FOREX TRADING

U.S. Review

Slow Growth, but Growth Nonetheless

• Economic data released this week came in slightly below expectations, but remain consistent with our forecast of slow economic growth with a low probability of a double-dip recession. Second-quarter real GDP figures, however, may be revised lower based on international trade and wholesale inventory data.
• Consumer prices in July showed inflation remains benign. Contained inflation is good news for two key reasons: It increases consumers’ purchasing power and gives the Fed flexibility to keep short-term interest rates low.

Slow Growth, with Low Probability of a Double Dip

Economic data released this week came in slightly below expectations, but remain consistent with our forecast of slow economic growth with a low probability of a double-dip recession. Second-quarter real GDP figures, however, may be revised lower based on international trade and wholesale inventory data. (more…)

Today’s FOMC statement reflected a cautious view on the economy with an emphasis on modest gains in household and investment spending. “Subdued” inflation remains. Dissent continues.

Economic Outlook: Downgraded Again

Economic activity “has slowed” according to the FOMC statement. We agree. Household spending is increasing gradually but remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.” Real positive momentum in the economy is reflected in business spending on equipment and software. Nonresidential construction spending continues to be weak and housing starts “remain at a depressed level.” We agree. (more…)

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…)

The risk trade lives and breathes. The United States July employment situation report from the Bureau of labor Statistics was uniformly disappointing in detail and worrying in implication. But currency traders piled into the euro, the yen and the sterling and generally opted to see the anti-dollar comparison rather than the threat that a serious slowdown United States poses for the world economy. The euro rose to more than 150 points to 1.3332, the yen 82 points to 85.11 and the pound 130 point to 1.5996, within 90 minutes of the NFP release. (more…)

Market Outlook

Tactical view:

• Risk of snap back in GBP/USD and USD/JPY
• Long AUD positions outpace CAD

Dollar weakness continues to characterise G10 fx markets as doubts over the US economy multiply and all-time lows for US yields boost the attractiveness of carry. With the Fed running out of policy options and evidence of macro economic decoupling in the G10 prevailing, we look for the AUD to remain a desirable G10 destination. A test of 85.0 in USD/JPY now looks probable. Though next week will be dominated by the FOMC, all eyes in the UK will be on the latest BoE Inflation Report (QIR) on Wednesday. The QIR has proved a hurdle for GBP in the past and could again prove the proverbial ‘bridge too far’ that forces GBP/USD bulls to rein in their exuberance. Special notes on GBP/USD and AUD/ ZAR are included in this week’s publication.

Recap

GBP/USD closed up 1.7% at 1.5962 and just fell short of 1.60. GBP lost 0.04% vs the EUR as EUR/USD (+1.7%) kept track of GBP/USD. GBP/CAD burst through the 1.64 level (1.65 target) after a shock 139,000 drop in Canadian employment in July. The MPC left Bank Rate on hold at 0.50% and the APF at £200bln, but suspense is set to stay elevated over the next two weeks and leaves GBP vulnerable to possible profit taking after a stellar run. Elsewhere, we note the gains for the JPY and the fall in USD/JPY blow 0.8550. A test of the Nov-09 low now looms, prompting possible intervention to weaken the yen. (more…)

HIGHLIGHTS OF THE WEEK

• The U.S. economy scrapped 131K non-farm jobs in July.
• If it continues to create jobs at the speed it has showed since the labor market bottomed in December 2009, it would take roughly seven years to fully absorb the 8.4 million jobs lost to the recession.
• A research paper written by Federal Reserve FOMC member James Bullard reignited the debate on the prospects of further Quantitative Easing.
• Following six months of strong gains, Canadian employment fell by 9,300 in July, and the unemployment rate inched up to 8.0%, from 7.9% in the prior month. The majority of the jobs lost were in full-time positions (-139,000) where almost half the decline was in education services.
• Canadian Building permits rose to 212,000 units in June, up from 208,500 units in May. Despite the slight uptick, building permits are below levels seen at the end of 2009, indicating a continued drop in construction activity.
• This week we got a preview into July’s existing home sales for major Canadian markets – where sales fell well below the record levels from a year ago.

