FOREX TRADING

US Dollar Consolidation Bound to Yield Breakout This Week

Fundamental Outlook for US Dollar: Bullish

- Conference Board consumer confidence surprisingly surged to a 3-month high in August
- Despite revisions, the University of Michigan’s consumer confidence index fell slightly
- US durable goods orders jumped by the most in 2 years, but excluding autos, gains were muted

The US dollar ended the past week on a mixed note across the majors, losing against the New Zealand dollar, Australian dollar, and Japanese yen, but rising versus the Swiss franc, euro, Canadian dollar, and British pound. Ultimately, this amounted to little more than a continued period of consolidation, as the US dollar index remains above a rising trendline connecting the July 2008 and August 2009 lows. Nevertheless, trading conditions have been extremely difficult, even for those that thrive on range trading, as the low volumes so often associated with the “summer doldrums” create highly choppy price action, and this may remain the case throughout next week ahead of the US Labor Day holiday.

There are a number of indicators due out over the next week that could trigger breakouts for the US dollar. On Tuesday, the ISM manufacturing index is projected to rise above 50 – the point of neutrality – for the first time since January 2008, which would suggest that the sector is finally experiencing a legitimate recovery in business activity. Indeed, the US government’s “cash for clunkers” program has been a boon for the auto industry and for manufacturers in general, but since the program formally ended on August 24, there could be a noticeable drop in output in coming months. Regardless, a strong ISM manufacturing reading would bode well for the US dollar. (more…)

The Euro may see selling pressure in European hours with Germany’s Consumer Price Index expected to show that the annual inflation rate fell for the second straight month in August. UK Nationwide House Prices are also on tap, with forecasts calling for home values to fall the least in 16 months.

Key Overnight Developments

• New Zealand Trade Deficit Narrowed in July as Imports Tumbled

• Australian Business Investment Trumps Expectations in Second Quarter (more…)

The Euro and the British Pound tested higher in Asian trading but failed to retain momentum, retreating versus the Greenback ahead of the UK Consumer Price Index and German ZEW survey of investor confidence due in European hours.

Key Overnight Developments

• RBA Weighs Risk of ‘Choking’ Demand If Rates Rise Too Soon

• Euro, British Pound Try Higher But Fail to Build Momentum (more…)

Asia session trading saw Reserve Bank of Australia Governor Glenn Stevens use sharper rhetoric in discussing the sure thing of arising the overnight cash rate from “emergency” levels. This comes just hours before CPI data from half-way around the world, is expected to point toward deflation. Unexpected growth in the Euro-Zone, nevertheless, might derail this estimate and may cause inflation to actually publish in positive territory.

Key Overnight Developments

• RBA’s Stevens Conjures ‘Emergency’ Rate Increase Speculation
• New Zealand Retail Sales Unexpectedly Gain in June

• Some Bank of Japan Members Wanted to Extend Program (more…)

The US Dollar is set to go highly volatile today on the release of Advance GDP figures for the second quarter from the U.S. economy at 12:30 GMT. The forecasted results are -1.4%, significantly better than the first quarter results of -5.5%. The other matters that are expected to move the market today are the issue of the CPI Flash Estimate and the Unemployment Rate from the Euro-Zone. In order to earn some big profits today, open you positions in the USD, EUR, GBP, and JPY now, as Friday’s trading gets under way.

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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…)

Having risen nearly 30% against the US Dollar since March, the New Zealand Dollar (NZD or Kiwi) is now close to a 9 1/2 month high. While still far from the record highs of 2008, the currency is already erased a large portion of the losses it racked up since the credit crisis gave way to economic recession.

As part of last Friday’s coverage of the Japanese Yen, we included a chart which compared the performance of the AUD/JPY cross to the S&P 500. Even without calculating the correlation coefficient, a cursory review of the chart revealed an uncanny relationship! Unsurprisingly, it turns out the same relationship also applies to the New Zealand Dollar, whose recent performance closely mirrors US equities.

In other words, the interplay between risk appetite and risk aversion continues to dominate the forex markets, as traders move to calibrate the split of funds between so-called safe haven currencies and the riskier alternatives, among which the New Zealand Dollar is certainly counted. Much of the rally in the Kiwi, then, represents a correction, as investors acknowledge that the near 50% slide from-peak-to-trough was an overreaction.

Going forward, however, the Kiwi will have to rest on its own feet, as new themes move to the fore of investors’ minds. Specifically, they will begin to look more closely at the New Zealand economy, and demand evidence of a recovery. “Reserve Bank of New Zealand Governor Alan Bollard told a business audience the world has ‘avoided a repeat of the Great Depression. Now, we and the world, appear to be on our way to recovery. New Zealand looks likely to start recovering ahead of the pack.’ ”

At the same time, the most recent economic data showed an economy in freefall, as “New Zealand’s economy shrank for a fifth straight quarter…The economy contracted 2.7 per cent in the January-March quarter.” While forecasts vary, GDP is expected to fall by at least 2.1% in 2009, with a modest pickup expected in 2010. Investors are betting that the recovery will be driven by rising demand for commodities, which will help to buoy New Zealand exports. Once again, this conflicts with the data, which shows an annualized trade deficit of $3 Billion. Despite a fall in imports, the country is still importing more than its exporting. This could be a product of the stronger currency, which all stakeholders agree is not conducive to economic growth. In the end, the economy’s best chance for recovery lies in a resumption of debt-induced consumption and residential construction, the very forces which caused the current downturn. Says Mr. Bollard, “Reliance on past experience of strong house price inflation and easy credit will be untenable.”

Given the uncertain prospects for growth, combined with moderating price inflation, the RBNZ can be expected to hold interest rates at current levels for the near-term. “Bollard will leave the benchmark interest rate unchanged at a record low 2.5 percent on July 30, according to all 10 economists surveyed by Bloomberg.” Based on swap rates, the markets feel similarly, and are pricing a mere 25 basis point hike over the next twelve months. With such a dubious prognosis, one has to wonder whether the Kiwi’s rally is really sustainable.