FOREX TRADING

Retail Sales Increase on Cash for Clunkers, While Inflation Ease over a Slowing Pace!!!

Retail sales in the United States jumped in August by the most in three years due to a jump in auto sales, as consumers used the government’s “cash for clunkers” program, meanwhile inflation continued to show easing signs though the pace of drop eased noticeably compared with last year, as seemingly the recent rise in economic activity will prevent the economy from a disinflationary phase.

Retail sales increased in August by 2.7% more than estimates of 1.9% and following a revised 0.2% drop back in July, while retail sales that exclude autos increased by 1.1% more than estimates for a flat estimate following a 0.5% drop back in July, as auto sales increased by the most in 8 years. (more…)

Important Week for the United States, as Inflation, Spending, and Manufacturing Fundamentals are Due to be Released

The world’s largest economy has been showing signs of improvement over the past few months, as several economic sectors started to show that the worst recession since WWII is coming to an end, while data this week is expected to show that recovery is undergoing and that the U.S. economy is on its way out of this recession.

The start this week will be the producer price index which is expected to show that prices on the producers’ level continued to ease on annual basis, as the ongoing recession continues to weigh down on prices, as demand levels are still subdued in general despite the recent increase in activity.

Meanwhile, the manufacturing sector which has been showing signs of increased activity over the past period is still expected to show recovery is undergoing, as both the NY empire manufacturing and Philadelphia Fed index are both expected to show some sort of improvement. (more…)

On that point was never much question about the fundamental causes of the credit crisis. In essence, combination of low interest rates and lax regulation fueled a leveraged credit expansion, which exploded spectacularly last fall. The primary issue has always been how to ensure such a crisis does not ever happen over again- at least not on the same scale. Towards that end, policymakers around the world have been busy over the last few months conducting hearings and soliciting expert testimony, and are now about passing sweeping inspection and repair of their countries’ respective financial systems.

Well, perhaps sweeping is (more…)

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…)

The price of Crude Oil experienced a sharp decline in prices yesterday after a U.S. inventories report highlighted a sudden surge in energy supplies. While these reports may carry mixed messages about demand, supply, and growth expectations, the message yesterday was quite clear: demand is plummeting. Many analysts were expecting a draw-back in prices after last week’s surge, but the inventory report only demonstrated how unwanted this commodity has become, which only put additional weight on the downward pressure this commodity was already expecting.

USD – Dollar Extends Profits against the Majors

The Dollar continues to strengthen against all the major currencies. During yesterday’s session the greenback was traded near a two-week high versus the EUR. The Dollar also marked a significant uptrend against the Pound and Yen.

It seems that the main reason for the USD’s appreciation yesterday came as a result of the positive Core Durable Goods Orders monthly report, as well as a statement by China that it will maintain a more loose monetary policy. Whilst the Durable Goods figures reported a drop of 2.5% in June, mainly as a result of the weak demand for new civilian aircraft and defense equipment, it seems that investors were more impressed by the 1.1% rise in the Core Orders during June.

The difference between the two reports is that the Core report measures the change in the total value of new purchases orders placed with manufacturers for durable goods, excluding transportation items. Orders for aircraft are known to be very volatile, and thus have the potential to distort the underlying trend. This is why investors tend to attribute more importance to the Core report. The positive figure marked the third consecutive month in which this report delivered signs of positive growth, driving investors to believe that the global recession is reaching its end.

As for today, the main publication from the U.S economy looks to be the weekly Unemployment Claims report at 12:30 GMT. Currently, while all the major indicators of the U.S economy are showing signs of improvement, it is only the job sector which continues to deliver negative figures. Analysts forecast that 578K individuals have filed for unemployment insurance for the first time during the past week. If the actual result will be similar, this could be the harshest unemployment figures in the last month. Such a result may help drive the demand for the safety of the USD and drive its recent bullishness even higher.

EUR – German CPI Marks First Annual Decline in 22 Years

The EUR dropped yesterday against most of the major currencies. The EUR is currently traded near a two weeks low against the Dollar, as the pair fell to the 1.40 level. The EUR also saw a sharp drop against the Pound during yesterday’s session.

The EUR’s slide came as a result of the unexpected negative German Preliminary Consumer Price Index (CPI) report. This indicator measures the change in the price of goods and services purchased by consumers in Germany. Considering the fact the Germany currently holds the strongest and relatively healthiest economy in the Euro-Zone, the inflation indicators from this nation have a large impact on the EUR. The indicator showed a drop of 0.1% in July.

More severely, this report has marked the first annual decline in consumer prices in Germany in more than 22 years! It appears to be the drop in energy and food costs, which took place as a result of the global recession, which created the poor annual decline in German CPI. It now seems quite certain that for any negative indicators from the German economy such as this one have the potential to weaken the EUR in the near future.

