FOREX TRADING

Market Movers ahead

• In the US the FOMC meeting is the main event next week. We believe that the speculations about further monetary easing are premature, but that the assessment of the current economic situation will be downgraded. We expect US July retail sales to increase 0.5% m/m after a weak H1 2010.
• For the euro area, the key event next week is expected to be the release of Q2 GDP data. We expect to see robust growth, but at a rather uneven pace. Germany is expected to stand out as the top-performer.
• UK inflation report on Wednesday is expected to weigh on GBP and support Gilts.
• In Scandinavia focus turns to inflation numbers out of Denmark, Sweden and Norway. The monetary policy meeting in Norges Bank will not attract much attention. Unchanged rates are widely expected.

Global Update

• Over the past month the euro area has been the main provider of good news while US data have disappointed. The German Ifo index, German factory orders and Euro PMI all surprised to the upside, while US data covering housing, business and consumption have all been weak.
• The relative stronger numbers out of the euro area relative to the US and less PIIGS concern have pushed EUR/USD above 1.32.
• Wheat prices rise strongly on Russian drought and subsequent export ban. A new food crisis cannot be ruled out if the export ban spreads to other countries like we saw in 2008. However, global wheat stocks are in fact plenty and other grains prices are not rising to the same degree. (more…)

Today’s beige book report, compiled in preparation for the August 10 FOMC meeting, provided a much more qualified characterization of the recovery among the 12 Fed districts compared to the report prepared in advance of the June 22-23 FOMC. Although the report opened by stating that economic activity continued to grow, the qualifier “on balance” quickly followed. This qualifier reflected that while eight Districts seemingly indicated that economic activity improved, albeit modestly, two Districts indicated steady activity with two Districts, Atlanta and Chicago, indicating the pace of activity had slowed recently. In June, it was indicated that economic activity had improved in all 12 Fed Districts. (more…)

Highlights

• USD sputters, EUR recovers, but risk lags
• G8/G20 next week may reveal global rifts
• EUR: corrective rally more likely than broad based recovery
• UK budget; austerity on its way

USD sputters, EUR recovers, but risk lags

This past week saw broad based USD weakness against all other major currencies as tensions over the Eurozone debt crisis eased further and optimism returned that the global recovery would stay on track. The EUR was a prime beneficiary of the rebound in global sentiment (more below), but by the end of the week its progress looked to be stalling. From a broader perspective, risky assets (stocks, commodities and JPY-crosses) failed to exhibit the same degree of optimism, suggesting risk aversion remains just beneath the surface. Indeed, gold surged to new all-time highs while US Treasuries rallied and yields remained around recent lows, suggesting safe haven refuges remain in demand. As well, stock markets broke to new highs for the current rebound but seemed unable to extend those gains in any significant fashion going into the end of the week. (more…)

Market Outlook

Tactical view:

• buy CHF dips vs EUR, GBP

US dollar weakness and Swiss Franc strength translate into an interesting setup heading into the UK Budget, the FOMC and G20 summit next week, and is manifested in USD/G10 crosses approaching potential breakout territory and a rebound in volatility. GBP, NOK, SEK and the CHF all look set to test recent highs as equities negotiate one-month highs Underlying trading themes have not changed and should primarily continue to revolve around sovereign debt risk and the timing of a yuan reval, with US Q2 company results moving onto our radar. We stick to our longer-term bullish USD view but are pragmatic in a context where gold is hitting new highs and deteriorating US macro data and pressure from the G20 to curb public deficits have taken some wind out of the dollar’s sails. (more…)

Market Movers ahead

• In the US the main event next week is the FOMC meeting. We expect very few changes in the statement. If anything the section on growth might be downgraded.
• In Euroland we look for a small decline in both German Ifo and Euro flash PMI.
• The main event in the UK will be the crisis budget due on 22 June. It certainly looks like the austerity measures will be very tough.
• In Scandinavia Swedish confidence data and the meeting in Norges Bank will be in focus. We expect Norges Bank to keep rates unchanged.

Global Update

• The news flow has been mostly negative over the past week with softer macro data and continued tension in Euro bond markets.
• However, risk markets have been covered with Teflon, staging a recovery from the lows. The euro also managed to rise despite the EU bond market tension.
• US data have disappointed recently with declines in Philly Fed, housing data and retail sales. The data are not as weak as the headline suggests, though.
• EU debt problems continue to dominate the news flow in Euroland. A setback in ZEW sent a warning signal of weakening confidence.

Focus

• The first focus article takes the temperature of the US labour market after the recent disappointments in payrolls. We continue to look for decent gains in employment in coming quarters.
• In the second focus article we look at the outlook for Chinese growth and monetary tightening. The euro debt crisis has caused a postponement of a renminbi revaluation, but has not taken it off the table. (more…)

The FOMC will hold a one-day policy meeting on Tuesday, March 16th. This will be the first scheduled single day policy meeting for the Federal Reserve since the start of the financial crisis in September 2008. In February the Fed raised the discount rate 50bps to 0.75% and stated that the discount rate hike was not a signal of tightening of monetary policy. According to the Fed the discount rate hike will encourage financial institutions to rely more on money markets than on the Fed for short-term borrowing. The discount rate hike has encouraged speculation over whether the Fed is nearing the end of its accommodative monetary policy. Investors want to know if the Fed will soon hint that the end of easy money is near.

The key focus of Tuesday’s FOMC meeting is whether Fed maintains in its policy statement the language, keeping interest rates at exceptionally low level for an "extended period". Recent statements from Fed officials suggest that the weak labor market, uncertainty about the sustainability of the US recovery and subdued inflation will encourage the Fed to hold policy steady at Tuesday’s meeting.

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FOMC Meeting Wednesday, No Change Expected

The FOMC will conclude a two-day policy meeting on Wednesday the 27th of January and announce its policy decision at 14:15 PM ET. The FOMC is widely expected to maintain steady rate policy and 0.0 to .25%. At the December FOMC meeting the FOMC concluded that economic conditions warrant maintaining yields a low level for an ‘extended period’ and the economy is strengthening. The FOMC is expected to reaffirm commitment to maintaining low yields for an extended period at Wednesday’s policy meeting. If the Fed were to surprise and drop the extended period language from statement it would be a sign that the Fed is shifting monetary policy and preparing its tightening cycle. This is unlikely at Wednesday’s policy meeting because there has not been a significant change in the US economic outlook since the last policy meeting. In December Fed officials said that the economy is improving and that inflation pressures were likely to remain subdued. Recent US economic data has been mixed with Christmas retail sales weak, improvement in the housing market slowing and December unemployment disappointing.

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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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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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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…)