FOREX TRADING

European Market Update

Risk appetite theme remains intact; Lack of non-conciliatory FX-rhetoric from the U.S.-China discussion

ECONOMIC DATA

(EU) EU Oct 25 Car Registrations: 11.6% v 6.3% prior

(SP) Spain Sept House Transactions Y/Y: -17.2% v -9.9% prior

(CZ) Czech Oct PPI Industrial M/M: -0.2% v 0.0%e; Y/Y: -4.6% v -4.5%e

(CZ) Czech Sept Export Price Index Y/Y: -4.3% v -2.7% prior; Import Price Index Y/Y: -9.3% v -7.2% prior

(TU) Turkey Oct Consumer Confidence: 80.5 v 81.9 prior

(TU) Turkey Aug Unemployment rate: 13.4% v 13.0%e

(SW) Swedish Oct Avg House Prices (SEK): 1.78M v 1.78M prior

(DE) Denmark Oct Wholesale Prices M/M: -0.3% v -0.1% prior; Y/Y: -5.3% v -7.6% prior

(RU) Russia Oct Producer Prices M/M: -0.9% v 1.3%e; Y/Y: -1.8% v 1.6%e

(IT) Italian Oct Final CPI NIC incl tobacco M/M: 0.1% v 0.1%e; Y/Y: 0.3% v 0.3%e

(IT) Italian Oct Final CPI-EU Harmonized M//M: 0.4% v 0.5%e, Y/Y: 0.3% v 0.4%e

(NO) Norway Oct Trade Balance (NOK): 27.4B v 22.6B prior

(EU) Euro-Zone Oct CPI M/M: 0.2% v 0.3%e; Y/Y: -0.1% v -0.1%e; CPI-Core Y/Y: 1.2% v 1.1%e

(IT) Sept Current Account: -€4.2B v -€3.2B prior

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Majors Running On Sentiment

Overall, the major pairs were testing immediate support and resistance areas during the overnight session. Some volume entered the market as the dollar began to weaken. There were no major news reports released during the session so the pairs are currently running on sentiment until the European session begins.

The euro (Eur/Usd 1.4857) is currently testing the 20 day moving average as resistance after falling below during the last half of the US session. Just above the moving average is the neutral swing point at 1.4892 which will add to the resistance.

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European Market Update

German ZEW suggest that recovery is fragile; Currency rhetoric picking up from all angle

ECONOMIC DATA

(FI) Finland Sept Industrial Production M/M: -1.7% v 0.5%e ; Y/Y: -23.0% v -20.9%e

(GE) German Oct Final CPI M/M: 0.1% v 0.1%e; Y/Y: 0.0% v 0.0%e

(GE) German Oct Final CPI – EU Harmonized M/M: 0.1% v 0.2%e; Y/Y: -0.1% v 0.0%e

(FR) France Sept Industrial Production M/M: -1.5% v 0.5%; Y/Y: -10.4% v -9.2%e

(FR) France Sept Manufacturing Production M/M: -1.6% v 1.2%e; Y/Y: -11.0% v -10.5%e

(SW) Sweden Sept Industrial Production M/M: 0.2% v 0.5%e; Y/Y: -15.7% v -19.7%e

(SW) Sweden Sept Industrial Orders M/M: 0.7% v -4.2% prior; Y/Y: -12.1% v -18.1% prior

(DE) Danish Oct CPI M/M: 0.0% v 0.2% prior; Y/Y: 1.0% v 0.8% prior

(DE) Danish Oct CPI EU Harmonized M/M: 0.0% v 0.2% prior; Y/Y: 0.6% v 0.5% prior

(IT) Italy Sept Industrial Production M/M: -5.3% v -4.0%e; Y/Y: -15.7% v -15.8%e; Industrial Production NSA Y/Y: -15.3% v -13.8%e

(NO) Norway Oct CPI M/M: 0.2% v 0.0%e; Y/Y: 0.6% v 0.8%e

(NO) Norway Oct CPI Underlying M/M: -0.1% v 0.1%e; Y/Y: 2.1% v 2.2%e

(NO) Norway Oct Producer Prices M/M: 1.5% v -6.0% prior; Y/Y: -4.1% v -4.1%e

(SA) South Africa Oct SACCI Business Confidence: 82.2 v 85.5 prior

(UK) Sept Visible Trade Balance: -£7.2B v -£6.1B; Trade Balance Non-EU: -£3.8B v -£3.0B; Total Trade Balance: -£3.5B v -£2.2B