Looking ahead to today, another significant report is scheduled from the German economy. The German Unemployment Change, which measures the change in the number of unemployed people during the previous month, is expected at 07:55 GMT. Analysts have forecasted that unemployment in Germany increased by 44K in June. If the results are indeed close to this figure, the EUR might continue to depreciate against the major currencies.

JPY – Yen Slides on Poor Retail Sales Release

The Yen underwent a bearish session against most of the major currencies yesterday. The JPY dropped over 100 pips versus the Dollar, and over 200 pips against the Pound.

The Yen dropped yesterday on poor Retails Sales data. The report showed that the total value of sales at the retail level dropped by 3.0% in June, failing to reach expectations for a 2.5% drop. Furthermore, Japan’s retails sales fell for a 10th month in June, making the longest losing streak since 2003. It seems that even though the Japanese economy is showing signs of recovering, mainly due to the positive export figures, the Japanese citizens are reluctant to resume last year’s consumption levels, an indication that optimism may be lacking in Japan.

As for today, a batch of data is expected from the Japanese economy. Traders are advised to follow the Tokyo Core Consumer Price Index report. This report is a leading inflationary indicator for Japan, and thus tends to have a large impact on the JPY’s value. If current expectations for a 1.7% drop will be similar to the real result, the Yen might continue to weaken against the major currencies in late-trading today.

Crude Oil – Will Crude Oil Drop Below $60 a Barrel?

Crude Oil prices continued to slide yesterday. Yesterday morning, a barrel of oil was valued near $66, but the current price is trading for less than $63. The main reason for the sharp cut in crude oil prices yesterday was the Crude Oil Inventories report. The report shows an unexpected surge in U.S. energy stockpiles. While analysts expected a drop of 1.1M barrels, the actual result showed that stockpiles surged by 5.1M barrels!

Most analysts had anticipated a pull-back in prices since Oil was seemingly over-bought technically and fundamentally, but the high inventories report simply put added weight to this expected downward pressure. In addition, the USD continued to strengthen yesterday. Crude Oil is valued in Dollars, and as such, tends to fall under the weight of a strong Dollar.

Looking ahead to today, traders are advised to follow the Natural Gas Storage report, scheduled at 14:30 GMT. This is more energy data that has the potential to influence oil prices by showing a continued trend of high stockpiles, indicating low demand. Traders should also consider the Dollar’s movements in today’s trading, as it has a large effect on commodity values.

Article Source – Crude Oil Price Crashes after Unusually High Inventory Data

The next rate-setting meeting of the European Central Bank (”ECB”) is rapidly approaching (August 3), and analysts are stepping up to offer their opinions on the direction of EU monetary policy. At its last meeting, on July 2, the ECB voted to hold rates at the current record-low level of 1%, and all indications are that the August meeting will yield the same result.

Despite getting off to a late start, the ECB has since moved adroitly to strike a balance in its monetary policy between inflation and growth. For those that insist that its rates are still too high – especially compared to the US and UK – the ECB can counter by arguing that this way it still has some scope to lower rates, if need be. “If a deflationary spiral does become entrenched, unlike most of the other major global economies, at least the European Central Bank still has some of the interest rate tool left to fall back on,” agrees one analyst.

The ECB can also refer critics to its overnight lending rate, which are 75 basis points lower than its main policy rate. “Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate.” It is at this refinancing rate that it recently lent out a record €442 billion to banks and other financial institutions.

While the ECB “has had one eye on the exit since the start of the crisis,” it nonetheless appears to be in no hurry to hike rates – neither its overnight nor its refi rate. Jean-Claude Trichet himself has said, “The current rates are appropriate.” He even refused to rule out the possibility that rates could even fall further before policy is tightened.

According to a Bloomberg survey of economists, this won’t happen for at least a year – the fourth quarter of 2010 to be specific. After all, inflation has touched a record low of -.1%. The Eurozone economy contracted by a record 4.5% last quarter. Private sector lending growth has fallen to a record low of 1.8%. All in all, not exactly the right environment for a rate hike. There is at least one vocal inflation hawk on the governing board of the ECB who is arguing for preemptive rate hikes, but for now at least he has been silenced. “Economists at Barclays in London have forecast that Europe’s policy makers won’t begin raising rates until late 2011.”

The forex markets, meanwhile, appear to be indifferent to this whole debate, concerned not about Eurozone growth, inflation, low interest rates, not to mention political uncertainties and trade deficits. The Euro has resumed its upward rise against the Dollar, begun in March, and may not slow down until the Fed starts to tighten monetary policy.

