Daily Forex Brief

Wednesday 19th February 2014 11:01:09 am (GMT)
Daily Forex Brief
The Daily Forex Brief is written by FxPro's team in the City of London. Visit fxpro.co.uk for more news, FX commentaries, FxPro TV, real-time feeds, calculators and tools.

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The underlying theme of dollar weakness has continued overnight, with the main dollar index (DXY) hitting a new low for the year below the 80.0 level. The single currency itself managed to stage something of a come-back yesterday above the 1.3750 area. Expectations of more policy action and the passing of year end factors which had boosted the euro at the end of 2013 made for a soft start to the year, but so far in February there have only been 3 down days for EURUSD.
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Sterling wrong-footed by rise in unemployment rate
19th February 2014 @ 09:37 GMT
Sterling dropping below 1.67 after surprise rise in unemployment rate from 7.1% to 7.2%. Earnings rising 1....
Dollar weaker after latest data, EUR at 1.3745
18th February 2014 @ 13:36 GMT
EURUSD moving higher to 1.3740, level last seen 2nd Jan. US Empire manuf data weaker at 4.48 (from 12.51). ...Upcoming Webinars
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Bank of England keeps digging
12/02/14 @ 12:21 GMT by Simon Smith, Chief Economist
The Bank of England is in a hole and instead of climbing out, it has continued to dig. Recall, when forward guidance was introduced 6 months ago, there were several knock-outs, which allowed the Bank 'wiggle room' around its new 7.0% threshold level on the unemployment rate, above which rates would continue to be kept low. Six months on, with unemployment having moved close to the 7.0% level far faster than anyone anticipated, the Bank has introduced a lot more complexity to the policy outlook.

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China factory activity slows to 7-month low

China's manufacturing activity slowed to a seven-month low in February, a private survey showed on Thursday, once again stirring concerns over the health of the world's second-largest economy.
The flash Markit/HSBC Purchasing Managers' Index (PMI) fell to 48.3 from a final reading of 49.5 in January.

This is the second straight month the PMI has fallen below 50, which signals contraction.

"Economic activity has slowed in early 2014. Tighter credit in the fourth quarter of 2013 has made inventories more difficult to finance, prompting manufacturers to destock in February," said Bill Adams, senior international economist with financial services firm PNC.

The reaction in markets was swift; the Australia dollar fell half a U.S. cent to $0.8957, from $0.9004 before the data, while Aussie stocks turned negative. Australia is particularly sensitive to data from China, its top export market.

(Read more: China,Japan headed down opposite policy paths)

Chinese stocks also pared gains, with the Shanghai Composite trading up 0.7 percent compared with its earlier rise of over 1 percent. Hong Kong's Hang Seng was down 1 percent.
A breakdown of the PMI showed new orders falling to 48.1 from 50.1 in January, and production dropping to 49.2 from 50.8. New export orders, however, rose to 49.3 from 48.4.
But getting the most attention is the employment sub-index, which Chinese policymakers are particularly attuned to. That came in at 46.9, its lowest reading since February 2009.

According to Zhiwei Zhang of Nomura, the figures back the bank's view that China will struggle to maintain its rebound.

Stringer | AFP | Getty Images

"We reiterate our view that the recovery in China is not sustainable and that GDP (gross domestic product) growth will slow to 7.5 percent year-on-year in the first quarter and 7.1 percent in the second quarter, despite favorable base effects," he said.
"We expect the government to loosen monetary policy in the second quarter to support growth," he added.

(Read more: Is China's love for Treasurys waning?)
Earlier this week, China's central bank unexpectedly drained 48 billion yuan ($7.9 billion) from money markets following a boom in lending at the start of the year, a sign that the tightening bias by the central bank remains in place.
Data confusion
The latest data adds to confusion over the true state of China's economy. While factory activity has been weakening since the start of the year, bank lending and trade data in January painted a rosy picture.
Blurring the picture further is the fact that Chinese data at the start of the year is typically distorted due to the Lunar New Year effect, when many businesses wind down operations.
According to Steve Brice, chief investment strategist at Standard Chartered Wealth Management, the fluctuations in the data won't change the fact that Chinese policymakers want to rebalance the economy and will tolerate slower growth in the forseeable future.
(Read more: The China risk you may have forgotten about)

"The authorities clearly want to support growth at some levels around 7 percent, they don't want to blow up above 8 percent as they manage the credit bubble," he said. "Overall, the picture will not be positive coming out of china for some time."