(UK) Sept DCLG House Prices Y/Y: -4.1% v -4.9%e

(GE) German Nov ZEW Econ Sentiment: 51.1 v 55.0e; Current Situation: -65.6 v -70.0e

(EU) Euro-Zone Nov ZEW Econ Sentiment: 51.8 v 58.0e

(IR) Irish Sept Industrial Production M/M: 11.2% v -16.1% prior; Y/Y: -0.7% v -13.0% prior

(SA) South Africa Sept Manufacturing production M/M: 3.1% v 0.8%e; Y/Y: -11.4% v -13.1%e

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G-20 Signals Green Light To Sell Dollar

The dollar plunged on Monday after G-20 finance ministers did not address the dollar slide and agreed to maintain the stimulus programs for the foreseeable future. UK Chancellor of the Exchequer Alistair Darling said the G-20 had decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold.

Separately, the International Monetary Fund said the US currency may still be overvalued. Dollar carry trades returned while global stocks and commodities surged. Gold rose above $1,100 an ounce, a record high. Dow Jones 30 made a new yearly high. The S&P 500 rose 23.78 to 1,093.08. The yen, while little changed against the dollar, dropped versus other major currencies on improved risk sentiment. The euro rose to the 1.50 handle on stronger-than-expected German industrial production and improving EMU investor sentiment. Sterling gained for a sixth consecutive day. The Australian and Canadian dollars were supported by gains in risky asset prices. Canadian housing starts climbed to the highest level this year while Australian data were mixed.

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USD Lower, Stocks Surge, G-20 to Maintain Stimulus

• USD: Lower, IMF says USD still on the strong side, G-20 pledged to maintain stimulus, low Fed yields
• JPY: Higher, Japan tops China as biggest buyer of US debt, reserves rise to a new record
• EUR: Higher, EU Sentix rises, German exports surge, strong German industrial output
• CHF: Higher, unemployment at 11 year high, consumer prices fall, rising risk of intervention
• GBP: Mixed, supported by improving risk appetite
• CAD and AUD: AUD &CAD higher, tracking stocks, risk appetite, higher crude and record price of gold

Overview

USD traded sharply lower Monday pressured by a number of factors which included, stronger global equity markets, a pledge by the G-20 to continue with stimulus and a statement from the IMF that the USD is overvalued. The USD was also pressured by G-20 silence on USD decline. Speculation that the Fed will maintain low yields for an extended period coupled with the G-20 pledge to not withdraw stimulus until the global recovery is secure fueled demand for equities and sparked an improvement in risk appetite.

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German Industrial Production Improves Ahead of GDP Data This Week

Today, Germany released another upbeat data after the buoyant news released recently; marking that the worst is over and the largest economy in the euro area will lead growth in the third quarter as it did in the second quarter.

The Euro Zone’s gigantic economy released its Industrial Production showing improvement in September coming in at 2.7%, higher than the revised 1.8% and median estimates of 1.0%. Also, on the year the reading inclined to -12.9% compared with the revised -16.5% and expectations of -14.4%.

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Jobs Data Disappoints, USD Edges Up

The major currency pairs teetered within a close range in the Friday session, whipsawing sharply following the release of the October US unemployment report. The euro slid from above the 1.49-level to a session low at 1.4814 while the yen jumped to 89.62 against the greenback.

The October labor report was worst than expected, with the unemployment rate climbing to a fresh 26-year high at 10.2% versus 9.8% from September. The non-farm payrolls figure revealed a loss of 190k jobs in October, worst than the forecasted loss of 175k jobs from a downwardly revised September reading of 219k jobs lost. The worst than estimated jobs data sent US equity futures lower and pushed the greenback higher on a shift from riskier assets.