The British Pound is likely to look past minutes from the July meeting of the Bank of England with traders unlikely to be treated to anything that has not already been priced into the exchange rate, leaving the currency to continue taking cues from risk sentiment. Germany’s IFO survey of business sentiment is also on tap.

Key Overnight Developments

• Australian Inflation Falls to the Lowest in a Decade
• Euro, British Pound Turn Lower in Asian Trading

Critical Levels

The Euro traded lower in the overnight session, losing as much as -0.4% against the US Dollar. The British Pound followed suit, testing as low as 1.6391 against the greenback.

Asia Session Highlights

Australia’s Consumer Price Index printed in line with expectations with the annual pace of inflation falling to 1.5% in the second quarter, the lowest in a decade. Continued downward pressure on consumer prices looks likely as tumbling wholesale costs filter into the final price of products. Australian Treasurer Wayne Swan said “inflation is expected to remain subdued over the near term as the effects of the global recession continue to impact on the domestic economy.” This bolsters the case for additional rate cuts from the Reserve Bank of Australia in the months ahead. Indeed, RBA Governor Glenn Stevens said as much even as the bank kept rates unchanged in July, noting that “the outlook for inflation allows some scope for further easing of monetary policy.”

Euro Session: What to Expect

Germany’s IFO Survey of business sentiment is expected to rise for the seventh consecutive month in July, pointing to continued improvement in firms’ 6-month economic outlook. Still, the reading is expected at 90.1, a print below the 100 “boom-bust” threshold, suggesting conditions are still deteriorating albeit at a slower pace. Some recovery is to be expected as the government’s 82 billion euro fiscal boost filters into the broad economy, but the big question in Germany as well as most anywhere at this stage is whether growth is sustainable after stimulus cash dries up. As it stands, the latest economic forecast from the International Monetary Fund (IMF) reveals that the Euro Zone will stand apart from other industrialized economies in seeing economic growth continue to contract in 2010, pointing to a comparatively slower return to higher interest rates that will keep the Euro on the defensive against most major currencies.

Minutes from the July meeting of the Bank of England are unlikely to prove particularly market-moving this time around, with traders unlikely to be treated to anything that has not already been priced into the exchange rate. The bank made no changes to benchmark interest rates or the quantitative easing program, saying they will “review the scale” of their unconventional easing measures in August as they release their quarterly inflation report. From here, next week’s GDP report is likely to be the key to the market’s expectations on the future direction of monetary policy. Initial cues are favorable: London-based think tank NIESR has reported the economy probably shrank just -0.4% in the second quarter, the slowest pace of decline in a year. Still, the British Chamber of Commerce has urged policymakers to expand their asset-buying scheme by 25 billion pounds, saying a recovery is “not guaranteed”, a sentiment that has been echoed by the Shadow Monetary Policy Committee (a group of independent economists that meet at the London-based Institute of Economic Affairs). On balance, British Pound price action is likely to continue taking its cues from risk appetite, with the sterling’s trade-weighted average value now 87.8% correlated with the MSCI World Stock Index.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound to Look Past Bank of England Minutes, Trade on Risk Sentiment (Euro Open)

In the last three months alone, the Brazilian Real has risen by an impressive 15% against the Dollar alone. What’s driving this impressive importance? The lead paragraph for one article offered the following encapsulation: “Brazil’s real climbed to the highest in more than nine months as stronger-than-estimated corporate earnings, rising equities and higher metal prices bolstered the outlook for Latin America’s largest economy.”

These factors certainly represent a good starting point for any analysis of the Real. As signs continue to emerge that the global economy – and China specifically – have turned a corner in their fight to overcome recession, commodities will likely continue to rally, which is excellent news for Brazil bulls. In addition, “May industrial production and especially retail sales came in stronger than expected, following incipient signs of improvement in labor and credit conditions, consumer and investor confidence, and inventory levels.” As a result, after a modest contraction in 2009 (the bulk of which took place in the first quarter), 2010 is expected to mark a return to solid growth, with estimates ranging from 3.5% to 4.5%, rising to 5% in 2011.

The Central Bank of Brazil, however, is not necessarily on the same page. Last week, it cut rates to a record low of 8.75%, in order to ensure that Brazilian monetary policy remains easy enough to support growth. While this is an unwelcome development for carry traders, there are a few mitigating circumstances. First, considering that Brazilian inflation is projected to average 4.5% in 2009, this still affords investors a solid 4% real return, without factoring in currency fluctuations. Second, Brazilian rates are still significantly higher than levels in industrialized countries, such that the interest rate differential which makes Brazil attractive has been carefully preserved. Finally, while precise forecasts vary, the Central Bank is expected to begin hiking rates as soon as the end of this year, with further hikes throughout 2010.