Play Video

Swan: Don't panic over weak Chinese PMI

Wayne Swan, former Treasurer of Australia, says he is confident that China will continue to grow above 7 percent annually and explains why there's no need for panic over latest factory data.

Former Treasurer of Australia, Wayne Swan, also weighed in on the China debate.

"China growing at 7 percent plus is still very big and important contribution to global growth, we should never lose sight of that. The Chinese are reorienting their economy from export-led growth to more domestic consumption, so this is not going to be an easy thing for them," he told CNBC on the sidelines of the G20 meeting that will kick off in Sydney this weekend.
"But I believe Chinese government has the will power and the confidence to ensure that their economy continue to grow. I don't think there's a need to panic every time we see a PMI which might be a bit below the average," he added.
— By CNBC

Fed issues stricter capital rule for foreign banks

The U.S. Federal Reserve on Tuesday released the final version of tight new capital rules for foreign banks, giving them a year longer to meet the standard and applying it to fewer banks than in a first draft.
The reform is designed to address concerns that U.S. taxpayers will need to foot the bill if European and Asian regulators treat U.S. subsidiaries with low priority when rescuing one of their banks.
The largest foreign banks, with $50 billion or more in U.S. assets, will need to set up an intermediate holding company and be subject to the same capital, risk-management and liquidity standards as U.S. banks, the Fed staff said.
(Read more: Foreign banks bracing for tough U.S. Fed capital rules)
The Fed estimated that between 15 and 20 foreign banks would fall under the requirement, which was eased from when the rule was first proposed in December 2012, when the cut-off was $10 billion in U.S. assets.
Foreign banks with sizable operations on Wall Street such as Deutsche Bank and Barclays have pushed back hard against the plan because it means they will need to transfer costly capital from Europe.
"The most important contribution we can make to the global financial system is to ensure the stability of the U.S. financial system,'' Fed Governor Dan Tarullo, in charge of financial regulation, said in a speech.
(Read more: U.S. spat looms with foreign regulators over swap rules)
Europe has warned of tit-for-tat action, with European Union financial services commissioner Michel Barnier saying in October the bloc would draw up similar measures if the Fed pushed ahead with its plans.
The Fed also gave foreign banks a year longer to meet the requirement to set up the new structure, with the new deadline being July 1, 2016. Both changes had been widely expected in the market.
(Read more: EU plans for trading rules widen global gap in bank regulations)
The new structure gives banks less flexibility to move money around than under the current rules, which allow banks to use capital legally allocated in their home country. In some cases, the U.S. rules are tougher than elsewhere.
The rule also subjects foreign banks with global assets of $10 billion or more to stress tests that rely on the home-country stress tests standards, the Fed staff said.
—By Reuters

Wall Street fights to keep young, restless analysts

Wall Street's two-year analyst program is the stuff of undergraduate legend. The deal: Give a bank your waking hours for a finite period of time, in which one is guaranteed nearly six figures in compensation and a rigorous boot camp in high finance.
That honest bargain created a decades-old institution that provided many a first job for executives across a wide variety of industries beyond Wall Street.

Getty Images

A trader works on the floor of the New York Stock Exchange.

But as regulation mounts, pay stalls, and industries like technology, media and consulting compete for talent, young and restless analysts are throwing in the towel, leaving banks with a new dilemma of how to keep them.

Take Chris Martinez.

