Much volatility was experienced in the forex markets last week as all attention were turned to the turbulence in credit markets. News that BNP Paribas suspended redemption from three funds that are exposed to US subprime markets triggered concern that investors would seek redemptions from other funds, which could in term dry up the markets. LIBOR rates spiked higher in the middle of the week and that in turn, triggered injection of cash from central banks around the world, including Fed, ECB, BoJ, BoC and RBA. But the fear in the makets continued, with stocks stumbling and carry trade unwinding massively. The markets only stabilized on Friday after the Fed added another $38b and pledged more fund will be injected "as necessary" to calm the markets. Looking ahead, news about the credit markets and subprime problem will continue to take the center stage. Economic calendar is jam-packed this week, which could trigger further volatility in the markets. But impact from data could be temporary as they continue to play a secondary role in moving the markets.
Higher yield currencies were most hit by massive carry trade unwinding last week, in particular Aussie and Kiwi, which also weakened sharply against dollar. The greenback benefited such carry trade unwinding and indeed rose against other majors and even closed higher against the yen on late Friday recovery.
FOMC rate decision was the main event from US last week. Fed kept rates unchanged at 5.25% as widely expected. Tightening bias was, to some's surprise, maintained in the accompanying statement as "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," even though downside risks to growth have increased. Regarding inflation, Fed members still think that the sustainable moderation in inflation pressure is not "convincingly demonstrated" yet. Regarding growth, Fed still expects "the economy seems likely to continue to expand at a moderate pace over the coming quarters", but added that it will be "supported by solid growth in employment and incomes and a robust global economy."After all, the statement ruled out the possibility of a Sep cut and didn't hint on any rate cut this year yet. However, the Fed seems left the door for moving to a more neutral stance. The upcoming employment and incomes data will become evenly more closely watched and market moving and that could be trigger for bias shift.
Another major events of last week was the BoE quarterly inflation report which confirmed market's expectation that one more rate hike is needed to bring CPI inflation back to 2% target in 09. Sterling was also boosted temporarily by hawkish comments from BoE Governor King who said that the starting point of UK economic growth is stronger than the latest ONS numbers and that inflation expectations have not fallen back yet. Housing market also remains strong.
RBA raised Australian interest rates to a decade-high of 6.5% to curb persistent core inflationary pressures as widely expected. However, reaction to the news was muted as this was already widely expected. Also, markets are speculating that RBA will be on hold at 6.5% for the remainder of the year. Kiwi and CAD was boosted temporarily by lower than expected unemployment rate but just like others, both were pressured again as carry trade unwinding returned to be the focus.
Sunday
$ Slid after Payrolls
The dollar slid broadly after US Labor Department July employment report showed new added jobs were less than expected, squeezing out the possibility of a rate hike by the Fed this year and raising speculation of a rate cut.
US non-farm payrolls came out at 92k, far below the estimate of 130k and a reading of 132k in the previous month. Unemployment rate increased from 4.5% to 4.6% in July. The labor market, one of the few fundamentals that always support the dollar in the past, turned from robust to modest, adding to the bearish sentiment on the dollar.
Besides, US non-manufacturing ISM fell from 60.7 to 55.8 in July, below the estimate of 59. The dollar extended its loss against the euro, sterling and yen.
US non-farm payrolls came out at 92k, far below the estimate of 130k and a reading of 132k in the previous month. Unemployment rate increased from 4.5% to 4.6% in July. The labor market, one of the few fundamentals that always support the dollar in the past, turned from robust to modest, adding to the bearish sentiment on the dollar.
Besides, US non-manufacturing ISM fell from 60.7 to 55.8 in July, below the estimate of 59. The dollar extended its loss against the euro, sterling and yen.
Markets Await FOMC
The dollar recovered its earlier losses against the sterling and euro by the US afternoon to hover around 2.03 and 1.38, respectively. In overnight trading, the greenback slipped toward record lows versus the euro at 1.3838 but pared its losses heading into Tuesday’s FOMC policy announcement. With the exception of the Fed rate decision tomorrow, the US economic calendar this week is light thus shifting the focus to the accompanying FOMC statement.
The Fed is largely anticipated to leave policy unchanged at 5.25% when it announces its decision tomorrow at 2:15 PM. The key point of focus will be the accompanying statement from the FOMC, in which we expect minor changes to acknowledge further slowdown in the housing market stemming from the continued unfolding of the subprime debacle. However, we believe any reference to the subprime market will assure markets that the issue will likely remain contained and have limited impact on global financial markets. We expect the Fed will maintain its bias against inflationary pressure, adding that it sees inflation moderating over time.
