FOREX TRADING

The Euro may see selling pressure emerge in the coming session as the Euro Zone Consumer Price Index shows that inflation fell for the second consecutive month in July, stoking risks of deflation that could commit the currency bloc to a long-term period of economic stagnation.

Key Overnight Developments……. (more…)

The US Dollar avoided a breakdown in overnight trading despite sharp gains across Asian stock exchanges as the market continued to look ahead to this week’s record-setting $115 billion US Treasury bond auction that promises to boost long-term interest rates and spur demand for the greenback. Germany’s GfK Consumer Confidence report is on tap in European hours.

Key Overnight Developments

• Bernanke Defends Fed’s Independence, Supports “Strong Dollar Policy”
• Buyers Returning to UK Housing Market, Reveals Hometrack Survey
• US Dollar Avoids Breakdown Despite Stock Rally, Bond Auction Looms Ahead

Critical Levels

The Euro and the British Pound traded near familiar levels against the US Dollar despite a sharp rally across Asian stock exchanges that would have been expected to weigh on the safety-linked greenback. The MSCI Asia Pacific added over 1% overnight, putting in 10 consecutive days of gains for the first time since 2004. We noted last week that the majors were showing signs of diverging from risk trends following the US Treasury’s announcement of a record-setting $115 billion bond auction that stands to boost long-term interest rates and spur US Dollar demand.

Asia Session Highlights

US Federal Reserve Chairman Ben Bernanke defended the central bank’s independence at the taping of a “town hall”-style meeting for PBS, saying the Fed is already “very accountable” to Congress and stressing that citizens don’t want Congress running monetary policy. On the economy, Bernanke said that credit markets are still “very constrained” and warned that employment won’t recover for “a while”, forecasting that the jobless rate will likely exceed 10%. Regardless, the Fed chief said he has “tremendous confidence” in the US economy, saying output will be “growing strong” within a few years. Answering critics that have argued policymakers’ actions would stoke future inflation, Bernanke said the Fed does not want to “over-stimulate” the economy and is “very confident” it has the tools to unwind the emergency liquidity-boosting measures put in place amid the financial crisis. Bernanke added that it was too early to judge the impact of the government’s stimulus plan, but stressed that Congress needs to come up with a plan to restore fiscal balance by trimming the burgeoning budget deficit. Commenting on currencies, Bernanke echoed the Treasury’s mantra of support for a “strong Dollar policy” and said a stronger US economy will bolster the greenback.

In the UK, the Hometrack Housing Survey revealed that real estate prices fell -7.7% in the year to July, the slowest pace of decline since October 2008. Details of the report revealed that property sellers were able to secure 91.5% of their initial asking price in the final transaction, marking the eighth consecutive month that their bargaining power has improved; meanwhile, the average time a property spent on the market before being sold fell to 9 weeks, the lowest in over a year. On balance, the survey reinforces reports of a rebound in buying interest that has been noted in other recent data. That said, rising unemployment may prove to be a barrier to a near-term rebound in real estate prices: the jobless rate is expected to top approach a whopping 9% by the end of this year, trimming incomes and hindering Britons’ ability to pay their mortgages. This is likely to boost repossessions, flooding the market with fresh supply and sending property values downward.

Euro Session: What to Expect

Germany’s GfK Consumer Confidence gauge is expected to stall at 2.9 in August after rising for two consecutive months in June and July. Last month, the market research firm commented that, “Reports that the inflation rate stood at zero percent in May are having a positive effect on income expectations and the propensity to buy.” Although falling prices stand to boost spending in the short term, entrenching expectations of deflation will work against consumption, encouraging people to wait for the best possible bargain and perpetually put off purchases. Clearly, this threatens firms’ revenues and darkens the outlook for employment, which in turn can reasonably be expected to put the brakes on any rebound in consumer sentiment. Most worryingly, the onset of deflation may already be at hand, with Germany’s Consumer Price Index set to show later this week that the annual pace of inflation turned negative for the first time in 23 years.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar Avoids Breakdown Despite Stock Rally, Bond Auction Looms Ahead (Euro Open)

The British Pound is likely to look past an upswing in Retail Sales and a continued rebound in Home Loans data to fall in with trends in risk appetite as another round of key earnings reports crosses the wires in European hours. Japan’s trade surplus expanded for the third month in June as imports continued to tumble.

