FOREX TRADING

December 15-16 FOMC Minutes Highlight Risks that Securitization Markets are “Still Substantially Impaired”

The minutes of the December 15/16 meeting suggested that most members saw recent economic data as consistent “moderate growth and subdued inflation in 2010.” As a result, the Fed saw little reason to change either the target range for Fed funds of 0 to ¼ percent or the large-scale asset purchase programs. This outlook also provided no reason to alter the central bank’s assessment that these exceptionally low interest rates would continue to be warranted “for an extended period.”

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Improvement Continues In The Euro Zone Ahead Of The Rate Decision

Following the release of buoyant manufacturing data released this week showing that PMI manufacturing for November final reading rose for the second month to 51.2 from 50.7 in October; today euro zone released its PMI services final reading for November coming in at 53.0 compared with October’s reading of 52.6. As a consequence, PMI composite climbed to 53.7 from 53.0 recorded a month earlier.

The reading was lifted by PMI in Germany and France, where it soared to 51.4 from 50.7 in Germany, while it inclined to 60.9 from 57.7 in France. In other European countries, PMI services in the U.K. slid to 56.6 from 56.9, but still close to the highest in 2 years.

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ECB To Hold Rates Steady, Outline An Exit Strategy

The European Central Bank (ECB) will hold a policy meeting on Thursday December 3rd. The ECB is expected to maintain steady interest rate policy and outline an exit strategy from extraordinary liquidity measures. Last week, ECB President Trichet said that the ECB would cautiously begin to exit strategies that helped provide liquidity during the global financial crisis that could pose inflation threats in the future. Trichet warned EU banks not to get addicted to cheap credit provided by the ECB and he indicated that liquidity measures will be phased out in a timely and gradual fashion to counter any threat to price stability over the medium and long-term. Trichet indicated that the ECB will tighten collateral criteria for the March auction. The tightening of collateral criteria is seen as the first step in an exit strategy by the ECB.

Note in Trichet’s statement above his focus on the impact of extraordinary liquidity measures on price stability. Monday, the EU reported that CPI rose for the first time in seven months. The rise in EU inflation may influence Thursday’s ECB policy decision. The rise in the EU CPI could encourage ECB officials to move the timeframe of an exit strategy forward as inflation pressures may be starting to build. The trade will be closely monitoring what Trichet say about the ECB’s 12 month auctions in the press conference following the ECB policy announcement. The ECB will likely confirm that the 12 month auctions will be allowed to lapse and that liquidity operations may be for shorter term loans. This would signal the start of the ECB’s exit strategy.

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USD Rebounds on Profit Taking in Holiday Thinned Trade

• USD: Mixed, Fed’s Fisher and Lacker said that interest rates will remain low because of weak US economy
• JPY: Lower, core machinery orders rise more than expected, bond redemptions limit downside
• EUR: Lower, tracking equity markets and US yield outlook, pressured by a wave of profit taking
• GBP: Lower, BOE Governor King says weak GDP will help exports, open to expanding asset purchases
• CAD and AUD: AUD lower & CAD higher, tracking stocks & commodities, Chinese data mixed

Overview

USD traded at a 15 month low Wednesday pressured by a statement from Fed officials which indicates the Fed plans to continue to maintain low interest rates for some time to come. The Feds Fisher said that that the weak US economy calls for lower rates and he sees the prospect for a weak US recovery. Fisher went on to say that he’s aware that Fed policies are pressuring the USD but that the USD decline has not been disorderly and inflation remains subdued.

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Fed Recovery Tone Upsets Dollar Bulls

Overall, the currency market traded under the influence of the Fed’s interest rate decision on Wednesday. The dollar index saw sell orders most of the day, as traders anticipated a continued bearish statement from the Fed, as they concede that interest rates will remain low for a prolonged period. This is a sign that the spread between the interest rate of the U.S. dollar and the other major pairs could start to widen, thus fueling the carry trade scenario that has the dollar on the short side of the spread bet. Ahead, the market might follow a similar pattern, as investors prepare for the BoE and ECB interest rate meetings.

Dollar Index Technical View:

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Preview of Thursday’s BOE & ECB meetings

The Bank of England (BOE) will hold a policy meeting on Thursday November 5th. At the October policy meeting the BOE elected to maintain the current level of interest rates at a record low 0.5% and asset purchases at £175bln. The BOE indicated that they would keep the scale of the asset purchase plan under review. Two recent UK economic reports generated concern about the outlook for the UK economy and may encourage the BOE to expand its asset purchase plan at the November policy meeting. UK Q3 GDP posted an unexpected 0.4% decline.