The Fed is largely anticipated to leave policy unchanged at 5.25% when it announces its decision tomorrow at 2:15 PM. The key point of focus will be the accompanying statement from the FOMC, in which we expect minor changes to acknowledge further slowdown in the housing market stemming from the continued unfolding of the subprime debacle. However, we believe any reference to the subprime market will assure markets that the issue will likely remain contained and have limited impact on global financial markets. We expect the Fed will maintain its bias against inflationary pressure, adding that it sees inflation moderating over time.
Dollar Slipped after FOMC
The Fed kept interest rates at 5.25% unchanged as widely expected. The Fed acknowledged tightening credit conditions and slowing economy, but maintained its bias against inflationary pressure for fear that inflation may not moderate as expected. The dollar fell slightly against the euro and sterling after the post-meeting statement.
The euro will face resistance at 1.3750, followed by 1.3780 and 1.38. Additional gains will target 1.3830 and 1.3850. Meanwhile, on the downside the pair will encounter support at 1.3720 followed by 1.37 and 1.3680. Subsequent floors will emerge at 1.3650, backed by 1.3620 and 1.36.
The euro will face resistance at 1.3750, followed by 1.3780 and 1.38. Additional gains will target 1.3830 and 1.3850. Meanwhile, on the downside the pair will encounter support at 1.3720 followed by 1.37 and 1.3680. Subsequent floors will emerge at 1.3650, backed by 1.3620 and 1.36.
Volatility Forces Central Banks
The currency market experienced large swings in the morning amid sharp volatility prompted by heightened risk aversion to fears of a widespread credit crunch. The yen continued to benefit from such wariness, rallying across the board to 117.24 against the dollar and 160 versus the euro. Those gains were short-lived as the Fed announced that it would intervene by injecting funds “to facilitate the orderly function of financial markets”. The Fed’s decision follows similar liquidity injections from the ECB, initiated yesterday and several Asian central banks including the Bank of Japan.
The Fed intervened three times today, amounting to nearly $38 billion in fund injections -- its largest since September 14, 2001, and said it would provide reserves as necessary. The Fed’s move momentarily quelled fears of a credit crunch as markets stemmed earlier losses and the yen reversed its gains against the majors. Currency traders will continue to focus on developments with the subprime debacle and exhibit greater wariness to carry trade volatility.
The Fed intervened three times today, amounting to nearly $38 billion in fund injections -- its largest since September 14, 2001, and said it would provide reserves as necessary. The Fed’s move momentarily quelled fears of a credit crunch as markets stemmed earlier losses and the yen reversed its gains against the majors. Currency traders will continue to focus on developments with the subprime debacle and exhibit greater wariness to carry trade volatility.
Rate Sentiment
The dollar was mixed in the Wednesday session amid a dearth of fresh US economic news, climbing higher against the yen but falling sharply versus the sterling. The data release was limited to June wholesale inventories, which was slightly higher than expected at 0.5%, unchanged from the previous month. Interest rate expectations continue to play a key role in the FX market, with the Aussie and sterling regaining its footing on hawkish sentiment from both respective central banks.
Sterling Shines
The sterling rallied sharply against the dollar and yen overnight, climbing just shy of the 2.04-level and slightly above 244, respectively. The strength was predominantly triggered the Bank of England’s Quarterly Inflation Report, which revealed expectations for CPI inflation to be slightly above the 2% target in two years with market rates, and clearly above target based on constant rates. The BoE said that risks to inflation remained skewed to the upside but with growth now forecasted to be softer over the next two years.
Sterling Shines
The sterling rallied sharply against the dollar and yen overnight, climbing just shy of the 2.04-level and slightly above 244, respectively. The strength was predominantly triggered the Bank of England’s Quarterly Inflation Report, which revealed expectations for CPI inflation to be slightly above the 2% target in two years with market rates, and clearly above target based on constant rates. The BoE said that risks to inflation remained skewed to the upside but with growth now forecasted to be softer over the next two years.
Yen Rallied after BNP Froze Funds
The yen rose sharply BNP Paribas, France’s biggest bank, froze three investment funds worth 1.6 billion euros, raising concern the US subprime mortgage sector woes is spreading worldwide. The ECB today injected 94.8 billion euros into the region’s banking market to meet the sudden liquidity demand. The US subprime worries prompted investors to unwind carry trades, driving the yen higher against high-yielding currencies.
The euro slumped from 165 to 161.55 versus the yen, while the sterling slid from 244 to test the 239 level. The yen strengthened from 119.75 to as low as 118.20 versus the dollar.
