USD - Dollar Climbs on Increased Risk Aversion
The U.S Dollar rose broadly yesterday against the GBP and EUR, due to uncertainty about the global economic outlook, and a renewed bout of risk aversion ahead of a key government report on the U.S. labor market due today. By yesterday's close, the USD rose against the GBP, pushing the oft-traded currency pair to 1.6769. The Dollar experienced similar behavior against the EUR, and closed at 1.4360.
A leading indicator released yesterday from the U.S was the Unemployment Claims report. Data showed a drop in U.S. weekly jobless claims failed to support expectations that the labor market and the economy were stabilizing. The report showed claims fell by 38000 to 550000 last week, the fifth straight time claims were under 600000, after being above that level since January.
The other factor that led to the bullish Dollar yesterday was that U.S stocks fell, which boosted demand for the USD as a safe-haven currency. Moreover, renewed demand for the Dollar comes after a sharp drop earlier in the week, when the greenback hit multi-month lows versus the EUR, as investors favored foreign currencies and other riskier assets such as equities.
Looking ahead today, the news event that may have a very large impact on the Dollar and its main currency pairs in today's trading is the Non-Farm Employment Change at around 12:30 GMT. This report is very important as it is likely to impact Dollar volatility. Traders should pay close attention to the market as there is an opportunity for traders to capitalize on the fluctuations which are likely to follow this release.
EUR - EUR Falls against the USD on Interest Rate Decision
The EUR finished yesterday's trading session with mixed results versus the major currencies. The 16-nation currency extended gains versus the Pound Sterling during yesterday's trading session, to trade above 0.8560 amid a broad sell-off in the GBP. This was largely owed to the Bank of England (BoE) increasing quantitative easing to ₤175 billion from ₤125 billion. The EUR did see bearishness as well, as it lost over 50 pips against the USD, and closed at the 143.60 level.
A leading indicator released yesterday was the EUR Minimum Bid Rate. The European Central Bank (ECB) left Interest Rates at a record low of 1%, as it tries to get credit flowing again to strengthen an economy that may return to growth this quarter. Some reports show the outlook is brightening for the Euro-Zone. Economic confidence rose to an eight-month high in July, and the contraction in the region's manufacturing and service industries has slowed. In Germany, Europe's largest economy, Factory Orders posted their biggest gain in two years in June.
As for today, the most important economic indicator scheduled to be released from the Euro-Zone is the German Industrial Production at 10:00 GMT. Traders will be paying close attention to today's announcement as a stronger than expected result may boost the EUR in the short-term. Traders are also advised to follow the Non-Farm Employment Change figures coming out of the U.S at 12:30 GMT, as this result may set the EUR's main currency pairs for the day.
JPY - JPY Set to Move on Key Economic Data
The Yen completed yesterday's trading session with mixed results versus the other major currencies. The JPY was broadly unchanged versus the EUR yesterday and closed its trading session at around the 137 level. The JPY experienced bullishness against the GBP as it jumped around 250 points to close at the 159.86. This behavior comes about as exports improve and manufacturers boost production. However, deflation may escalate as households, whose spending accounts for more than half of the nation's GDP, delay purchases on the expectation that goods will get cheaper, restraining a recovery in the world's second-largest economy.
The JPY's trends will be affected by the rallies of its primary currency pairs today. It seems that the USD and EUR are expected to continue a volatile trading session today, especially against the Japanese currency. Traders should keep a close look on the news coming from the U.S. and Europe as these economies will be the deciding factors in the JPY's movement today, especially the U.S. Non-Farm Employment Change at 12:30. It is also advisable for traders to follow any unexpected comments coming from key Japanese governmental figures, as this is also likely to lead to further JPY volatility.
Crude Oil - Oil Prices Stabilize Near $72
Crude Oil ended yesterday's trading below $72 as equities declined and the Dollar strengthened, undermining the need to use commodities as an alternative investment. Crude dropped to an intra-day low of $70.24 a barrel before rebounding to the settlement level of 71.55, which was little changed compared with the previous session.
Oil prices were pressured by the weaker equity markets and the strong Dollar yesterday, as the USD strengthened against the EUR and GBP, limiting the demand for Crude Oil as an alternative investment. Today, the U.S monthly Non-Farm Employment report will likely determine Crude's next moves, with any mildly positive elements within the data is likely to keep the Crude price in an upwards direction.
Article Source - U.S Non-Farm employment Change Set to Determine USD Volatility
Key Overnight Developments
• Australia’s Construction Sector Shrinks Most Since April
• RBA Hints at Rate Hikes But Traders Not Convinced
• Euro, Pound Little Changed in Overnight Trading
The Euro failed to retain momentum on an attempted rebound in Asian trading after the selloff in New York hours, testing as high as 1.4373 but reversing course mid-way through the session to trade little changed ahead of the opening bell in Europe. The British Pound traded sideways in a narrow 60-pip range above US-session lows near 1.6750.
