FOREX TRADING

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 There is concern that when government stimulus is withdrawn the pace of the expansion may slow with growth limited by the weakness of the US labor market.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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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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European Market Update

UK remains in recession with weaker-than expected Q3 GDP data; Continental European Manufacturing PMIs moves above the growth level

ECONOMIC DATA

(FR) French Sept Consumer Spending M/M: 2.3% v 0.5%e; Y/Y: 1.0% v -0.4%e

(FR) French Oct preliminary PMI Manufacturing: 55.3 v 50.1 v 49.6e (highest reading in 35 months); PMI Services: 57.8 v 54.0e (highest reading in 20 months)

(AV) Austria Aug Industrial Production M/M: 2.0% v -0.9%e; Y/Y: -10.0% v -10.6% prior

(SP) Spanish Q3 Unemployment Rate: 17.9% v 18.7%e

(GE) German Oct Advance PMI Manufacturing: 51.1v 50.1e; 52.5e; PMI Services: 50.9 v 52.5e

(NV) Dutch Aug Consumer Spending: -3.5% v -2.3% prior

(TT) Taiwan Sept Industrial Production Y/Y: +1.0% v -4.9%e; Export Orders: -3.0% v -6.3%e

(EU) Euro-Zone Oct Adv PMI Manufacturing: 50.7 v 50.0e; PMI Services: 52.3 v 51.3e; PMI Composite: 53.0 v 51.6e

(GE) German Oct IFO-Business Climate: 91.9v 92.0e; Current Assessment: 87.3 v 88.0e; Expectations: 96.8 v 96.2e

(PD) Polish Sept Retail Sales M/M: -0.7% v 0.7%e; Y/Y: 2.5% v 4.0%e

(PD) Polish Sept Unemployment Rate: 10.9% v 11.0%e

(UK) Q3 Adv GDP Q/Q: -0.4% v +0.2%e; Y/Y: -5.2% v -4.6%e

(UK) Sept BBA Loans for House Purchase: 42.1K v 39.3Ke

(UK) Aug Index of Services 3m3/m: -0.1% v 0.1%e

(EU) Euro-Zone Aug Industrial New Orders: 2.0% v 1.2%e; Y/Y: -23.1% v -22.5%e

(MA) Malaysia Sept CPI Y/Y: -2.0% v -2.0%e

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With a reference to the X-factor in forex markets: the US National Debt. As a matter of fact, the surging debt is just among various factors that’s exerting downward pressure on the Greenback, although it’s maybe the one that receives the most attention, and it likely represents the most pernicious threat to the Dollar’s long-term viability as the world’s reserve currency.

It’s hard to say certainly how big the federal government debt presently is, and even more difficult to forecast. We can begin by looking at gross debt (Treasury securities) outstanding, which is around $11.4 Trillion. Since half of this represents intra-governmental debt, debt owed to external parties is probably about $6 Trillion. Going forward, meanwhile, the latest government projections indicate a $9 trillion increase over the next decade, touching a whopping $20 Trillion in 2020. In absolute terms, it would smash all previous records, while in real terms (as a percentage of GDP), it would be the largest increase since World War II.

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Japan came out from recession in the second quarter, but much of this was due to government spending with private-sector demand continuing to dwindle. Equities in the Asian country took notice, shedding 2.57% at 00:07 EST. Euro price action lost for a second day, touching upward sloping support dating back to May 6.

Key Overnight Developments

• Japan Comes Out From Recession, But Private Spending Contracts
• Foreign Direct Investment Into China Worse-Than-Expected (more…)

Witnessing a steady decline during yesterday’s trading sessions, the USD became weakened as traders unwound their Dollar buy positions in exchange for riskier assets, such as stocks. The global stock market rally seen yesterday may have been one of the leading causes of the Dollar’s depreciation. With recent market optimism, traders may continue to see a small downward trend in the U.S. Dollar, as its positions are unwound in exchange for higher yielding assets.