As a safe haven currency, the dollar also benefited from anti-risk trades. The euro fell off the 1.38 handle and was supported by the 1.3650 level versus the dollar. The sterling dipped from 2.04 to as low as 2.0212.
The euro slumped from 165 to 161.55 versus the yen, while the sterling slid from 244 to test the 239 level. The yen strengthened from 119.75 to as low as 118.20 versus the dollar.
As a safe haven currency, the dollar also benefited from anti-risk trades. The euro fell off the 1.38 handle and was supported by the 1.3650 level versus the dollar. The sterling dipped from 2.04 to as low as 2.0212.
Yen Crosses Could Stabilize But Short Term Risk Remains on Downside
Euro and Sterling stabilize a bit against dollar today as the greenback is dragged further down by selling in USD/JPY. Though, the high yielding commodities are still the biggest victims of the current carry trade unwinding. Fed fund rate surged to as high as 6%, well above Fed's target rate of 5.25% earlier today and triggered the Fed to add another $19 b in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash. On the other hand, ECB also loaned another 61.05b euros into the banking system. Sentiments in the markets remains fragile as US stocks are set to open lower, following yesterday's sharp sell off and today's fall in Asian and European markets.
USD/JPY
USD/JPY's fall from 119.80 extends further to as low as 117.20 today, inches above prior low of 117.15. At this point, further decline is expected to follow as long as 118.87 resistance holds. Break of 117.15 low will confirm recent sharp decline from 124.13 has resumed for 114.41/115.13 support zone. Above 118.22 will turn intraday outlook neutral and indicates that price actions from 117.15 is developing into further consolidation with another test of 119.81/89 cluster resistance (100% projection of 117.15 to 119.07 from 117.97 at 119.89 and 38.2% retracement of 124.13 to 117.15 at 119.81) before completion.
In the bigger picture, break of 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) has also had medium term rising trend line (108.99 to 155.13, now at 118.39) taken out. Sustained trading below these levels argues that whole rise from 108.99 has completed. In such case, much deeper decline should then be seen to long term rising trend line support (now at 115.70) and then further to next important support zone of 114.41 and 115.13 (61.8% retracement of 108.99 to 124.13 at 114.77).
In the bigger picture, break of 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) has also had medium term rising trend line (108.99 to 155.13, now at 118.39) taken out. Sustained trading below these levels argues that whole rise from 108.99 has completed. In such case, much deeper decline should then be seen to long term rising trend line support (now at 115.70) and then further to next important support zone of 114.41 and 115.13 (61.8% retracement of 108.99 to 124.13 at 114.77).
GBP/USD
Cable edges further lower to 2.2154, breaking marginally below 2.0156 low but lacks follow through selling so far. As this point, further downside is still in favor as long as 2.0242 resistance holds. As discussed before, cable's correction from 2.0652 is still in progress and is expected to further test 2.0086/2.0206 support zone before completion. However as we'd expect such consolidation to be contained by this support zone, focus will be on reversal signal as the current fall proceeds.
Above 2.0242 will turn intraday outlook neutral first and probably bring strong recovery. But still, break of 2.0462 cluster resistance (61.8% retracement of 2.0652 to 2.0156 at 2.0463) is needed to confirm correction from 2.0652 has completed and bring retest of key medium term resistance of 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677. Otherwise, further downside is still in favor.
Above 2.0242 will turn intraday outlook neutral first and probably bring strong recovery. But still, break of 2.0462 cluster resistance (61.8% retracement of 2.0652 to 2.0156 at 2.0463) is needed to confirm correction from 2.0652 has completed and bring retest of key medium term resistance of 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677. Otherwise, further downside is still in favor.
EUR/USD
EUR/USD edges further lower to 1.3643 today but stabilizes as no follow through selling is seen yet. Though, intraday bias will remain on the downside as long as 1.3713 minor resistance holds. Further decline is still in favor. As discussed before, EUR/USD should still be bounded in consolidation that started at 1.3851 and hence, another test of 1.3567/3658 support zone is expected to be seen before completing such consolidation. However, downside is also expected to be contained there.
Above 1.3713 minor resistance resistance will turn intraday outlook neutral and probably bring stronger recovery. But firm break of 1.3839 resistance is needed to confirm rise from 1.3262 has resumed. Otherwise, choppy sideway trading is still in progress.
In the bigger picture, firstly, the momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought and the rise from 1.3262 could be part of another set of medium term rally instead of the last advance of a 5 wave rally from 1.2483 that we originally thought.