Key Overnight Developments

• Japanese Trade Surplus Grows as Imports Continue to Tumble
• Euro, British Pound Little Changed Despite Overnight Stock Gains

Critical Levels

The Euro tested below 1.42 and rebounded as high as 1.4243 but stands little changed ahead of the opening bell in Europe. The British Pound followed a similar dynamic, oscillating around the 1.6470 level.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus expanded for the third consecutive month, rising to 508 billion yen in June from 298.2 billion in May. We argued the likelihood of such an outcome in our Japanese Yen weekly forecast, noting that the abysmal job market will surely continue to weigh on imports. Indeed, inbound shipments tumbled -41.9% from a year before while exports shed -35.7%. More of the same is likely in the months ahead as unemployment continues to push higher: a survey of economists conducted by Bloomberg suggests the jobless rate surpassed 5% in the second quarter and will approach the 6% mark by the second half of 2010 while minutes from the last meeting of the Bank of Japan revealed policymakers expect consumption to remain weak as “the employment and income situation [is] likely to become increasingly severe”.

Euro Session: What to Expect

UK Retail Sales are set to swing back into positive territory in June, growing at an annualized rate of 2.1% after shrinking -1.6% in the year to May, the most in 17 years. A rebound in retail spending seems to bolster expectations from NIESR, a closely watched London-based think thank, that forecast the economy probably shrank just -0.4% in the second quarter, the smallest drop in a year. NIESR has argued that “the U.K. economy is now stagnating rather than continuing to contract at a sharp pace.” Notably, the apparent signs of stabilization may not translate into meaningful gains for the British Pound. Retail sales figures have exhibited extraordinary volatility since the beginning of this year: annualized receipts grew 2.6% in January, dropped -1.5% in February, then gained 0.9% and 2.7% in the following two months before plunging again in May. This suggests traders will be wary of taking even a sharp improvement at face value, waiting for a discernable trend to be established. Cues from the labor market seem to point to subdued retail activity for the time being, with the jobless rate to approach 9% by the end of next year for the first time since 1994, trimming disposable incomes and weighing on spending.

Separately, BBA Loans for House Purchases will probably continue to rebound in June, extending a move higher that began after the metric set a record low in November 2008. The metric closely tracks the GfK measure of consumer confidence; indeed, indeed, 24-month rolling studies show the two are 96.6% correlated. Consumer confidence rose to a 14-month high in June, suggesting the BBA report will follow.

On balance, risk trends are likely to remain as the primary driver of forex price action. A number of notable earnings releases are on tap in European hours: ABB Ltd, the world’s largest maker of electricity grids, and Cie. de Saint-Gobain SA, Europe’s top supplier of construction materials, are set to report that profits fell by a staggering 42% and 83% respectively in the second quarter. Credit Suisse, Switzerland’s largest bank by market value, may help support shares in the Financials sector with expectations calling for the second consecutive quarter of profits driven by trading revenue.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound to Look Past Retail Sales, Home Loans Data to Trade on Risk Appetite (Euro Open)

The British Pound is likely to look past minutes from the July meeting of the Bank of England with traders unlikely to be treated to anything that has not already been priced into the exchange rate, leaving the currency to continue taking cues from risk sentiment. Germany’s IFO survey of business sentiment is also on tap.

Key Overnight Developments

• Australian Inflation Falls to the Lowest in a Decade
• Euro, British Pound Turn Lower in Asian Trading

Critical Levels

The Euro traded lower in the overnight session, losing as much as -0.4% against the US Dollar. The British Pound followed suit, testing as low as 1.6391 against the greenback.

Asia Session Highlights

Australia’s Consumer Price Index printed in line with expectations with the annual pace of inflation falling to 1.5% in the second quarter, the lowest in a decade. Continued downward pressure on consumer prices looks likely as tumbling wholesale costs filter into the final price of products. Australian Treasurer Wayne Swan said “inflation is expected to remain subdued over the near term as the effects of the global recession continue to impact on the domestic economy.” This bolsters the case for additional rate cuts from the Reserve Bank of Australia in the months ahead. Indeed, RBA Governor Glenn Stevens said as much even as the bank kept rates unchanged in July, noting that “the outlook for inflation allows some scope for further easing of monetary policy.”

Euro Session: What to Expect

Germany’s IFO Survey of business sentiment is expected to rise for the seventh consecutive month in July, pointing to continued improvement in firms’ 6-month economic outlook. Still, the reading is expected at 90.1, a print below the 100 “boom-bust” threshold, suggesting conditions are still deteriorating albeit at a slower pace. Some recovery is to be expected as the government’s 82 billion euro fiscal boost filters into the broad economy, but the big question in Germany as well as most anywhere at this stage is whether growth is sustainable after stimulus cash dries up. As it stands, the latest economic forecast from the International Monetary Fund (IMF) reveals that the Euro Zone will stand apart from other industrialized economies in seeing economic growth continue to contract in 2010, pointing to a comparatively slower return to higher interest rates that will keep the Euro on the defensive against most major currencies.

