USD - Dollar Finishes a Volatile Week Ahead of the Non-Farm Payrolls
The Dollar underwent a volatile trading week against the major currencies. The EUR/USD was traded between the 1.4200 and 1.4400 levels without showing a clear direction. The Dollar continued the rising trend against the Pound, yet saw bearish activity against the Yen.
The greenback's unstable trading week took place largely due to the mixed results published from the U.S economy. While the Consumer Confidence report showed a surprising improvement in consumers' confidence regarding their financial outlook. Also, the housing sector continues to show signs of recovery as 433,000 New Home Sales were sold during July, marking a 9-month record. The Preliminary Gross Domestic Product (GDP) dropped by 1.0% in the second quarter of the year, showing that the American economy continues to contract, despite some optimistic reports.
In addition, the weekly Unemployment Claims report showed that 570,000 individuals have filed for unemployment insurance for the first time during the past week, questioning that the employment conditions in the U.S have entered a recovery process.
Looking ahead to this week, many impacting data is expected from the U.S economy, and above all the Non-Farm Employment Change report which is expected on Friday. The main publications for this week will include the Pending Home Sales on Tuesday. A positive result could strengthen the notion that the housing sector is recovering, which could boost the Dollar. The Manufacturing Purchasing Managers' Index on Tuesday is also likely to create strong volatility in the market. Yet the Non-Farm Payrolls on Friday is likely to affect the Dollar the most. Traders are also advised to follow the ADP forecast on Wednesday, as its results have proven to impact the Dollar in the short-term.
EUR - EUR Recovers before the Weekend on Positive German Data
Last week, the Euro saw volatile activity against the major currencies. The EUR first dropped against the Dollar, just to rise back up. The EUR saw a strong bullish trend against the Pound, as the EUR/GBP pair rose over the 0.8820 level. However, the Euro dropped almost 400 pips against the Yen.
The EUR began last week's trading with falling trends largely due to the positive economic data published from the U.S economy. However, as the week proceeded, a batch of positive economic data saw light from the Euro-Zone as well, jumping the Euro back up. The German Business Climate report saw an 11-month high, proving that businesses in Germany feel the economy is on the right track to recover from the global crisis.
Also last week, the German Consumer Climate index rose by 3.7 points, marking a 15-month record, supporting the sentiment that the German economy could be the first leading economy to pull out of recession. Considering that Germany holds the largest and strongest economy in the Euro-Zone, a continuation of such data is likely to strengthen the Euro against the major currencies.
As for this week, many interesting publications are expected from the Euro-Zone. The German Retails Sales is scheduled on Tuesday 06:00 GMT. This report measures the total value of inflation-adjusted sales at the retail level, and is considered to be a reliable indication for an economy's health. A positive data is likely to boost the Euro. Another publication that traders are advised to focus on is the Revised Gross Domestic Product (GDP) expected on Wednesday. Current expectations are that the European GDP has dropped by 0.1% during the second quarter of the year. However, a surprising result is likely to affect the Euro, and traders should be prepared.
JPY - Japanese Elections Support Yen Towards 7-Week High against USD
Last week, traders that went long on the Yen saw nice profits. The Yen rose close to 300 pips against the Dollar, sending the USD/JPY towards the 92.50 level. The JPY also rose against the Euro, and marked over 600 pips rise against the Pound.
It seems that the Yen was boosted last week much due to the end of election uncertainty following a win for the opposition Democratic Party of Japan. The elections' end even supported the Yen up to a seven week high against the Dollar. Another reason for the Yen's appreciation last week is the trade balance report which was published on Tuesday. This report measured the difference in value between imported and exported goods during July, and delivered a 0.19T figure. This means that the Bank of Japan (BoJ) is succeeding in its target to recover the Japanese economy with strong exporting activity. The BoJ keeps its low interest rates mainly for this purpose, and it seems that as long as Japanese exports will continue to expand, the Yen is likely to rise further and further.
As for the week ahead, a batch of data is expected from the Japanese economy. Traders are advised to focus on the monetary Base and the Capital Spending reports, as they are likely to create large volatility in the market. The Capital Spending report measures the total value of new capital expenditures made by businesses, and thus tends to have a large impact on the Yen.
Crude Oil - Crude Oil Recovers to $73 a Barrel
After starting last week with sharp losses, Crude Oil managed to recover and to resume towards $73 a barrel. Two main reasons led to Crude Oil's recovery since mid-week. First, optimistic data from Germany and the U.S have increased speculations that demand for energy will rise. A very relieving assumption is that as the global economies' condition will improve, demand for oil will rise in accordance. The other reason was the drop of the Dollar against the Euro and the Yen. As a commodity, Crude Oil is traded in Dollars, and thus a drop of the Dollar usually leads to a rising trend for oil, and vice versa.
As for the week ahead, traders are advised to follow the leading publications from the major economies, as they are likely to dominate Crude Oil's value. Traders should also bear in mind that positive data from the major economies is likely to create speculations regarding energy demand which tends to boost crude oil. In addition, the Crude Oil Inventories report is scheduled for Wednesday. This report is also likely to have a large impact on crude oil's value and traders should follow its outcomes.
Article Source - Forex Traders Anticipate Heavy News Week
Key Overnight Developments
• Japan: Industrial Production, Retail Trade Top Expectations; Manufacturing Expands
• Australia’s Business Loans Grow the Least in 7 Years, Company Profits Tumble
• New Zealand Business Confidence Rises to the Highest in Over a Decade
• Japanese Yen Surges as Stocks Drop Overnight on Earnings, Japan’s Election
The Euro traded sideways in a narrow 30-pip range above 1.4290 in overnight trading. The British Pound trended lower after a brief test above the 1.63 level early in the session, giving up 0.2%. Technical positioning suggests the US Dollar is carving out a bottom against most major currencies.
Asia Session Highlights
The initial estimate of Japan’s Industrial Production showed that output added 1.9% in July from the previous month, more than economists expected but the least in four months. In annual terms, the pace of decline moderated to -22.9%, the slowest rate of contraction since December 2008. Output has rebounded from the lows noted in February as firms began to replenish inventories that had been depleted after sharp production cuts kicked in as overseas demand for Japanese cars and electronics began to drop off in March last year amid the deepening global economic crisis. Indeed, the Nomura/JMMA PMI gauge printed at 53.6 in August, showing that the manufacturing sector expanded for the second consecutive month. However, a sustainable upturn will have to come with growth in underlying demand, which seems destined to remain sluggish for some time. Indeed, the International Monetary Fund (IMF) said its latest world economic outlook that global trade volumes are likely to rebound just 1% having shed a whopping -12.2% in 2009.
Meanwhile, Japanese Retail Trade unexpectedly fell just -2.5% in the year to July, the smallest drop since January. Economists had predicted a -3.5% decline ahead of the release. However, the improvement in the headline figure may not be indicative of a true rebound in consumer sentiment. Indeed, most of the improvement seems to have been driven by a 7.6% jump in motor vehicle sales, which can likely be chalked up to tax breaks on purchases of fuel-efficient cars that were included into the government’s fiscal stimulus package. Looking ahead, continued weakness in the labor market is likely to keep a lid on spending as layoffs weigh on disposable incomes.
Australian Private Sector Credit grew 0.2% as expected in July, driven by a 0.84% jump in loans for new house purchases, the largest increase since April of last year. Separately, the Housing Industry Association reported that New Home Sales grew for the second consecutive month in July, adding 0.1%. The improvement is suspect however, having likely owed to fiscal stimulus rather than improved consumer confidence as the government extended a scheme offering an A$21,000 grant for first-time home buyers in May. Most worryingly, business loans grew just 0.5%, the least in over 7 years, while Operating Profits fell by a nearly twice as much as economists expected in the second quarter. A meaningful economic recovery will not materialize without a rebound in private consumption. This, in turn, requires a rebound in the labor market, which seems highly unlikely if firms are not able to either earn or borrow adequate funding for expansion. On balance, this could translate into a double-dip recession as the inherently temporary boost from fiscal stimulus begins to fade.
