FOREX TRADING

The rally in stocks has been “excessive” and the financial system is still “very damaged” according to comments from Nouriel Roubini, the infamous New York University professor that has earned the nickname “Dr. Doom” for predicting the 2008 credit crisis and recession.

Key Overnight Developments

• Australian Manufacturing Sector Shrinks at Slowest Pace in 10 Months
• Japanese Workers’ Earnings Fell The Most in Over 18 Years
• New Zealand Economy Will Shrink in Third Quarter, Says Treasury
• Roubini Says Financial System “Very Damaged”, Stocks Rally “Excessive” (more…)

The British Pound is likely to look past an upswing in Retail Sales and a continued rebound in Home Loans data to fall in with trends in risk appetite as another round of key earnings reports crosses the wires in European hours. Japan’s trade surplus expanded for the third month in June as imports continued to tumble.

Key Overnight Developments

• Japanese Trade Surplus Grows as Imports Continue to Tumble
• Euro, British Pound Little Changed Despite Overnight Stock Gains

Critical Levels

The Euro tested below 1.42 and rebounded as high as 1.4243 but stands little changed ahead of the opening bell in Europe. The British Pound followed a similar dynamic, oscillating around the 1.6470 level.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus expanded for the third consecutive month, rising to 508 billion yen in June from 298.2 billion in May. We argued the likelihood of such an outcome in our Japanese Yen weekly forecast, noting that the abysmal job market will surely continue to weigh on imports. Indeed, inbound shipments tumbled -41.9% from a year before while exports shed -35.7%. More of the same is likely in the months ahead as unemployment continues to push higher: a survey of economists conducted by Bloomberg suggests the jobless rate surpassed 5% in the second quarter and will approach the 6% mark by the second half of 2010 while minutes from the last meeting of the Bank of Japan revealed policymakers expect consumption to remain weak as “the employment and income situation [is] likely to become increasingly severe”.

Euro Session: What to Expect

UK Retail Sales are set to swing back into positive territory in June, growing at an annualized rate of 2.1% after shrinking -1.6% in the year to May, the most in 17 years. A rebound in retail spending seems to bolster expectations from NIESR, a closely watched London-based think thank, that forecast the economy probably shrank just -0.4% in the second quarter, the smallest drop in a year. NIESR has argued that “the U.K. economy is now stagnating rather than continuing to contract at a sharp pace.” Notably, the apparent signs of stabilization may not translate into meaningful gains for the British Pound. Retail sales figures have exhibited extraordinary volatility since the beginning of this year: annualized receipts grew 2.6% in January, dropped -1.5% in February, then gained 0.9% and 2.7% in the following two months before plunging again in May. This suggests traders will be wary of taking even a sharp improvement at face value, waiting for a discernable trend to be established. Cues from the labor market seem to point to subdued retail activity for the time being, with the jobless rate to approach 9% by the end of next year for the first time since 1994, trimming disposable incomes and weighing on spending.

Separately, BBA Loans for House Purchases will probably continue to rebound in June, extending a move higher that began after the metric set a record low in November 2008. The metric closely tracks the GfK measure of consumer confidence; indeed, indeed, 24-month rolling studies show the two are 96.6% correlated. Consumer confidence rose to a 14-month high in June, suggesting the BBA report will follow.

On balance, risk trends are likely to remain as the primary driver of forex price action. A number of notable earnings releases are on tap in European hours: ABB Ltd, the world’s largest maker of electricity grids, and Cie. de Saint-Gobain SA, Europe’s top supplier of construction materials, are set to report that profits fell by a staggering 42% and 83% respectively in the second quarter. Credit Suisse, Switzerland’s largest bank by market value, may help support shares in the Financials sector with expectations calling for the second consecutive quarter of profits driven by trading revenue.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound to Look Past Retail Sales, Home Loans Data to Trade on Risk Appetite (Euro Open)

The U.S Dollar rose against most other major currencies Tuesday, as comments by Ben Bernanke eased concerns that policy-makers won’t act decisively to head off inflation spawned by efforts to counter the credit crisis. The Federal Reserve Board chairman’s testimony was favorable for the USD, as his assessment on the U.S. economy revived the greenback’s safe-haven appeal.

