Forex Charts & News

RMB may Accelerate Post-Olympics

2008-07-11T18:07:00.002+03:00

The first half of 2008 has come to a dramatic end, and it's official: China's stock market was the world's worst performer, finishing down 48%. Ironically, some analysts believe this may be a harbinger for a faster appreciation of the Chinese Yuan. While the global credit crisis cannot be completely disentangled from the Chinese macroeconomic picture, certain conclusions can be drawn that are specific to China. In a nutshell, the party may be over. Inflation has surged to a 10-year high, economic growth is slowing, and stocks are facing a prolonged bear market. The Chinese government will likely continue to bide its time so as not to disrupt the Olympics. After the conclusion of the games, however, the Central Bank may begin aggressively hiking rates in order to tame inflation. While this would adversely affect economic growth, it would cause the RMB to appreciate. Forbes reports:

Maybe that's what Shanghai's decline is really telling us, that the China miracle may be losing some of its luster, as China tries to make the transition from a low-cost exporter to a leading provider of 21st century goods and services.

Yen Back in Vogue

2008-07-11T18:06:00.001+03:00

Volatility, the perennial enemy of the carry trade, has returned with a vengeance. The US stock market, a proxy for global risk appetite, has fallen significantly (nearly 20%) over the last six months, a trend that has accelerated over the last two weeks. By no coincidence, the Japanese Yen and Swiss Franc have rallied dramatically over the same time period. On one hand, currency trading is seemingly becoming more cut-and-dried, as correlations strengthen between different sectors of the global capital markets and specific currencies. The respective inverse relationships between the Dollar and oil, and between the Yen and US stocks, have been particularly strong of late. In the end, though, it is anyone's best guess whether the price of oil will continue to rise and stocks will continue to fall. Reuters reports:

"We're back on the brink," said one analyst. "It seems there is a feeling of resignation and helplessness amid this credit crisis."

ECB Hikes Rates

2008-07-11T18:05:00.004+03:00

In a move that will shock some investors but please others, the European Central Bank has raised its benchmark interest rate by 25 basis points, to 4.25%. On several recent occasions, Jean-Claude Trichet had alluded to the possibility, in connection to soaring inflation. Critics, including several politicians, have countered that the ECB should also be cognizant of the macroeconomic picture in Europe, which is faltering amid the global credit crunch. But such naysayers should remember that the ECB is mandated to maintain price stability, rather than to explicitly facilitate economic growth. In any event, this move certainly throws a wrench into the forex markets. The Dollar had rallied over the last couple months, as traders had prepared for a narrowing US-EU interest rate differential in the medium-term. So much for that theory, reports The New York Times:

But the sharp rise in inflation has put Europe’s bank into a policy bind because it has been accompanied, in recent days, by evidence that the economy here is deteriorating much like that of the United States.

Vietnam Nears Crisis

2008-07-11T18:05:00.002+03:00

In what some analysts have termed 'an act of desperation,' Vietnam has devalued its currency, the Dong, by .5%. Negative pressure had been building above the Dong for months, due to a burgeoning trade deficit, sagging stock market, and a stratospheric inflation rate, most recently clocked at 23%. Unfortunately for Vietnam's economic planners, the black market exchange rate remains nearly 5% below the official rate. In addition, futures prices reflect the expectation that the Dong will lose 30% of its value over the next twelve months. At this point, Vietnam is simply trying to forestall a full-scale economic crisis. This will probably involve further devaluations of the Dong. The Times Online reports-

Analysts said that the rising risk of a sudden and crippling depreciation comes as the cracks in Vietnam’s vaunted “economic miracle” have grown too large to ignore.

Inflation or Economic Growth

2008-07-11T18:04:00.002+03:00

Global capital markets remain caught in a tug of war between inflation and economic growth. For most of 2008, the economic growth story prevailed as the Federal Reserve Bank cut interest rates aggressively to cushion the blow from the housing crisis. However, the pendulum soon swung to inflation and the Fed began to worry that perhaps it had lowered rates too far and may in fact need to hike them in response to surging food and fuel prices. In fact, the European Central Bank recently hiked its benchmark interest rates. Now, a slew of negative economic data threatens to shift the rhetoric back to the other corner. Securities and currencies have fluctuated wildly over this period, and investors remain unsure about which side the world's Central Banks will err on. Currency traders need to look no further than credit markets for a snapshot of the current consensus, which often presages changes in currency valuations. A quick and dirty analysis would place American and Euro-zone short-term bonds side by side and compare the yields (or prices), as a proxy for the EUR/USD exchange rate. The Wall Street Journal reports:

Two-year yields in all three markets have been on a wild ride in June, driven up by tough inflation rhetoric from central banks, then down again by renewed worries about the credit crisis and the state of financial markets.

Fed Increases Liquidity

2008-07-11T18:03:00.002+03:00

In a bid designed to placate skittish investors, America's Federal Reserve Bank announced that it will extend the duration of its liquidity facilities at least through 2008 and possible into 2009. It is hoped that the continued enabling (which began several months ago) of certain Wall Street firms to borrow on especially favorable terms will prop up faltering credit markets. Given that both credit conditions and the economy at large continue to flounder, this move seems more symbolic than anything. Analysts are divided about whether this increased liquidity will serve as a complement or a substitute for a near-term interest rate hike. Futures prices had previously reflected a 65% chance that the Fed would hike rates in September, but the bet is now closer to even money. Reuters reports:

Others...think liquidity problems and inflation concerns are two separate issues. [One analyst] believes that the Fed is still on track to raise rates in September.

ECB, Unemployment Weigh on Dollar

2008-06-20T20:39:00.000+03:00

In the near future, this day may be looked back on as important in the battle between the Dollar and Euro that is currently being waged. The previous month had been relatively kind to the Dollar, which had gradually clawed its way back from a record low against the Euro. Then came yesterday, when Jean-Claude Trichet, leader of the European Central Bank, surprised investors when he announced that not only will the ECB not be cutting rates, but in fact, it may hike them. If enough members of the Central Bank become convinced that inflation is unlikely to abate, the rate hike could come as soon as next month. Today, the knockout punch was delivered, when the US unemployment rate came in at 5.5%. Not insignificant by itself, what was most shocking was that the crucial indicator had risen .5% from last month, its largest increase in more than a decade. Reuters reports:

That should undermine the dollar's prospects..."The focus is on the unemployment rate, as it's obviously starting to catch up with the softening in the payrolls figures...and that's what the market is reacting to."

