USD - Dollar Down on All Fronts Except JPY Following Fed Statement
The U.S. Dollar trimmed earlier losses against major counterparts on Wednesday after the Federal Reserve left Interest Rates unchanged, near zero percent. The Dollar pared earlier losses versus the EUR in the first 20 minutes after the Fed's statement on optimism that the end of the purchase program would reduce the risk of inflation, which erodes the purchasing power of the greenback. However, the USD resumed its decline afterwards as stocks gained.
Against the Japanese yen the U.S. Dollar kept broad gains after the Federal Reserve painted a less gloomy outlook for the U.S. economy, an assessment that led investors to return to commodity-linked currencies in droves. The Federal Reserve has also said it would slow the pace at which it buys Treasuries by extending the duration, but not the size, of its $300 billion program to buy long-term government securities.
Analysts have said that while sentiment toward riskier assets has improved, there was a general degree of caution on the Fed's move to extend the time-frame of asset purchases as it indicated that the economy was still vulnerable. Today, forex traders will catch a glimpse into US Retail Sales and the weekly unemployment claims report. If sales continue to grow in the US, as is forecast, the USD may be capable of going bullish later in the day.
EUR - The Sterling Remains under Downward Pressure
The European currency gained for a 3rd consecutive day against the U.S Dollar before the European Union's statistics office releases its 2nd quarter Gross Domestic Product numbers in Luxembourg. GDP in the 16-nation Euro-Zone shrank 0.5% after a 2.5% contraction in the 1st quarter, according to economist predictions.
The EUR also advanced against 13 of the 16 major currencies before the release of a U.S. report that may show retail sales gaining for a third straight month, prompting investors to seek higher-yielding assets.
The British currency had weakened yesterday ahead of the release of the Bank of England's (BOE) quarterly inflation report. The Pound fell against the Dollar after the BOE said it may miss its inflation target amid a slow recovery. Fear of undershooting the target means the central bank is more likely to hold off on increasing rates, analysts have said.
Britain's currency also dropped versus the Yen after the central bank's governor said it was more likely that inflation will slow below 1% this year and unemployment may reach a 14-year high.
JPY - Yen Falls on Low Safe-Haven Demand
The Yen fell for a 2nd consecutive day against the EUR after the Federal Reserve said economic activity is leveling out, sapping demand for Japan's currency as a refuge. The Yen depreciated to as low as 96.23 from 95.51 vs. the US Dollar at the close of Tokyo stock trading. A weaker domestic currency increases the value of overseas sales at Japanese companies when repatriated.
The JPY also weakened against all 16 major currencies as Asian stocks extended a U.S. equity rally on signs the global slump is abating, encouraging investors to buy higher-yielding securities. For today, most attention will be paid to the New Zealand Dollar (NZD) following the evening release of its retail sales reports. With a recently bullish NZD, this report has the potential of creating a reversal to this trend if it comes out worse than forecast.
Crude Oil - Oil Prices Rebound above $70 a Barrel
Crude Oil ended higher Wednesday as a rally on Wall Street and sudden Dollar weakness overshadowed government data showing a bigger-than-expected rise in crude supplies. While the fundamental picture is bearish, Crude is being supported by a weaker U.S Dollar and stronger equity markets. Traders appeared to shrug off government data showing a build-up in crude supplies. Oil's strength came despite a report from the U.S. Energy Information Administration (EIA) showing U.S. Crude Oil Inventories rose 2.5 million barrels in the week to August 7, well over analysts' expectations.
Oil trimmed gains after the U.S. Federal Reserve in its policy statement said the U.S. economy is leveling out and that it was extending purchases of long-term U.S. Treasury debt to the end of October. Crude also rose as the International Energy Agency (IEA) boosted its oil-demand outlook for this year and next. In its report yesterday, the IEA said that the world will need 85.25 million barrels of oil a day next year, 70,000 barrels more than previously estimated.