Minutes from the July meeting of the Bank of England are unlikely to prove particularly market-moving this time around, with traders unlikely to be treated to anything that has not already been priced into the exchange rate. The bank made no changes to benchmark interest rates or the quantitative easing program, saying they will “review the scale” of their unconventional easing measures in August as they release their quarterly inflation report. From here, next week’s GDP report is likely to be the key to the market’s expectations on the future direction of monetary policy. Initial cues are favorable: London-based think tank NIESR has reported the economy probably shrank just -0.4% in the second quarter, the slowest pace of decline in a year. Still, the British Chamber of Commerce has urged policymakers to expand their asset-buying scheme by 25 billion pounds, saying a recovery is “not guaranteed”, a sentiment that has been echoed by the Shadow Monetary Policy Committee (a group of independent economists that meet at the London-based Institute of Economic Affairs). On balance, British Pound price action is likely to continue taking its cues from risk appetite, with the sterling’s trade-weighted average value now 87.8% correlated with the MSCI World Stock Index.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound to Look Past Bank of England Minutes, Trade on Risk Sentiment (Euro Open)

The British Pound may see selling pressure in European hours as the UK Public Finances report shows the government’s monthly cash shortfall rose again in June, boosting fears that mounting fiscal debt may lead to a reduction in the UK’s sovereign credit rating. Switzerland’s Trade Balance figures are also on tap.

Key Overnight Developments

• Bank of Japan Says Global Economic Growth Faces Downside Risks
• Australia to Recover from Recession Later This Year, Says RBA
• Euro, British Pound Pare Gains Against US Dollar in Asian Trading

Critical Levels

The Euro saw a bit of selling pressure in overnight trading, testing as low as 1.4190 to the US Dollar. The British Pound also retreated, slipping -0.3% against the greenback.

Asia Session Highlights

Minutes from June’s Bank of Japan policy meeting said conditions in the global economy have “begun to stop worsening” and credit markets are “starting to regain stability”. Turning to Japan itself, the bank echoed familiar sentiments, saying that exports will continue to recover “mainly due to progress in adjustments in overseas inventories” while private consumption remains relatively weak “as the employment and income situation [is] likely to become increasingly severe”. On inflation, the BOJ said that the pace of consumer price growth is likely to turn negative, reflecting the declines in the prices of petroleum products, stabilization of food prices, and overall economic weakness. On balance, policymakers concluded that uncertainty surrounding the outlook for the global economy [remained] high” and warned that “risks to the outlook were still tilted to the downside” despite some early signs of improvement.

Meanwhile, the Reserve Bank of Australia released minutes from their July policy meeting. Policymakers struck a positive tone, saying the Australian economy has proved “more resilient than expected” as fiscal and monetary measures have been effective in stoking demand. The bank added that the full effect of lower interest rates is yet to be felt, with downside risks diminishing and the economy to recover later this year. Still, Glenn Stevens and company cautioned that the Australian labor market is likely to “remain soft for some time” and reiterated that they have “scope” to cut interest rates even though current policy is “consistent with fostering growth”. Perhaps most interestingly, the RBA said that exports have been “remarkably strong” on demand from China, a far different story than what is being seen in the latest Trade Balance figures.

Separately, New Motor Vehicle Sales rose for the third consecutive month in June, adding 5.7% following a 5.4% increase in the previous month. In annual terms, sales fell -7.2%, the smallest decline in nearly a year. The improvements are likely linked to the government’s aggressive stimulus efforts, including over A$12 billion in cash handouts to households. The big question going forward is if current momentum can be maintained as the flow of stimulus cash dries up. The RBA’s optimistic posture notwithstanding, the labor market continues to suffer, erecting barriers to a meaningful rebound in demand.

Euro Session: What to Expect

Switzerland’s Trade Balance surplus may continue to contract in June as the country’s top trading partners in the US and the European Union continue to struggle with recession, weighing on export sales. That said, the possibility of a move higher in the headline figure does exist: the UBS Consumption Indicator that forecasts the trend in private spending in the coming 3-4 months fell to the lowest level in over 5 years in May, hinting at lackluster domestic demand that could weigh on sales of foreign-made goods and trim import volumes. Recent trends in the Swiss Franc are supportive of such an outcome: the currency has declined 2.4% in trade-weighted terms since the beginning of the year, a trend that makes Swiss goods comparatively cheaper for overseas buyers while cutting into domestic consumer’s purchasing power of imported products.

Turning to the UK, June’s Public Finances report is set to show that the government’s monthly cash shortfall rose to 20.2 billion pounds from 18.8 billion in the previous month. The gap swelled for the first time in three years in 2008, rising 22.7%. Continued shortages will add to fears that mounting public debt may lead to a reduction in the UK’s sovereign credit rating. Indeed, a survey of economists conducted by Bloomberg expects the overall budget deficit to average 12.4% of GDP through 2010, amounting to the worst fiscal position of any G10 nation.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound Vulnerable as UK Cash Shortage Rises, Threatening Credit Rating (Euro Open)