• The ECB is taking a pause on the exit path. We expect the full allotment at all auctions to be extended until year-end and interest rates kept unchanged.
• As the risk of an economic downturn has increased we expect a softer tone at the press conference. Trichet is not going to announce new measures, but the door is still open.
• The staff growth forecast should be revised upwards – in particular for this year – while the inflation forecast should be kept practically unchanged.
• We expect a first interest rate hike from the ECB in Q4 2011. Current market pricing, based on EONIA forwards, suggests no hikes for the next couple of years.

Is Mr. Trichet still happy?

Will Mr. Trichet be as happy as he appeared at the last meeting? We believe not – US data have deteriorated a lot since the last meeting and it can only be a matter of time before the US downturn begins to drag on European growth. Nevertheless, the euro area did enter Q3 with strong momentum and seen from Frankfurt there is no cause for alarm yet.

Will the ECB prolong full allotment? We are pretty confident that they will – at least until the end of the year. This has already been indicated by Axel Weber in an interview with Bloomberg on 20 August 2010, see Flash Comment – ECB: No further exit before 2011. Financial markets are still fragile and there is no good reason to “rock the boat” before end-Q3 and before year-end, when liquidity tends to becomes more scarce. (more…)

EUR/GBP

Current level – 0.8206

Longer term bias switched to bearish now that the cross has breached key support in 0.8400 area.

Intraday:  No change from last week, keeps on sliding for a retest of Junes low in 0.8070 zone. Trade the 100 pip range developed between 0.8140 and 0.8235.

Profit-taking affects gold curbing silver and platinum

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EUR/USD

Current level – 1.2657

EUR/USD is in a downtrend, after peaking at 1.5146 (Nov.25,2009). Technical indicators are descending, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.3458 and 1.4206.

Yesterday’s break below the crucial 1.2677 set an end to the rebound above 1.2587 and current bias is negative towards 1.2475. Intraday resistance is seen at 1.2680.

Profit-taking affects gold curbing silver and platinum

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EURUSD Outlook

The EURUSD was indecisive on Friday. We are still in bullish correction phase but my major bearish outlook remains intact especially if price break below the rising wedge formation and 1.2680 support area testing 1.2523 – 1.2470 area. On the other hand, if the upside correction continues and price break above the rising wedge, we could see further upside correction testing 1.2825 – 1.2930 region which could be a serious threat to the current bearish outlook.

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EUR/USD closed higher due to short covering on Thursday as it consolidates some of the decline off this month’s high. The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI are oversold but remain neutral to bearish signalling that additional weakness is possible near-term. If it extends this month’s decline, the reaction low crossing is the next downside target. Closes above the 20-day moving average crossing would temper the bearish outlook.

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First thing to do is finding the forex software. After having the software, you need to find the best forex platform so you can do the process well without significant difficulties. The example of popular forex trading platform is Easy-Forex. You also need to consider finding the best broker for helping you run your forex trading. Forex broker is an institution and their job is helping you concerning to the forex trading process.

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Highlights

• Making lemonade out of lemons
• Important levels to watch
• Emergency BOJ meeting may hit the JPY
• Key data and events to watch next week

Making lemonade out of lemons

The past week saw a continuation of the stream of disappointing data out of the US and elsewhere, but around mid-week markets decided it was no longer a reason to sell risk. New lows were made in USD/JPY and the JPY-crosses early in the week after eye-popping declines in US housing data and a drop in durable goods orders. In Europe, comments from ECB and BOE officials warned of the real risk of a return to recession in the months ahead. European debt spreads continued to widen, with peripheral Eurozone (Ireland (credit rating cut), Greece, and Portugal) debt being sold and core Eurozone (Germany and France) bonds being bought on continuing fears of a sovereign default amid the worsening outlook. US Treasury yields dropped to new lows, with 10-year note yields touching 2.42% at mid-week.