The Central Bank has also been busy on other fronts. Thanks to a healthy trade surplus, its foreign exchange reserves are burgeoning, recently touching a record $209 Billion. This figure well exceeds Brazil’s outstanding debt, which gives it great flexibility in determining how to allocate these reserves. Already, the Central Bank has begun to pare down its holdings of US Treasury securities, in search of higher-yielding alternatives. In addition, the Central Bank has taken to intervening regularly in the forex spot market, in a vain effort to stem the rise of the Real.

In the short term, analysts are now lining up around various technical levels, backed by little real fundamental analysis. “Moreover, without fundamental economic news showing better times ahead for the U.S. economy, principally, then the BRL1.90 support will remain cemented in place,” offered one analyst. “You show me some more good news and the support will be closer to 1.85,” argued another. It looks like traders are just looking for excuses to keep bidding up the Real.

The British Pound may see selling pressure in European hours as the UK Public Finances report shows the government’s monthly cash shortfall rose again in June, boosting fears that mounting fiscal debt may lead to a reduction in the UK’s sovereign credit rating. Switzerland’s Trade Balance figures are also on tap.

Key Overnight Developments

• Bank of Japan Says Global Economic Growth Faces Downside Risks
• Australia to Recover from Recession Later This Year, Says RBA
• Euro, British Pound Pare Gains Against US Dollar in Asian Trading

Critical Levels

The Euro saw a bit of selling pressure in overnight trading, testing as low as 1.4190 to the US Dollar. The British Pound also retreated, slipping -0.3% against the greenback.

Asia Session Highlights

Minutes from June’s Bank of Japan policy meeting said conditions in the global economy have “begun to stop worsening” and credit markets are “starting to regain stability”. Turning to Japan itself, the bank echoed familiar sentiments, saying that exports will continue to recover “mainly due to progress in adjustments in overseas inventories” while private consumption remains relatively weak “as the employment and income situation [is] likely to become increasingly severe”. On inflation, the BOJ said that the pace of consumer price growth is likely to turn negative, reflecting the declines in the prices of petroleum products, stabilization of food prices, and overall economic weakness. On balance, policymakers concluded that uncertainty surrounding the outlook for the global economy [remained] high” and warned that “risks to the outlook were still tilted to the downside” despite some early signs of improvement.

Meanwhile, the Reserve Bank of Australia released minutes from their July policy meeting. Policymakers struck a positive tone, saying the Australian economy has proved “more resilient than expected” as fiscal and monetary measures have been effective in stoking demand. The bank added that the full effect of lower interest rates is yet to be felt, with downside risks diminishing and the economy to recover later this year. Still, Glenn Stevens and company cautioned that the Australian labor market is likely to “remain soft for some time” and reiterated that they have “scope” to cut interest rates even though current policy is “consistent with fostering growth”. Perhaps most interestingly, the RBA said that exports have been “remarkably strong” on demand from China, a far different story than what is being seen in the latest Trade Balance figures.

Separately, New Motor Vehicle Sales rose for the third consecutive month in June, adding 5.7% following a 5.4% increase in the previous month. In annual terms, sales fell -7.2%, the smallest decline in nearly a year. The improvements are likely linked to the government’s aggressive stimulus efforts, including over A$12 billion in cash handouts to households. The big question going forward is if current momentum can be maintained as the flow of stimulus cash dries up. The RBA’s optimistic posture notwithstanding, the labor market continues to suffer, erecting barriers to a meaningful rebound in demand.

Euro Session: What to Expect

Switzerland’s Trade Balance surplus may continue to contract in June as the country’s top trading partners in the US and the European Union continue to struggle with recession, weighing on export sales. That said, the possibility of a move higher in the headline figure does exist: the UBS Consumption Indicator that forecasts the trend in private spending in the coming 3-4 months fell to the lowest level in over 5 years in May, hinting at lackluster domestic demand that could weigh on sales of foreign-made goods and trim import volumes. Recent trends in the Swiss Franc are supportive of such an outcome: the currency has declined 2.4% in trade-weighted terms since the beginning of the year, a trend that makes Swiss goods comparatively cheaper for overseas buyers while cutting into domestic consumer’s purchasing power of imported products.

Turning to the UK, June’s Public Finances report is set to show that the government’s monthly cash shortfall rose to 20.2 billion pounds from 18.8 billion in the previous month. The gap swelled for the first time in three years in 2008, rising 22.7%. Continued shortages will add to fears that mounting public debt may lead to a reduction in the UK’s sovereign credit rating. Indeed, a survey of economists conducted by Bloomberg expects the overall budget deficit to average 12.4% of GDP through 2010, amounting to the worst fiscal position of any G10 nation.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound Vulnerable as UK Cash Shortage Rises, Threatening Credit Rating (Euro Open)