Asia Session Highlights
Australia’s AiG Performance of Construction Index fell for the second consecutive month to register at 39.5 in July, showing the building industry contracted at the fastest pace since April. The metric was led lower by drops in sector-wide employment, apartment construction, and engineering demand. The government introduced A$34 billion in fiscal stimulus this year, distributing A$12 billion as cash handouts to households and setting aside A$22 billion for infrastructure projects. We noted signs that the consumer-focused portion of the plan was losing steam earlier this week, and today’s report may be the first clue to confirming that the building component is heading in the same direction. Indeed, it is hard to imagine that any infrastructure project can meaningfully get off the ground without engineers to design it and new builders to execute it.
Euro Session: What to Expect
Switzerland’s seasonally adjusted Unemployment Rate is set to rise to 3.9% in July, the highest in close to five years, pointing to mounting headwinds for consumer spending and thereby overall economic growth. In fact, the jobless rate may actually be understating the total impact of the current downturn on consumers’ spending power as many firms looked to cut costs by switching a portion of the workforce to a “short-time” schedule, which amounts to fewer hours and thereby smaller paychecks. Naturally, this trims disposable incomes and adds to already formidable disincentives to consume. Although exports are heavily represented as a component of Swiss economic growth, domestic demand is still by far the most important driver of activity, contributing about 60% to total output. The State Secretariat for Economic Affairs (SECO) has forecast that the jobless rate will register at 3.8% through 2009, an expectation that has been echoed in a survey of economists conducted by Bloomberg. Job losses have grown at an average pace of 3.35% in the six months through June and so would be expected to rise by an average of 4.25% in the second half of the year.
Germany’s Current Account surplus is expected to print at 8 billion euro in June from 3.7 billion in the previous month as exports grow 0.9%, outpacing a 0.7% increase in imports. Although this would mark a bit of an improvement on a monthly basis, the outcome still falls firmly within the downward trajectory that has been in place since the surplus peaked in the third quarter of 2007. Indeed, economists polled by Bloomberg predict that net exports will contribute an average of 3.72% to overall economic growth this year and in 2010, the smallest in 6 years. While Germany’s current account has been eroding for the better part of the past two years, its US counterpart has been narrowing. Indeed, the US external deficit peaked in the three months to September 2006 and has narrowed by a whopping $113.3 billion to date. Germany has a deep trade relationship with the US, so a continuation of this trajectory implies long-term downward pressure on EURUSD as capital outflows overwhelm inflows into the Euro Zone’s largest economy and top exporter.
Separately, the annual pace of decline in German Industrial Production is expected to moderate for the third consecutive month, with output shrinking -17.5%. As with similar improvements noted in recent months across developed countries, the reading is unlikely to prove particularly market-moving considering traders have likely already priced in the stabilizing effects of the ample global fiscal boost and inventory restocking into the exchange rate. Indeed, the question to be answered from here is what will happen after the flow of government cash dries up and the inventory cycle runs its course.
Finally, the UK Producer Price Index report is expected to show that wholesale inflation shrank at an annual pace of -1.7% in June, the largest drop on since records began in 1979. The metric points to continued downward pressure on consumer prices, the headline inflation gauge, as lower wholesale costs filter into the final price tag. Indeed, the Bank of England said that while “some recovery in output growth is in prospect,” aggregate supply is likely to continue to outstrip demand “for some while yet, bearing down on inflation in the medium term.” CPI fell below the 2% target level for the first time in 2 years in June and is expected to average at 1.15% for the remainder of the year.
On balance, the European data docket is likely to prove secondary as currency markets focus their attention on the upcoming Non Farm Payrolls report out of United States to be released late into the session.
Written by Ilya Spivak, Currency Analyst
Article Source - Currency Markets to Look Past European Data, Focus on US Jobs Report (Euro Open)
Key Overnight Developments
• New Zealand’s Jobless Rate Surges to Highest in Nearly a Decade
• Australian Unemployment Rate Holds Steady on Part-Time Job Gains
The Euro and the British Pound oscillated near familiar levels in overnight session to stand effectively unchanged ahead of the opening bell in Europe as traders braced for volatility ahead of interest rate announcements from the Bank of England and the European Central Bank.
Asia Session Highlights
New Zealand’s Unemployment Rate surged more than economists expected, rising a full percentage point through the second quarter to register at 6.0%, the highest in nearly 10 years. On balance, the report in and of itself does not introduce a significant change to the near-term outlook for the smaller antipodean nation. Indeed, the central bank noted in June and reaffirmed last week that the labor market is projected to continue deteriorating “well into 2010”. The release is significant in terms of its implications for wage growth and thereby the overall trajectory of inflation. Private wages rose at the slowest pace in 9 years in the second quarter and outsized gains in the jobless rate point to more of the same ahead, creating a supportive environment for the central bank to lower benchmark interest rates. As we noted in this week’s New Zealand Dollar weekly forecast, a rate cut is the next logical step to help decouple the domestic currency from risk trends and check its recent appreciation, which has weighed on exports and thereby “derailed” the economy according to Prime Minister John Key as well as “complicated” the necessary adjustments to New Zealand’s public and current account deficits according to Fitch, a ratings agency.