But by the end of the week, it was all good. US weekly jobless claims declined, though they remain at highly elevated levels, and the revision to 2Q GDP was not as bad as feared, though it confirms the meager pace of the US recovery. In a much anticipated speech, Fed Chair Bernanke repeated earlier comments that the Fed stood ready to undertake further unconventional easing measures if the outlook deteriorates more significantly, but was short on specifics about what might actually trigger Fed action. Perhaps most significantly, he did not make a concrete commitment to another round of quantitative easing (buying US Treasury or other debt), which effectively pulled the rug out from under bond prices. Bond markets have been on a moon-shot in recent weeks and the lack of assurances from Bernanke that fresh buying from the Fed would soon materialize sent the longs dashing for the exits, sending 10-year yields up over 16 bps on Friday alone and more than 20bps from their lows. That move inspired further gains in USD/JPY and the JPY-crosses, sending them out with actual gains on the week. (more…)

U.S. Review

New Day Yesterday

• Subpar recovery in housing had been our expectation but this week’s existing and new home sales data reinforced that the old themes of consumer deleveraging and the long-term workout for the U.S. economy remain in place. Our outlook for the second half of this year is for sub 2 percent growth and housing continuing its slow workout.
• Disappointing durable goods orders are an issue, given our expectation that capital spending would be a major positive for growth this year.
• Real growth in the second quarter was revised down to 1.6 percent due to weaker trade and inventories.

Old Day Now

Economic readjustment continues to dominate any upside momentum the economy may have, and this is especially true for housing. Existing home sales dropped 27.2 percent in July, which was well below expectations. The monthly decline was the largest on record. Payback from the tax credit is largely responsible for the sizable decline. High inventories, at 11.9 months for single-family homes, continue to dominate home prices and buyer expectations. Combined with weak job growth and low consumer confidence, the case remains for a slow workout from the housing boom. Meanwhile, new home sales fell 12.4 percent in July, which was well below the consensus estimate. Prior months’ data were revised downward. The absolute level of sales dropped to a 276,000-unit pace, which is a record low. Unfortunately, median and average sales prices fell in July as well. (more…)

HIGHLIGHTS OF THE WEEK

• Post-tax credit U.S. home sales plummet by 27% in July, pushing inventories of unsold homes to a new peak of 11.3 months and renewing recovery fears.
• New orders of U.S. durable goods orders rose slighly by 0.3% in Jul. Core capital goods fell by 8.0%, pointing to a slowdown in the pace of equipment and software investment in the third quarter.
• U.S. second quarter GDP was revised down to 1.6% from a previously reported 2.4%. Revisions were in higher imports and lower inventory investment. Final domestic demand, including consumption and business inevstment where revised up.
• Fed chairman Ben Bernanke’s speech in Jackson Hole discusses the ins and outs of the options available to the Fed for supporting the economic recovery and stresses that deflation seems an unlikely outcome.
• Canadian retail sales slide 0.8% in Q2, marking the worst performance since the first quarter of 2009.
• Corporate profits in Canada were down 1.8% in Q2, ending a 3-quarter string of rising profits.
• The Teranet Home Price Index showed a 13.6% Y/Y rise in existing home prices in Canada in June.
• We have scaled back our Bank of Canada interest rate forecast. We now expect the overnight rate to sit at 1.00% at the end of 2010, and 2.00% at the end of 2011. (more…)

Framed by an United States housing market in far worse shape than previously expected, an American GDP revision not quite a poor as predicted, a German economy exhibiting almost 9.0% annual growth in the second quarter and widening sovereign spreads in Europe, currency markets choose the better part of valor and kept to a narrow two figure range all week. The slowdown in trading volatility cannot last; a new narrative will emerge in September. We have already seen a preview and it depends on the intensity of the US contraction.

If the US best economic news of the week is a choice between a second quarter GDP revisions down to 1.6% from 2.4% rather than to 1.4% and initial jobless claims at 473,000 rather than 490,000 the next leg down in the economy cannot be long delayed. But let’s look at some of the weeks’ statistics first.