In New Zealand, NBNZ Business Confidence rose to 34.2 in August, the highest in over a decade. However, as we noted in our New Zealand Dollar Weekly Forecast, improvements in the headline figure may be misleading. The higher reading implies that optimists are outnumbering pessimists by an increasingly wider margin among polled survey respondents, but this is no tall order considering the New Zealand economy has been shrinking for six consecutive quarters and could prove to be flimsy evidence of a sustainable recovery in economic growth. Put another way, the relative improvement in firms’ optimism is more so a factor of the sharp declines in the recent past rather than a meaningful surge in confidence about the future.
The Japanese Yen surged sharply higher, with a trade-weighted index of the unit’s average value adding 1.2% from Friday’s close as stocks tumbled 2% in Asian trading to boost demand for the safety-linked currency. Chinese shares led the selloff, dropping over 5% to a three-month low, as China Merchants Bank (the nation’s fifth largest lender by market value) reported a third consecutive quarter of falling profits and set aside additional funds to cover future loan defaults. Japanese stocks slipped nearly a full percentage point as an election swept the Democratic Party of Japan into power for the first time ever, raising uncertainty about the practical impact that the change of leadership will have on economic policy.
Euro Session: What to Expect
A preliminary estimate of the Euro Zone Consumer Price Index is expected to show that inflation fell at an annual pace of -0.3% in August, a slight improvement over the -0.7% result registered in the previous month. Still, the bottom line is that prices are set to decline for the third consecutive month, contributing to building expectations of lower prices in the future. This threatens to unleash a deflationary spiral that sees consumers and businesses perpetually hold off on spending and investment as they wait for the best possible bargain, bringing economic growth to a virtual standstill. At this point, a survey of economists polled by Bloomberg suggests the market sees CPI shrinking through the third quarter and returning to a path of positive growth by the end of the year. If this proves to be too rosy, traders may punish the Euro as it becomes clear that the currency bloc is heading for a long-term period of low interest rates and sub-par economic growth. A disappointing outcome seems likely considering the European Central Bank’s apparent inability to offer effective monetary easing as well as well-founded reservations about the sustainability of the upswing in economic growth seen in the second quarter.
Written by Ilya Spivak, Currency Analyst
Article Source - Japanese Yen Surges as Stocks Drop on Election Results, China Bank Earnings (Euro Open)
Fundamental Outlook for US Dollar: Bullish
- Conference Board consumer confidence surprisingly surged to a 3-month high in August
- Despite revisions, the University of Michigan’s consumer confidence index fell slightly
- US durable goods orders jumped by the most in 2 years, but excluding autos, gains were muted
The US dollar ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. Ultimately, this amounted to little more than a continued period of consolidation, as the US dollar index remains above a rising trendline connecting the July 2008 and August 2009 lows. Nevertheless, trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the “summer doldrums” create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.
There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. Indeed, the US government’s “cash for clunkers” program has been a boon for the auto industry and for manufacturers in general, but since the program formally ended on August 24, there could be a noticeable drop in output in coming months. Regardless, a strong ISM manufacturing reading would bode well for the US dollar.
The main event risk for the US dollar on Wednesday will be the release of the minutes from the Federal Reserve’s last meeting on August 12. Following that meeting, the policy statement eventually led to a quick return to risk-taking that pushed the greenback lower, as the Federal Open Market Committee (FOMC) said that the current "policy actions…will contribute to a gradual resumption of sustainable economic growth" and that they had decided to gradually slow the pace of Treasury securities purchases. A reiteration of these statements has the potential to lift risk appetite further, but on the other hand, indications that FOMC members are feeling uneasy about the outlook for growth or the need to expand quantitative easing down the road could do quite the opposite.
On Thursday, ISM non-manufacturing is anticipated to rise to an 11-month high of 48.0 for the month of August from 46.4. While stronger readings are always a positive, anything below 50 will continue to signal a further contraction in activity and will ultimately highlight the lack of consumer spending growth in the US.
On Friday, the US non-farm payroll (NFP) report is forecasted to show job losses for the twentieth straight month in August, though the rate of decline is anticipated to slow further. Bloomberg News is currently calling for NFPs to decline by 227,000, which would be the smallest drop in a year. Meanwhile, the unemployment rate is projected to edge up to 9.5 percent from 9.4 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.
Euro Forecast Dims on S&P 500 September Effect
Fundamental Forecast for Euro: Neutral
- Euro fails to hold gains despite fourth straight German IFO improvement
- German Consumer Price Index report boosts fears of deflation
- Consumer confidence data nonetheless boosts fundamental forecasts
The Euro saw yet another week of incredibly choppy trade, finishing the week almost exactly unchanged despite surging near year-to-date highs against the US Dollar. The last week of summer trading produced brief moments of sharp price moves and uneventful price action at moments in between. Relatively wide bid/ask spreads on major currency pairs underlined that market conditions remained illiquid—making short-term currency forecasts all but impossible. We expect that market conditions will improve through the first week of September trading, and it will be important to watch whether the Euro and US Dollar embark on new trends to start the trading year.
The vaunted “September effect” typically stipulates that stock markets typically fare worst through September, and a fall in risky assets would likely benefit the safe-haven US Dollar. In the past 10 years, the US S&P 500 has lost an average of approximately 30 points through September—by far its worst tally in any month of the year. Past performance is hardly a guarantee of future results, but it will nonetheless be important to watch for a turnaround in recently high-flying risky asset classes. The very fact that the S&P 500 has set fresh year-to-date highs through end of week trade underlines the risks of noteworthy pullback, and this may be one of the most important FX market themes in the week ahead. A busy week of European economic event risk likewise promises eventful price action through the coming days.
The combination of European and US employment figures could finally provide clear impetus for sustained Euro/US Dollar moves. German and EU officials report on regional unemployment on Tuesday the 1st of September—setting the tone for the subsequent month of fundamental data. Both are expected to show continued deterioration in unemployment rates and underline downside risks to economic growth. Subsequent Euro Zone Gross Domestic Product revisions are expected to show a modest downgrade to second quarter expansion numbers, but the true fireworks will likely come on the following day’s European Central Bank interest rate decision.
The ECB is very widely expected to leave interest rates unchanged—ostensibly leaving little risk for major volatility. Yet recent price action has taught us to expect the unexpected, and markets will be paying close attention to any shifts in rhetoric from the regional central bank. Officials will likewise release their new economic outlooks for the Euro Zone, and any surprises could likewise produce reactions in the Euro itself.
Last but most certainly not least, traders should keep a lookout for US Nonfarm Payroll results on Friday. Continued improvements in US employment numbers leave economists expecting a slowdown in job losses. Yet any surprises could easily cause substantial Euro/US dollar moves.
Japanese Yen Crosses Ready for the Next Trend in Risk Appetite
Fundamental Forecast for Japanese Yen: Bullish
- How long will risk appetite run astray of fundamentals?
- Unemployment hits a record low through July, deferring the timing of an economic recovery
- Will the rest of the yen crosses follow GBPJPY’s plunge this past week?
While other majors’ economic calendars have been filled to the brim, there are comparatively few Japanese economic indicators due for release next week. However, that doesn’t mean the yen will be relegated to tight ranges. The light docket belies the heavy event risk that is looming for the single currency. This weekend, the nation will go to the polls to vote in the first general election since 2005. Such a political episode is always market moving; but the fundamental implications in this election run especially deep as the world’s second largest economy is struggles to recovery from its worst recession in history and opinion polls suggest a change in power (and therefore policy approach) may be in the cards. And, if this wasn’t enough for market participants to worry about, there is always the high correlation to market sentiment to worry about. Tight ranges and stalled rallies should concern rather than pacify the astute trader.
First and foremost on the table is the general election that is to take place on Sunday the 30th. All 480 seats of the House of Representatives are open to the ballot – and for those unfamiliar with the Japanese political system, the house designates the Prime Minister. Clearly, there is at lot at stake from the traders stand point in this event risk. Whomever has control over the government will set vital policies that will steer the economy’s recovery from its worst recession since WWII. The uncertainty surrounding the event alone is enough to shake what confidence is still inherent in the yen. Even before the recent financial and economic crisis, Japan was mired in what is popularly coined a ‘lost decade’ of feeble growth, deflation, high savings and weak domestic investment trends. This is a wily ship to helm. What makes it even more interesting is that early opinion polls suggest the ruling coalition of the Liberal Democratic Party (LDP) will be unseated for the first time in nearly half a century by the opposition Democratic Party of Japan (DPJ). Admittedly, both their economic policy outlines are similar and spotty; but the desire to make an immediate impression and take control of the recession would likely see more immediate reaction should the DPJ win.
