FOREX TRADING

The main story in currency markets from overnight was the resignation of the Japanese Prime Minister. The news weakened the Yen as the political instability dents the safe-haven appeal of the currency. The likely replacement will be the Finance Minister Kan, though that wont be known until Friday when the Democratic Party of Japan holds its leadership election. Six months ago, when assigned to the post Kan stated that he preferred a weaker Yen, and that makes the change at the top of the Japanese government a Yen negative story.

As we see from this month-long look at the USD/JPY using 4-hour candles, the Dollar continued to extend its gains following its break of the 90.60 level last week, and the move above 91.60 in overnight trading. In the early NY session the pair had moved above the 92 level with the next clear level of resistance at the 93 area (where we stalled in mid-May) and above that at 93.50. (more…)

GBP still struggling to find its feet

HEADLINES – PREVIOUS SESSION

• US Mar. Trade Balance out at -$40.4b vs. -$40.5b expected and revised -$39.4b prior
• US Apr. Budget out at -$82.7b vs. -$57.9b expected and -$20.9b prior
• NZ Apr. Business PMI out at 58.9 vs. revised 56.7 prior
• NZ Apr. Food prices out at -0.5% m/m vs. +0.2% prior
• UK Apr. Nationwide Consumer Confidence out at 74 vs. 73 expected and revised 73 prior
• JP Mar. C/a Balance out at ¥2534.2b vs. ¥2173.6b expected and ¥1470.6b prior
• JP Mar. Trade Balance out at ¥1074.7b vs. ¥1077.2b expected and ¥778.0b prior
• JP Apr. Bank Lending out at -1.8% y/y, unchanged from prior
• AU Apr. Employment Change out at +33.7k vs. +22.5k expected and revised 27.7k prior
• AU Apr. Unemployment Rate out at 5.4% vs. 5.3% expected and revised 5.4% prior
• JP Apr. Economy Watchers Survey: Current out at 49.8 vs. 47.5 expected and 47.4 prior
• JP Apr. Economy Watchers Survey: Outlook out at 49.9 vs. 47.0 prior

THEMES TO WATCH – UPCOMING SESSION

• EU ECB Monthly Report (0800)
• UK Visible Trade Balance (0830)
• UK DCLG House Prices (0830)
• EU ECB’s Gonzalez-Paramo to speak (1115)
• EU ECB’s Weber to speak (1220)
• US Import Price Index (1230)
• US Initial Jobless Claims (1230)
• US Fed’s Kohn to speak (1300)

Market Comments

The EUR started the overnight session on a stronger footing, helped along by a modest rise in Euro-zone Q1 GDP (0.2% /q, 0.5% y/y) and announcements from Spain regarding a host of cost-cutting initiatives intending to reduce the country’s budget deficit to 6 percent of gross domestic product in 2011 from 11.2 percent in 2009. However, as has often been the case of late, EUR strength was seen as another opportunity to short the single currency and the foray above 1.27 proved short-lived and by the NY close we were back to levels where Asia left them yesterday. (more…)

Today’s moves were for the record books, as a very ugly day for risk suddenly transformed into a freakish rout in US equity indices. Rumors swirled of a bad price in Proctor and Gamble stock triggering a four minute meltdown that saw a vertical 5% drop in equity prices. Some spoke of $16 billion of S&P500 futures hitting the market nearly simultaneously. One wonders to what degree the algorithmic and automated trading community was responsible for the insane volatility that rocked markets during those four minutes – and one can hope that the people behind these parasitic systems were the ones who took the losses. This is in some ways like the 1987 program trading-driven crash all over again and one wonders what kind of investigation today’s events will trigger. Regardless, these kinds of moves actually become self-fulfilling once they are set in motion – especially with automatic risk reduction triggers in place for many of these "smart" systems. In the coming days/weeks, will one of the algorithmic trading operations out there announce a $1 billion trading loss….?

During the mayhem, EURJPY was off as much as 1000 pips during this time frame from its earlier highs before bouncing. AUDJPY was off as much as 800 pips – thus off by an even higher percentage briefly.

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In April, the ISM non-manufacturing index was unchanged from March’s 55.4 level indicating that the sector grew for the fourth consecutive month (a reading above 50 indicates the sector is generally expanding). Market expectations going into today’s report were for a rise to 56.0. The employment index stayed just outside of expansionary territory, falling to 49.5 from the previous month’s 49.8.