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Market Outlook

Tactical view:

• GBP: selective gains targeted on AUD, CAD underperformance

Selling rallies in pro-risk and carry trade strategies is favoured in G10 currency markets and should translate into steady demand for safe haven harbours. We look ahead to next Tuesday when Japanese PM Kan will announce a plan to support the economy and tackle the JPY. With the SNB not explicitly targeting a level for the CHF, we wonder if safe haven dynamics may turn even more overwhelming in favour of long CHF positions. Next week also features US non-farm payrolls and the G7 meeting, promising a lively run in to September. If the relentless deterioration in the US economy observed this month is echoed in Friday’s non-farm payrolls, then a precipitous sell-off in risk and AUD, CAD and NOK could follow. For EUR/GBP to progress towards the June lows, we look for resilience in the UK August PMIs and the ECB to extend unlimited liquidity operations until year-end.

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Market Movers ahead

• Market focus is likely to remain on the US economy in the coming week. The minutes of the most recent FOMC policy meeting could reveal important information about the Federal Reserve’s decision to reinvest the proceeds of its MBS portfolio in Treasuries. There have been rumours that several FOMC members were in doubt about the decision. In addition, the ISM will give us an update on the pace of the slowdown in the US manufacturing industry. We expect the ISM to decline to 53.6 in August. The August employment report will finish off a hectic week on Friday. Early labour market indicators are pointing towards a weak report, with private employment set to grow a meagre 20,000.
• In Europe, the key event of the week will be the ECB Governing Council meeting on Thursday. While policy rates are likely to remain unchanged, a key question is whether the ECB has become more worried about the effect of the increasingly disappointing US indicators on the European growth outlook. Another important question that might be addressed at the policy meeting is whether the ECB will extend the full liquidity allotment – we believe this is likely. In Sweden, we expect the Riksbank to hike policy rates by 25bp to 0.75%.

Global Update

• The flow of weak economic indicators out of the US continued in the past week. Home sales have plummeted following the expiry of the tax credit for homebuyers. This has raised concerns about the strength of the underlying trend in home sales. Also, durable goods orders have called the strength of business investment into doubt. However, the reduction of weekly jobless claims was a positive, with initial jobless claims retreating to 473,000.
• The weakness in US indicators is likely to feed through to the European economy. In fact, new export orders in Europe’s manufacturing PMI weakened. The European economy, led by Germany, should nonetheless be able to continue delivering abovetrend growth in Q3. However, although it has remained strong so far, Germany’s Ifo manufacturing activity index is also pointing towards slowing growth.

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Overview

The rush into top-rated Treasury paper continues, new record low yields set for Swiss ten-year Conf (1.05%), Bund (2.09%), German 30-year (2.58%) and US ones (3.46%%), though Brazilian, Mexican and Russian benchmark yields are up from last week’s record lows. Equity indices are lower, many for a third consecutive week, the Nikkei 225 hitting a low at 8,807 and a weekly close just below key long term support at 9000. Only the Shanghai B share index bucked the trend with its biggest daily rally since November on speculation that it will be merged with the much larger domestic A-share market. Kuala Lumpur inched to its best level since February 2008 (just under the record high 1,521 of January 2008) and Jakarta set a new record at 3,150. The yen and Swiss franc gained against all currencies, another feature of the flight to safety, hitting 85.68 and 1.0220 per US dollar, EUR/CHF a new record low 1.2971. Commodities generally sidelined though 3-month LME Tin at $21,750 is at its most expensive in a year and Nymex Natural Gas at $3.825 per MMBtu cheapest since March and close to its lowest levels this decade.

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Highlights

• Ifo goes up – Euro goes down
• Dollar strengthens on double dip fears
• ECB Council meeting: Will dovish comments be confirmed or corrected?

Euro Does Not Benefit from Good Eurozone Economic Data

The single European currency lost some ground against the dollar on average again this week. After climbing over 1.33 at the beginning of August, the euro hovered around 1.27 this week. This seems rather odd, given that most of the eurozone economic indicators were much better than forecasted, in contrast to the US data, many of which were disastrous, fuelling fresh fears of a sharp economic slowdown.

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EUR/USD closed higher due to short covering on Thursday as it consolidates some of the decline off this month’s high. The mid-range close sets the stage for a steady opening on Friday. Stochastics and the RSI are oversold but remain neutral to bearish signalling that additional weakness is possible near-term. If it extends this month’s decline, the reaction low crossing is the next downside target. Closes above the 20-day moving average crossing would temper the bearish outlook.

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