(more…)

Highlights

• Interest rate spreads may have stopped undermining the USD
• All eyes on the Fed next week
• Sterling faces headwinds but could still win back ground
• ECB policy supports EUR near-term, but medium term outlook less certain
• Important price levels to watch
• Key data and events to watch next week

Interest rate spreads may have stopped undermining the USD

The greenback lost further ground this past week as data continued to portray a stalling US recovery and speculation mounted that the Fed would announce additional easing on Tuesday. In addition to weak data, one of the main drivers of USD weakness since the beginning of June has been a widening in interest rate spreads against the USD relative to other major currencies, especially in EUR/USD. EUR rates increased as markets priced-in the withdrawal of ECB long-term lending facilities and convulsed through the European sovereign debt crisis. US short-term rates also moved modestly lower as incoming data painted a weak outlook. Those spreads have stopped widening (from about -2 bps at the end of May to a peak at -50 bps at the end of July; last at -44.5 bps) and there is reason to believe they may begin to narrow in the weeks ahead, potentially signaling a medium-term top for EURUSD. With the worst of the Euro-zone sovereign debt concerns likely past, there is room for EUR rates to drop back, narrowing its advantage over the USD. At the moment, we have no evidence of EUR rates moving lower (US rates have moved up), but we will be watching this relationship closely in the weeks ahead. For the moment, the inertia is still against the USD and until we see more concrete shifts in rates, the buck remains a sell on bounces. (more…)

U.S. Review

Home Is Where the Economy’s Heart Is

• Housing starts and existing home sales declined in June, reflecting the winding down of homebuyer tax credits.
• Building confidence fell to 14 in July, and June’s numbers were revised down slightly.
• The effect from the unwinding of various economic stimulus programs is evident in other data, with the leading indicators declining 0.2 percent and weekly firsttime unemployment claims bouncing back to 464,000.
• Bernanke’s midyear report to Congress outlined possible future steps the Fed may take to boost economic growth.

We Have Got to Get in Shape

If the state of the nation’s housing market is at the center of the economy’s near-term prospects, then we have got to get in shape. Nearly all of the major housing indicators reported this past week showed more weakness than was widely expected, suggesting that the payback from the homebuyer tax credit program will be a bit deeper and longer lasting than many had hoped. One of the most disconcerting pieces of news was housing starts, which fell 5 percent in June, following a downwardly revised 14.9 percent drop in May. A slight 2.1 percent rise in building permits initially took some of the sting out of the headline number, but all of that gain was in the volatile multi-family unit series. Permits for new single-family homes fell 3.4 percent, following 10.3 percent drops in both May and April

Single-family permits are now running at just a 421,000-unit pace, well below the recent trend in starts. When you couple this with July’s decline in the Wells Fargo/NAHB homebuilders’ index, there is no reason to expect housing starts to increase in July, and we may not see a gain in August either. With demand flat and credit for homebuilders still extremely tight, there is no incentive for builders to get out ahead of demand.

Existing home sales actually fell less that expected, but the trend remains unfavorable. Existing home sales have been harder to read because of the extension of the closing deadline for homebuyer tax credits from June 30 to September 30. The net effect of the deadline extension will be to moderate the slide in existing home sales over the new few months. (more…)

The Bank of Canada, as expected, hiked rates by a quarter point to 0.75% in today’s meeting. The accompanying release, while saying economic activity in Canada was unfolding largely as expected, did cut its forecasts for growth in 2010 and 2011. Growth in 2010 is now forecast at 3.5% from 3.7%, while the forecast for 2011 was revised to 2.9% from 3.1%. “This revision reflects a slightly weaker profile for global economic growth and more modest consumption growth in Canada.”

From the Release: “Reflecting all of these factors, the Bank has decided to raise the target for the overnight rate to 3/4 per cent. This decision leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery. (more…)

BoE policy makers opted to leave both interest rate and APF quantity unchanged at 0.50% and 200 billion pounds, in line with forecasts, to boost recovery that started to gain momentum amid the austerity measures adopted by the government to tame the skyrocketing budget deficit.

Today’s rate decision was also undertaken by only eight members as the new member Martin Weale will join the committee in August’s rate decision.

The British economy has been showing improvement recently but there are fears that growth may wane amid the planned sharpest spending-cut plan in decades. Thus, eyes are on economic fundamentals to assess the performance of the economy and its major sectors. (more…)

In the absence of fundamentals from the euro zone and U.K. and ahead of the release ISM non-manufacturing in the United States, Investors will be focusing on the rate decision on Thursday where the ECB and BoE are expected to leave the cost of borrowing unchanged at 1.00% and 0.50% respectively to boost growth amid the announced austerity measures.

