FOREX TRADING

USD Trades at a Five Week High on Fed Rate Hike Talk

FX Highlights

• The USD is trading higher to start the week as global equity markets slump and investors digest the impact of Friday’s US employment report, better than expected US November unemployment suggests the US economic rebound may be stronger than expected and the Fed may hike rates sooner than most analysts had originally thought, GBP pressured by concern about UK exposure to Dubai debt, a report that EU Sentix index rose to an 18 month high and hawkish comments from Trichet were ignored, Australia’s jobs ads rose strongly last month, AUD pressured by a drop in risk appetite
• Focus turns to today’s release of US consumer credit and Canada’s building permits
• The Japanese government will decide on new stimulus package Tuesday, November foreign reserves rose to a record high, Japan’s financial services Minister Otsuka says Japan must address Forex for fair competition for Japanese companies, JPY higher
• Australia’s November job ads rose 5.2%, AUD lower (more…)

The last few weeks have been some of the busiest in the gold markets of the world. The run up to Christmas and the USA interest rates have combined to send the price of bullion up to its highest ever levels. Those trading in the precious metal have made huge profits on the growth of it.

Many forex traders using popular online trading platforms have also benefitted from the price surge, because as well as the traditional foreign exchange trading, they’ve also been putting money into commodities trading on items such as gold and oil. It’s easy to see why, when many modern forex platforms also offer commodities trading within the same simple interface.

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This Week’s Market Outlook

Highlights

• The US Dollar turns a corner; gold melts
• JPY to reprise as the FX punching bag
• Four central bank meetings next week
• NFP beats, but buyer beware
• Key data and events to watch next week

The US Dollar turns a corner; gold melts

The greenback looks to have made a significant reversal as we head into the year-end. The proximate catalyst was a better than expected November jobs report (see below), which saw Fed interest rate expectations move up, but the move was unfolding from earlier in the week as USD/JPY staged a sharp rebound. In a twist to the normal ‘risk on’ reaction, stock markets failed to sustain initial gains and continued to show signs of stalling below recent highs. The failure in shares may stem from multiple causes: the USD rebound may have driven risk positioning out; accelerated rate hike expectations may have damped investor sentiment; year-end profit-taking/position reductions; technical exhaustion as new highs fail, take your pick. But for the USD it was a one-way ticket higher.

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ECB Meeting: Heading for the Exit

• The ECB is now heading for the exit. For one thing they are cutting down on the longer term auctions. The 12-month auction in December will be the last of its kind and so will the 6-month auction at end-March. This is slightly more hawkish than expected.
• Markets were particularly surprised by the ECB moving away from 1% at the 12-month auction and instead applying a rate calculated as the average minimum bid rate of the weekly main refinancing operations over 12 months. Consensus expectation was a flat 1%.
• Trichet was eager to say that this was not intended as a signal of future rate hikes, but it is nevertheless likely to be interpreted as an indication that the ECB considers hikes in 2010 likely. The procedure might help to curb banks’ demand at the auction without affecting interest rate expectations as much as a fixed spread would have.
• The weekly main refinancing operations and the 1-month and 3-month auctions will be with full allotment at least until early April. We find it likely that the ECB moves away from full allotment at the 1-month and 3-month auctions in April.
• The ECB’s assessment of the economic situation is becoming more positive. Nevertheless we still consider that the ECB is too downbeat. We think that they could double their growth forecast for 2010 and still turn out to be too dovish.
• The ECB expects inflationary pressures to be low. But in their inflation projection, the upper end of their band for 2011 is nevertheless 2.0%. They will not have to revise their inflation expectations much upward before they can defend moving away from record low interest rates.
• Today’s press conference has been slightly more hawkish than we expected. It has clearly surprised some observers how determined the ECB is to move towards the exit. Nevertheless market reactions were muted – with interest rates rising ahead of the meeting on rumours that the ECB would be hawkish.