The trade had expected a rise of 0.2% for Q3 GDP. The decline in GDP suggests that the BOE asset purchase plan has yet to boost the UK economy out of recession. UK manufacturing output fell by 1.8% in August. The decline in manufacturing output adds additional doubt about the UK economic recovery. The BOE must also take in consideration today’s report of continued UK bank troubles. The UK government announced Tuesday that it will take a bigger stake in RBS and Lloyds Bank. It is not clear if he BOE will hold its asset purchase plan unchanged or elect to expand the purchase plan by £25bln or £50bln at Thursday’s policy meeting. Today’s Wall Street Journal reports that a majority of economists expect the BOE to hold policy steady and expand its asset purchase plan by £25bln. Based on the UK Q3 GDP report it may be difficult for the BOE to refrain from adding additional stimulus. Recent GBP price action has found that the GBP benefits from BOE decision to hold the level of asset purchases and weakens when the BOE elects to expand quantitative ease. Monday, the BOE’s Blanchflower said that the BOE may expand its asset purchase program by another £50bln. The Sunday Times however carried a piece warning the BOE not to panic over the Q3 GDP report. GDP is seen as a lagging indicator.

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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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The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

• Australia becomes the first G-20 nation to hike interest rates, whereas the ECB left its rates unchanged and reiterated its intent to keep them low.
• On balance, Fed officials continued to stress this week that the current environment doesn’t call for tighter monetary policy.
• U.S. ISM non-manufacturing index rises above the 50-threshold in September for the first time in a year, but only 5 of the 18 sectors surveyed recorded growth.
• U.S. trade deficit unexpectedly narrows in August, but largely on the back of falling imports.
• In the clearest sign yet that job conditions are stabilizing, Canada’s job market pumped out 31,000 net new positions in September.
• While the job recovery remains in the early stages and vulnerable to setbacks, Canada’s relatively healthy domestic economy suggests that a early-1990s style “jobless recovery” is not in store.
• Canadian trade figures for August highlight the bumpy ride facing Canada’s export sector as it confronts a loonie hovering close to parity.
• A speech by BOC Deputy Governor Jenkins reiterated the downside risks to sustained recovery from the ultra-high loonie, but also indicated that the Bank is watching housing price movements closely.

UNITED STATES – NOT THERE YET…

Early this week, a surprise interest rate hike by the central bank in Australia sent a wave of optimism around the world. Stock markets were soaring, commodity prices were surging, and just about every major currency gained against the U.S. dollar. Australia is the first among the G20 nations to hike rates since the onset of the recession, and  forex markets took this as a sign that the global economic recovery is gaining traction.

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Dollar Regains Some Ground Ahead Of Earnings Next Week

News and Events:

The USD has clawed back some ground today; DXY is strongly off its 75.77 lows (last at 76.25), a development attributed to Bernanke comments that the Fed would be ready to tighten rates once the economy improves. But in our minds the reaction is a little bizarre considering the remarks were identical to those published in a WSJ article dated 21 July this year: ‘I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.’. Nevertheless, the market chose to re-interpret the remarks as hawkish, causing EURUSD to retreat to 1.4700 support and gold to withdraw from the frontier to intraday support at $1046. The USD weakness trade has paid off fantastically in the past week, and we would not be surprised if a little profit-taking were to come ahead of next week’s spate of major earnings releases. Most of the heavy-weight financials will start reporting from Wednesday through to the start of the following week; the results of which will be pivotal to confidence in the financial system and economic sentiment going forward. The Q3 releases thus far have all been impressing to the upside, including aluminium giant Alcoa. If these early indicators are anything to go by, the USD could be in for further tough times ahead. ECB’s Trichet was steadfast yesterday in avoiding direct comment on levels of EURUSD, and with the weakest in the pack, GBP, getting a reprieve until the BoE’s November meeting, the feeling is that investors have the green light to continue current trends. The main data releases of the morning have been Norwegian CPI and UK PPI. The headline Norwegian print of 0.8% MoM in Sep vs. expectations of 0.5% has once again underlined the likelihood of a Norges Bank hike in the upcoming 28 October meeting, EURNOK dipped to a low of 8.2940, and it seems any rallies to get into this trade will be hard to come by with continually better than expected data releases. Meanwhile UK PPI figures were higher than consensus forecasts, but this was largely anticipated and GBPUSD has continued to grind lower as the USD continues its resurgence (last 1.5970). This afternoon the main item on the agenda will be Canadian Unemployment, which is expected to rise to 8.8% in Sep from 8.7% prior. USDCAD has spent the last few days toying with downside levels around 1.0530, but officials has expressed their concern that the labour market remains soft, so watch for surprises either way on this one. (more…)