Turning to Australia, headline labor market figures surprised to the upside: the Unemployment Rate held steady at 5.8% in July, marking only the second time that the figure did not rise since August of last year. The details of the report are not nearly as rosy as the headline outcome seems, however. Part-time hiring accounted for all of the 32.2K net jobs gain in July; indeed, full-time employment fell by 16K. Looking at the longer-term picture of employment trends, full time positions have fallen -189.4K in the 12 months from July 2008 while part time jobs have gained a nearly equivalent 190.7K over the same period. Simply put, this means that over the past year, around 190,000 Australians were transferred from full-time to part-time employment and thereby from higher to lower wages. Needless to say, this does not bode well for consumer spending and by extension for overall economic growth.
Euro Session: What to Expect
Interest rate decisions from the European Central Bank and the Bank of England headline the economic calendar in European hours. For the ECB, the name of the game is deflation. Consumer prices have now registered in negative for two months straight and are likely to continue along the same trajectory with producer prices shrinking at a record annual rate of -6.6%. Downward price pressure born of overall economic weakness is being compounded by a buoyant currency, which has boosted the Euro’s purchasing power and thereby helped to drive costs downward. Needless to say, entrenching expectations of lower prices in the future threaten to commit the Euro Zone to prolonged stagnation as consumers and businesses wait for the best possible bargain and perpetually delay spending and investment. Up to this point, Jean-Claude Trichet and company have focused primarily on offering banks unlimited borrowing ability, including an unprecedented 442 billion euro in 12-month bank loans, in the hopes that this would be passed on to the overall economy to both stimulate growth and put a floor on prices by making money cheaper. So far, this has not worked: although interbank borrowing costs have stayed well below 0.5% for over two months, this has not filtered through into the economy at large. Indeed, loans to Euro Zone businesses and households grew just 1.5% in June, the lowest since records began in 1991. European banks have yet to come to terms with an estimated $1.1 trillion in unrealized sub-prime related losses (courtesy of the IMF), a hit that could be compounded by losses from default or devaluation in some of the newly-minted EU member states, and so may be perfectly content to sit on the money they have borrowed for the time being. The ECB has also flirted with the direct approach, putting in place a 60 billion euro bond-buying scheme. Although it is too early to tell for certain, this seems too small of a program to have any meaningful impact. Bottom line, greater monetary easing is clearly needed if deflation is to be averted. A rate cut is probably too much to ask for and would be largely a moot point considering the bank has clearly allowed real overnight lending rates to drift much lower than the 1% target level. Rather, traders will be watching Jean-Claude Trichet’s post-announcement Q&A session for any clues that policymakers are open to expanding upon the current asset-buying program. The likelihood of such an outcome hinges entirely on the ECB’s perception of the moderate stabilization in leading economic indicators over recent months: if the bank believes that current trends could lead to a sustainable recovery, a wait-and-see approach is likely; conversely, if the bank sees the current environment as a temporary reprieve courtesy of government spending and (overly) optimistic financial markets, additional measures will be taken. Given the ECB’s perennially slow-moving approach to monetary policy, we tend to lead towards the former outcome, although the latter surely seems more prudent.
Turning to the BOE, an actual change in benchmark borrowing costs is effectively off the table, but traders will be closely watching to see if policymakers choose to ramp up quantitative easing measures after promising to “review the scale” of the program for the August rate decision in conjunction with the release of their quarterly inflation report. Despite the BOE’s apparent optimism and signs of stabilization in some leading indicators, economic growth disappointed in the second quarter, bolstering dovish arguments from the likes of the British Chamber of Commerce and the Shadow Monetary Policy Committee (a group of independent economists that meet at the London-based Institute of Economic Affairs). Further, as has been aptly noted by DailyFX Strategist Terri Belkas, the BOE has not done a whole lot better than the ECB having largely failed to affect lending to the real economy. Indeed, loans to non-financial firms fell by a record 14.7 billion pounds while the pace of money supply growth fell for the first time in close to a decade in the second quarter. The question facing the central bank now is whether they believe expanding the QE program by 25 billion pounds will make much of a difference to the program’s success considering 125 billion pounds have already been put in use (a total of 150 billion was authorized by the government). On balance, policymakers could make use of the recent upswing in sentiment as cover to retire the program and wait for the positive vibes now swirling around the world economy to become a self-fulfilling prophecy. Unfortunately, we are of the view that this will prove to be wishful thinking in the coming months as the flow of government cash dries up while equity markets are shown to be grossly overvalued and begin to retreat. Indeed, stocks finished July trading at the highest level relative to earnings since October 2003, which seems more than a little overdone considering the kind of revenue growth that can be expected in a year when real global output is set to shrink for the first time in the postwar period. How the BOE will deal with such an outcome remains a mystery for the time being.
Written by Ilya Spivak, Currency Analyst
Article Source - Euro, British Pound in Play Ahead of Key Interest Rate Decisions (Euro Open)
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The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.
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