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China Commerce Minister Deals Another Blow To Prospect Of Yuan Appreciation

News and Events:

Yet another day of Asian equity market gains have ensured the European session has started with a positive tone; and gold has once again made new all-time highs above $1226 as the USD has been put under renewed pressure from virtually all currencies except the JPY. The morning rally has pushed EURUSD to test 1.5130 resistance, and after negligible effect from the Eurozone Services and Composite PMI data, the mantle will likely fall to this afternoon’s ECB policy meeting to provide the catalyst for a further climb to test 1.5150 levels. Really there is only one factor that hangs in the balance at this meeting, and that will be the possible discontinuation of the ECB’s 12-month fixed rate-tenders. There is not expected to be any alteration in the refinancing rate, and indeed the recent rhetoric from US officials that they are not concerned by USD depreciation will likely negate the effect of any repetition of the ‘strong USD policy’ from European officials. For now, the issue of JPY strength is taking a back seat after USDJPY has recovered back above 87.15 pivot levels to touch highs of 87.92. However the tension surrounding the recent appreciation of the currency is still simmering amongst Japanese policymakers, with the leader of the Japanese government’s opposition accusing the Prime Minister of exacerbating the currency surge with confusing comments that ‘prompted misconceptions’ in the market. With the powerful downtrend in USDJPY still intact, it is unlikely this matter is going to stay on the sidelines for long, and recent meetings between Japanese and US officials has certainly ignited speculation that Japan is trying to lay the foundations for coordinated currency intervention. In other headlines from Asia, it seems that China is more resolute than ever to deflect pressure for the CNY to appreciate. Commerce Minister Chen Deming was on the wires overnight to say that the world’s attentions would be better focused on the damaging lack of stability in the USD, rather than the value of the CNY. He claimed that an unstable CNY would have a very bad effect on the global economy; echoing previous Chinese rhetoric that by keeping the CNY stable they have helped stimulate the recovery. As we have frequently observed whenever CNY appreciation has been debated in the press, it is almost never supported by China itself, and this is yet another setback for US officials after the much-hyped Obama visit last month. (more…)

ECB To Hold Rates Steady, Outline An Exit Strategy

The European Central Bank (ECB) will hold a policy meeting on Thursday December 3rd. The ECB is expected to maintain steady interest rate policy and outline an exit strategy from extraordinary liquidity measures. Last week, ECB President Trichet said that the ECB would cautiously begin to exit strategies that helped provide liquidity during the global financial crisis that could pose inflation threats in the future. Trichet warned EU banks not to get addicted to cheap credit provided by the ECB and he indicated that liquidity measures will be phased out in a timely and gradual fashion to counter any threat to price stability over the medium and long-term. Trichet indicated that the ECB will tighten collateral criteria for the March auction. The tightening of collateral criteria is seen as the first step in an exit strategy by the ECB.

Note in Trichet’s statement above his focus on the impact of extraordinary liquidity measures on price stability. Monday, the EU reported that CPI rose for the first time in seven months. The rise in EU inflation may influence Thursday’s ECB policy decision. The rise in the EU CPI could encourage ECB officials to move the timeframe of an exit strategy forward as inflation pressures may be starting to build. The trade will be closely monitoring what Trichet say about the ECB’s 12 month auctions in the press conference following the ECB policy announcement. The ECB will likely confirm that the 12 month auctions will be allowed to lapse and that liquidity operations may be for shorter term loans. This would signal the start of the ECB’s exit strategy.

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Gold Tops $1200 An Ounce

U.S. Dollar Trading (USD) never gained traction as global stocks markets roared back to life and risk was put ‘back on’. November ISM Manufacturing was weaker than forecast at 53.6 vs. 55.7 but this offset by October Pending Homes Sales at +3.7%. DJIA +126 points closing at 10471, S&P +13 points closing at 1108 and NASDAQ +31 points closing at 2175. Looking ahead, ADP National Employment forecast at -155k vs. -203k previously. Also released, Crude Oil Inventories forecast at -0.4% vs. 1% previously.

The Euro (EUR) was strong after testing support below 1.5000 in Early Europe went on to trade above 1.5100 resistance. EUR/JPY was extremely well supported in Asia on BOJ speculation and held those gains to close comfortably above 130. October German retail sales were +0.5% as forecast. Overall the EUR/USD traded with a low of 1.4970 and a high of 1.5119 before closing at 1.5090. Looking ahead, October PPI forecast at 0.0% vs. -0.4% previously.

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UK’s Mortgage Approvals Rises To The Highest In 18 Months, While CPI Beat Estimates In The Euro Zone

Today U.K. released important data reflecting the economic situation in the economy after the improvement signaled recently. The British economy managed to moderate the pace of contraction in the third quarter to 0.3% from 0.6% in the second quarter thanks to the stimulus measures adopted by the BoE to stall the deterioration.

Mortgage approvals for October, after touching its highest in 18 months in September, it continued its upside rise in October to from 56.2 thousand. It seems that the housing market which was responsible for the crisis is emerging from a rout.

