FOREX TRADING

USD on the Defensive, Stocks and Commodities Surge

• USD: Lower, pressured by improving risk appetite and a surge in commodity prices, ISM beats expectation
• JPY: Higher, tracking broad USD weakness versus the majors
• EUR: Higher, manufacturing PMI rose to 21 month high, investor confidence at best level since June 2008
• GBP: Higher, UK manufacturing PMI and mortgage approvals beat expectations, debt worries limit gains
• CHF: Higher, EUR/CHF near multi-month low, Swiss manufacturing PMI remains above 50
• CAD and AUD: AUD & CAD higher, China may use FX reserves to buy commodities, PMI at 20 month high

Overview

USD traded lower to start the year pressured by firmer equity market trade and a surge in commodity prices. Strong PMI data from China and Europe contributed to equity market gains and demand for commodities. China’s manufacturing PMI rose to its highest level since April 2004. The improvement in China’s PMI data suggests that China’s economy may grow by 10% in early 2010. There are reports that China may use FX reserves to buy oil and commodities. Crude traded above $80 a barrel and metals prices surged. The surge in commodity prices sparked demand for growth led currencies like the CAD and AUD. GBP underperformed pressured by selling in cross trade as UK Chancellor Darling warns that cutting the deficit too quickly could hurt the UK economy. In addition, Pimco says it will cut holdings of UK bonds because of increased borrowing. USD started the year higher in Asian trade supported by speculation that improving US economic data will lead to an earlier Fed rate hike and in reaction to a statement from Fed Chairman Bernanke that all options are open for interest rates. There was limited reaction to a UBS report which says the USD may firm in 2010 as US investors cut foreign holdings with US investors are less willing to increase their foreign exposures. US economic data was mixed with construction spending declining more than expected and manufacturing ISM rising more than expected. USD remained on the defensive post release of the ISM report.

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UK: Government Budget Deficit Widens to Most Since 1993

The United Kingdom continues each day to try and rise from recession that has been ravaging the nation heavily while today we saw that the government’s budget deficit widened to most since 1993 as a result of lower tax receipts and rising welfare costs, and this is just another woe the nation faces.

Public finances for the month of August today were released showing that the budget deficit widened to 10.4 billion pounds from the revised prior deficit of 1.7 billion pounds from 0.2 billion pounds while the markets were expecting 14.5 billion pounds. (more…)

After having a mild reverse coming after the press release of yesterday’s Federal Funds Rate policy statement, the USD today looks poised for a come-back. At the opening of the US Forex market today at 12:30 GMT, traders will get a look of US retail sales and unemployment claims which are both expected to show a continuation of growing in the United States helping the USD recover some of yesterday’s losses. (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 US Dollar tumbled as Asian stock exchanges surged 2.4% to on news that US lender CIT will avoid bankruptcy while commodities advanced, boosting financial and resources-linked issues and trimming demand for the safe-haven currency. German Producer Prices are on tap in European hours, with expectations calling for the biggest decline in 22 years.

Key Overnight Developments

• UK House Prices See Smallest Decline in a Year, Says Rightmove
• Australian Producer Prices Fall More Than Expected on Stronger Currency
• US Dollar Falls on Stock Gains as CIT Avoids Bankruptcy, Commodities Rise

Critical Levels

The Euro pushed sharply higher in overnight trading, adding 0.6% against the US Dollar. The British Pound mirrored its continental counterpart, testing above the 1.64 level. The greenback tumbled as Asian stock exchanges surged 2.4% to on news that US lender CIT will avoid bankruptcy while commodities advanced, boosting financial and resources-linked issues and trimming demand for the safe-haven currency.

Asia Session Highlights

UK House Prices grew 0.6% in July after falling -0.4% in the previous month according to Rightmove, an online listing of for-sale properties. In annualized terms, prices fell -3.1%, the smallest decline in a year. Rightmove commercial director Miles Shipside said buyers interest was rising on “growing confidence that we’ve passed the bottom”, adding that the number of people looking at property listings on Rightmove’s website is “much higher than we would expect” for this time of year. Still, Shipside warned that a robust recovery is far from imminent: “With only seven [major] lenders remaining in the lending game, including three government-backed institutions that are prioritizing their balance sheets over new lending, we are set to bump along the bottom for some time yet.” That said, loans for house purchases have steadily moved higher having hit a record low in November 2008, printing at the highest level in a year in May. On balance, rising unemployment may prove to be the largest barrier to a sustained rebound in real estate prices: the jobless rate is expected to top approach a whopping 9% by the end of this year, trimming incomes and hindering Briton’s ability to pay their mortgages. This is likely to boost repossessions, flooding the market with fresh supply and sending property values downward.

In Australia, the Producer Prices Index fell more than economists expected, shedding -0.8% in the second quarter to bring the annual pace of wholesale inflation to 2.1%, the lowest in 5 years. A stronger Australian Dollar was the likely catalyst behind the result: the Aussie added a whopping 10.4% in the three months through June, making imports cheaper in terms of the domestic currency. Slower PPI growth foreshadows downward pressure on consumer inflation in the months ahead as cheaper wholesale costs are passed on via a lower final price tag. This bolsters the case for additional rate cuts from the Reserve Bank of Australia. 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

German Producer Prices are set to fall at an annual pace of -4.1% in June, the most in over 22 years. The reading implies continued downward pressure on consumer prices in the months ahead, threatening to push CPI into negative territory for the first time since 1986 as lower wholesale costs filter into the final price tag. The onset of deflation in Euro Zone’s largest economy is all but certain to take the currency bloc as a whole along the same trajectory, threatening to commit the region to long-term stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment.

The European Central Bank has seemingly struggled to formulate an effective policy response thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing. The bank will also implement a 60 billion bond-buying scheme. To the ECB’s credit, borrowing costs have indeed moved lower: although the bank publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euro has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%. However, the lower cost of credit between banks has not translated into lending, and so has offered little stimulus to the overall economy. Indeed, loans to Euro Zone businesses and households grew just 1.8% in May, the lowest since records began in 1991. Banks may be choosing to hang on to cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, according to the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s newly-minted central European members. In any case, deflation is all but certain to take firm hold of the currency bloc if the ECB does not ensure that looser monetary conditions translate beyond the interbank market.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar Falls on Stock Gains as CIT Avoids Bankruptcy, Commodities Rise (Euro Open)