Markets Stalls, But Yen Moves

Overall, the forex market continued to trade with very thin momentum during the U.S. session. The only exception was the yen, but the rest of the market traded far below the ATR of the last few weeks. This comes, as investors prepare for the Bank of England and for the European Central Bank to announce the latest monetary policy developments tomorrow, during the late European/early U.S. session.

Dollar Index Technical View:

Daily chart trend: Long possibilities. Main price points: 75.83. Looking for: Wave V low

Prices on the dollar index chart were recently testing the upper resistance line of a trading channel, where a possible long break-out will confirm that wave V of a black C is done. However, this is not the case yet, and as such move into much deeper levels is still possible over the coming days, especially once the current 75.83 low is taken out. In this case, we will be looking for a new wave V target somewhere around 74.00 support zone.

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USD Rallies as Existing Home Sales Fall and Stocks Drop

• USD: Higher, jobless claims decline sparks risk demand, existing home sales drop sparks risk aversion
• JPY: Higher, supported by repatriation flows and Yuan revaluation speculation, exports fall 36% y/y
• EUR: Lower, German IFO business sentiment rises at a slower pace, Fed not prepared to withdraw stimulus
• GBP: Lower, BOE’s King says weak GBP will help rebalance UK economy
• CAD and AUD: AUD & CAD lower, Australian home sales rise, BOC concern about CAD strength

Overview

USD and GBP opened lower Thursday. USD was pressured by the FOMC policy statement which says that the Fed will keep interest rates low for an extended period. The Fed sees the US economy improving but not enough to withdraw stimulus. GBP was pressured by dovish comments from the BOE Governor King that a weak GBP will help to rebalance the UK economy and that weaker GBP was helping to cushion UK economic downturn. USD downside was limited by report of an unexpected decline in US August existing home sales. JPY traded higher supported by repatriation flows in front of Japan’s fiscal half-year end on September 30th and a report that G-20 officials may increase pressure on China to revalue the Yuan to help reduce global trade imbalances. EUR opened higher and rallied to a five month high versus the GBP.EUR gains were limited by report of below expectation German IFO business confidence and a statement from an IFO official that it’s not clear if the EU recovery is self sustainable. EUR/CHF cross traded at a three-month low. The weakness in the EUR/CHF increases the risk of SNB intervention. Commodity currencies were mixed rallying in early trade despite weaker crude prices with AUD supported by report of strong Australian home sales. CAD gains were limited by a statement from the BOC warning that strong CAD puts the Canadian recovery at risk. AUD turned lower tracking weaker US equities. US economic data was mixed with jobless claims falling to their lowest level since the week ending July 11th and existing home sales posting an unexpected decline in August. USD turned higher for the day after the release of the unexpected fall in August existing home sales. Stocks dropped in reaction to the home sales report. USD was also supported by report that the Fed may reduce the TSLF facility. Focus turns to the G-20 meeting. The G-20 meeting will be held on September 24th and 25th.The G-20 meeting may spark selling of the USD if the G-20 suggests that exchange rates will need to be adjusted to help correct global trade imbalances. (more…)

The Forex Road To Nowhere

Overall, the entire day of trading could have very well started just minutes before and after the FOMC reports. Other than this, the market traded with very thin momentum, unable to develop or sustain a trend. Even the pips gained during the FOMC interest rate decision were quickly retraced, and now most pairs are trading below Wednesday’s opening price and below the area where they were ahead of the FOMC.