Beyond the immediate volatility following the market open after the election is decided, the outcome of this political shuffle will have a lasting impact on the Japanese economy and currency. Yet much of its influence will be subtle. In contrast, general risk appetite trends could cause severe waves for the yen over the coming week. Over the past few weeks, bullish sentiment has stalled. The S&P 500 has stalled below 9,635; crude has failed to surmount $75/barrel; and carry trade has tested the same 10-month high through all of August. Either these markets will have to push through or retrace; and with the progress of these speculative markets, we will see sentiment unfold. Supporting an ongoing bull wave, there is still immense amounts of side-lined capital that can find its way into the market. However, even if there is another leg of the now five month advance, it will likely be short-lived. Sentiment is waging a heavy premium over what fundamentals suggest the recovery can support and the lack of investment turn over can produce in returns.
Finally, we should not ignore the data on Japan’s economic docket. There are few readings on hand; but they are potent in furthering growth forecasts. Housing starts and vehicle sales will offer a look into the availability of consumer credit and the willingness to purchase big ticket items given current market conditions. Further up the economic stream, industrial production will measure orders (domestic and foreign) by translating what it will mean for local growth and employment. The 2Q capital spending will benchmark this same sector.
British Pound Outlook Bearish on Technical Break Lower
Fundamental Forecast for British Pound: Bearish
- British Pound technical sell entry ahead
- UK Consumer Confidence points to pessimism on economic conditions
- FX Sentiment points to British Pound losses against Japanese Yen
A lackluster week of British fundamental data made the Pound the worst performer among all G10 currencies through recent trade, and a technical break below multi-month trendline support leaves risks to the downside for the UK currency. Disappointments in GfK consumer confidence survey numbers and late-week international trade figures underlined risks to domestic consumption. A modestly positive revision to second quarter Gross Domestic Product figures failed to elicit a reaction from the UK currency, and it seems that markets had little interest in holding long-GBP exposure through illiquid trading conditions. The week ahead should bring far more liquidity into the FX market, and it will be critical to watch the next GBPUSD moves as traders return to their desks for the first week of September.
Seasonality in global financial markets add further downside risks for the GBP, as stock markets often experience their worst month of the year through September. Indeed, the much-talked-about “September Effect” looms large on FX markets; a strong GBPUSD correlation to the US S&P 500 strongly suggests that the British Pound would lose on S&P declines. Past trends hardly guarantee future results, but we cannot ignore fairly clear seasonal tendencies. Second-tier UK economic event risk may provide some surprises, but we expect that broader financial market risk sentiment will provide the strongest influence on the risk-correlated British Pound.
Traders should keep an eye out for noteworthy results in upcoming Purchasing Managers Index (PMI) Manufacturing, Construction, and Services reports; the surveys are typically leading indicators for economic growth trends. All three surveys are expected to improve on the month of August. Lofty expectations certainly leave room for disappointment and, if anything, risks remain to the downside ahead of PMI data.
Finally, forex traders will keep a very close eye on end-of-week US Nonfarm Payrolls data. The infamous NFP’s report often sparks impressive, if unpredictable, moves in the US S&P 500 and US Dollar. Needless to say, any particularly sizeable surprises in the data could provide substantial GBPUSD volatility.
Written by Terri Belkas, David Rodriguez, John Kicklighter, John Rivera, Ilya Spivak and David Song, Currency Analysts
Article Source - Forex Weekly Trading Forecast - 08.31.09
USD - USD Falls Steeply on Thin Trading and Market Optimism
After a period of steady appreciation, the USD took a sharp nose dive at the end of European market hours to close yesterday's trading at 1.4364 versus the EUR, 1.6284 against the Pound, and 1.0877 against the CAD. The greenback fell due to several reasons that are linked to thin summer trading.
First, with Crude Oil advancing from industrial growth worldwide, the USD is experiencing some downward pressure from commodity purchases. With growth being forecast on the horizon, safety investments like the USD are losing some of their appeal. While the Gross Domestic Product (GDP) of the United States shrank less than expected, many economists are anticipating a rally in US stocks, Crude Oil prices, and riskier investments. These all point to further downward pressure on the Dollar in the days ahead. As such, yesterday's sharp drop was inevitable.
If today's figures on Personal Income and Personal Spending in the US confirm the rising trend of growth, the USD could see some added downward pressure. The University of Michigan's Consumer Sentiment report will also give credibility to these assumptions if it reveals market optimism is on the rise. Traders may anticipate a bearish Dollar if economic news continues to support these latest trends.
EUR - EUR Remains Bullish at End of Month Trading
The EUR's bullish rally against all major currency pairs continued yesterday with a surprising reversal to the EUR/USD's recent downtrend coming at the close of European markets. Closing at a surprising 1.4364 against the greenback, the EUR made significant gains on recent boosts to market optimism, risk appetite, and thin market trading. As the month comes to an end, a significant level of position shifting takes place and some trends may see a reversal at the start of September.
Market data from the Euro-Zone and Britain has lately put a positive spin on the 16-nation currency. Germany's Ifo Business Climate report on Wednesday showed an improvement to investor confidence in the German economy and other data yesterday continued adding momentum. While Britain's economic figures may also show positive data, the level of confidence in the British banking system, as well as their influx of cash from their quantitative easing program, has put a downward spin on the GBP. This trend may not come to an end anytime soon, but end of month trading usually generates enough volatility to surprise even the most veteran traders.
As for today, the Euro-Zone isn't scheduled to release any significant reports, but the British government will release its Revised GDP figures showing that Britain's economy likely shrank by 0.8% last quarter. Switzerland will also publish its KOF Economic Barometer today, measuring the relative strength of the Swiss economy. This report has the potential to add a level of volatility to the CHF not typically experienced in the average trading week.
JPY - JPY Ends August with Batch of Poor Data
Yesterday was a day of bearishness for the Japanese Yen. Losing on all fronts, the JPY finished the day at 134.48 against the EUR, 152.35 versus the GBP, and stable at 93.64 against the Dollar. With the recent surge in market optimism, combined with thin trading at the end of the month, the Japanese Yen has faced surmounting downward pressure as safe-havens are losing their appeal.
Adding to this downward momentum was a batch of negative data releases from Tokyo at the start of Friday's trading session. Household spending, Japanese CPI, and Japan's Unemployment Rate all showed worse than expected numbers, with unemployment climbing to 5.7% last month. Closing out the month with such abysmal data definitely does not help the JPY's strength.
Crude Oil - Crude Oil's Appeal as Alternative Investment on the Rise
The appeal of Crude Oil investments rose yesterday after the US Dollar weakened on thin trading, growing risk appetite, increasing demand for energy, and end of month investment shifting. As Crude Oil prices rose for the first time in 3 days, investors flocked to the commodity as an alternative investment. Failing to breach the $70 support level, the price of a barrel of Light Sweet Crude subsequently rose back to $72.68 by the end of Thursday's trading hours.
With global economies beginning to show signs of recovery, and countries such as Australia already on their way to substantial growth, energy prices are expected to pick up in the near future. Likewise, as strength returns to the market, the safety of the US Dollar will fall alongside it, adding further support to Crude Oil prices. A near-term target of $75 a barrel has become a popular goal for many speculators as a result.
Article Source - U.S. Consumer Spending Report at Forefront of Forex Trading Today
Key Overnight Developments
• UK Consumer Confidence Held Flat for Third Month in August, Says GfK
• Japan's Jobless Rate Highest in 33 Years, Spending and Inflation Plummet
• Bank of China Plans to Reduce Credit Access in the Second Half of 2009
The Euro drifted modestly higher in the overnight session, adding 0.3% against the US Dollar. The British Pound followed suit, rising to test as high as 1.63 to the greenback.
Asia Session Highlights
Japan’s labor market continued to disappoint in July as the Jobless Rate rose to a greater-than-expected 5.7%, a 33-year record high, while the ratio of available jobs to seeking applicants unexpectedly dropped to a fresh all-time low of 0.42. Looking ahead, a survey of economists conducted by Bloomberg suggests the pace of job losses will continue to accelerate at least through the second half of next year. This points to continued weakness in consumer spending as layoffs weigh on disposable incomes. Indeed, Household Spending fell -2.0% in the year to July, four times worse than forecast.