Shekel is One of the Big Boys

2008-06-17T20:38:00.000+03:00

The Continuous Linked Settlement (CLS) Bank, which performs the thankless job of settling the nearly $4 Trillion in currency trades completed each day, recently announced that it will now settle trades involving the Israeli Shekel. This is quite an honor for Israel, as only 16 other currencies can claim this distinction. Implicitly, the Israeli Shekel has been deemed both important and stable enough to be fully convertible. The announcement marks another positive development for the currency, which has appreciated by an astounding 30% against the Dollar over the last year, including 15% since the beginning of 2008. It is unclear when amateur traders will be able to trade the Shekel, but now that it is included in the CLS roster, it probably won't be long. YNet reports:

The Bank of Israel has been in contact with CLS on the matter since 2004 and had consistently pushed Israeli banks to meet the CLS criteria. The induction of the shekel into the CLS system is considered a very important step towards upgrading Israel's financial infrastructure.

How Far Has the Dollar Really Fallen?

2008-06-16T20:37:00.000+03:00

Kurt Brouwer offers his take on the falling USD over at Fundmastery Blog:

Let’s start with how far the dollar has fallen. One problem with our media is that the news of the day is often one-sided and it seldom comes with any historical perspective. For example, do you remember hearing that the Euro fell to historic lows versus the dollar? Well, as you will see from the chart below, it happened not too long ago. In fact, the Euro fell steadily versus the dollar for the first five years of its existence, beginning in January 1999. It did not get back to even until mid-November, 2003. At the low point for the Euro you could have bought one for 84 cents. Now, it takes a $1.56.

Talking up the Dollar

2008-06-15T08:36:00.000+03:00

When it comes to forex, the old adage actions speak louder than words doesn't always hold. In fact, words can be quite effective on their own in holding down or propping up a currency. For a while, the threat of intervention by the Central Bank of Japan was enough to hold down the Yen, despite a lack of supporting action. With regard to the Dollar, several high-ranking economic officials have recently made unsolicited comments implying that traders should think twice about shorting the Dollar. First, Ben Bernanke worried publicly about the effect of the sinking Dollar on inflation. Then, President Bush suggested that the Dollar was undervalued relative to economic fundamentals. Treasury Secretary Hank Paulson capped the effort by refusing to dismiss the possibility of coordinated intervention on behalf of the Dollar. While it has been eight years since the US last intervened in forex markets, it looks like investors are taking these threats seriously. The Wall Street Journal reports:

Traders seized on the comments as a signal that the administration -- which has never intervened in the markets before -- could do so if a dollar rout gets bad enough.

The Next Reserve Currency is The Rouble

2008-06-14T20:33:00.001+03:00

Apparently, Russia has aspirations to turn its currency, the Rouble, into an international reserve currency. Moreover, according to an official with the International Monetary Fund (IMF), this plan is not that far-fetched. Despite soaring inflation and political oppression, Russia's economy is forecast to grow at 8% for the next two years, due primarily to soaring natural resource prices. By its own admission, Russia needs to diversify its economy without inhibiting growth, strengthen its financial system, and conduct monetary policy with price stability in mind. These ambitious steps, combined with continued economic growth, would position the Rouble to be a stable and viable alternative to the Dollar, especially on a regional basis. The Guardian reports:

Russia, with a $1.3 trillion economy at the end of last year, is targeting a place among the world's top five economies by 2020, [President] Medvedev has said. But he acknowledges the rule of law needs to be strengthened and corruption must be rooted out.

Soros Bearish on Dollar

2008-06-13T20:35:00.000+03:00

George Soros, one of the most well-respected investors who sits in the same echelon as Warren Buffet, just released his book on the current state of the world's financial markets. His conclusion is that a "super-bubble" is forming. Connecting to all of the major financial markets, namely property, commodities, and equities, Soros outlines how the expansion in credit that has unfolded over the last 30 years has caused an unsustainable run-up in the prices of most investable assets. Due to the resulting inflation, investors are now fleeing en masse from mainstream securities and parking their money in commodities, triggering a super-bubble therein. With regard to the Dollar, Soros expects the currency to fall as the credit crisis runs its course and Central Banks gradually replace it with more stable currencies. CBC reports:

I think that the dollar is probably still, will emerge as the most widely used currency but the United State will have to abide by the limitations that are imposed on it by the willingness of the rest of the world to hold dollar reserves.

Vietnam Devalues Dong

2008-06-12T14:36:00.000+03:00

The Central Bank of Vietnam has effectively devalued its national currency, the Dong, to bring it in line with market fundamentals. Pressure had been building under the Dong due to soaring inflation, currently estimated at 25%. While 2% devaluation was small in itself, it caps a 5% drop in the currency since March 25. In addition, the move showed just how seriousness Vietnam is about restoring macroeconomic stability. Unfortunately, Vietnam's balance of trade is probably deteriorating faster than it can be repaired, which means the Dong may slide much further. The black market exchange rate is estimated at 18,000:1, compared to the official rate of 16,461:1. Non-deliverable forward contracts imply a 30% depreciation in the Dong in the next year. The Guardian reports:

Fitch Ratings, which lowered its ratings outlook on Vietnam to negative from stable in May, said policy responses have been too slow and too small to deal with the economic pressures.

EU Weakens Economy

2008-05-28T18:39:00.002+03:00

While the credit crisis has ravaged the economies of the US and the UK, the EU has largely been spared. First quarter GDP grew at a healthy annualized rate of 2.8%, helped by a whopping 6% expansion in Germany. However, a number of economic indicators now suggest that all is not well on the European front. Business and consumer confidence indexes are trending downward. Manufacturing output is down. So are retail sales. Spain, which benefited the most during the credit boom, is now reaping the greatest losses during the crunch, and could put a drag on the entire Euro-zone. One prominent economist is predicting that the EU economy won't expand at all in the second quarter.

Unfortunately, the only data point which is trending upwards is inflation. Even though the EU is much more efficient than the US in terms of its use of oil, record oil prices (as well as food prices) are taking their toll. As a result, the European Central Bank cannot (or will not) lower interest rates until price inflation returns to a more palatable level. Accordingly, EU member states are taking matters into their own hands by unveiling economic stimulus plans and tax cuts. As far as the Euro concerned, the ECB's focus on price stability (at the expense of growth) is not hurting the common currency, although if the economy really tanks, the story could change depending on concurrent circumstances in the US. The Economist reports:

The ECB has a strict remit to keep inflation in check, so rising commodity prices are likely to keep interest rates high, lending further support to the euro.