Above 1.3713 minor resistance resistance will turn intraday outlook neutral and probably bring stronger recovery. But firm break of 1.3839 resistance is needed to confirm rise from 1.3262 has resumed. Otherwise, choppy sideway trading is still in progress.
In the bigger picture, firstly, the momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought and the rise from 1.3262 could be part of another set of medium term rally instead of the last advance of a 5 wave rally from 1.2483 that we originally thought.
Dollar Down Slightly, Awaits US Payrolls
The dollar fell slightly against the euro and sterling as traders adjusted positions to wait for tomorrow’s US non-farm payrolls report, which will be a major market mover. The euro climbed 50 pips to test 1.37 level against the dollar, and the sterling rose from 2.0300 to as high as 2.0377 versus the dollar.
The euro and sterling was little changed after the European Central Bank and the Bank of England left interest rates on hold as expected at 4.00% and 5.75% respectively. ECB President Trichet said at the post-meeting press conference that “strong vigilance” is needed to contain inflation, signaling a possible rate hike in September.
The dollar was flat after Today’s data as traders keep cautious before Friday morning’s key job report. US jobless claims for the week ended on July 28 came out at 307k, in line with the expectation of 310k. Factory orders rose 0.6% in June, reversing a 0.5% decline in the earlier month but below the estimate of 1.0%. Durable goods orders came out at 1.3%, slightly below the forecast and the previous reading of 1.4%.
The euro and sterling was little changed after the European Central Bank and the Bank of England left interest rates on hold as expected at 4.00% and 5.75% respectively. ECB President Trichet said at the post-meeting press conference that “strong vigilance” is needed to contain inflation, signaling a possible rate hike in September.
The dollar was flat after Today’s data as traders keep cautious before Friday morning’s key job report. US jobless claims for the week ended on July 28 came out at 307k, in line with the expectation of 310k. Factory orders rose 0.6% in June, reversing a 0.5% decline in the earlier month but below the estimate of 1.0%. Durable goods orders came out at 1.3%, slightly below the forecast and the previous reading of 1.4%.
Central Bank Decisions
At 5:00 AM Eurozone June PPI m/m (exp 0.3%, prev 0.3%)
Eurozone June PPI y/y (exp 2.3%, prev 2.3%)
At 7:00 AM BoE Monetary Policy Decision (exp 5.75%, prev 5.75%)
At 7:45 AM ECB Monetary Policy Decision (exp 4.0%, prev 4.0%)
At 8:30 AM ECB President Trichet Press Conference
US Weekly Jobless Claims (exp 310k, prev 301k)
At 10:00 AM US June Durable Goods Orders (exp 1.4%, prev 1.4%)
US June Factory Orders (exp 1.0%, prev –0.5%)
The major currencies are little changed heading into Thursday, with the dollar and yen maintaining their buoyant tone. US equities rebounded late in the session, briefly sending the yen lower toward the 119-level against the dollar and 163 versus the euro. Currencies will continue to be dictated by moves in the global equity bourses as fears of the subprime debacle fester in the background – prompting heightened risk aversion among traders.
In addition to closely monitoring equity performance, markets will look ahead to US weekly jobless claims, June durable goods orders and factory orders. Weekly jobless claims are seen creeping higher to 310k, up from 301k in the prior week. Durable goods orders, typically a volatile number, is seen unchanged in June at 1.4%, while factory orders are expected to reverse last month’s 0.5% decline, rising by 1.0% in June.
Eurozone June PPI y/y (exp 2.3%, prev 2.3%)
At 7:00 AM BoE Monetary Policy Decision (exp 5.75%, prev 5.75%)
At 7:45 AM ECB Monetary Policy Decision (exp 4.0%, prev 4.0%)
At 8:30 AM ECB President Trichet Press Conference
US Weekly Jobless Claims (exp 310k, prev 301k)
At 10:00 AM US June Durable Goods Orders (exp 1.4%, prev 1.4%)
US June Factory Orders (exp 1.0%, prev –0.5%)
The major currencies are little changed heading into Thursday, with the dollar and yen maintaining their buoyant tone. US equities rebounded late in the session, briefly sending the yen lower toward the 119-level against the dollar and 163 versus the euro. Currencies will continue to be dictated by moves in the global equity bourses as fears of the subprime debacle fester in the background – prompting heightened risk aversion among traders.
In addition to closely monitoring equity performance, markets will look ahead to US weekly jobless claims, June durable goods orders and factory orders. Weekly jobless claims are seen creeping higher to 310k, up from 301k in the prior week. Durable goods orders, typically a volatile number, is seen unchanged in June at 1.4%, while factory orders are expected to reverse last month’s 0.5% decline, rising by 1.0% in June.