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Headline Unemployment Rate Creates dollar Shocker

We’re not quite sure what all the fuss is about this morning when it comes to splicing and dicing the non-farm payrolls report. A 10.2% headline national rate of unemployment – the first in 26 years grabbed attention upon the announcement and created an avalanche of currency selling in favor of the dollar by investors. And how wrong they were! The actual payroll decline of 190,000 might have been 15,000 more than analysts were primed for but it was only the second time since August 2008 that employers shed less than 200,000 jobs in a single month.

We really don’t think anything changed, in terms of likely consumption habits, on account of the fact that a double-digit rate unemployment rate has arrived. As traders realize the mistake they made by reaching for the sanctity of the dollar after the report, its fast losing any gains on the day and as we commence our report, the dollar is now lower at $1.4900 after rising to $1.4813 earlier in the day.

Let’s get this straight. October’s report revealed 15,000 more job losses than expected. So what? The revision to the September report saw a smaller change by 44,000 jobs as the earlier reported losses were contracted. On a net basis the number of jobs lost over these two months at the end of the summer was actually 29,000 less than was expected moments before the data. So any notion that the economy is having a second-round meltdown is well premature and investors fixated by the glaring headline 10.2% headline appear to be simply blinded by the light today. On the agenda next month it will be no surprise to see ongoing amelioration in the pace of job cuts and a downwards revision to today’s household survey number. That’ll do the trick of garnering a huge year end rally!

The pound regained its poise against the dollar and is now higher at $1.6593. Indeed the broad dollar index is now lower on the day as everything has turned around with one exception.

The Canadian employment report was admittedly ugly and it remains to be seen whether a loss to 93.61 U.S. cents can be undone today. We suspect that may be the case later in the day. The concern for the health of the Canadian economy came after employers shed 43,200 jobs rather than expanding positions by 10,000. Last month’s data shocked by adding workers and one could argue that on average, today’s report is a wash. But we won’t go that far and we have to once again raise the issue of whether currency strength is indeed constraining economic growth as the government and central bank suggests.

The situation in Australia, that other commodity rich nation, continues to improve. A quarterly update from the Reserve Bank overnight shows substantially stronger economic growth compared to the report in August. The RBA raised its 2009 prediction of GDP growth from 0.5% to 1.75% and boosted its 2010 reading from 2.25% to 3.25%. As one might expect the Aussie has improved to 91.76 U.S. cents today.

Now that the sticker-shock is fading the U.S. markets might be setting up for a pretty positive day. The S&P 500 index future took a 12-point dive after the employment report and is now up on the day. We continue to expect the dollar to suffer at the hands of being the worst of the bunch, while we should also note the fact that gold futures exceeded $1,100 per ounce in the aftermath of today’s data.

Andrew Wilkinson
Senior Market Analyst

Interactive Brokers

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Dollar Falls As Fed Keeps Loose Monetary Stance

The dollar fell on Wednesday as the Federal Open Market Committee reiterated that US economic conditions ‘are likely to warrant exceptionally low levels of the federal funds rate for an extended period.’ The FOMC also said inflationary expectations are well anchored and consumer spending is improving. Bond yields and commodity prices rose following the Fed statement, but US stocks pared strong gains at the close and the S&P 500 closed just 1.09 points higher at 1,046.50. The yen fell for a third consecutive day. The euro, supported by improved risk sentiment, rallied after finding support at the 1.47 handle. Sterling rose on strong UK consumer confidence and services PMI data. The Australian and Canadian dollars gained as commodity prices advanced and gold made a new record high.

The dollar index fell as risk appetite increased. Negatively correlated with the equity market, the dollar index fell as stocks rose. The dollar index’ long-term downtrend was broken last week. The 76-area support was broken today as the Fed promised to keep its highly accommodative monetary stance. The Fed’s stance makes it difficult to see any upside on the dollar; still, shorting dollar is a crowded trade, so there could be sharp short covering rallies. There are support at the 75-handle and resistance in the 77-78 area.

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Fed Recovery Tone Upsets Dollar Bulls

Overall, the currency market traded under the influence of the Fed’s interest rate decision on Wednesday. The dollar index saw sell orders most of the day, as traders anticipated a continued bearish statement from the Fed, as they concede that interest rates will remain low for a prolonged period. This is a sign that the spread between the interest rate of the U.S. dollar and the other major pairs could start to widen, thus fueling the carry trade scenario that has the dollar on the short side of the spread bet. Ahead, the market might follow a similar pattern, as investors prepare for the BoE and ECB interest rate meetings.