USD Recovers

2008-05-28T18:36:00.001+03:00

The greenback kicked off the holiday-shortened week higher against the majors, edging up to 104.32 versus the yen and 1.5703 against the euro on the heels of mixed US economic reports earlier in the session. New home sales in April reversed an 8.5% decline in March, improving by 3.3% to 526k units. However, the Case Shiller home price index in March posted its steepest decline on record, down by 14.4% versus a 12.7% drop in February. Meanwhile, in another sign of the struggling US economy ¨C the Conference Board¡¯s May Consumer Confidence survey dropped to a two-year low and worst than expectations to 57.2 versus April at 62.3.

Chinks in the Euro's Armor

2008-05-08T11:11:00.000+03:00

2008 has witnessed a rapid appreciation in the Euro, which recently breached the psychologically important $1.60 barrier. Last week, however, the Dollar dramatically reversed course, leading many traders to speculate that the Euro's best days may be temporarily behind it. There are two ideas underlying this theory. First, the Federal Reserve Bank is probably near the end of its tightening cycle, while the ECB has yet to begin. In addition, recent economic data suggests that the Euro-zone economy, which has appeared recession-proof in spite of the credit crisis, may soon falter. The best-case scenario, according to Dollar bulls, would be a loosening of monetary policy in the EU simultaneous with tightening in the US. If such a scenario were to obtain, it would bridge the interest rate differential between the two economies, which many believe is behind the weakness in the Dollar. The Wall Street Journal reports:

If bad news out of Europe starts to accumulate and the Fed stands pat, the dollar’s slide could taper off.

April Marks Dollar Turnaround

2008-05-07T11:53:00.000+03:00

Earlier this week, the Forex Blog speculated that the tide was turning on the Euro, which had retreated from the $1.60 threshold. Sure enough, the month of April saw the best monthly performance by the Dollar in over two years. The sudden about-face by the Dollar stems from changes in interest rate expectations. Only a couple weeks ago, the consensus among investors was that the Fed would cut rates further at its next meeting; the only point of uncertainty was whether rates would be cut by 25 or 50 basis points.

As of today, however, there is only a 25% chance that the Fed will cut rates at all, if you go by futures prices. Regarding the Euro, investors are no longer so sure that the ECB will hike rates in response to surging inflation. In short, the new consensus is that the US/EU interest rate differential has stabilized. Then there is the economic picture; investors have "chosen" to be pleasantly surprised by the most recent economic data. While the economic downturn still seems inevitable, it may not be as severe as investors had previously feared. Reuters reports:

In contrast to slightly stronger U.S. data, the Ifo German business sentiment index this week showed the biggest monthly fall since September 2001.

AUD Nears Parity

2008-05-06T23:56:00.001+03:00

AUD Nears Parity

The word "parity" is becoming a mainstay of traders in the forex markets. In 2007, it applied to the Canadian Dollar, which had rallied 70% over the course of five years to reach the mythical 1:1 level against the USD. This year, it is the Australian Dollar that is threatening to surpass the Dollar in value. The AUD has always benefited from general USD weakness, but now the focus is shifting to the AUD, itself. The most recent Australian price data suggests that inflation in Australia remains problematic, which could force its Central Bank to raise the benchmark lending rate to 7.5%. In addition, high commodity prices and consequently strong exports should provide demand for the currency. As always, analysts are divided over the likelihood of parity, but that hasn't stopped them from bandying the term about. The Australian Age reports:

Parity was never a "ridiculous suggestion." "But it's probably a bit tougher going because the Australian economy is slowing," says one analyst. "Then again, if you saw a reacceleration in growth, that might be a different story."

Forwards Gain Retail Appeal

2008-05-06T23:55:00.001+03:00

The anecdotal evidence for surging retail interest in forex is cropping up everywhere. Moreover, investors are no longer even limiting themselves to the spot market, utilizing derivatives to speculate on future exchange rates. In the UK, for example, 10% of investors intending to purchase real estate in the EU are utilizing forward agreements to hedge their exposure to the Euro, which has risen 10% against the Pound since the beginning of 2008. Evidently, prospective home buyers are hoping that the Euro returns to 2007 levels, which would significantly lower the cost of buying property there. However, if the Euro continues to appreciate, such investors could end up losing more than they bargained for. Homes Worldwide reports:

Even the movement in the markets over a couple of days can make the difference between owning a property and no longer being able to afford it.

Turkish Lira Set for Decline

2008-05-06T23:52:00.002+03:00

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall. In addition, the country is beset by political uncertainty, as the courts determine whether the nation's current government can stay in office. Bloomberg News reports:

"The recent political developments are likely to complicate policy-making and the investment climate. The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda."

Fed Lowers Rates

2008-05-06T23:51:00.002+03:00

The Federal Reserve Bank recently lowered interest rates for the seventh, and perhaps final, time, bringing its benchmark federal funds rate to 2.0%. Since inflation is still hovering around the 4% mark, the Fed will probably be reluctant to lower rates further. Thus, the markets have been given all of the boost that they are likely to receive, and it is "fate" that will determine whether the economy will find its footing. (GDP growth clocked in at an anemic .6% for the last two quarters). The most recent data (including the just-released jobs data) indicate that the economy may be stabilizing, although consumption and the employment situation are still deteriorating. As a result, the National Bureau of Research has yet to officially declare the current economic downturn a "recession," since the picture remains nuanced. The New York Times reports:

The recession-or-not question is now almost entirely academic, Mr. Bernstein contended, given the steady erosion of American spending power and soaring costs for food and gasoline.

Korean Won is Worst in Asia

2008-05-06T23:49:00.001+03:00

In the year-to-date, the Korean Won has recorded the worst performance of any currency in Asia, having recently fallen to a 6-week low. The story is being driven as much by Dollar strength is by Won weakness. US equities have rallied over the last month, as investors may have been overly pessimistic in the previous months regarding near-term US economic prospects. In addition, the Fed has probably lowered interest rates for the last time, whereas the Central Bank of Korea has held its benchmark lending rate at 5% since the summer. This yield differential, which currently favors Korea, may narrow substantially over the coming months, as the Bank of Korea is forced to reckon with slowing growth and rising inflation. Bloomberg News reports:

Growth, at the slowest in more than three years last quarter, is losing momentum, the Bank of Korea said in a report on May 1. Policy makers next meet on May 8 to decide on the benchmark seven-day repurchase rate.