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Gold Rush Continues

U.S. Dollar Trading (USD) with the FOMC minutes confirming a low rate outlook for some time the market took this as a signal to sell the USD and during the day key levels were broken across the board whilst Gold continued to surge higher. October Durable Goods Orders were -0.6% vs. 2% previously. Also released, Weekly Jobless Claims at 455k vs. 501k previously. In US Stocks, DJIA +30 points closing at 10464, S&P +5 points closing at 1110 and NASDAQ +7 points closing at 2176. Looking ahead, Thanks Giving Holidays.

The Euro (EUR) Broke through the Key 1.5000 in late Asia and then kicked on to break major resistance and year highs at 1.5060 in the US session to finish the day at 1.5140. Broad USD weakness and strength in Gold and Oil helped underpin the move higher which opens up potential further gains. Overall the EUR/USD traded with a low of 1.4960 and a high of 1.5146 before closing at 1.5130. Looking ahead, October Private Loans are forecast at -0.5% vs. -0.3%.

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USD Sinks to 15 Month Low, Jobless Claims Drop Sharply

• USD: Lower, FOMC signals rates will remain low for an extended period, jobless claims drop sharply
• JPY: Higher, Japan’s export sales improve, Sakakibara says JPY may fall to 85.00
• EUR: Higher, ECB may announce details of exit strategy at the December policy meeting
• GBP: Higher, Q3 GDP revised up slightly
• CAD and AUD: AUD & CAD higher, RBA rate hike speculation, Russia to add CAD to its reserves

Overview

The USD traded sharply lower Wednesday dropping to a 15 month low pressured by a number of factors. The main catalyst for today’s USD decline was confirmation in Tuesday’s release of the FOMC minutes for the November policy meeting that the Fed plans to maintain a low level of interest rates for an extended period. The FOMC minutes also stated that the Fed sees the USD depreciation as “orderly.” This statement is seen by some as a green light to sell the USD as the Fed indicates that it has no plans to support the USD.

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Fed releases FOMC meeting Minutes and New Projections for GDP, Unemployment, and Inflation

The Federal Reserve Minutes of FOMC meeting was released showing projections of the Federal Reserve governors along with Banks presidents about the future outlook for this year and the upcoming year, During the last FOMC Rate decision meeting the Fed kept the borrowing costs at record lows among 0.0% – 0.25% to stimulate economic growth.

The Federal Reserve focused on the future outlook for the world’s leading economy, regarding the challenges that currently pose a threat to economical recovery such as Unemployment, inflation and growth outlook along with other major concerns about the performance of company’s especially financial institutions and the effect of tight credit conditions on markets.

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European Market Update

German IFO survey hits 15 month highs; European bourses shakes off initial concerns over financial sector

ECONOMIC DATA

(MA) Malaysia Central Bank Interest rate maintains its overnight Rate at 2.00%; as expected

(RU) Russian Central Bank cuts its Refi rate by 50bps to 9.0%; In line with views

(FI) Finland Oct Unemployment Rate: 8.2% v 8.1%e

(GE) Germany GDP SA Q/Q: 0.7% v 0.7%e; Y/Y: -4.8% v -4.8%e; GDP NSA Y/Y: -4.7% v -4.7%e
(GE) German Q3 Final Private consumption: -0.9% v -0.4%e; Government Spending: 0.1% v 0.3%e; Imports: 5.0%e v 3.55e; Exports: 3.4% v 4.1%e

(SZ) Swiss Oct UBS Consumption Indicator: 0.867 v 0.671 prior

(FR) France Nov Business Confidence Indicator: 89 v 91e; Production Outlook: -9 v -9e; Own-Company Production: -3 v 1e
(FR) French Oct Consumer Spending M/M: 1.1% v 0.4%e; Y/Y: 3.5% v 2.3%e

(SP) Spain Oct Producer Prices M/M: 0.0% v 0.8%e; Y/Y: -4.2% v -3.1%e

(SZ) Swiss Q3 Employment Level Y/Y: 0.2% v -0.8%e; 3.96M 3.94Me

(NV) Netherlands Nov Producer Confidence: -5.6 v -6.5%e

(SW) Sweden Oct PPI M/M: -0.4% v -0.1%e; Y/Y: -1.8% v -1.6%e

(GE) Germany Nov IFO Business Climate: 93.9 v 92.5e (15 month high); Current Assessment: 89.1 v 88.0e; Expectations Survey: 98.9 v 97.3e