The economic outlook for the world’s second-largest economy was made all the more ominous as the Consumer Price Index fell -2.2% in the year to July, marking the sixth consecutive month in negative territory and threatening to send Japan spiraling back into another “lost decade” of deflation-fueled stagnation as consumers and businesses expecting lower prices in the future delay spending and investment, encouraged to perpetually wait for the best possible bargain.
In the UK, GfK Consumer Confidence disappointed in August, holding flat at -25 to show that pessimists among those polled for the survey outnumbered the optimists by the same margin for a third consecutive month, upsetting expectations of an improvement to -24. Expectations of economic conditions for the next 12 months and the propensity to commit to major purchases both deteriorated; the former for the first time since April. On the other hand, a gauge of saving intentions rose for the seventh consecutive month. A statement accompanying the release noted that, “While UK consumers are still cautious about the economy, they are less pessimistic than this time last year.”
The Bank of China Ltd, the country’s third-largest lender by assets, said it plans to slow credit growth in the second half of the year. The news reinforces the government’s efforts to rein in lending and may weigh on risky assets considering the market’s recent focus on China as the poster-child of recovery from the global downturn.
Euro Session: What to Expect
A revision of the second-quarter UK Gross Domestic Product is set to confirm that the economy shrank 0.8% in the three months to June to bring the annual growth rate to -5.6%, the worst in at least 53 years. Barring an unexpected, large revision in the headline figure or any of the key components (in particular the Private Consumption reading), the outcome is unlikely to produce much of a reaction in the currency markets having already been priced into the exchange rate. Indeed, the market seems focused more on the Bank of England’s dovish posture despite surface-level improvements in economic data: a trade-weighted index of the Pound’s average value topped out on 08/05, the day before the last rate decision, and has been trending lower ever since; a Credit Suisse index gauging traders' 1-year BOE rate hike expectations (as derived from overnight index swaps) topped out on the very same day.
Turning to the continent, Euro Zone Consumer Confidence is expected to rise for the fifth straight month to print at -21 in August, up from -23 in the previous month. The metric closely tracks a Morgan Stanley index of Euro Zone stock performance; indeed, the correlation now stands at a formidable 97.7% and has registered above 80% since October 2005. Equities listed on Euro Zone exchanges have added 5.7% so far this month, bolstering the case for an improvement in sentiment. The Euro Zone Business Climate Indicator is likely to follow a similar trajectory: this metric is 95.1% correlated to stock performance in the currency bloc. While these results will offer little by way of new insights, they may offer some additional near-term fuel to continue feeding the rebound in risky assets that began late into the New York trading session. The longer-term outlook is far more ominous, however: unemployment stands at 9.4%, the highest in a decade, while loans to Euro Zone businesses and households grew just 0.6% in July, the lowest since records began in 1991. Clearly, private demand can’t grow without the ability to earn or borrow money, making any rebound beyond the fleeting effects of government stimulus a distant prospect.
Written by Ilya Spivak, Currency Analyst
Article Source - Bank of China Plans to Cut Lending, Threatening Risk Appetite (Euro Open)
USD - Dollar Rises on Signs of Economic Recovery
The Dollar rallied yesterday against most of its major counterparts after data suggesting the slowdown in the U.S. housing market has bottomed out. A better-then-expected result gave further support to the U.S. currency. The Dollar has been sold off recently partly due to growing optimism regarding the state of the U.S. economy. The USD finished yesterday's trading session about 50 pips higher against the EUR at the1.4249 level.
Yesterday's main U.S economic event was the New Home Sales data. New U.S. home sales hit its highest level in 10 months in July. Orders for Long-Lasting Manufactured Goods also surged yesterday and are interpreted by traders as fresh evidence of a modest economic recovery. Sales of "New Single-family Homes" rose by 9.6% from June, the highest rate since September. It is in fact the biggest percentage gain since a matching increase in February 2005, another indication that housing activity had stabilized after a three-year slump.
Looking ahead to today, there are few important news releases coming out of the U.S. These include the Prelim GDP and Unemployment Claims at 12.30 GMT. Traders will be paying close attention to today's announcement as a stronger than expected result may continue to boost the USD in the short-term. On the other hand, if the results turn out to be lower than forecast, then the Dollar may record a fairly bearish session in today's trading.
EUR - EUR Records Mixed Results against the Majors
The EUR finished yesterday's trading session with mixed results versus the major currencies. The 16-nation currency extended gains versus the Sterling on Wednesday, to trade above $0.8775 amid a broad sell-off in the GBP. The EUR experienced similar behavior against the CHF as the pair rose from 1.5185 to 1.5220 by days end. The EUR did see bearishness as well against the USD as it lost over 50 pips and closed at 1.4249.
A leading indicator released yesterday from Europe was the German Ifo Business Climate report. Germany holds the largest and strongest economy in the Euro-Zone, and thus the relevant publications from this economy usually have a hefty impact over the EUR. This indicator jumped to 90.5 in August from 87.4 in July, above economists' expectations. Analysts said that this is a plus for the European economy, and it's a sign confirming that the real economy is starting to get out of the period of freefall.
Sentiment in the Euro-Zone economy has brightened in the past month following better-than-expected news. The EUR is showing signs of resilience even though there was volatility throughout non-Euro crosses. It will be crucial for traders to identify how the preceding economic indicators from the U.S., Japanese, and other key economies will affect their positions.
JPY - The Japanese Yen Extends its Bullish Run
The Japanese yen rose for a second day against the EUR amid concerns financial losses will delay a recovery in the global economy, boosting demand for Japan's currency as a safe haven. The Yen also rose to a 5-week high against the British pound as a smaller-than-expected July trade balance data from Japan prompted investors flee from riskier-assets.
The outlook for economy in Japan is still doubtful as Japan's export slump deepened in July, indicating the boost in demand that helped pull the country out of its recession last quarter may be short-lived. Shipments abroad fell 36.5 % from a year earlier, steeper than June's 35.7% drop.
Crude Oil - Crude Oil Falls 1.4% on U.S Inventory Data
The price of Crude Oil fell 1.4% or $1.00 to $71.20 yesterday, as the latest inventory numbers from the U.S. Energy Information Administration (EIA) showed an increase in crude oil stockpiles. The EIA reports that U.S. commercial crude oil inventories, excluding those in the Strategic Petroleum Reserve, increased by 200,000 barrels in the week ending August 21, from the previous week.
Crude Oil also declined on concern China may cut back on industrial investment, slowing demand for fuels in the world's second-largest energy user. Crude traded low after China said it was studying curbs on overcapacity in industries including steel and cement. Some analysts said the failure to break through the key level of $75 may signal that prices have topped out, with demand for oil still depressed by the global economic slowdown and murky signs of a broad recovery.
Article Source - Dollar Benefits on U.S. Economic Data; Today Traders Focus on the U.S Unemployment Claims
Key Overnight Developments
• New Zealand Trade Deficit Narrowed in July as Imports Tumbled
• Australian Business Investment Trumps Expectations in Second Quarter
The Euro drifted slightly lower ahead of the opening bell in Europe, shedding 0.1%. The British Pound also trended lower, giving up 0.2% to the greenback. Technical positioning suggests the US Dollar is carving out a bottom against most major currencies.
Asia Session Highlights
New Zealand’s Trade Balance deficit narrowed to –NZ$2.5 billion in July from –NZ$3.1 billion in the preceding month as imports fell by a whopping -20.9% from a year before, easily overwhelming a -7.3% decline in exports. The reading is likely a reflection of the impact of rising unemployment on domestic demand: the jobless rate has risen to a nine-year high of 6%, trimming incomes and discouraging consumption. The outcome is all the more ominous considering the local currency has gained 20.1% since the beginning of the year, which would be expected to have helped imports higher by boosting New Zealanders’ purchasing power of foreign goods. More of the same is likely ahead, with economists calling for the unemployment rate to continue higher to hit 7.45% next year.