Yen Carry Trade Under Siege

2008-04-20T15:34:00.001+03:00

Volatility levels on JPY/AUD forward contracts recently jumped to 25%, the highest level since the Asian financial crisis of 1997-1998. Combined with other factors, this suggests that the JPY/AUD carry trade, whereby investors borrow in low-yield Yen in order to invest in high-yield Australian Dollars, may be coming to an end. Economic indicators show a faltering Australian economy, sagging confidence, and a record trade deficit. Meanwhile, inflation has moderated, such that it is unlikely that the Royal Bank of Australia will hike rates any further and enhance the nation's comparatively attractive yields. Even though the interest rate differential between Australia and Japan remains a healthy 6.75%, investors may deem this inadequate compensation for the risk implied by weak economic fundamentals. Bloomberg News reports:

"For the next one or two quarters, the Aussie's fundamentals will probably look very soggy. I would suggest the Aussie dollar is expensive. There has been a stunning shift back in favor of the yen," [said one analyst].

G7 Warns of Volatility

2008-04-20T15:33:00.000+03:00

For the last few months, EU politicians have whined about the appreciating Euro. Aside from some token comments by the European Central Bank, however, the world failed to pay heed. That changed last week, when the G7 formally and harshly warned that volatility in forex markets risks harming the global economy. But talk is cheap, and the real question is whether it will be backed up by action. Most analysts reckon that it will be difficult and would take time for the governments of the EU, US, and Japan, at the very least, to put together a coordinated plan of intervention. Besides, the window has probably closed on action by Central Banks, which have conducted monetary policy irrespective of currency valuations. Reuters reports:

The U.S. Federal Reserve Board [is] nearing the end of its interest rate-cutting cycle, the European Central Bank [is] likely to reduce rates before the end of the year, and things might not get much worse for the U.S. economy. That suggests the dollar may recover in the coming months, with or without official intervention.

ECB Holds Rates

2008-04-11T15:39:00.001+03:00

The European Central Bank (ECB) has decided to hold its benchmark interest rate at 4%. Despite signs that the EU economy is slowing, inflation is hovering around 3.5%, and the ECB has announced that its priority will be to maintain price stability. Jean Claude Trichet, President of the ECB, declared during the accompanying news conference that he "deplores" volatility in the forex markets, an indication that he is concerned that the Euro is appreciating too rapidly. It doesn't help the Euro's cause that the Bank of England lowered its benchmark lending rate to 5% earlier in the week and that the Fed is also in the process of easing monetary policy. Both the US Dollar and British Pound recently touched record lows against the Euro.

Retail Appeal of Forex Grows

2008-04-11T15:38:00.004+03:00

With average daily turnover of $3 Trillion, the foreign exchange markets are the largest financial markets in the world. Despite boasting such impressive volume and liquidity characteristics, forex is nonetheless considered extremely risky, and thus viewed as the bastion of experienced traders. This is slowly beginning to change, as investors have moved to diversify their portfolios away from the traditional allocation of stocks, bonds, and cash. Investing directly in forex still not recommended by financial advisers. However, there exist alternative strategies, such as buying CDs denominated in foreign currencies and/or securities that are issued by foreign companies and trade on domestic exchanges. These kinds of "indirect" strategies typically take the form of either "single play" or "double play" strategies. With both strategies, investors attempt to profit through cross-border interest rate disparities, but with "double play" trades, investors seek to profit from currency appreciation as well. The New York Times reports:

Mr. Orr advised currency buyers to research foreign nations and their credit risks, determine at the start their own risk-reward ratio and tolerance to volatility, and have exit strategies, while watching their positions constantly.

Central Bank of Japan Appoints Leader

2008-04-11T15:38:00.003+03:00

For several months, the Central Bank of Japan had been leaderless, creating a situation that was politically and economically awkward. Finally, after much debate, Masaaki Shirakawa, a former academic and veteran central banker, was appointed. It is unclear what effect Mr. Shirakawa will have on Japan's economy, which is foundering (for reasons unrelated to the global credit crunch). He is considered highly competent, and analysts have suggested that he could help Japan develop a sensible and focused economic policy, which has been lacking for quite a while. With regard to monetary policy, he is unlikely to either raise or lower interest rates from the current level of .5%. Thus, if he is to return Japan to economic credibility, he will have to use other methods. Nonetheless, analysts are optimistic. The New York Times reports:

Simply having a hand at the central bank’s tiller will do much to restore global confidence in Japan and its ability to manage its $5 trillion economy, economists and former bank officials said.

USD: Where is it Headed?

2008-04-11T15:38:00.001+03:00

The last week has seen a spate of positive developments in the financial markets, including reassurances by several bulge bracket investment banks that their respective capital positions are in strong and in no need of shoring up. As a result, some analysts are speculating that the worst of the credit crunch has already been priced into securities and the USD, and that actual write-downs on subprime mortgage obligations won't match the "Himalaya-like guesstimates." At the same time, job losses are mounting and the unemployment rate recently crossed 5% for the first time in two years. Interest rate futures contracts suggest a 20% chance that the Fed will cut rates by 50 basis points at its meeting on April 30. Then, there is the ECB, which has been vocal about fighting inflation and European financial markets, which have benefited from "domestic" investors diversifying within the EU rather than to the US. Thus, there is no definitive answer regarding where the Dollar is headed in the near-term: everyone seems to have their own opinion. Bloomberg News reports:

The Dollar Index traded on ICE Futures in New York, which tracks the currency against those of six trading partners, dropped 0.2 percent to 72.049, its third straight decline. It was at a record low of 70.698 on March 17.

Forex Leads Equities

2008-04-11T15:37:00.002+03:00

In recent months, the credit crunch has ignited a global trend towards risk aversion. As a result, a correlation has developed between equities, which serve as a proxy for risk, and certain currencies. The Forex Blog previously covered the link between the S&P 500 and the Japanese Yen, whereby the Japanese Yen moved inversely with the S&P as a decline in risk appetite led carry traders to unwind their positions. Perhaps, this connection can be seen in other currencies. Since the forex markets are open 24 hours a day and are the most liquid financial markets in the world, macroeconomic events are often priced into currencies before they are priced into equities. In addition, carry trading strategies have expanded beyond the Japanese Yen. In fact, the USD is now a decent candidate as interest rates are negative,when adjusted for inflation. Thus, an increase in risk appetite could simultaneously boost the S&P and punish the Dollar!

USD: Worst Quarter in 4 Years

2008-04-11T15:37:00.001+03:00

In the first three months of 2008, the USD notched its worst quarterly performance since 2004, falling over 8%. During the same period, the Dollar lost 10% of its value against the Japanese Yen and 6.4% against a broad basket of currencies. Forex analysts reckon the slide was so steep because investors have taken stock of the US economic situation and have concluded that recession is inevitable. The story is also being driven by interest rates. The Fed has already cut rates by 300 bps in the current cycle of easing, making the benchmark federal funds rate the lowest in the industrialized world, in real terms. Meanwhile, the European Central Bank is giving every indication that it will maintain rates at current levels in order to keep a lid on inflation. As a result, the Dollar could fall further, especially if the Fed continues to hike rates and investors use the currency to fund carry trades. Reuters reports:

[According to one analyst], "And to call a bottom now is still a very risky call. It's too early to say the worst is behind us and the dollar's in for a sharp rebound."