The ISM non-manufacturing index remained in expansionary territory in April, staying flat at the 55.4 reading seen in March. Business activity edged up to 60.3 from 60.0 in March, but new orders fell to 58.2 from 62.3 the previous month. The employment activity index contracted for the 28th consecutive month falling to 49.5 from 49.8 in March, as the report noted that firms continue to try to “get by with existing workforce until new orders increase”. With respect to inflationary pressures, prices paid climbed to 64.7 from 62.9 in March, the highest level since September 2008. (more…)

• Fed keeps policy measures unchanged, with minimal alterations to statement.
• Growth assessment marginally upgraded, but outlook maintained.
• No changes to inflation paragraph.
• ‘Extended period’ paragraph left unaltered.
• We still expect the Fed to begin removing its accommodation later this year.

Details

The committee was slightly more upbeat in its assessment of growth. Language on consumption, the labour market and housing was upgraded. However, in all cases changes were incremental and came with a cautionary note attached. (more…)

FX Highlights

• The USD is trading mostly lower as the G-20 communiqué says the global recovery is better than anticipated and stock markets trade higher, EUR trades lower awaiting fresh news on the Greek debt as Greek credit spreads continue to widen to a new record high, some press reports suggest Germany may reject aid for Greece, investors await Merkel’s comments on Greece at 13:00 GMT, Canada’s Finance Minister Flaherty says the G-20 fears current Greek aid plan is insufficient, GBP trades higher supported by report of rising UK house prices, commodity currencies trade higher tracking firmer equities, higher price of gold and crude and Yuan revaluation speculation, Flaherty says China will likely revalue the Yuan, JPY trades lower pressured by a surge in the Nikkei, signs of improving global recovery competes with Greek debt worries for FX price direction
• Japan’s March corporate service price index rose by 0.5%,JPY lower
• German/Greek ten year government bond spread hits new record high of 663bps, The Times reports that the Greek meltdown is in danger of spreading, Harvard Professor Rogoff says that Greek rescue won’t be the last as focus shifts to Ireland and Spain, EUR lower
• UK Hometrack house prices rose 0.2% in April, rising house prices and higher UK inflation may encourage the BOE to hike rates before year-end, UK inflation rate rose by 3.4% March, GBP higher
• SNB’s Jordan says interest rates are right now, he is against excessive CHF rise, CHF lower
• ECRI growth gauge rose to 133.0 from 131.3 last week confirming the recovery is on track
• NABE says ¼ of US employers plan to begin hiring
• US equity markets set to open higher, European equities 1% higher, Nikkei closed 251 points higher

Upcoming Events

• US – Monday, no major US economic data is due for release today
• CAN – Monday, no major Canadian economic data is due for release today

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.

U.S. Dollar Trading (USD) very strong US data sent stock markets higher and helped the USD/JPY regain the Y94 level. Risk currencies though did well as the Euro led the rest of the market higher against the safe haven Dollar. March New Home Sales jumped over 20% to 411k vs. 330k forecast. March ex-Trans Durable Goods surged 2.8% vs. 0.7% expected. In US stocks, DJIA +69 points closing at 11204, S&P +8 points closing at 1217 and NASDAQ +11 points closing at 2530.

The Euro (EUR) was well supported when Greece Activated its Aid package in Early Europe although initial gains were limited and the market waited for supportive comments from France and Germany before pushing higher into the US close. April IFO was very strong at 101.6 vs. 98.8 expected. Overall the EUR/USD traded with a low of 1.3202 and a high of 1.3400 before closing at 1.3370. Looking ahead, ECB President Trichet Speaks.

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Wakeup Call: SEC Charge Against Goldman Sachs Makes Risk Retrace

Clearly this will negative for risk sentiment in the short term, but if earnings continue to outperform and macro data also continues to show progress markets will retrace back

Calendar

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Housing starts rose in March, and February’s 5.9% decline was revised to show a 1.1% monthly increase. In March, starts were 626,000 at an annualized rate while the level of February starts was revised to 616,000 annualized units, from an earlier reported 575,000. The March increase bested expectations that starts reached 610,000 annualized units. Permits were also firmer than expected, rising to 685,000 at an annualized rate, the highest since October 2008.

Starts of single-detached homes dipped 0.9% to 531,000 while multiple-units starts rose to 95,000 from 80,000 in February. In the first quarter, single-family starts increased at a 10.4% annualized rate and were running 37.7% higher than in the first quarter of 2009. Multiple-unit starts were still running 45% slower than in the same quarter a year earlier. A large gain in the South (+18.2%) was partially offset by widespread declines in the Midwest (-28.4%), the West (-2.1%) and the Northeast (-8.3%).