President of the ECB Jean-Claude Trichet urged European economies on Monday to reduce spending to trim their budget deficits as this would enhance growth prospects, confirming that deficit cuts by governments will not affect growth.

Trichet’s announcement moves in line with the G-20 plans which involve cutting deficits to half by 2013. However, U.S. President is giving more attention to boosting growth to support recovery. (more…)

This week, the greenback started with a bang. However after the FOMC announcement, which puts a lid on interest hike prospects, dimmed the USD gains. By Friday, the USD has lost most of the gains from earlier in the week. The yen held its gains better. Commodity currencies such as CAD and AUD also started the week strong, but reversed these gains into losses by Friday. Let’s take a look.

EUR/USD Unconfirmed Bearish Engulfing

Daily and 1H: The daily chart shows this week’s move dominated by the first day, which created an engulfing pattern. However, the rest of the week has laboriously pared some of the initial loses in the EUR/USD.

The projection to 1.17 is still valid, with two negative reversals with the RSI in the Daily chart suggesting this target. (This is when the RSI makes a higher high from bottoming, but price action does not).

Basically there was no bearish confirmation after the signal offered at the start of the week

Looking at the 1H chart, we see the latest twist and turns develop a downswing and then a gartley retracement pattern yesterday. This suggests a swing towards 1.2150 sometime in the beginning of the next week.

We can see in the daily, that the 1.2150 area is an importan powerline, and may be tested as support when the decline reaches it.

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U.S. Review

Despite Disappointing Data, the Recovery Is Still On

• Both existing and new home sales posted disappointing figures this week. Declines in sales for both were likely due potentially to the expiring homebuyers’ tax credit.
• The third revision of first quarter GDP was also released this week with growth revised lower than the consensus had expected to a 2.7 percent annual pace. Final sales, which is a good gauge of underlying demand, was also revised lower to a 0.8 percent annual pace. While growth is slower than initially expected, it is growth, nonetheless.

Did Homebuyer Tax Incentives Build A House of Cards?

Housing market data released during the week were largely disappointing as figures were likely distorted due to the expiring homebuyers’ tax credit. Existing home sales posted a surprising 2.2 percent decline in May while consensus estimates were looking for a gain of 6.1 percent. Economic forecasts took into consideration increases in pending home sales and mortgage applications, which indicated a boost in sales well in excess of a 6.0 million unit pace. According to the National Association of Realtors, roughly 180,000 homebuyers who signed contracts will likely not be able to close by the end of June due to delays in mortgage processing. If this is indeed the case, home sales in June will likely be elevated.

New home sales also fell in May, but while the retracement was expected, the 32.7 percent drop to a 300,000 unit pace, its lowest level on record, was unexpected. The sharp decline is likely due to homebuyers rushing to meet the April 30 contract signing deadline for the tax credit. The seasonal adjustment process also likely exaggerated the extent of the slowdown. (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…)

HIGHLIGHTS OF THE WEEK

• In the U.S., consumer prices fell again in May, driving annual inflation 0.2 percentage points down to 2.0%. Core inflation was flat at 0.9%.
• U.S. industrial production surprised on the upside with a 1.2% monthly gain in May. The rate of capacity utilization rose in tandem to 74.7%, landing half-way up its peak-to-trough gap.
• U.S. housing starts fell by a sharp 10% M/M. A contraction in homebuilding was anticipated, but the magnitude was much larger than expected and it highlights the strong headwinds faced by this sector.
• In a speech this week, Bank of Canada (BoC) Governor Mark Carney struck a cautious tone, noting that “no particular path for monetary policy is preordained”. In light of the multitude of risks still clouding the horizon, the BoC remains understandably vague. While it increased the overnight rate to 0.50% on June 1st, and should continue with gradual increases in the months ahead, it is giving itself room to pause the hiking cycle if the recovery wobbles.
• Existing home sales dropped by 9.5% M/M in May. The sales-to-new listings ratio eased from 0.52 to 0.49. In line with this easing in market balance, the seasonally-adjusted average price slipped by 1.0% M/M with Y/Y growth cooling from 12.2% to 8.5%.
• Manufacturing sales and wholesale trade data for April are consistent with a monthly real GDP expansion of 0.3% M/M.

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