Dollar Index Technical View:

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Attention Turns To FOMC

U.S. Dollar Trading (USD) hit multi-week highs in Europe against a raft of currencies as banking worries put stock markets on the back foot. News of India buying gold and Warren Buffet making a large investment in US railways help the US reverse the market’s direction and helped gold to rally to fresh year highs above $1080. September Factory Orders forecast at 0.8% were actually 0.9%. In US Stocks, DJIA -17 points closing at 9771, S&P +2 points closing at 1045 and NASDAQ +8 points closing at 2057. Looking ahead, US FOMC Rate decision widely expected to remain at 0.25% but with the market focused on the accompanying statement. Also released, ADP October Employment Report is forecast at -190k vs. -254k previously.

The Euro (EUR) fell to fresh lows below 1.4650 as the Euro came under pressure from concerns about European and UK banking issues. Some analysts are beginning to view the recent Euro rally as nearing a top and are focusing on the downside for the first time in many months. Ongoing sovereign support is helping to slow the decent. EUR/JPY found support below 132 Yen. Overall the EUR/USD traded with a low of 1.4625 and a high of 1.4813 before closing at 1.4720. Looking ahead, October PMI services forecast at 52.3 vs. 50.9 previously. Also released, EU September PPI forecast at -0.4% vs. 0.4% previously.

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USD Consolidates Gains, Factory Orders Rise

• USD: Higher, stocks erase early losses on banking woes, factory orders rise
• JPY: Higher, supported by rising risk aversion as equity markets decline
• EUR: Lower, bank stress tests reveal the EU may face additional bank losses, deficits rising
• GBP: Mixed, UK construction spending falls, bank troubles re-emerge, more bailout money for RBS & Lloyds
• CAD and AUD: AUD lower & CAD higher, RBA hikes rates, dovish statement, CAD supported by gold rally

Overview

European bank troubles sparked a sharp sell of in global equity markets, a spike in risk aversion and a rally in the USD. UBS posted a larger than expected Q3 loss, RBS and Lloyd’s will receive additional bailout funds from the UK government and the EU commission warns that EU banks face additional banks looses. The GBP was pressured by a WSJ report which says economists expect the BOE to expand its asset purchases by 25 bln at Thursday BOE policy meeting. The other major feature of Tuesday’s trade was the RBA decision to hike rates 25 bps to 3.5%. The rate hike was widely expected and the AUD traded lower pressured by falling equity markets and doubt about whether the RBA will hike rates again in December. The RBA policy statement showed little urgency for the need to hike rates again in December. US economic data was positive as factory orders rise. The rise in factory orders helped to erase sharp early losses for the US equity market and the USD gave back some of its overseas gains versus the high yields currencies. JPM cut its GDP forecast to 3.1% from 3.5% after today’s release factory orders release.

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European Market Update

Risk aversion continues to simmer over health of global financial sector; UK Gov’t provides more aid to Lloyds, RBS; EU Commission sees more banking sector losses in region

ECONOMIC DATA

(IN) India Sept Trade balance: -$7.8B v -$8.4B prior

(SP) Spanish Oct Net Unemployment M/M: 98.9K v 80.4K prior

(NO) Norwegian Oct PMI: 45.8 v 49.0e

(SP) Spanish Oct Consumer Confidence: 69.2 v 70.3 prior

(UK) Oct PMI Construction: 46.2 v 47.2e

(EU) EU Commission releases forecasts: Euro-zone 2010 GDP 0.7% v +0.4% prior, Unemployment to hit 10.9% in 2011; Outlook For EU, Euro-Zone remain ‘Highly Uncertain’

(GE) German VDIK Oct New Car Registrations at 312K, +24% y/y; YTD registrations +26%