In Australia, Private Capital Expenditure (a measure of business investment) surprised sharply to the upside, adding 3.3% in the second quarter to trump expectations of a -5.0% decline. The improvement likely came as the government spent 4% of GDP in stimulus to boost the sagging economy amid the global downturn. Similar developments have been readily indentified across the world as governments stepped in to replace shrinking private demand, with the real question now being whether the recovery has any staying power once fiscal stimulus reaches its inherent limits.
Euro Session: What to Expect
The preliminary estimate of Germany’s EU-harmonized Consumer Price Index is expected to show that inflation fell at an annual pace of -0.4% in August, a slight improvement over the -0.7% result registered in the previous month. Still, the bottom line is that prices are set to decline for the second consecutive month; if this continues to be the case, it will contribute to building expectations of lower prices in the future, threatening to unleash a deflationary spiral wherein consumers and businesses perpetually hold off on spending and investment as they wait for the best possible bargain, bringing economic growth to a virtual standstill. At the moment, a survey of economists polled by Bloomberg suggests the market sees CPI shrinking through the third quarter and returning to a path of positive growth by the end of the year. If this proves to be too rosy, traders may punish the Euro as it becomes clear that the Euro Zone’s largest economy and by extension the currency bloc as a whole are heading for a long-term period of low interest rates and sub-par economic growth. A disappointing outcome seems likely considering the European Central Bank’s apparent inability to offer effective monetary easing as well as well-founded reservations about the sustainability of the second-quarter uptick in German GDP. Indeed, the expected improvements in GfK Consumer Confidence and Bloomberg Retail PMI are all but certainly a product of fiscal stimulus both domestically and abroad, with the big question for Germany as well as most anywhere at this stage being whether growth will continue after the flow of government cash dries up.
In the UK, the Nationwide House Prices report is set to show that property values fell -3.9% in the year to August, the smallest decline in 16 months and a significant improvement over the -6.2% result noted in the previous month. The improvement follows yesterday’s surprisingly strong rise in approved loans for house purchases. Still, it must be kept in mind that any boost to consumer confidence that can be expected from rising real estate values (via a positive wealth effect) is likely to be had from changes in the actual monetary value of Britons’ homes rather than an improvement in the growth rate. Indeed, it is not difficult to produce better results in the percent-change reading considering the very low base form which prices must recovery. If expectations are to be validated, home prices will stand near October 2005 levels, putting everyone that bought real estate between then and the peak in October 2007 firmly under water. Home prices grew five-fold during this period, hinting that the number of homes sold was more than formidable and suggesting that a good portion of UK homeowners are far from seeing any income boost from their real-estate portfolio.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro in Play as German CPI Shrinks for Second Month, Boosting Deflation Fears (Euro Open)
USD - Dollar Sees Mixed Results against the Majors
Yesterday, the Dollar saw mixed results against its major currency rivals. Against the EUR, the Dollar began the trading session with sharp drops, yet it managed to fully recover later on. The Dollar saw mixed result against the Yen as well.
The Dollar's recovery came as a result of the better than expected Conference Board Consumer Confidence report. The report showed that the U.S. consumers' confidence has increased in August, largely due to the labor market recovery. The report rose to 54.1, making the first gain in three months, from 47.4 in July. The most significant outcome of this result is that it shows that consumers feel their financial outlook is secure and thus allow themselves to spend more. Eventually this has the potential to elevate the economy as analysts expect.
Looking ahead for today, a batch of data is expected from the U.S. economy. Two main publications are expected to create large volatility in the market - the Durable Goods Orders indices and the New Home Sales. The Durable Goods Orders indices are expected at 12:30 GMT. Investors hold great importance to their results as they are leading indicators of production, especially the core report. The New Home Sales is scheduled for 14:00 GMT. This is one of the highest indicators of the housing sector, and thus has an immense impact on the Dollar. Analysts forecast 393K new single-family homes were sold during July, and if the end result will be similar it has the potential to boost the Dollar's recovery.
EUR - German Business Climate on Tap
During yesterday's trading the EUR saw volatile activity against the major currencies. The Euro saw mixed results against the Dollar and the Yen, beginning the day with rising trends yet dropping later on. However against the Pound, the Euro continued the bullish trend from the last few days.
The EUR's rise in early trading came as a result of the positive data published from the Euro-Zone. The German Final Gross Domestic Product showed a 0.3% rise in the inflation-adjusted value of all goods and services purchased by the German economy, marking the first positive results in 5 months. This continued the recent positive figures from both Germany and France, the two largest economies in the Euro-Zone. Also yesterday, the Belgium Business Climate report delivered a better than expected figure after dropping 18.2 points, beating expectations for a 19.7 drop. This also supported the EUR during yesterday's trading.
As for today, two main publications are expected from the German economy, the German Import Prices and the German Business Climate. The German Business Climate, published by the Institute for Economic Research, is expected to create a large impact on the EUR. It is considered to be a leading indicator of economic health because business is known to react quickly to market conditions. A positive result is likely to increase hope for an early economic recover, which has the potential to strengthen the EUR.
JPY - Yen Recovers against the Major Currencies
The Yen saw a mixed trading day during yesterday's session. The Yen began with bearish trends against both the Dollar and the EUR. However, later on it managed to recover back to previous rates. Against the Pound, the JPY continued to strengthen and the GBP/JPY is currently traded around the 153.40 level.
The Yen recovered due to concerns that financial losses will delay a recovery in the global economy, increasing demand for the Yen as a refuge. Currently, many analysts claim that the outlook for economies around the world is still doubtful. This situation is known to create risk aversion, which leads to the purchase of the Yen.
During late trading, the Japanese Trade Balance report was released, delivering a poor result of 0.19T, lower than the 0.35T expected. The Japanese economy largely relies on its exporting, and thus this result has the potential to halt the Yen's recovery.
As for the day ahead, no imported data is expected from the Japanese economy. Traders are advised to follow the leading publications from the U.S and the Euro-Zone as they are likely to set the tone in today's trading.
Crude Oil - Crude Oil Drops to $71 a Barrel
Crude Oil fell close to $3 a barrel during yesterday's trading, to the lowest price in a week, seeing the first decline in six days.
Crude Oil dropped from $75 a barrel to $71.20 on signs that reduced lending in China deceased demand for the world's fastest-growing, energy-consuming county. Another reason for oil's weakness is the recovering Dollar. Because Oil is valued in Dollars, the fluctuations in the Dollar's value tend to affect oil as well. During yesterday's trading, a U.S. Consumer Confidence report was released, providing a better than expected figure, which promptly strengthen the Dollar. This eventually had an impact on Crude Oil's value, and led to the sharp drop.
As for today, the U.S. Crude Oil Inventories is scheduled at 14:30 GMT. This report measures the change in number of barrels of crude oil held in inventory by commercial firms during the past week. Its result tends to have an immense impact on oil's value, and traders are advised to follow this report with extra caution.
Article Source - Crude Oil Plummets on Profit Taking
Key Overnight Developments
• Japan's Trade Surplus Shrinks in July, Further Losses Likely
• Euro Flat, British Pound Lower Against USD in Overnight Trading
The Euro tried lower but rebounded late into the session to yield a flat result in Asian trading. The British Pound declined, testing as low as 1.6306. Technical positioning suggests the US Dollar is carving out a bottom against most major currencies.
Asia Session Highlights
Japan’s Merchandise Trade Balance surplus shrank to 380.2 billion yen in July, down from a revised 507.5 billion in June as imports grew 3% while exports shrank -1.3% from the previous month. The metric hit a record low in January 2009 and has since corrected higher, coinciding with acceleration in the growth of unemployment that has weighed on consumer spending, including that of foreign-made products. Indeed, in annual terms, the rate of contraction in inbound shipments (-40.8%) continues to outpace the drop in overseas sales (-36.5%). Still, the trade balance has been trending firmly lower since the surplus peaked in September 2007, the same month that US personal consumption of durable goods topped out and began to trend sharply lower. Although current economic growth forecasts suggest the US will outpace most industrial countries as the global recovery gains traction, chances are it will be some time before the American consumer is ready to meaningfully commit to big-ticket purchases such as Japanese cars and electronics. Indeed, a survey of economists conducted by Bloomberg calls for the external sector to add just 2.3% to overall growth on average this year and in 2010, the least in 9 years.