A 2010 graduate of Wisconsin, Martinez joined a group working on mergers in the tech, media and telecoms sector. Martinez worked on high-profile deals around the clock, pulling more all-nighters than he could count. Within seven months, Martinez had secured a job at private equity firm Apax Partners and, though interested in the content of the work he did, began counting down days to better hours.
(Read more: Wall Street jobs to increase, but there's a catch)
"It's almost expected that an analyst, especially in their first year, is just going to be miserable," Martinez told CNBC. High achievers hand over the keys to their lives to do "repetitive, simple work" on Excel spreadsheets, he said. He estimated that only 5 percent of his work made it to his group's corporate clients.
"The fundamental nature of the work makes it very difficult for the job to compete with many other jobs out there," Martinez said.
Around the time Martinez was leaving, Goldman executives had realized many like him were taking the bank's training and heading to rivals. To stem the exits, it set up a junior banker task force, responsible for conceiving ideas for how to introduce a semblance of work-life balance for the twentysomethings who had previously checked that "life" part of the equation at the door.

(Read more: From brats to bosses—Gen Y to dominate by 2025)
Goldman has since suggested analysts aim for a 75-hour workweek (not 100). The bank has also eliminated Saturday work, unless the analyst is on a live deal. The most notable outcome: the end of Goldman's two-year trainee program, which has roots in the 1980s. Graduates will now join as full-time employees, instead of as contractors.
"If more banks moved in the direction of breaking down this two-year program, they'd be better off," said Adam Grant, a behavioral expert and professor at the University of Pennsylvania's Wharton School, noting that employees join with only short-term goals in mind. "If Wall Street doesn't change, it will be the next dinosaur."
Grant has been so vocal on the topics of burnout and employee morale that Goldman sought his counsel when it was looking to implement more changes in 2013. At his suggestion, the firm is now conducting "entry interviews" with new joiners, attempting to curtail unnecessary face time, and eliminating Saturday work (unless the analyst is working on a live deal).

Play Video

Big banks fight to keep young analyst

CNBC's Kayla Tausche reports on the efforts of big banks to retain young talent on Wall Street.

Grant wanted to go even further, to have the analysts rank their managers and do away with those higher-ups who were especially toxic. However, Goldman rejected the idea, Grant says, because it didn't want to have to ditch managers who were top producers.
It's not just Goldman's problem. All of Wall Street's banks have been grappling with how to stem the flight of analysts as constant industry vilification and regulation have meant there aren't the risks—or, more importantly, rewards—that once existed.
Entry-level analysts who join investment banks following financial crises earn less overall in their careers than those who join in good times, according to 2008 research by Stanford's Paul Oyer. Oyer estimates investment bankers graduating into a bull market earn up to $5 million more over time than those who join during downturns.
(Read more: Gen Y managersperceived as entitled, need polish)
Mark Horney at Columbia Business School says bull markets see more of these "shoppers"—students who choose Wall Street because of its pay or cachet, not because they like the core content of the work. Oyer found that in his research, too.
"When times are lean on Wall Street," Oyer writes, the group of applicants interested in Wall Street as a quick payday "shows less interest in working there."

Between 2012 and 2013, the number of MBA candidates who planned to head to Wall Street fell across the top business schools, by 8 percentage points at Harvard Business School alone. The trend at the undergraduate level is even more drastic: For instance, the percentage of Princeton graduates going into finance fell 14 percentage points between 2006 and 2011.

Kevin Roose, a writer for New York Magazine, explores these issues in his new book "Young Money." Roose followed eight analysts into the two-year trenches and found that, while most went to Wall Street in search of financial security, by the end of their two years "they just want some sleep."

(Read more: What the millennial generation wants from work)
For others, Wall Street is simply intellectually rigorous prep for an unrelated career—one of the main types of flight investment banks are now trying to stem.
Graham Carroll, an MBA student at UNC's Kenan-Flagler business school, spent three years at Bank of America Merrill Lynch in the first analyst class following the firms' hurried merger. In order to keep top talent in the 24-person financial institutions group around for longer, the bank created a rare third-year analyst position, a mezzanine level of sorts.

But Carroll realized that, fundamentally, he wanted to do something entrepreneurial—not something ever more senior within the bank's bureaucratic strata. He and his brother have tiptoed into the business of recycling electronics but are now steering toward something more financial.