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Asia Pacific markets were stronger today after a stellar rally in US equities. The Nasdaq led the rally, advancing more than 1.5% to close at 2504.86. The Dow and S&P were also firmer, gaining .94% and 1.12% respectively. The recent boost in global equities comes on the heels of better than expected retail sales and earnings reports as well as improving market sentiment. At yesterday’s congressional testimony, Fed Chairman Ben Bernanke re-affirmed the Fed’s commitment to keep rates "very low, extremely low " for an "extended period", easing investor’s concerns of a possible rate hike in the near term. The Chairman did however hint to lagging improvements in the housing and labor markets, noting that "in March 44% of the unemployed had been without a job for six months or more." The dollar was slightly higher early in the session but remains subdued on improving risk appetite, with the dollar index hovering just above the 80 handle. Commodities relinquished gains early in London trade with crude oil dipping below the $86 figure and gold falling to $1153.60.

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The dollar traded lower across the board as increased risk-appetite helped the Loonie extend gains to the 0.9956 mark and the euro climb to 1.3677. The Nasdaq led today’s gains, trading higher by nearly 1.3% while the Dow Jones and S&P 500 edged up by around 0.8%. Crude oil bounced by around 2.4% to trade above the $86-mark on Wednesday as EIA inventory data released earlier today posted an unexpected draw on the week with crude supplies decreasing by 2.2 million barrels.

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Singapore dollar revaluation

The government of Singapore decided on a modest revaluation of the Singapore dollar, which jumped a little over 1% vs. the US dollar and therefore to the strongest level since before the crisis hit in 2008. The move is seen as a response to stronger inflation readings in Asia as China’s commodity demand has seen prices for key commodities rise as much as 70% over the last year. The magnitude of the "revaluation" was not particularly great, but the Singapore authorities are clearly not against further appreciation of their currency as growth is expected to surge past previous expectations. The Monetary Authority of Singapore said it would seek a "modest and gradual appreciation" of the SGD against a basket of currencies. This pushed the USD a bit weaker in Asia, and commodity currencies a bit higher (is this a preview of the kneejerk reaction that awaits if the Chinese try to revalue?) but later the EURUSD was back lower, and the market must also consider the argument of whether less pressure on reserve diversification from trying to maintain currency pegs or managed floats is a Euro negative.

Risk rally

Of course, commodity currencies are stronger not just on the Singapore news, but also because risk appetite remains robust after the market liked what it saw from the key chip company Intel yesterday after the US equity markets closed. Sales, profits and guidance were all positive and Nasdaq 100 futures are trading at a new high for the cycle, having rallied almost 100 percent now from their lowest levels after the crisis, and even more remarkably, now only a little over 10% from the 2007 highs. Crude oil also survived a test of support below 84 dollars a barrel and Gold rebounded from its two-day sell-off. The kiwi was a reluctant participant in the commodity currency rally, since its retail sales numbers saw an ugly dip in February, against expectations for reasonably strong expansion.

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Thin Holiday Markets

FX markets were quiet in Asia ahead of the holidays. Regional indexes traded broadly higher, with Shanghai up 2.59%. After yesterday’s weaker than expected US data, it seems that the USD dependence on yields and domestic economic data has become stronger than the year long risk aversion trade.

Most of Europe is closed today and tomorrow is Christmas, when most major markets, with the exception of Tokyo, are closed. Thin liquidity and directionless trading should dominate FX activity. The GBPUSD opened in Asia at 1.5962, powerless to take advantage of yesterday’s broad USD weakness, prompted by weaker US new home sales data.

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USD Trying to Rally, Though Volatility Looks Rather Muted so Far

Improved Jobless Claims sees bond yields higher, USDJPY trying resistance. US 30-year auction results up later.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Oct. Business PMI out at 50.6 vs. 51.5 in Sep.
• New Zealand Sep. Retail Sales out at 0.2%/0.0% MoM less Autos vs. 0.4%/0.4% expected, respectively
• Japan Oct. Domestic CGPI fell -0.7% MoM and -6.7% YoY vs. -0.1%/-6.0% expected, respectively
• Australia Oct. Employment Change rose 24.5k vs. -10k expected
• Sweden Oct. CPI out at +0.3% MoM and -1.5% YoY vs. +0.2/-1.6% expected, respectively
• EuroZone Sep. Industrial Production rose 0.3% MoM vs. 0.5% expected (YoY was -12.9% vs. -14.1% exp.)
• Canada Sep. New Housing Price Index rose +0.5% MoM vs. +0.2% expected
• US Weekly Initial Jobless Claims fell to 502k vs. 510k expected and 514k last week
• US Weekly Continuing Jobless Claims fell to 5631k vs. 5700k expected and 5770k last week

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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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