Barclays Introduces Carry Trade ETN

2008-04-11T15:36:00.000+03:00

Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade. In accordance with this strategy, this note is linked to the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields. This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona. Traditionally, carry traders have sold one specific currency (i.e. Japanese Yen) in favor of another currency (i.e. the New Zealand Dollar). By instead purchasing this note, which will trade under the ticker ICI, investors can buy a share of an entire portfolio, optimized expressly for this strategy. Comtex reports:

The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.

How Can An Offshore Company Be Used?

2008-03-23T21:43:00.001+02:00

Listed below are just some of the ways our clients use their Offshore Companies. Intended as no more than a general guide, and avoiding technical terms, it is meant to give you an idea of how versatile offshore companies can be. Naturally, we can give you precise advice on how best to achieve your goals by using an offshore company. All you need to do is ask.

International Trading using an Offshore Company

How to use an offshore company

Import and Export transactions can be made significantly more tax-efficient if they're carried out through offshore companies. Using an offshore company as an intermediary between a seller and a buyer of products or services in different countries allows profits to be accumulated offshore. (This is often called Transfer-Pricing.) Such offshore-companies are generally called marketing or export consultancies, and, with nominees handling all offshore company administration such as phone calls, emails or faxes, the appearance of the company is greatly enhanced.

Although invoicing is invariably carried out via the offshore company, the goods can, nevertheless, normally be delivered direct from seller to buyer.

Such devices can be particularly beneficial for transactions between EU countries, with VAT accounting problems solved by registration in a suitable location, such as the UK or Southern Ireland, the onshore company then working in conjunction with another corporate vehicle, for example a Belize company.

Factoring of debts using an offshore company also offers possibilities to move money from a high-tax to a low-tax area.

Manufacturing

Some countries have a preferential tax-rate for manufacturers, and this can be exploited by establishing a manufacturing company in the appropriate jurisdiction and separating the manufacturing parts of the company's operations from its other functions by basing it in such a free-trade zone. Structured correctly, huge savings can be made.

Offshore Investment companies

An Cloud Worldwide Ltd is often used to make investments and accumulate wealth. Just as an onshore company can invest in stocks, shares, property or commodities, so can an offshore company. The only difference is that the offshore company doesn't have to pay tax on its profits, nor inheritance tax when it is passed on to heirs.

In many jurisdictions, Withholding Tax is levied on income remitted out of the jurisdiction, but the careful use of double-tax treaties can reduce or even eliminate tax on the investment income. This may enable the investor to make investments in high-tax countries from an offshore base with minimal tax liability.

In some countries, interest is paid gross on tax-free bonds or bank deposits and this can be integrated into the client's tax planning. In certain circumstances, interest may be rolled up without income being remitted, and, in some jurisdictions, death duties and capital gains taxes are not levied.

Most importantly, the use of an offshore company also protects the identity of the ultimate beneficial owner. Anonymity comes automatically with offshore companies, and is respected by the law in the offshore world

Offshore Holding companies

Offshore holding companies can handle dividend receipts from a spread of subsidiaries. This allows a group to centralise its resources and maximise tax benefits. Careful use of tax treaties is necessary to obtain the best results.

Various locations, both on and offshore, can be used, with the holding company funding subsidiaries in a tax-efficient manner.

Property-owning Companies Registered Offshore

Placing property into the ownership of an offshore company yields many immediate advantages, including the avoidance of Inheritance Tax and Capital Gains Tax. This is because the anonymously-owned offshore company changes hands in the event of death or re-sale, not the property.

Additionally, any subsequent sale is greatly simplified. In some countries the establishment of title is time-consuming and costly; but once title has been established for a company-owned property it never needs to be dealt with again. This is because the sale can be made by transferring the shares of the company, with title to the property remaining vested in the company. In other words, the company can be sold instead of the property.

Sales by share-transfer almost always save on legal fees, together with any transfer or value-added taxes that are levied in some countries. Government stamp-duties and capital gains taxes can also be avoided.

Probate

The ownership of a portfolio of investments through a single offshore holding company greatly simplifies probate procedures upon the owner's death. It is easy and anonymous to deal with an Offshore Banking in this way. Probate can be applied for in one offshore jurisdiction rather than in several different countries where the assets are located.

Legal fees are often significantly reduced and publicity can be avoided for high-profile individuals and families.

Consultancy and services

Consultants, financial advisors, real estate agents, musicians, security consultants, bodyguards and entertainers often receive much of their income from overseas.

This income can be remitted to an offshore company, which is the individual's employer, and, after paying only a modest amount for expenses, thus retains the bulk of the funds in an offshore account.

Employment overseas is often facilitated by the use of an offshore employment company. This can either employ an individual or a group of individuals working overseas. The employee keeps the bulk of his income outside the country of employment. This type of structure can also reduce currency exchange problems and circumvent a number of employment and residency obstacles. For further information on this, please see our Offshore Payroll section.

Offshore Ship and yacht ownership

It's often advantageous to pass ownership of a vessel to an offshore company. As well as securing significant tax benefits, it can also provide an easy registration procedure for yachts, which in certain countries can only be registered on the major national register with onerous compliance requirements.

We can provide a separate offshore company formation to operate or charter the vessel, thus separating ownership and income for additional tax benefits.

Intellectual property

Patents, copyrights, trade marks, franchises and other rights such as those in music, computer software and technical know-how can all be transferred to the ownership of a licensing company, either offshore or onshore. The licensing company enters into licence or franchise agreements with the original company owner and then receives royalty payments and licence fees.

Insurance companies

Most offshore centres will only accept registration of insurance companies which are subsidiaries of existing insurance groups, or which are very heavily capitalised. Nevertheless, in several first-class jurisdictions it is still surprisingly easy to register an insurance company that would not meet the capitalisation requirements of the UK.

Offshore Internet Trading

One of the fastest growing areas of international trade is the Internet. The international nature of the trade and the potential tax complications of dealing across borders can be solved by the creation of a specialist internet trading company offshore.

To obtain favourable tax treatment, it is best to locate the server physically offshore. However, you can still use a normal domain name.Your customers would not notice any difference, no matter where the server was hosted. We can assist with Web Design and Offshore Hosting or simply give you free advice if you require it.