USD – Dollar Rises on Increased Risk Aversion

The U.S. Dollar rebounded while U.S. stocks retreated yesterday after initial gains were overshadowed by cautious outlooks on the economy from corporate executives and Federal Reserve Board Chairman Ben Bernanke. As a result, the USD finished yesterday trading session 100 pips higher against the GBP at the1.6410 level. The greenback also saw bullishness against the EUR and closed at 1.4175.

U.S. government debt prices rose sharply on Bernanke’s comments that an easy money policy would likely be needed for an extended period. Moreover, risk appetite had increased in the past few days after stronger-than-expected U.S. corporate earnings. The latest to report higher-than-expected quarterly results was manufacturer and Dow component Caterpillar Inc. yesterday.

Looking ahead to today, the most important economic indicator scheduled to be released from the U.S. is the Crude Oil Inventories report at 14:30 GMT. Traders will be paying close attention to today’s announcement as it has the potential to boost the USD in the short-term. Traders are also advised to follow Federal Reserve Board Chairman Ben Bernanke’s testimony at around 14:00 GMT. This testimony is very important as it is very likely to impact the Dollar’s volatility. Traders are advised to watch closely, as this is likely to set the pace of the USD going into the rest of the week’s trading.

EUR – EUR and GBP Erase Gaines on all Fronts

The EUR weakened against most of its major currency rivals yesterday on concerns CIT Group Inc. may file for bankruptcy, renewing demand for a refuge. By yesterday’s close, the EUR fell against the JPY, pushing the oft-traded currency pair to 133.17. The EUR experienced similar behavior against the CHF and closed at 1.5160.

The British Pound also fell against the U.S Dollar as a report showed the U.K budget deficit climbed in June to the highest per month since records began in 1993, fueling concern the government will struggle to find buyers for its assets. The drop pushed the GBP down from near the highest level this month against the Dollar. The budget shortfall rose to 13 billion Pounds from 7.5 billion a year earlier. Gilts reversed earlier declines after Federal Reserve Board Chairman Ben S. Bernanke told Congress that policy makers will keep Interest Rates “exceptionally low.”

Today, there is plenty of economic news coming from the Euro-Zone that will determine the GBP and EUR levels by the end of today’s trading. From the Euro-Zone, there are the European Industrial New Orders, and French Consumer Spending figures. From Britain, the most important news will be the MPC Meeting Minutes and CBI Industrial Order Expectations figures. All these news events will be important in helping set the strength of the GBP and EUR in this week’s trading.

JPY – Yen Strengthens on Bernanke Testimony

Japan’s currency rose against most of its major counterparts after Bernanke mentioned that at some point the Fed “will need to tighten monetary policy” to counter the emergence of an inflationary problem. The Yen also advanced from near a 2 week low against the U.S dollar on speculation Japanese exporters bought the currency after its 1.8% decline last week.

Traders today have very little fundamental news emanating from Japan as the only indicator being released is the trade balance report. Analysts forecast the figure to increase from its previous reading. This indicator typically generates small amounts of volatility. However, the USD and the GBP appear to be clutching the reins of today’s market. Traders would be wise to note its future direction as it usually carries a heavy impact on the other currencies.

Crude Oil – Oil Stabilizes after Steady Appreciation

Crude Oil slid down slightly, to just above $65 a barrel, on Wednesday, after data showing an unexpected rise in U.S. crude stocks underscored worries about persistently weak demand from the world’s top oil user. The U.S. crude oil stockpiles rose unexpectedly last week as domestic refining activity slumped, the American Petroleum Institute (API) said on Tuesday. However, firm equity markets and a weak Dollar could lend some support to Oil, analysts say.

Crude prices climbed 8.7% for the past week as investors bought futures on expectations of higher fuel demand. Optimism that the worst of the global recession is over followed gains in U.S. leading economic indicators and as financial service companies said earnings climbed.

Article Source – Greenback Rebounds from 6-Week Low