Currency Bets Cripple Companies

In an interesting twist of fate, currency bets are beginning to cripple the corporate sector. Apparently many corporations did not believe that the dollar would strengthen as much as it has. Yesterday, we learned that Citic Pacific lost more than $1.8B due to leveraged contracts on the Australian dollar and the Euro. Their contracts requires them to buy the AUD/USD for 87 cents and the Euro for 1.44. That is a more than 25 percent premium for the Aussie and a more than 10 percent for the Euro.

Unfortunately Citic Pacific is not alone in making these bets. According to the Wall Street Journal today, many Latin American companies have seen large currency related losses. The velocity of the dollar’s rally has given these companies little chance to exit out of their positions at good prices. Instead, they have been forced to take major losses.

I fully expect a similar trend for companies in other parts of the world including Asia.

Hopefully these companies will learn from the losses and start hedging their FX risk completely. To their credit, they did hedge but not enough.

Under the deals, the banks offered financing and currency trades at favorable rates. But there was a hitch. If the U.S. dollar strengthened beyond a certain threshold, then the companies would have to sell dollars at a loss. In some cases, the contracts had triggers that doubled the number of dollars the companies owed.

These companies should stick to their core business and try not to gain a few cents and potentially lose a few dollars by getting involved in the currency markets.

Source: Wall Street Journal

Source: Wall Street Journal

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In the Financial Papers: Today’s Top Forex News 07.22.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 6:22 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

Read my Daily report on DailyFX.com

In the Financial Papers:

 

Podcast Covers:
Paulson and Plosser Comments
Fed Appears to Focus on Inflaiton Ahead of Growth
Measures to Avoid the Worst Recession in 30 Years
United Airlines Planned to Cut 7000 Jobs as Fuel Costs Surge, 6000k jobs cuts at Wachovia
Weak Earnings from American Express and Wachovia
Oil Prices: Have they Peaked?
Russians are Coming, Wallets in Hand

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US Dollar: 5 Event Risks Not to Miss

Fannie Mae and Freddie Mac’s developments continue to drive the price

action for the currency market. Despite Paulson’s announcement yesterday that he will be seeking Congressional Approval for the authorization to buy stock in Fannie and Freddie and a higher credit line, currency and stock traders are still not convinced that this is enough. On Friday, Fed Chairman Bernanke announced that Fannie and Freddie could tap into the discount window.

As the Wall Street Journal muses in this morning’s paper “Are the Hunters Low on Magic Bullets?

There are 5 major event risks that will affect the US dollar this week:

1. Fannie Mae and Freddie Mac will continue to dominate headlines. Watch out for more comments by the US government

2. Earnings! JP Morgan, Merrill Lynch and Citigroup are all reporting earnings this week. With the failure of IndyMac, more trouble could be in store for the financial sector

3. Bernanke delivers his semiannual testimony on the Economy and Monetary Policy Tuesday and Wednesday. Although he will remain hawkish on inflation, he will receive serious criticism for more action during the question and answer session about the continual strains in the financial markets and the slide in US equities.

4. Retail Sales will be released on Tuesday.
The level of consumer spending will play a big role in the outlook for the US economy

5. Inflation, inflation, inflation. Producer and consumer prices are due for release this week – softer inflation pressures could reduce the chance of a rate hike by the Federal Reserve.

It will be a very busy trading week in the foreign exchange market!

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In the Financial Papers: Today’s Top Forex News 07.10.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 7:48 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

Read my Daily report on DailyFX.com

In the Financial Papers:

 

Podcast Covers:
Jobless Claims Drop Distorted by Seasonality
Australian Employment Numbers Much Stronger than Expected
Bank of England Leaves Interest Rates Unchanged
Ex BoE Goodhart Says UK Faces Quite a Recession, Forcing Rate Cut
S&P 500 Ventures into Bear Territory
Canada and Mexico: Stock Markets Holding Up In Face of US Sell-off
What Would the Fed do If Fannie or Freddie Failed?
BNP Outlook for Australian and New Zealand Dollars

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In the Financial Papers: Today’s Top Forex News 07.09.08

kathysmallHere is the “In the Financial Papers Radio Broadcast” (Length: 6:01 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy

Read my Daily report on DailyFX.com

In the Financial Papers:

 

Podcast Covers:
Canadian Dollar Skyrockets After Housing Market Numbers and Oil
Geopolitical Tensions Weigh on Euro – Iran tests missiles
Trichet Reminding the Markets that they have no bias > last week’s hike was meant a “signal.” ECB is determined to re-establish inflation target.
Hedge Funds Have Worst First-Half Performance in 18 Years, Dropping 0.75%
Australian consumer confidence hits 16 Yr Lows
Fed Bernanke Ready to Extend Bank Aid
Asian Oil Usage Reined in by Reduced Subsidies and High Prices
Oil Prices Sees Largest One Day Drop Since 1991

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