Though the opinion is often expressed that such operations are 'all in cyberspace' and therefore location is not important, it remains a fact that regulation is increasing and planning should anticipate possible future developments. Although the Americans seem determined to keep the internet tax free, no one really knows how it will turn out long term. True to form, EU legislation concerning the sale of downloadable products and services relating to the payment of VAT is making things more complicated. An example of this is eBay: if you live in the EU you have to pay VAT on your invoices, but if your billing address is outside the EU you don't. This is the result of EU legislation which came into force in July 2003.

Asset Protection using an Offshore Company

An offshore company can be perfect for Asset Protection. Transferring title to assets to an offshore trust means that the settlor (the person who gives up ownership in favour of the trust) no longer visibly controls these assets. This means that they cannot be seized in cases of insolvency, marital proceedings, professional negligence, or by the taxman.

However, if the trust was set up intentionally to avoid a known current or future liability it may be set aside by the courts. Particular care is needed in the US and, since the 2004 budget, the UK is also looking closely at trusts.

Regardless of problems in some countries, trusts, when correctly structured, are excellent asset protection vehicles, and are extremely flexible in times of political and economic instability.

A further advantage of trust formation is that 100% anonymity is still possible and a trust can perform all the functions of a company without some of the restrictions that apply to companies.

Family wealth protection

Trusts are often used to safeguard family wealth by imposing conditions on the use and distribution of money and assets by present and future generations. Such arrangements may also replace a will in certain circumstances. Trusts can be used legitimately to avoid 'forced heirship' provisions affecting inheritance. Inheritance, capital gains and income taxes can all be minimised in this way.

Currency Traders Dump Bernanke

2008-03-23T21:42:00.005+02:00

On January 31, 2006, Ben Bernanke officially replaced Alan Greenspan as Chairman of America's Federal Reserve Bank. At that time, the EUR/USD and USD/JPY exchange rates hovered around 1.20 and 118, respectively. For the first year of his tenure, Bernanke lived up to investor expectations and burnished his credentials as an inflation fighter by continuing a string of interest rate hikes begun by Greenspan. Fast forward to today, where the US economy is in tatters, inflation is raging, home and equity prices are slumping, and the Dollar has declined to $1.55 against the Euro and 100 against the Japanese Yen. Meanwhile, forex volatility levels are climbing rapidly, suggesting that the Dollar's troubles still havn't reached their climax.

Needless to say, currency traders- and a whole host of other investors and analysts- are furious with Bernanke. Many insist that he misled them, by downplaying the seriousness of housing jitters and insisiting stubbornly that inflation isn't a problem. Even now, he is lowering interest rates in order to spur the economy, but at the expense of price stability. As any experienced currency trader can attest, low interest rates and high inflation are a recipe for a weak currency. Reuters reports:

Bernanke "has sacrificed the dollar in an attempt to save jobs and U.S. business," said one analyst. "He had to do something, but at the same time he is only putting off the crisis. We will face tight credit for a decade and we will have stagflation."

The Yen Marches On

2008-03-23T21:42:00.003+02:00

In recent periods of Dollar Weakness, all of the major currencies have been quick to capitalize- all but the Japanese Yen. After a while, it became clear that the Yen was being held down by carry traders, who sold Yen in favor of higher-yielding, more risky currencies. It was long believed that the only thing that would shake the Yen loose from its moorings was not a Japanese interest rate hike or economic growth, but volatility in capital and forex markets. Sure enough, the explosion of the credit crisis induced a rapid appreciation in the Yen. Yesterday, it crashed through the psychological milestone of 100 for the first time since 1995.

But can the Yen sustain this momentum? On paper, if the Dollar continues to fall, it seems the answer is 'Yes.' However, Japan's economy is extremely dependent on exports. In fact, 50% of its 2007 GDP growth can be attributed to exports. With the Dollar crashing, Japan's exports are becoming less competitive, and its exports to the US (estimated at $150 Billion) are in jeopardy. In addition, Japanese consumers are notoriously tight-fisted, so it's unclear who would pick up the slack if the export sector falters. This begs another question: will the Bank of Japan be forced to intervene in currency markets (like it did in 1995) in order to prevent its economy from dipping into recession? The Wall Street Journal reports:

Its big budget deficit makes a stimulus package more difficult. Intervention -- which Tokyo also tried in 2004 during a bout of yen strength -- would fly in the face of efforts by the U.S. and other nations to let markets decide currency values.

Bank Collapses, Dollar Plummets

2008-03-23T21:42:00.001+02:00

Over the weekend, Bear Stearns, a prestigious American investment bank, hurriedly scrambled to find a buyer in order to avoid having to file for bankruptcy. While a buyer (JP Morgan) was ultimately secured, investors remained jittery, as the collapse of this magnitude is virtually unprecedented. When forex markets re-opened on Monday, the Dollar crashed against all of the world's major currencies, namely the Euro and the Yen. Furthermore, analysts are now beginning to view forex intervention as increasingly likely. It's still unclear whether the Bank of Japan or the European Central Bank (with or without support from the Fed) would spearhead any such intervention. At the breakneck speed at which events are unfolding, however, no one will be surprised if a plan is quickly cobbled together. The Wall Street Journal reports:

"Were such intervention to be seen, (the euro) could briefly trade down to $1.55, yet unless the (ECB) is prepared to back up such intervention with a rate cut, intervention will be futile," said [one analyst].

BOC to Cut Rates Further

2008-03-23T21:41:00.005+02:00

Ironically, the faltering US economy has induced the Dollar to appreciate against many of the world's currencies. The reasoning is that countries whose economies are tied closely to the US will falter even more than the US during a recession. One of those countries is apparently Canada. As a result, the Bank of Canada has already moved to cut rates by 50 basis points in order to mitigate against a full-blown Canadian recession. All of the economic indicators are already pointing downwards and GDP growth is projected to be a paltry 1.8% in 2008. In addition, exports to Canada's largest trade partner, the US, have sagged noticeably, such that its current account recently slipped into deficit for the first time in nearly a decade. The Bank of Canada is busy plotting strategy, with additional rate cuts in the offing. It looks like the monumental run of the Loonie has finally come to an end. Bloomberg News reports:

Canada's dollar will probably remain within the range it has held since the start of the year because investors are still avoiding risk amid the unsettled U.S. economic outlook. It has traded within about 4 percent of parity with its U.S. counterpart, after surging last year as high as 17 percent.