Euro Session: What to Expect
Germany’s IFO Survey of business confidence is expected to show that firms’ 6-month economic outlook improved for the eighth consecutive month in August. Still, the reading is expected at 92.0, a print below the 100 “boom-bust” threshold, suggesting conditions are still deteriorating but at a perpetually slower pace. Some recovery is to be expected as an array of fiscal stimulus both in Germany and abroad boost domestic demand and exports, but the big question in the Euro Zone’s top economy as well as most anywhere at this stage is whether growth is sustainable after the flow of government cash dries up. As it stands, a survey of economists conducted by Bloomberg suggests that Germany, and by extension the Euro region as a whole, will underperform most industrialized countries at least through the end of next year. The most pronounced differentials are seen against commodity-linked counties (Canada, Australia, and New Zealand) as well as the United States. A comparatively slower pace of economic growth will mean that Europe lags behind the curve as central banks begin to return to higher interest rates, a prospect that surely bodes ill for the single currency.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro May Gain as German IFO Rises But Long-Term Outlook Favors Downside (Euro Open)
USD - The U.S Dollar Strengthens Against Most Rivals
The greenback rebounded versus major currencies Monday, from a string of recent declines after signals at the weekend that most key central banks backed a policy of keeping their Interest Rates low for the foreseeable future.
Analysts continue to anticipate that at some point signs of strength in the U.S. economy will be read as positive for the nation's currency, ending an inverse relationship since the credit crisis began, where negative news triggered safe-haven buying of the U.S Dollar. That relationship still held back the Dollar's gains on Monday.
The USD also advanced yesterday vs. the EUR and Japanese yen as Wall Street surrendered earlier gains and traders repositioned themselves ahead of U.S. consumer and Housing data due this week. Solid U.S. data and an upbeat assessment on the economy from Federal Reserve Chairman Ben Bernanke over the weekend earlier pushed investors to take on riskier investments at the expense of the low-yielding Yen and Dollar.
EUR - Sterling Pressured; Hits 11 Week Low vs. the EUR
The EUR erased its gains versus the Dollar yesterday as Treasury yields fell and the European Central Bank (ECB) policy makers warned against succumbing to optimism with regard to the economic situation in Europe. The EUR also reversed again versus the Japanese yen after the Euro-Zone industrial orders came in much higher than expected.
But investors are keen to see how the Euro-Zone economy fares, especially after higher-than-forecast purchasing managers' index readings last week. Traders expect Germany's Ifo survey of business sentiment to be the key event for the European currency this week.
The British pound dropped yesterday against 14 of the 16 most-traded counterparts on speculation the Bank of England will depress yields on gilts, making the U.K.'s assets less attractive to foreign investors. The Sterling declined yesterday to an 11-week low versus the EUR as much as 0.6%, the weakest level since June 8th. Analysts have said that the EUR was pushed past a key options barrier at 87 pence, setting up further gains in the pair, while traders said expectations for persistently low UK Interest Rates were weighing on the British currency.
JPY - The Yen Advances as Stocks Extend Losses
The Japanese yen was broadly firmer on Tuesday as investors took a pause from a recent rush to stocks and higher-yielding currencies, with focus shifting to U.S. data later in the day for clues on an uncertain economic recovery. The low yielding Yen tends to gain when stocks and higher-yielding currencies fall or when weak economic data highlights a long and uncertain road for global recovery.
The JPY rose against all of the 16 most-active currencies after Atlanta-based SunTrust Banks Inc., Georgia's biggest lender, said U.S. financial institutions may report more credit losses as commercial real estate falters. Worries are re-emerging that regional and local banks in the U.S. may be facing more loan losses, hence causing risk aversion and buying of the Yen.
Crude Oil - Oil Trades Near 10-Month High on Economic Optimism
Crude Oil prices rose Monday, briefly touching their highest level in 10 months, as optimism about a rebound in the global economy boosted energy prices. The gains came alongside strength on Wall Street, where the stock market also briefly touched 10-month highs before pulling back slightly after a 4 day rally.
Commodities markets have tracked stocks indexes closely in recent months as dealers view equities as a leading indicator of economic performance. Oil dealers said many investors were also using commodities as a hedge against the U.S Dollar, particularly oil, as OPEC producers work to restrain supply.
However, Crude reduced its earlier gains in afternoon trade as U.S. stocks turned lower. With demand remaining weak and supplies standing abundant, the crude market could be ready for a quick and sharp downward movement.
Article Source - U.S Consumer Confidence will determine Today's Trend
Key Overnight Developments
• New Zealand’s Inflation Outlook Bolsters Case for Interest Rate Cuts
• Euro, British Pound Yield Flat Result as Bears Fail to Keep Momentum
• US President Obama to Nominate Fed Chief Ben Bernanke To 2nd Term
The Euro tried lower in overnight trading, testing as low as 1.4274, but rebounded just above the 1.43 mark late into the session to yield an effectively flat result ahead of the opening bell in Europe. The British Pound followed a nearly identical dynamic, tipping a low of 1.6383 before running back up to 1.6420, the same place where it started after the close in New York.
Asia Session Highlights
The Reserve Bank of New Zealand released the Inflation Expectation report, revealing that consumer prices are expected to remain below the 2% target level in a year from the third quarter but rebound to 2.3% into the second half of 2011. Although 1-year GDP growth projections turned positive for the first time in six months, wages are set to grow at a record-low 1.7% in the same period and 2.3% in 24 months, the lowest estimate in over a decade. Forecasts of rising unemployment are surely the culprit here: unemployment expectations were revised higher yet again, now calling for the jobless rate to hit 7.2% by September 2010 and 6.7% by the same time in the following year.
As we have previously argued, the likelihood of a low-inflation environment in the near to medium term gives the Reserve Bank of New Zealand scope to lower interest rates. Such a move would help to decouple the local currency from overall trends in risky assets, helping to trim the formidable current account shortfall as well as offer some additional stimulus at a time when the government has cancelled additional fiscal measures amid concerns about the nation’s public debt, both of which recently forced downgrades of new Zealand’s sovereign credit rating by both Fitch and Moody’s.
Currency markets took little notice as US President Barack Obama announced that he will nominate current Federal Reserve Chairman Ben Bernanke to another term when the central bank chief’s term expires in January. Obama had taken atypically long to make the announcement, causing some market-watchers to suspect he will look to install someone closer to the administration into the key position. On balance, the move points to continuity in US monetary policy for the time being, though little can be reasonably assumed given the extraordinary measures taken by Bernanke and company in recent months to check the fallout from the credit crisis that erupted last year and the global recession that followed.
Euro Session: What to Expect
The final revision of Germany’s second-quarter Gross Domestic Product is expected to confirm that output grew 0.3% in the three months through June, the first positive result after four consecutive quarters of losses. The annual rate of contraction is also expected to be confirmed at -5.9%, the first improvement in the year-on-year metric since the end of 2007. Despite the seemingly positive tone of the headline figure, the comparative picture of German growth is far from favorable. A survey of economists conducted by Bloomberg suggests that the Euro Zone’s largest economy, and by extension the region as a whole, will underperform most industrialized countries at least through the end of next year. The most pronounced differentials are seen against commodity-linked counties (Canada, Australia, and New Zealand) as well as the United States. A slower pace of economic growth will mean that Europe lags behind the curve as central banks begin to raise interest rates at the onset of the global recovery, a prospect that bodes ill for the single currency.
In Switzerland, Employment is expected to have contracted at an annual pace of -0.1% in the three months to June, the first negative reading since the third quarter of 2003. The unemployment rate hit 3.7% in July, the highest in over three years, and official government forecasts suggest that it will top 5% by the end of 2010. Job losses will trim on incomes and discourage consumption, weighing on overall economic growth. Against this background, UBS will release the July edition of its monthly Consumption Indicator, a measure intended to foreshadow spending trends and thereby overall economic growth by approximately 3-4 months. The metric rose for the first time in three months in June, but UBS cautioned that the future environment “remains difficult” with unemployment “likely to increase significantly in the coming months”.