Interestingly enough, the dollar index and crude oil diverged today for the first time over the last few weeks of trading. During the early U.S. session, a report showed that crude inventories surged, something that sent it lower by $3. Still, the dollar index failed to follow this move, but now it seems that the currency market is catching up. (more…)

EUR Trades at a New One Year High Versus USD

• USD: Lower, Asian Development Bank says China and developing Asia to expand faster than expected
• JPY: Higher, pressured by central bank diversification and broad USD weakness
• EUR: Higher, ECB’s Weber says interest rates are appropriate and FX not out of line with EU data
• GBP: Higher, PM Brown says continued stimulus needed, drops to five month low versus EUR
• CAD and AUD: AUD & CAD higher, New Zealand’s current account improves, Can. retail sales decline

Overview

USD traded sharply lower Tuesday in reaction to report that the Asian Development Bank (ADB) raised China’s and developing Asia’s growth forecast. ADB expects China’s 2009 GDP to grow by 8.2% and by 8.9% in 2010 and raised developing Asia’s growth forecast to 6.4% from 6%. The USD selloff is also attributed to speculation that the FOMC will confirm that it will maintain ultra easy monetary policy well into 2010 and that the G-20 will call for a reduction in global trade imbalances that may require further USD weakness. Reuters reports that 24 years ago today major nations called for deprecation of the USD to help rebalance the global economy. President Obama is expected to call on the G-20 to help the US reduce its trade and budget deficits. The FOMC will conclude a two-day policy meeting Wednesday and are widely expected to hold policy steady and maintain the current level of quantitative ease. The FOMC is expected to turn upbeat about the US economy but hold off on tightening of monetary policy for some time to come. The G-20 meets on September 24th and 25th and are expected to focus on new global financial market regulation and global trade imbalances. According to UK PM Brown the G-20 will likely endorse maintaining fiscal and monetary stimulus and avoid an early withdrawal of stimulus. The ADB warned that withdrawing stimulus too early could lead to a double dip recession. Equities, crude and gold prices surged reflecting improving risk sentiment and speculation that G-20 nations will not withdraw stimulus anytime soon. The New Zealand dollar traded at a 13 month high versus the USD and led the assault against the USD supported by report of the sharp improvement in New Zealand’s current account deficit. New Zealand’s GDP debt ratio fell to 5.9%, the trade had expected a reading of -7.2%. The New Zealand dollar was also supported by report that dairy giant Fonterra raised its pay out to farmers by 12%. EUR traded at a one-year high versus the USD supported by improving risk sentiment and a statement from the ECB Weber that interest rates are appropriate and FX is not out of line with stronger EU data. CHF was supported by report of improving Swiss trade balance with exports reported up 2% in July and an upgrade of the Swiss 2010 GDP forecast. The Swiss government expects the Swiss GDP to expand in 2010. CAD traded higher despite report of much weaker than expected July retail sales. Optimism about the global recovery and speculation a weaker USD will be needed to reduce global imbalances are the driving factors for FX markets. (more…)

Will The Real Dollar Bulls Please Stand Up

Overall, the U.S. session had been light, with the major pairs trading on a thin volume and retracing the declines seen earlier in the day. Most pairs moved somewhere around 100 pips, but today’s most actives currencies were, surprisingly, the Canadian dollar and the Japanese yen. The slow trading seen throughout the U.S. session might be a consequence of the fact that the economic calendar was very light on Monday, and will remain light until the FOMC Rate Statement on Wednesday. On top of this, the Japanese session will remain closed until Thursday, which has a strong influence over the trading volumes recorded overnight.

The Dollar Index: Daily chart trend: Short. Main price points: 75.00-76.00. Looking for: Wave V This is one of three charts posted daily the Dollar Index, and one of thirty available each day for LFB members that cover global equity, oil, gold, dollar index, plus six major currency pairs. On a daily dollar index chart we can see that wave V is maybe not complete as yet, as we are still looking for an ending diagonal in the wave V position, with a blue wave IV) in progress. Prices needs to stay below the upper black resistance line, otherwise the shape of an ending diagonal will be invalidated. So long as the structure remains intact, we will be looking for a move lower, with wave V) near to the 75-76 support zone, where a huge long turning point may appear.

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Japan’s Central Bank Hold Rates Steady And Improve Its Economic Forecasts

Japan’s economy released today some new improved data indicating that the economy is recovering from the worst global financial crisis, determining Japan’s central bank to hold rates steady for the ninth consecutive month at 0.1%.

The Tertiary Industry Index that evaluates the monthly change in output produced by the service sector in the country therefore it’s a key indicator of domestic activity, rose by 0.6% in July from the previous revised reading of 0.2%, while markets expected it to rise only by 0.5%. (more…)