Fed Rate Cut has Small Effect

2008-03-23T21:41:00.003+02:00

On Tuesday, the Federal Reserve Bank lowered its benchmark federal funds rate by 75 basis points, its sharpest cut in decades. The markets initially reacted positively to the move, which was intended to shore up sagging confidence in the economy and financial markets. But the next day, most of the gains had been lost, as investors feared both that the recession has already begun and that the Fed is giving up on fighting inflation to battle the lost cause of the economy. In fact, as many analysts feel a recession is a foregone conclusion, the focus may soon turn to inflation, especially given exploding commodity prices and the sagging dollar. The New York Times reports:

"I'm disappointed," said an economist at Citigroup. "It's not as if we're trying to gauge policy priorities on a sunny day. I'd like to know how you're going to get inflation in an environment with suffocating financial restraint and pervasive slowing in demand."

USD: 0 for 3

2008-03-23T21:41:00.001+02:00

In a recent commentary piece, the Market Oracle used the analogy of baseball to outline why this will be an "off year" for the Dollar, listing three reasons to support its claim. Consumer spending was listed first because it represents the largest component of US GDP. Since much consumption is financed through borrowing and since the credit crunch has forced banks to rein in lending, the Oracle reasoned that consumer spending will be especially hard hit. Next, there is the worsening employment picture. As its moniker implies, the "jobless recovery" that has characterized the US economy over the last few years did not add many jobs, and due to the economic downturn, jobs are now being shed. Finally, the Market Oracle has identified the Federal Reserve as a primary contributor to the decline of the Dollar. While the Fed is trying to shore up the economy, it is simultaneously enabling inflation. Thus, even if the battle is won and recession is averted, the Fed may still find that it has lost the war- on prices.

Brazil to Alter Forex Rules

2008-03-23T21:39:00.000+02:00

In a thinly disguised effort to stem the appreciation of its currency, Brazil has announced sweeping changes to its rules governing forex. Rather than revert to outright intervention in the forex markets, however, Brazil will permit businesses to hold more foreign currency as part of their reserves. In this way, the Central Bank won't have to purchase Dollar-denominated assets directly. Instead, it is hoping that the natural attraction of US and other Western capital markets will be enough to drive private Brazilian companies to increase their holdings abroad. It is intended that this will act against the upward pressure on the Real, which rose 20% against the Dollar in 2007, and 5% already in 2008, and now threatens to drag down the economy. Dow Jones reports:

The strong real has made some Brazilian manufactured exports such as textiles and footwear less competitive. Meanwhile, it also has introduced a boom in imports resulting in a narrowing of the country's trade surplus.

USD Weighed on Bernanke`s Assessment

2008-02-24T15:53:00.001+02:00

The dollar fell against the euro and sterling, slipping to 1.4647 and 1.9736, respectively. The greenback was unable to sustain earlier gains following better than expected US economic reports as hints of further interest rates cuts from the FOMC weighed on the currency.

The data included weekly jobless claims, which eased to 348k down from 356k a week earlier. Meanwhile, the December trade deficit shrunk by more than estimates, falling to $58.76 billion, compared with calls for a decline to $61.5 billion from $63.12 billion in November. Also, the deficit with China fell to $18.79 billion versus $23.95 billion from November.

Fed Chairman Ben Bernanke said the outlook for the economy has worsened in recent months and that downside risks to growth have increased. He provided a somber assessment of the housing market, labor market and credit conditions, adding that conditions could worsen more than anticipated. Bernanke expects sluggish growth in the near term but anticipates a stronger pace later as monetary and fiscal stimulus trickle into the economy. He emphasized lags in monetary policy and that stance should be assessed in light of medium term forecasts and risks. Further, Bernanke sees overall CPI easing from recent rates and expectations remain anchored. He said the Fed would closely monitor inflation expectations. Bernanke’s comments reinforce market sentiment that the FOMC will maintain its easing stance, saying it would “act in a timely manner as needed to support growth and to provide adequate insurance against downside risks”.

Weak US Data Drags USD

2008-02-24T15:52:00.002+02:00

The dollar eased further versus the euro and sterling following another round of weak US economic data, falling to 1.4708 and 1.9722, respectively. A key indicator of consumer confidence fell to its lowest level in 16-years with the University of Michigan preliminary sentiment survey dropping to 69.6, versus 78.4 from January. Industrial output in January crept up marginally to 0.1% versus a flat reading in December. Meanwhile, capacity utilization also increased slightly to 81.5% from 81.4% a month earlier. Also released was the December net capital flows (TIC), which more than halved to $60.4 billion, versus a revised $150.8 billion a month prior.

The string of soft US data reinforces fears that the economy is headed toward a recession, thereby prompting the Fed to aggressively ease rates over the coming months. Fed funds futures contracts reflected a 60% probability for the FOMC to cut rates by 50-basis points to 2.50% at the next policy setting meeting in March.

AUD Rallies on Hawkish RBA

2008-02-24T15:52:00.001+02:00

The dollar is weaker against the euro and Aussie as the US market returns from holiday, falling to its lowest level in 3-months versus the Aussie at 0.9236 and a 2-week low against the euro at 1.4756.

The NAHB housing market index unexpectedly rose to 20 in February, versus 19 a month earlier. Nonetheless, despite the improvement, the index remains mired near record lows. Traders will turn to US economic data slated for release on Wednesday, which include January CPI, building permits, real earnings, and housing starts. Consumer prices in January are largely unchanged, with monthly headline CPI at 0.3% from 0.4% and 4.2% versus 4.1% from the previous year. The core readings are seen at 0.2%, unchanged from a month prior and 2.4% y/y, also unchanged.

FOMC Minutes Suggests Further Cuts

2008-02-24T15:51:00.002+02:00

The greenback edged higher against the majors, climbing to 108.36 versus the yen and pushing the euro to 1.4615. A barrage of US economic data was released earlier in the session, with key indicators on inflation and housing giving further clues on the scope for additional easing by the FOMC. Inflation ticked higher in January with the headline consumer price index edging out expectations – at 0.4% m/m and 4.3% from 4.1% a year earlier. The core CPI, which excludes food and energy, stood at 0.4% m/m and 2.5% from 2.4% in the previous year. Housing starts reversed the 14.2% plunge in December, edging up by 0.8% to 1.012 million units in January.

The FOMC released its monetary policy minutes revealing that in addition to the unscheduled meeting on January 21st, in which the board cut rates by 75-basis points, the Fed also met two weeks prior on January 9th. In the minutes from the January 30th meeting, the Fed expects downside risks to remain – lowering its growth projections for 2008 to 1.3%-2% from 1.8%-2.5%. The overall tone from the minutes provided a somber outlook for the economy, with risks for steeper deterioration in the housing market, tighter credit conditions and jobless rate risk tilted to the upside. However, the Fed did note that when conditions improve, “possible rapid reversal of cuts may be needed”.