Written by Ilya Spivak, Currency Analyst
Article Source - Currency Markets Quiet as Obama Says Bernanke to Be Nominated for 2nd Term (Euro Open)
USD - Dollar to Go Bearish on Strong Equity Market
The positive homes sales and manufacturing figures from the U.S. last week helped increase risk appetite resulted in the Dollar dropping significantly against the EUR. The bullish equity markets also continued to drive the greenback lower last Friday. The EUR/USD pair was trading as high as the 1.4374 level on Friday, and now trades at 1.4330. The GBP/USD cross began Friday's trading at 1.6442, and now stands at the 1.6535 level. This in itself indicates the very high volatility that the forex market has been going through in recent weeks.
The key meeting in the latter part of last week in Jackson Hole, Wyoming, is likely to play a key role in USD trading for today and this week. Traders should follow news still flowing from the developments from this meeting that was attended by central bankers and key financial experts. Additionally, forex traders need to pay close attention to economic news that will come out of Britain and the Euro-Zone, as news from these 2 regions will help establish the greenback's dominance against its main currency pairs today.
Looking ahead to this week, there are many economic data releases which will affect the Dollar. This includes CB Consumer Confidence, New Homes Sales, Prelim GDP, and Unemployment Claims. Also, the USD may indeed continue to go bearish if the equity market continues to rise rapidly. This could happen if traders continue to increase their risk appetite. In addition, the Personal Spending and Revised UoM Consumer Sentiment figures at 12:30 and 13:55 GMT on Friday are set to dominate the mind of traders at the conclusion of this trading week.
EUR - EUR Rises on Increased Optimism
The EUR/USD rate reached as high as 1.4374 last week, and it now stands at 1.4330. This has come about as the U.S. economy and other leading global economies, such as Germany and France continue to rise out of the recession. On the other hand, the British economy hasn't been fairing well as of late, as the EUR/GBP rate opened at 0.8608 last Thursday. However, it now stands at 0.8680, which signals a loss in confidence in the GBP since the beginning of Thursday's trading.
Due to the more optimistic patterns that we have seen from Germany, France, Japan and even the U.S., the EUR continues to strengthen as a response. However, Britain is lagging far behind, as she has a fragile banking system, debt is 60% of GDP and the printing of money is out of control. Things are so bleak that even the Governor of the Bank of England (BoE), Mervyn King, has run out of ways to stimulate the British economy. This may explain the GBP's weakness against the EUR and CHF last week.
Leading analysts forecast the possibility of a sell-off of the GBP at the commencement of this week. Nevertheless, this may actually reverse as the week drags on. Today, there is much important economic news coming out of the Euro-Zone, including Industrial New Orders at 9:00 GMT. Furthermore, there is a lot of data coming out of the Euro-Zone during the coming trading week. Thus the EUR is set to be a key currency in the forex market this week.
JPY - Yen to Lead Forex Trading This Week!
Recently, Japan's economy rose out of recession, beating even the best of estimates. Moreover, we saw some bullishness in the previous week for the Yen. For example, the Japanese currency rose heavily vs. the USD. There may be a number of reasons for this. Mixed figures from the U.S. played a role, as pessimistic unemployment figures from the U.S. economy, and increased risk appetite hurt the USD. The USD/JPY cross went was as low as 93.46 last week, and it is currently trading at the 94.60 level.
As there are many important data releases coming out of Japan this week, there is great potential for volatility in the Yen. A number of releases, such as the Trade Balance, Household Spending and Tokyo Core CPI figures are scheduled to be released this week. These releases will help forex traders get a taste of the health that the Japanese economy currently is in. Therefore, it is reasonable to suggest that the Yen will have a crucial role in leading forex trading this week.
Crude Oil - Oil Set to Hit $75 a Barrel?
Oil recorded a good trading week overall, as the commodity now stands at $74.30 a barrel. Crude prices were helped by a number of different factors last week. Improvements in data coming out of the leading global economies did help. A weak Dollar last week also helped push up the price of Crude, as the commodity itself is priced in Dollars. Additionally, the Crude Oil Inventories figures plummeting last week also drove-up the price of Crude.
Last week's behavior contradicted many people's expectations, as they expected Crude Oil to have another bearish trading week. However, last week shows that the black gold still has much support. Trading on Friday saw Crude rise by $1.75, which was probably due to the weak USD. If the U.S. continues to release positive economic news and the USD continues to weaken, we may see Crude prices hit $75 a barrel very soon.
Article Source - Will the Dollar's Bearish Trend Continue this Week?
Key Overnight Developments
• Currency Markets Ignore Rally on Asian Stock Exchanges
• Australian Dollar Options Traders Price in Bearish Reversal
The Euro kept to a narrow 20-pip range above 1.4330 in overnight trading. The British Pound followed suit, trading sideways above the 1.65 level.
Asia Session Highlights
With no significant economic data on the calendar, currency markets took a muted tone in overnight trading. A strong equities rally failed to translate into meaningful FX volatility: Asian shares rose on last Friday’s US Existing Home Sales and optimistic comments from Fed Chairman Ben Bernanke, both of which have already been priced into exchange rates.
Currency options markets showed the Australian Dollar rally that began in early March may be running out of steam. Options to sell the Aussie next month rose to cost 2.32% more than to buy the currency at current rates, showing traders were willing to be the biggest premium to protect against a drop in the Australian unit since mid-February. Technical positioning is supportive of a bearish scenario.
Euro Session: What to Expect
The economic calendar is decidedly bare in European hours, with June’s Euro Zone Industrial New Orders report the only item on the docket. Expectations call for orders to rise 1.6%, the largest monthly increase in 17 months. Manufacturing figures across most key markets have shown signs of improvement in recent months on the back of aggressive government stimulus measures (often focused on infrastructure projects) and widespread inventory restocking efforts. Still, the long-term trend in orders is far from encouraging: the annualized rate of decline is set to print at -28.6%, a reading well within the range of values noted since the beginning of the year. A meaningful, sustained return to growth will require the re-emergence of private demand in the Euro Zone’s key export markets, an outcome that seems unlikely considering nearly all of them (excluding Russia) are expected to see unemployment rise at least through 2010, trimming incomes and discouraging spending.
Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Supported as Stocks Rally, Australian Dollar Options Signal Losses (Euro Open)
Fundamental Outlook for US Dollar: Bullish
- Existing home sales see a record increase in July thanks to deflated prices through foreclosures, inventories
- Fed Chairman Bernanke offers a cautiously optimistic outlook among his peers at Jackson Hole
- Will the dollar topple or has resistance set the stage for a true reversal?
The US dollar ended this past week in a precarious position. After four consecutive days of selling pressure (the currency’s worst trend since the end of May), the greenback once again finds itself within arm’s reach of its yearly lows. The market has flirted with renewing the dollar’s bear trend for nearly two months now. It is only a matter of time and speculation before the world’s reserve currency finds direction once again – especially as the global recovery gathers traction and the scales between risk and reward tilt towards higher returns. In determining what may be the ultimate catalyst for a renewed trend, we have to determine what traders are more concerned about: risk appetite or growth potential. Investor sentiment is notoriously difficult to gauge as it is notoriously fickle and often sparked by innocuous factors that quickly snowball through speculation. However, there is a good chance that, in the end, both paths may lead back to growth.
Through the worst of the financial crisis, the US dollar garnered a clear distinction as a safe haven through its reserve status and the liquidity of the government debt that backed it. Whether this title still fits or not, the dollar’s flight-to-safety quality continues to drag it down while equities, commodities and other popular ‘risky’ asset classes rally. In the short-term, this designation may in fact benefit the currency. While we have seen investor sentiment steadily rise over the months, with the S&P 500 just recently hit new highs for the year; there are signs that optimism is flagging. Taking a look at the volume data that accompanies the steady trend in equities, there is a clearly diminishing trend in conviction behind this move. Considering the risks just beneath the surface of this speculatively-fueled recovery, it is no surprise that doubt is developing. Since the worst of the financial crisis depressed investment levels to oversold conditions, we have seen a natural rebound turn into an impromptu bull trend on the foundation that the global economy is returning to growth. However, the early signs of recovery that market participants have attached themselves to are merely evidence that the recession is easing and stability is returning. Policy officials and economists have unanimously warned that expansion through the next year will stagnate; but speculation has built off of its own momentum. Eventually, these divergent assessments have to realign - and it isn’t the nature of growth projections to suddenly change. However, with statistics like rising unemployment, strained credit availability and the US already facing the most bank failures in a year since 1992 (through August nonetheless); there are plenty of catalysts to spark a wave of fear.