"I didn't see the managing director I worked for as an idol of sorts, that I wanted to do what he did in 10, 12, 13 years," Carroll said. While admitting it's not for everyone, Carroll said he would "100 percent recommend" an analyst program to any graduate, as long as they were ready to make the lifestyle sacrifices in the short term. "What gets lost in translation a lot of times is that the job is a great job."

(Read more: The surprising reason college grads can't get a job)
Other analysts with less bullish perspectives preferred to remain anonymous, since they still do business with their former employers, but provided much the same responses. "I figured I could do anything for two years, but only two years," said one former JP Morgan analyst.
Banks are hoping that changes to analyst programs will be viewed as a positive structural change. While their private responses have been mixed—executives at one bank recalled "snickering" while others felt "relief" at Goldman's taking the initiative—the public responses have been unified: Nearly every bulge-bracket firm has taken steps toward, at the very least, reducing weekend work.
Unfortunately, many of the changes seem to be a mile wide and an inch deep. Beyond the internal memos issued within the banks, Bank of America, Credit Suisse, Citigroup and JP Morgan Chase have declined to make executives available to discuss the efforts, or elaborate on them on the record.

"They eat their young," said Brad Hintz, an equity research analyst covering the financials, whose curriculum vitae includes partner at Morgan Stanley and CFO of Lehman Brothers. "They're being nicer about it, but it's still a meritocracy."

(Read more: More confident,people are quitting jobs: Why that may be bad)
Wharton's Grant says the moves are a step in the right direction, but e-mails like one he received over the President's Day holiday still raise eyebrows.
In the e-mail, a first-year analyst at an unnamed bank contacted Grant after reading about his work with Fortune 100 companies. The analyst had been brainstorming ways to improve morale within his own firm—like catered lunches or out-of-office events—but found his ideas dead on arrival when he tried to suggest them to his bosses. Most of the talk about a groundswell of cultural change was simply "PR stunts."

"These banks often recruit top talent, treat them like crap after investing quite a bit of money in training them," the analyst concluded, "and continue to do it year after year."
—By CNBC'

Five years already? Stimulus debate still rages

President Barack Obama marked the five-year anniversary of a controversial economic stimulus plan by releasing a report on saying that government spending averted a second Great Depression, setting off a new round of partisan debate about the decision.
Obama had been in office only a month when he signed the American Recovery and Reinvestment Act of 2009, a $787 billion stimulus that Democratic majorities in both the Senate and House of Representatives passed over the objections of Republicans.
Many Americans remain doubtful about how helpful the stimulus was for an economy that still struggles to recover from a deep recession that took hold in 2008.
(Read more: What the Fed will tell markets this week)
The White House, eager to lay to rest those doubts, issued a five-year report on Monday that said the stimulus generated an average of 1.6 million jobs a year for four years through the end of 2012.

Play Video

Nothing wrong with more stimulus in Europe: Pro

Jaco Rouw, Senior Portfolio Manager, Core Fixed Income at ING Investment Management, says that "there's nothing wrong with a further dose of monetary stimulus" in Europe.

The stimulus by itself raised the level of gross domestic product by between 2 percent and 3 percent from late 2009 through mid-2011, said the report, issued by the White House Council of Economic Advisers.

Jason Furman, chairman of the council, said the Recovery Act had a "substantial positive impact on the economy, helped to avert a second Great Depression, and made targeted investments that will pay dividends long after the act has fully phased out."
(Read more: That's patriotic! Paying Uncle Sam extra—voluntarily)
Republicans, who are attempting to oust Democrats from control of the Senate and build on their House majority in November elections, were quick to raise objections to the White House report.
House Speaker John Boehner, the top U.S. Republican, said the stimulus turned out to be a classic case of "big promises and big spending with little results."
"Median household incomes are down. Prices on everything from gas to groceries are higher. A new normal of slow growth has set in, with most now saying the worst is yet to come," Boehner said in a statement.
The battle over the stimulus remains relevant today as Obama seeks congressional approval of infrastructure spending intended to create jobs.
(Read more: Welcome to the good news/bad news economy)
"Five years later, the stimulus is no success to celebrate. It is a tragedy to lament," said Senate Republican leader Mitch McConnell in an opinion article for Reuters.
—By Reuters