

Trading the OTC (over the counter) currency markets offers an opportunity to hedge stock and bond investing, but really is more of a traded market following the ebbs and flows of global commerce than it is an investment arena to plan retirement from.

Getting to know six major currency pairs would seem an easy task when compared to the tens of thousands of stock and bond options available for analysis. Forex trade is not necessarily about how each currency will move against the USD; more important is knowing when the market will have momentum, because that is key to not getting caught in reversals and snap-backs whilst leveraged at 100:1.
Setting times to trade really does make a lot of sense with the near-term view that forex valuations carry. There are three main forex moving times that regularly garner attention, and therefore offer an ability to move prices with momentum. They are the 2am EDT German Dax futures market, the 6am EDT London gold / oil fixings and LIBOR rates being set, and the 11am EDT European market close. Outside of that, the return from lunch in Japan and the closing of the NYMEX markets really are the only other times that prices move substantially and then hold.
At the end of the U.S. session the pattern is for Asian markets to try and initially reverse U.S. trade direction, although the lack of volume tends to soon allow pairs to find and hold support areas. The European markets tend to move in the same direction as Asian trade, and then Chicago based futures traders try to reverse things and re-set their books as the London fixings are placed between 5-6am EDT.
At 10:30am GMT in London telephone bids at the gold and oil fixings take place, something that sets the morning clearing prices for bullion and crude dealers that are then adjusted once again at 3.30pm GMT local time. At 11am GMT each day in London, the British Bankers Association set the inter-bank LIBOR rates, something that sets the tone for lending rates between financial market participants.
The London fixings tend to force Chicago based futures markets into a re-alignment program at 06:00 EDT that replicates the newly set fair values on oil, gold, and lending rates, and by default tends to then impact USD based currency values. It is rare for the U.S. not to push back each morning and reverse the pattern of forex trade that came before, especially if a sizeable move has happened overnight.
Forex traders really need to know what is going to trigger the technical set-ups, and therefore be prepared to ride momentum while it lasts. In the trading forex arena there are different things to look for than in the equity and bond investment world; a week in forex is like a month's worth of stock trade.
It is at the three or four times in a 24 hour period that forex traders are well advised to switch tack and reverse near-term directional thinking. The European and NYMEX close are the U.S. based things to get under our belts, because then, maybe, the equity markets can reveal where they really want to go. Traders looking for moves outside of 06:00 and 11:00 EDT, and maybe 14:30 EDT may just find themselves sitting and waiting, wondering why they just bought the high of the day that then reversed.
As the global economy travels through the contraction phase of its business cycle the leaning is towards looking at S&P futures trade to confirm sentiment. The speculators are never too far away from the S&P in times of fear; either selling into the fear of loss, or buying into the fear of missing profits. That is the reason for so much near-term volatility, and that is how things will stay until signs of GDP expansion are seen globally.
Until then it seems that the 23 hour a day S&P futures trade will set up the eight hour S&P cash market for currency traders to monitor. Trends it seems will come only when the two, GDP and Equity direction, get aligned.

Disclosure: No position

The consensus view is that the Spanish will be the next target if they are unable to get their fiscal house in order. While we will not dispute the fragile state of Queen Sofia’s monarchy, we believe the bigger problem is the UK. Queen Elizabeth has a rapidly rising debt load while revenues are declining.

We were surprised and concerned how rapidly the markets moved from Greece to the UK – bypassing Spain. The action in the British pound has been nothing short of astounding. Now it appears the debt market is getting into the act. (click to enlarge)

Alexander Tepper is Chief Economist at TKNG Capital, a global macro hedge fund based in New York. Previously, Mr. Tepper was a senior economic policy aide to U.S. Senator Frank Lautenberg. He also has experience at Oliver, Wyman & Company advising Fortune 500 financial institutions on risk management and as an investment banking Associate at Credit Suisse. He has a masters degree in Economics from Oxford University, and a BA in Physics from Princeton University.

We recently had the opportunity to ask Alexander about the single highest conviction position he currently holds in his fund.

I get paid in US dollars, but live on RMB. So as a matter of course, my morning routine includes a glance at the current exchange rate between the two currencies. That routine has been boringly predictable since China pegged the RMB at 6.83 to the dollar in July 2008.

Although the policy makers in Beijing had been allowing the RMB to slowly appreciate for several years—it was 8.15 RMB to the dollar when I moved to China in July of 2006—the peg was an obvious protectionist move to help stem the flight of foreign buyers of Chinese goods when the Western economies began to edge towards recession. And Western policy makers, who are keen to restore demand within their home markets, have been crying foul ever since.

By now, it's likely you've seen this chart of M2 as justification for why we're not seeing inflation in the economy:

<<< see previous page

With yesterday’s explanation of exchange rates, we can now examine investment opportunities resulting from a Chinese yuan increase. My focus will be on Chinese company stocks.

One of the financial papers this morning featured a survey of currency preferences by hedge fund managers. Since this survey was taken between Feb. 11 and Feb.22, the opinions seem more like recent history than hot news. The dollar was the most favored currency by hedge fund managers, at that time, but why should this be a featured story 20 to 30 days later? We have the echoes of past preferences making headlines today.

The latest commitment of traders report gives us data through March 6th. In that report, the large specs traders, probably almost all funds, had cast a decisive vote against the pound. Large specs were long 14,218 contracts and short 85,008 contracts, for a total net short of 70,790 contracts. Each futures contract is £62,500, so not exactly chump change. On Friday the pound had a decent rally, making it all the way back to 1.5164, and then selling off into the close to 1.5132. The open interest of Friday went down 7500 contracts on a little short covering rally. Monday gave us a rally that failed. We printed 1.5193 and then sold off, closing lower. What is interesting, however, is that the open interest soared 21.023 contracts higher on Monday, 14% of the total open interest.

The IMF's COFER data is the most authoritative source on the currency allocation of central bank reserves. It is updated at the end of every quarter for the preceding quarter. At the end of December 2009, Q3 data was released, and at the end of this month, Q4 data will be published.

Recall that in Q3 0'9, the dollar's share of allocated reserves slipped to 61.6% from 62.8%. The euro's share rose to 27.7% from 27.4%. Sterling and the yen's share together was little changed at 7.5%. The "other" category - which would include the Australian and Canadian dollars, for example - rose to 2.9% from 2.2%.