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities: European equity markets have traded under pressure since before the open. Corporate earnings news out of BMW [BMW.GE], Commerzbank [CBK.GE], UBS [UBSN.SZ] (all of which were disappointing) and Swiss Re [RUKN.SZ] were all put on the side burner following updated Lloyds [LLOY.UK] and RBS [RBS.UK] APS updates. In a massive and highly detailed series of releases, Lloyds announced that it would avoid the Asset Protection Scheme, raise £21B in new capital and divest a series of assets. RBS announced that it would participate in the APS (at a lower level) and take a massive £25.5B cash injection from the UK along with wide asset sales. Financial names traded broadly lower (ex Lloyds) on this news and led the negative pressure on the EuroStoxx50. EU Commission forecasts at 4:45EST calling for further 2009/10 banking sector losses pushed markets to new lows. Trading volumes have been high with all major bourses trading above their moving averages. Leading lagers by sectors included financials, industrials and consumer names.

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USD Lower, Manufacturing ISM Beats Expectation

• USD: Lower, stocks rally, construction spending, ISM and pending home sales rise
• JPY: Lower, Japan’s PM says JGB issuance must be below ¥44 trln, tracking stocks
• EUR: Higher, manufacturing PMI rises to 18 month high
• CHF: Higher, manufacturing PMI weaker than expected, KOF at 17 month high, threat of intervention
• GBP: Mixed, manufacturing PMI rises to a two-year high, UK government to break up banks
• CAD and AUD: AUD & CAD higher, RBA rate hike speculation, higher price of gold and crude

Overview

USD starts the week lower pressured by improving risk appetite sparked by report of better than expected manufacturing PMI data from Europe, Asia and the US. AUD outperformed supported by RBA rate hike speculation, an upgrade of Australia’s fiscal and economic outlook report of a sharp rise in Australian Q3 house prices. GBP underperformed with upside limited by weak UK bank shares and report that the UK government plans to split a number of UK banks including RBS. UK manufacturing PMI rose to its best level in almost 2 years. The UK manufacturing PMI helps limit selling pressure in the GBP. Commodity currencies were supported by a sharp rise in the price of gold and crude as improvement in manufacturing PMI points to expansion of the global recovery. China’s PMI for October rose to 55.2 from 54.3. Strong Chinese and US PMI data adds to demand for the commodity currencies. US economic data was strong with September construction spending rising, October ISM beat expectations and pending home sales were up for the eight straight month. Stocks traded at the day’s highs and USD at the day’s lows after the release of today’s US economic data. The stock rally fuels risk appetite.

This week’s focus turns to central bank meetings in Australia, the US, the EU and UK and Friday’s release of US unemployment. The RBA meet Tuesday and the central bank is expected to hike rates 25bps. The Fed meets on Tuesday and Wednesday and is expected to hold monetary policy unchanged. In light of the improving outlook for the US economy the Fed may drop its language that interest rates will remain low for an extended period. The ECB and BOE meet on Thursday. The ECB is expected to leave monetary policy unchanged. There is a great uncertainty over whether the BOE will elect to expand its asset purchase program as UK GDP posted a negative result. US unemployment is expected to rise to a new 26 year high but nonfarm payroll job losses will likely be less than 200k. The trade will be monitoring closely central bank policy decisions and how they may impact global liquidity and the economic recovery. The US unemployment report will be key to investor risk sentiment and speculation about whether the US recovery is sustainable. FX price direction remains closely correlated to equities and risk sentiment.

Today’s US data:

September construction spending rose 0.8%, a -0.3% reading was expected. October ISM rose to 55.7, a reading of 53 was expected. October pending home sales rose 6.1%.

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U.S. Market Update

Dow +112 S&P 11.5 NASDAQ +15

US equity markets are rallying off of the one-month lows seen last Friday thanks to strong economic data. The October reading of the ISM Manufacturing Index is the prime catalyst this morning, as the index hit its highest level since April 2006 at 55.7. Commentators are focusing in on the ISM’s employment sub index, which moved above the 50 level for the first time in 14 months, helping to sooth some of the fears generated by the Chicago PMI employment component last Friday.

The ISM’s Ore said production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. “Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode,” he said. The September pending homes sales data showed its eighth straight month of strong growth as buyers scurried to close deals ahead of the expiration of the home buyer tax credit at the end of November. Front-month crude is well off its Friday lows below the $77 handle, trading around $78.50 mid morning.

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