Looking outside of the simple measure of the appetite for and aversion to risk, we also have to consider the dollar’s relationship to this fundamental qualifier. The currency has been labeled a safe haven partly as a holdover from the panic-stage of the crisis through the end of 2008 and partly due to its loose monetary policy approach in the face of what some market participants consider a clear recovery (a situation which would likely suppress growth and yields). However, if indeed the global recovery will stagnate through the near-term, maintaining its fiscal stimulus, guarantees and bailout loans may actually encourage a faster return to sustainable growth. In the days ahead, the market will find a better sense of the United State’s standing in the race to recovery. Second readings of German, UK and US 2Q GDP numbers will provide important updates on the component data behind the headline readings. Consumer spending, capital investment and exports will be critical in evaluating the pace of recovery beyond the three months ending in June. Among the other notable economic listings on the docket, consumer confidence, personal income and spending figures will measure the health of an economic group that accounts for approximately 70 percent of GDP. Another notable contribution could be made housing. This past week, existing home sales marked their biggest jump on record, but due to a sharp drop in prices due to foreclosures and at the consequence of rising inventories. A genuine recovery in this vital source of wealth and employment depends on credit and consumer health.
Euro Could Hit Fresh 2009 Highs If Data Signals End of EZ Recession
Fundamental Forecast for Euro: Bullish
- German investor sentiment jumped to the highest level in over 3 years
- German producer prices plunged 7.8% in July from a year ago, the sharpest drop since records began in 1949
- German services, French manufacturing PMI breached 50 in August, signaling growth for first time in 12+ months
The euro staged an impressive rebound against the US dollar from 1.4050 last week, closing Friday just below resistance at 1.4350. The appreciation was the result of a variety of factors, including broad US dollar weakness, but also from fundamental forces. Indeed, German services PMI surged to a 16-month high of 54.1 in August while French manufacturing PMI hit a 15-month high of 50.2, signaling an expansion in activity after growth had contracted for more than a year. Together, these helped push the Euro-zone composite PMI, which encompasses both manufacturing and services, up to a 14-month high of 50 from 47.0. Now, 50 is the point of neutrality for these indices, so the data suggests that business activity in the Euro-zone registered no change during August, but put into perspective with the record lows seen in the first quarter, the news is positive. The data was timely when also considering Federal Reserve Chairman Ben Bernanke’s comments from the Jackson Hole Symposium – a meeting of the world’s central bankers and finance ministers – as he said we are "beginning to emerge" from a deep global recession. Given strong PMI reports, it looks like the Euro-zone could be helping lead the way.
That said, upcoming economic reports may exacerbate this optimistic sentiment or derail it. On Wednesday, the German IFO survey of business confidence. Like the latest ZEW survey, the results are anticipated to reflect a surge in confidence, with the index estimated to creep up to a 10-month high of 89.0 in August from 87.3. On Thursday, the German GfK survey of consumer confidence is projected to rise to a more than 1-year high of 3.6 in September from 3.5 and on Friday, Euro-zone economic confidence is anticipated to increase to a 10-month high of 78.0 in August from 76.0. Overall, a steady stream of positive news could be the impetus to drive EURUSD to fresh 2009 highs. That said, such a move would also require a broad increase in risk appetite, as the US dollar is still treated as a safe haven asset.
Japanese Yen Forecast Bullish but Price Action Depends on S&P 500
Fundamental Forecast for Japanese Yen: Neutral
- Japanese Yen forecast to rally further versus US Dollar, British Pound
- Japanese Yen may gain as China tightens banking rules
- Yen nonetheless under pressure as S&P 500 rallies further
The Japanese Yen finished the week near fresh monthly highs against the downtrodden US Dollar, but sharp rallies in the US S&P 500 and other risk sentiment barometers doomed the currency to losses against virtually all other counterparts. An earlier-week tumble in equities gave hope that the JPY would forced a sustained turnaround against the majors—yet markets clearly had other things in mind. We have found ourselves on the wrong side of the ‘risk’ trade for quite some time now. Indeed, our calls for Japanese Yen reversals on clear sentiment extremes have proven premature at best. A continued build in JPY-short positions nonetheless suggests that the Yen could rally sharply on episodes of financial market duress. Yet fresh 2009 highs in the US S&P 500 clearly gives us reason for pause for our JPY-bullish outlook, and it will be critical to watch the trajectory of financial market risk sentiment.
An ostensibly busy week of Japanese economic event risk is relatively unlikely to force major moves in JPY pairs; instead, we will continue to watch the Nikkei 225 and S&P 500 for cues on short-term direction. Markets have proven largely immune to Japanese economic developments, and we have little reason to believe that the coming week will force any noteworthy shifts in this dynamic. Of course, any especially large surprises out of Trade Balance, Jobless Rate, or Household Spending results could cause short-term volatility in domestic stock indices—likely forcing commensurate moves in the JPY. Japan’s economy remains heavily reliant on export industries, and disappointing trade numbers could affect economic confidence. Jobless Rate and Household Spending numbers are perhaps less likely to force major volatility in domestic assets, but we should nonetheless keep an eye out for noteworthy developments.
The Japanese Yen remains at the whims of global market risk sentiment, and short-term moves will continue to depend on the trajectory of the S&P 500 and other risk barometers. The index’s meteoric rise to fresh 2009 peaks suggests that risks remain to the downside for the safe-haven Yen, but as we know quite well, market dynamics can change in an instant. Japanese Yen sentiment remains at bearish extremes, and we favor medium-term strength (USDJPY weakness). Yet the timing of the reversal will clearly depend on the influence of broader financial market flows.
British Pound Outlook Hinges on Trends in Risky Assets
Fundamental Forecast for British Pound: Bearish
- Consumer Prices Unexpectedly Unchanged in July
- British Pound Takes a Hit After Bank of England Minutes
- UK Budget Deficit Soars by 8 Billion Pounds, Much More Than Expected
The British Pound is likely to look past much of the economic calendar to fall in with trends in risk sentiment as the primary driver of directional momentum once again in the week ahead. A trade weighted average of sterling’s value is now 88.1% correlated with the MSCI World Stock Index and 90.3% correlated with the Bloomberg/UBS CMCI Commodity Price Index, suggesting the currency trades largely in tandem with the broad direction of risky assets. Judging the near-term direction of risk sentiment has been a tricky endeavor in recent weeks: an increasing number of voices have started to qualify the rally that began in March as “overdone” given the fragile economic environment, but the bears are clearly still too few to form a dominant enough majority to meaningfully overtake momentum; the resulting tug of war has been superimposed on a backdrop of low summertime liquidity, producing a great deal of volatility with seemly little follow-through. The long-term picture seems to offer more clarity, however: global equities are trading at the highest levels relative to earnings since 2003, which seems more than a little overdone considering the kind of revenue potential that is to be expected in a year when the global economy is set to shrink for the first time in the postwar period; the demand for commodities also looks fragile, with the bulls’ stand-by story of steady Chinese growth challenged (at least for the time being) as the East Asian giant prepares to tighten credit access. On balance, this points to a bearish medium-term bias for risky assets and hints that a reversal of the recent rally will invariably bring the British Pound along for the ride.
Turning the economic calendar, a second revision of the second-quarter Gross Domestic Product figure headlines the docket of scheduled UK event risk. Expectations call for a validation of the originally reported 0.8% decline, bringing the annual growth rate to -5.6%, the worst in at least 53 years. Barring an unexpected, meaningful revision in the headline figure or any of the components, the outcome seems likely to be priced into the exchange rate already and is unlikely to cause much of a stir in currency markets. The releases of Augusts’ US Consumer Confidence, July’s Durable Goods Orders, and second quarter GDP figures will also be notable given their potency to drive overall market sentiment. Indeed, traders look to US economic data as a proxy for that of the world at large, expecting a rebound in the leading consumer market to yield positive spillover elsewhere. To that effect, these releases will likely prove market-moving across equity and commodity markets and thereby pull the sterling along as well.
Written by John Kicklighter, David Rodriguez, Terri Belkas, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source - Forex Weekly Trading Forecast - 08.24.09
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