USD – Dollar Outlook Remains Weak

The USD continued its decline against the EUR, as well as other risk sensitive currencies on Wednesday. However, the overall direction of the market was subdued due to unsteady equity markets. While the Dollar sentiment is bearish, the EUR seems unable to really take off. On Wednesday, the Dollar index was at 78.745, down from 78.920 on Tuesday

Strong performances from the stock markets continue to put downward pressure on the Dollar, as investors move to riskier higher yielding assets. Furthermore, the Dollar outlook suffers from concerns over U.S monetary policy. With growing uncertainty about the framework of the monetary and fiscal policies, particularly in light of the proposed health care reform, the outlook on the Dollar looks very weak despite the Fed’s and Treasury’s assurances.

Looking ahead to today, several important news releases are expected from the U.S, including the Unemployment Claims at 12:30 GMT and the Existing Home Sales at 14:00 GMT. These indicators are very important since they are leading indicators of economic health and tend to create great market volatility.

EUR – EUR Rises on Weaker Dollar

The EUR experienced a moderate rise against the Dollar and Yen yesterday. Late Wednesday, the EUR was at $1.4211 from $1.4197 late Tuesday and at ¥132.96 from ¥133.01. The Pound depreciated 0.3% to 153.92 Yen, and traded at 86.41 pence versus the EUR. The British Pound also appreciated slightly versus the Dollar, trading at $1.6463 from $1.6436.

The Pound’s drop against the EUR came after the National Institute of Economic and Social Research stated that home values will resume their decline. The institute also predicted Gross Domestic Product (GDP) will shrink by 0.4% in the second quarter, slightly worse the 0.3% expected by economists. Also putting downward pressure on the Pound were losses in equities throughout the trading day.

While no major news releases are expected from the Euro-Zone today, traders should follow the release of British Retail Sales that is due at 8:30 GMT. As this is a leading indicator of economic activity, it is likely to cause great volatility for the GBP pairs.

Yen – Yen Benefits from Stock Market Losses

The Yen gained for a fourth day against the Dollar, and for a second day against the EUR yesterday following a larger than expected second-quarter loss by Morgan Stanley, as well as a statement by Wells Fargo & Co. stating that bad loans jumped. The Yen traded at 132.87 per EUR from 133.18 and at 93.56 versus the Dollar from 93.68 yesterday.

With reports from CIT Group Inc. and American Express Co., risk aversion today will likely stay prominent as the expectation is for weak earnings announcements. As the Yen is highly sensitive to moves in the equity markets, any negative earnings reports will revive risk aversion among investors and push them toward the safety of the Japanese currency. The Yen may also rise today ahead of the U.S Unemployment Claims report which is expected to show an increase in claims.

Crude Oil – Oil Prices Slide on Disappointing Inventories Report

Crude Oil for September delivery settled down 21 cents, or 0.3%, at $65.40 a barrel Wednesday, snapping a five-day rally following the release of slightly worse than expected U.S Oil inventories. However, losses were limited due to a weak Dollar and equity gains.

With inventories remaining high and OPEC members not sticking to quotas, there is still too much supply and not enough demand. While rising equity markets and a weak Dollar continue to push Oil prices up, the fundamentals are still weak and do not supports another rally to the $70 price level. Furthermore, any negative news from the stock market, or signs of a faltering economic recovery might send Oil back to the $60 level.

Article Source – Global Stock Rally Dominates USD Trading

After a almost 20% arise versus the US. Dollar, the British Pound has been rangebound for almost the full month of June, with one columnist likening the situation to a “pause for breath.” For him, this amounts to a irregular cessation on the Pound’s inevitable upward path: “Compared to long term levels, the pound was still better value than its peers. He said: ‘It’s still cheap – about 10% below it’s trade-weighted average at present.’ ” For others analysts, nonetheless, the picture is not so cut-and-dried.

Forgetting about buying power parity for a minute, there are a lot of factors which could halt the Pound’s rise. Most importantly is the British economy, which is still struggling to find its feet. “The U.K. economy will recover ‘mildly’ next year, according to the OECD, compared with a previous projection of a 0.2 percent contraction. Gross domestic product will drop 4.3 percent this year, against a March forecast of 3.7 percent.”
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