$ Drifted Higher, Moving with Equities
The dollar still moves with the volatile stock market today as risk aversion drives the direction of carry trades, which dominates the currency market since last week. The dollar drifted slightly higher against the euro and yen.
In early US session, the dollar fell modestly after US ADP report showed only 48,000 jobs were added in private sector in July, far below the forecast of 100,000 and a 150,000 reading in the previous month. The euro tested the 1.37 handle against the dollar and dipped back to around 1.3670 later. There is no direct relationship between this private sector employment report and the non-farm payrolls. The market will focus on the key job report from US Labor Department this Friday for more clues on the broad labor market.
Besides, the other two US data did little to the market. US pending home sales rose 0.5% in June, beating the estimate of a 0.6% decline and a –3.5% reading in the previous month. However, it is the fact that the nation’s housing market is facing serious credit problems and a major downturn. A single second-tier housing report is not sufficient to change the evaluation of US housing market. US manufacturing ISM came out at 53.8, below the expectation of 55.5 and 56 in the earlier month.
In early US session, the dollar fell modestly after US ADP report showed only 48,000 jobs were added in private sector in July, far below the forecast of 100,000 and a 150,000 reading in the previous month. The euro tested the 1.37 handle against the dollar and dipped back to around 1.3670 later. There is no direct relationship between this private sector employment report and the non-farm payrolls. The market will focus on the key job report from US Labor Department this Friday for more clues on the broad labor market.
Besides, the other two US data did little to the market. US pending home sales rose 0.5% in June, beating the estimate of a 0.6% decline and a –3.5% reading in the previous month. However, it is the fact that the nation’s housing market is facing serious credit problems and a major downturn. A single second-tier housing report is not sufficient to change the evaluation of US housing market. US manufacturing ISM came out at 53.8, below the expectation of 55.5 and 56 in the earlier month.
Yen Buoyed, Traders Await Data
At 3:55 AM Germany July Manufacturing PMI (exp 56.8, prev 57.3)
At 4:00 AM Eurozone July Manufacturing PMI (exp 54.8, prev 55.6)
At 4:30 AM UK July Manufacturing CIPS/PMI (exp 54.0, prev 54.3)
At 8:15 AM US July ADP Employment (exp 100.0k, prev 150.0k)
At 10:00 AM US June Pending Home Sales (exp –0.6%, prev –3.5%)
US July Manufacturing ISM (exp 55.5, prev 56.0)
Heightened risk aversion continues to dictate the direction in the major currency pairs, with the yen reaping the benefits from safe haven flows as speculators scale back their carry trades. Meanwhile, the dollar also remains buoyed against the majors heading into the Wednesday session, hovering around 1.3660 versus the euro and 2.0282 against the sterling.
Economic data from the US continues to be patchy at best, with housing leading the declines, while the labor market and consumer confidence remain firm. The key highlight will be Friday’s July jobs report. Traders will look at the July ADP employment report as a proxy to this week’s non-farm payrolls data. The ADP private sector payrolls reading is seen dropping to 100k, down considerably from June at 150k jobs created. June pending home sales are forecasted to decline by 0.6%, which marks an improvement from the 3.5% drop in May. Lastly, the July manufacturing ISM reading is expected to fall to 55.5, versus 56.0 from June.
At 4:00 AM Eurozone July Manufacturing PMI (exp 54.8, prev 55.6)
At 4:30 AM UK July Manufacturing CIPS/PMI (exp 54.0, prev 54.3)
At 8:15 AM US July ADP Employment (exp 100.0k, prev 150.0k)
At 10:00 AM US June Pending Home Sales (exp –0.6%, prev –3.5%)
US July Manufacturing ISM (exp 55.5, prev 56.0)
Heightened risk aversion continues to dictate the direction in the major currency pairs, with the yen reaping the benefits from safe haven flows as speculators scale back their carry trades. Meanwhile, the dollar also remains buoyed against the majors heading into the Wednesday session, hovering around 1.3660 versus the euro and 2.0282 against the sterling.
Economic data from the US continues to be patchy at best, with housing leading the declines, while the labor market and consumer confidence remain firm. The key highlight will be Friday’s July jobs report. Traders will look at the July ADP employment report as a proxy to this week’s non-farm payrolls data. The ADP private sector payrolls reading is seen dropping to 100k, down considerably from June at 150k jobs created. June pending home sales are forecasted to decline by 0.6%, which marks an improvement from the 3.5% drop in May. Lastly, the July manufacturing ISM reading is expected to fall to 55.5, versus 56.0 from June.
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