Article Source - USD Setback Could Change Course Following Today's Retail Sales
Key Overnight Developments
• Australian Inflation Expectations Highest Since October
• Moody’s Holds ‘Negative’ Outlook on N.Z. Banks
• Wages in Australia Grow at 4-Year High
Sterling price action against the Dollar consolidated during Asian trading after having touched both our identified support and resistance levels. The Euro played it similarly and even broke through pivot support for a brief moment before continuing up toward our ceiling at 1.4161, coming only 29 pips shy.
Asia Session Highlights
A Moody's research article continued to hold a "negative" outlook for New Zealand’s banking system. "Impairment levels have risen noticeably so far in fiscal 2009...thereby reducing net profit growth and internal capital generation capabilities" said Marina Ip, assistant vice president at Moody's Australia. The unwanted news comes just four weeks after Fitch, another major ratings agency, slashed New Zealand's sovereign debt-rating outlook to "negative." In that report, the agency cited the high level of dependence that the country has on short-term financing from abroad as reason for the caution. The credit outlook for both the public and private sectors in New Zealand remains weak. Yields are likely to remain high. On Monday, the country's 10-year government bond yield rose to the highest level since the end of June. Such tight-money conditions might make it tough for the country to grow organically.
Australians expect the highest level of inflation since October, after gasoline rose to $1.50 per liter, or $6.40 per gallon and average weekly wages grew at the greatest pace since August 2005. Although it is true that an upward trend in the rate of wage growth may lead to a general rise in consumer prices, the anticipated 3.5% inflation rate might not necessarily become a realized threat. The 6.1% growth in pay through May substantially overshot forecasts, which called for figure to rise by only 5.3%. On one hand, this startling trend may induce wage-led inflation. On the other, it may not. The data does not include the wages of part-time workers. Keep in mind that since last summer, the number of full-time positions that were lost was replaced by almost the same amount of part-time ones created. This means that since the data only represents those who are working complete shifts it does not get weighed down by the downward wage pressure generally thrust upon part-timers. But the public does have some reason to believe the price of living will jump ahead. At its latest meeting, the RBA revised its growth forecast for 2009 significantly upward. The bank actually believes that their economy will expand by 0.5% - quite a stark difference from the 1.0% contraction which they had originally anticipated. It will be a tough call to predict. But in the mean time wages of all workers might continue to slow in gains, easing the pressure on overall inflation.
Euro Session: What to Expect
The economies of Germany, France and, more importantly, the Euro-Zone are expected to have continued shrinking during the second quarter of 2009. Contraction rates for each area are, however, clearly expected to fair better than the period prior. Such optimism may be coming on the back of a lagged monetary transmission system, which saw the European Central Bank slash it’s overnight policy rate by 2.75 percentage points in the six months leading up to March and another half-point in May. The ECB also took unprecedented action last month when it injected 442.2 billion Euros into the zone’s banking system. These stimulative efforts, aimed at kickstarting the economy or at least at easing the pain, may have done just that – at least in the final part of the period. June saw the Euro-Zone unemployment rate actually come in 0.3 percentage points under expectations to 9.4% and the May figure revised down 0.2 percentage points to 9.2%. Much of this June error came after Spain, the Euro-Zone country with the largest amount of job losses in the last year, revised their rate of unemployment downward. Some of this liquidity easing must be trickling down if even the country with the weakest labor market finds itself doing better than initially expected. While the joblessness situation does seem to be softening, the Euro-Zone economy probably continued to decline – but only at a slower pace than many may be expecting, it may seem.
Switzerland’s June Producer and Import Prices are expected top have risen by the largest monthly amount since July 2008. With the trade-weighted Franc exchange rate in May falling by the largest percentage amount since January, it may come to be that the country’s import prices will be reflected by such deterioration in the Swiss purchasing power abroad. On the contrary, trade data for June showed that the nominal value of imports rose by 2.5% while the real value rose even more, by 3.8%. In any case where the real value of a price variable exceeds that of the nominal one it is because the cost declined.
Written by Luis Gil, DailyFX Research
Article Source - Euro-Zone Economic Contraction Set to Ease (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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