(NO) Norway Q3 GDP Q/Q 0.9% v 0.8%e; Mainland GDP Q/Q: 0.5% v 0.8%e

(UK) Q3 Total Business Investment Q/Q: -3.0% v -5.0%e; Y/Y: -21.7% v -22.9%e
(UK) BBA Loans for House Purchase: 43.2K v 44Ke

(SA) South Africa Q3 GDP Annualized: 0.9% v 0.5%e; Y/Y: -2.1% v -2.6%e

(EU) Euro-Zone Sept Industrial New Orders M/M; 1.5% v 1.0%e; Y/Y: -16.5% v -17.3%e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities: Following a strong Monday session in which a three day downward trend was snapped, European markets gapped down in line with their Asian peers. Asian trading, specifically out of mainland China, was broadly negative as rebuttals from financials regarding capital raise speculation failed to restore confidence. Commentary from the Chinese Academy of Social Sciences supporting stronger capital controls fueled concern. Follow-through from this concern has hit the European financial sector with the large cap banks leading the downward trend.

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USD Lower, Existing Home Sales Rise 10.1%

• USD: Lower, Fed’s Bullard says Fed will maintain stimulus, existing home sales surge 10.1%
• JPY: Higher, Tokyo markets closed for holiday, gains limited by surging equity markets
• EUR: Higher, EU manufacturing and services PMI rise, ECB begins unwinding stimulus
• CHF: Higher, supported by improving risk sentiment, surge in equity markets and record price of gold
• GBP: Higher, supported by improving risk sentiment
• CAD and AUD: AUD & CAD higher, gold at record high, Australia’s auto sales & Canada’s retail sales rise

Overview

The USD starts the week sharply lower as equity markets rally and gold trades at a new record high. The initial catalyst for the surge in the equity markets and gold were linked to dovish comments from the Fed’s Bullard. Bullard called for the Fed to extend its asset purchase plan beyond Q1 2010. Bullard’s comments were seen as dovish and an endorsement of the Feds maintaining stimulus. In addition, the IMF says the global economy has passed the worst of the crisis.

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Dollar Index Drops as Shares Advance

Positive equity and commodity markets had a strong influence in the foreign exchange arena on Monday, sending the dollar index down to the 75.00 support area once again during the overnight session. The major currencies posted some small declines around the Sunday open, but soon afterwards the market reversed tack and since then the majors have moved almost exclusively higher. The only exception is the yen, which attempted to break below a 6-week old support area, but failed to find momentum to hold below 88.50.

Dollar Index Technical View: TheLFB Member Charts

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European Market Update

USD finds it hard to be loved; Gold hits fresh all-time highs near $1,1170/oz; Stocks aided by rising risk appetite

ECONOMIC DATA

(HU) Hungary Sept Retail Trade Y/Y: -7.3% v -6.8%e

(TT) Taiwan Oct Industrial Production Y/Y: 6.6% v 5.6%e; Export Orders Y/Y: 4.4% v 4.0%e
(TT) Taiwan Oct Unemployment rate: 6.0% v 6.1%e

(FR) France Nov PMI Manufacturing: 54.2 v 56.0e; PMI Services: 60.4 v 57.8e

(SZ) Swiss Oct Money supply M3 Y/Y: 7.7% v 7.7% prior

(GE) Germany Nov Advanced PMI Manufacturing: 52.0 v 51.6e; PMI Services: 51.5 v 51.2e

(IC) Iceland Oct Wage Index M/M: 0.3% v 0.3% prior; Y/Y: 1.9% v 1.9% prior

(EU) EU Nov Advanced PMI Manufacturing: 51.0 v 51.2e; PMI Services: 53.2v 52.9e; PMI Composite: 53.7 v 53.4e

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities: European markets have entered the abbreviated US week on a light tone. Rebounding from last week’s equity declines, markets have been supported across the board by the ‘global recovery’ story and new multi-year and all time highs in commodity prices. Corporate news, much like trading volumes have been thin with a relatively quiet weekend and pre-market session. Lloyds [LLOY.UK] announced the completion of the first stage in its multi-stage capital raise plan and Heritage Oil [HOIL.UK] confirmed sale of certain Ugandan license stakes to Italian firm ENI [ENI.IT]. Following commodity rises, basic resources and heavy industrial names have been the outstanding players throughout the session.

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