FOREX TRADING

Dollar Index Swing Point

The initial long-Usd moves in European trade were reversed as the U.S. GDP numbers printed at 2.2%, lower than expected, but were then added to again as Existing Home Sales came in at 6.5M units, which was above the expected 6.3M read. The last leg of Tuesday trade has then been to once again add to long-Usd positions as European markets close.

The pattern for currency markets is to go sideways in afternoon Wall Street trade, but there are signals in the way that forex pairs have split, that today could be different. Long equities, Long dollar, and Short gold and oil, are not things that pm U.S. trade has dealt with too often, and it will be interesting to see this unfold as the dollar takes another wipe out of the euro, cable, and aussie.

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US GDP

US preliminary Q3 GDP was revised down to 2.8% from original report of a 3.5% rise in the advanced estimate. Despite the downward revision, the improvement in US GDP suggests that the worst of the US recessions is over. According to the Bureau of Economic Analysis the increase in Q3 GDP reflects positive contributions from personal consumption, exports, private inventory investment, federal government spending and residential fixed investment. An increase in consumption and improvement in the housing market helped boost Q3 GDP.

This improvement reflects significant impact of government stimulus to encourage demand for auto sales by the cash for clunkers plan and tax credit for new homebuyers. There is concern that when government stimulus is withdrawn the pace of the expansion may slow with growth limited by the weakness of the US labor market. In addition, the Fed is beginning to lay the foundation for the end of its ultra low interest rate policy and the first steps to exit from quantitative ease. How the economy reacts when the Fed begins to withdraw stimulus will be key to the outlook for US GDP growth in 2010. Columbia University economist’s Stiglitz says there’s a significant chance that the US economy will contract in the second half of 2010. He urges the US government to prepare a second stimulus package to create jobs. According to Stiglitz, the economy must grow by at least 3% to create enough jobs to meet US population growth.

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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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Stock Market Correction Could Support USD

The dollar rose on Friday as US stocks consolidated recent strong gains and risk appetite moderated. US existing home sales rose to the highest level in more than two years. The S&P 500 index declined 13.31 to 1,079.69 despite strong earnings from Microsoft and Amazon. The yen fell to the lowest level in a month. The euro closed below the 1.50 handle but gained for a fourth consecutive week. Sterling plunged and closed modestly lower for the week after UK Q3 GDP unexpectedly declined for a record sixth time. The Australian dollar fell for a second day as commodity prices eased. Despite today’s decline, the aussie gained for a fourth straight week to the highest level since August 2008. The Canadian dollar fell today and for the week as the Bank of Canada warned about the high value of the loonie. The EUR/JPY, rising for a 12th consecutive day, is making a possible tipple top.

The dollar index rose from a 14-month low on Friday. The index, inversely correlated with the US stock market, has been falling since the stock market made a bottom in March. Exceptionally low US interest rates are weighting on the greenback as investors fund risky assets in low interest dollar loans. At the beginning of the financial crisis, the dollar appreciated and stock prices fell. It is difficult to determine whether the dollar’s appreciation overvalued assets or falling asset prices appreciated the dollar as investors repatriated funds to safe US papers. However, the correlation is clear and consolidation in the overbought stock market may mean an appreciation of the dollar.

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USD Holds Gains, Existing Home Sales Surge 9.4%

• USD: Higher, existing home sales surge 9.4%, equity markets trade lower as the data at fails to lift stocks
• JPY: Lower, BOJ forecasts that deflation pressures will continue into 2011
• EUR: Lower, EU composite PMI rose to a 22 month high, gains in cross trade to GBP
• GBP: Lower, UK Q3 GDP posts a surprise decline, early withdrawal of stimulus unlikely
• CAD and AUD: AUD & CAD lower, Australia’s import/export prices decline, BOC says intervention an option

Overview

USD traded mixed Friday with GBP sharply lower and EUR trading at a new high for 2009. GBP was pressured by report of an unexpected decline in UK Q3 advance Q3 GDP and the EUR was supported by gains in cross trade to GBP and in reaction to report that EU composite PMI rose to a 22 month high. Today’s economic data from Europe shows that the UK economy is still in recession and the EU economy is emerging from recession. The unexpected decline in UK GDP may force the BOE to consider expanding quantitative ease. JPY traded lower pressured by a BOJ report which says that deflationary pressures will continue through 2011. Commodity currencies traded lower despite firmer equity trade in Europe with the CAD pressured by a statement from BOC Governor Carney that intervention is an option and AUD pressured by report of falling Q3 export and import prices. US existing home sales came in much stronger than expected. The USD traded higher in reaction to the strong housing data as the trade debates how much of an impact the expected expiration of the tax credit for first home buyers impacts existing home sales. Some may argue the strength of today’s existing home sale report reflects the pulling forward of home sales because of the tax credit and that when the tax credit expires demand for homes may drop in the same way the demand for autos declined after the expiration of the cash for clunkers program. Bloomberg reports that Nomura research warns that US risks a lost decade like Japan if stimulus is withdrawn too soon. Upcoming US auto and existing home sale data will be a good test of the efficacy of the Nomura warning. At some point the private sector will have to carry the US recovery as government incentives and low prices are the main reason exiting home sales have improved. USD may benefit from speculation that today’s strong US housing data increases the risk of an earlier Fed rate hike. The Fed’s Plosser said he will be one of the Fed members to call for an earlier rate hike.

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Weekly Economic and Financial Commentary

U.S. Review

A Huge Week for Policy Announcements

• The U.N. General Assembly, G-20 and FOMC meeting overshadowed this week’s economic news. Stimulus efforts remain in place but some programs are approaching expiration and plans were announced for an orderly winding down of the Fed’s quantitative easing.
• This week’s key economic news included reports on new and existing home sales. New home sales rose 0.7 percent, whereas existing home sales fell 2.7 percent.
• Weekly first-time unemployment claims fell more than expected, dropping 21,000 to 530,000. (more…)

The Greenback is anticipated to go volatile today on U.S. Homes Sales data and the speech by Federal Reserve Chairman Ben Bernanke at 14:00 GMT. Bernanke is anticipated to discuss the economic crisis and recovery. With regards to the home sales data, the figure is anticipated to arise to 5.03 million, up from the previous figure of 4.89 million. Forex traders should follow both of these events closely as they’re set to determine the USD’s main crosses for Friday’s trading. (more…)