US economic reports slated for release on the Thursday session will see weekly jobless claims, January leading indicators, and the Philadelphia Fed survey. Weekly jobless claims are expected to edge up slightly to 350k, versus 348k in the previous week, while the leading economic indicators for January are forecasted to dip by 0.1%, improving slightly from the 0.2% a month earlier. The February Philadelphia Fed survey is seen improving to minus 11, from minus 20.9 a month earlier.

USD Slumps on Dismal Data

2008-02-24T15:51:00.001+02:00

The dollar fell across the board, slumping to a two-week low against the euro to 1.4837 and relinquishing the 1.96-level versus the sterling. The catalyst for the greenback’s losses was another round of weak US data reigniting fears that the economy is headed into recession.

The Philadelphia Fed manufacturing index plunged to its lowest level since 2001 to minus 24 in February deteriorating further from the minus 20.9 reading a month earlier and defying expectations for an improvement to minus 11. The January leading economic indicators index was in line with expectations, down 0.1% versus a 0.2% decline from the previous month. Meanwhile, weekly jobless claims came in at 349k, versus a revised 358k from the previous week.

Given the current scenario of deteriorating fundamentals and lingering inflationary pressure, we expect the Fed to maintain its focus on growth with inflation reports taking a secondary role. Yesterday’s stronger than expected consumer price index reports failed to deter markets from pricing in further aggressive rate cuts by the FOMC. We look for the Fed to cut rates by 50-basis points when they meet next month, taking their benchmark lending down to 2.5%.

Risk Aversion Lingers in FX

2007-09-11T19:20:00.001+03:00

At 4:30 AM UK August MPC Meeting Minutes (exp 9-0, prev 3-6)
UK June Claimant Count (exp –10.0k, prev –13.8k)
UK June Unemployment Rate (exp 5.4%, prev 5.4%)
At 8:30 AM Canada June Manufacturing Shipments (exp –0.2%, prev –0.1%)
August NY Fed Manufacturing Survey (exp 18.5, prev 26.46)
US July core CPI m/m (exp 0.2%, prev 0.2%)
US July core CPI y/y (exp 2.2%, prev 2.2%)
US July CPI y/y (exp 2.4%, prev 2.7%)
At 9:00 AM US June TICS (exp $65.0 bln, prev $126.1 bln)
At 9:15 AM US July Industrial Production (exp 0.3%, prev 0.5%)
US July Capacity Utilization (exp 81.8%, prev 81.7%)
At 1:00 PM US August NAHB (exp 23.0, prev 24.0)
The dollar continues to firm against the euro and sterling, but drifts further versus the yen. A barrage of US economic data is slated for release in the coming session, including key gauges of inflation and manufacturing. The July core CPI figures are seen unchanged from their prior readings at 0.2% m/m and 2.2% y/y. The annualized headline figure however, is estimated to fall to 2.4% for July, down from 2.7% in the previous year.
The August New York Fed manufacturing survey is forecasted to fall to 18.5, down from 26.46 from July, while industrial production in July is seen slowing to 0.3% versus 0.5% a month earlier. Capacity utilization is expected to edge up slightly to 81.8% from 81.7%. Meanwhile, consensus estimates for the June TICS data is seen sharply lower at $65.0 billion, versus $126.1 billion from May.

Greenback Rose on Heightened Risk Aversion

2007-09-11T19:19:00.002+03:00

The unwinding of carry trades continues to dominate the foreign exchange market. The greenback strengthened as investment capitals flow back to safe haven amid the heightened risk aversion. The euro fell another 100 pips today to as low as 1.3450 versus the dollar.
The market shrugged off economic data as all the eyes were on risk aversion. US CPI rose 0.1% in July, leading to a year-on-year rate down from 2.7% to 2.4% as expected. Excluding food and energy, core CPI rose 0.2% as expected. New York Fed manufacturing survey fell slightly from 26.46 to 25.06 in August, above the estimate of 18.5. US Treasury reported net foreign purchases of long-term securities for June were 120.9 billion, double the forecast of 65 billion. US industrial production increased 0.6% in July, beating the estimate of 0.3% and a reading of 0.5% in the earlier month. US capacity utilization was barely changed at 81.9% in July. The National Association of Home Builders/Wells Fargo sentiment index declined from 24 to 22 in August, the lowest since September 2001.
EURUSD will face interim resistance at 1.3480, followed by 1.35 and 1.3530. Additional ceilings will emerge at 1.3550, backed by 1.3570. Support starts at 1.3450, backed by 1.34, 1.3380 and 1.3350. Subsequent floors are eyed at 1.33.

Volatility Props USD, JPY

2007-09-11T19:19:00.001+03:00

At 2:00 AM Germany July HICP m/m (exp 0.5%, prev 0.1%)
Germany July HICP y/y (exp 2.0%, prev 2.0%)
Germany July CPI m/m (exp 0.4%, prev 0.1%)
Germany July CPI y/y (exp 1.9%, prev 1.8%)
At 4:30 AM UK July Retail Sales m/m (exp 0.2%, prev 0.2%)
UK July Retail Sales y/y (exp 3.4%, prev 3.4%)
At 5:00 AM Eurozone July HICP m/m (exp –0.2%, prev 0.1%)
Eurozone July HICP y/y (exp 1.8%, prev 1.9%)
At 8:30 AM US Weekly Jobless Claims (exp 313.0k, prev 316.0k)
US July Housing Starts (exp 1.405 mln units, prev 1.467 mln units)
US July Building Permits (exp 1.40 mln units, prev 1.413 mln units)
At 12:00 PMAugust Philadelphia Fed Survey (exp 9.0, prev 9.2)
With heightened risk aversion driving markets, the dollar and yen continue to benefit, while the British pound and euro remain laggards. US equities took another hit with the Dow losing over 167-pts on Wednesday as burgeoning fears of spillover from the subprime debacle linger. The increased cautiousness will likely prop the yen higher across the board as heavy unwinding of the carry trades persist.
US data due out today include weekly jobless claims, July housing starts, July building permits and the August Philadelphia Fed survey. Weekly jobless claims are seen slipping slightly to 313k, down from the previous week at 316k. Housing starts and building permits are both forecasted to reflect continued deterioration in the housing market, falling to 1.405 mln units and 1.40 mln units, respectively. Lastly, the August Philadelphia Fed survey is expected to slip to 9.0, down from 9.2 in July.

Yen Soars Most in 9 Years

2007-09-11T19:18:00.002+03:00

The yen had its biggest one-day gain against the dollar since 1998 as investors rushed out of carry trades amid credit market panic.
Global stocks tumbled today on fears of a funding crisis. The Dow Jones Industrial Averages were down more than 340 points in intraday trading, but rebounded at closing with a loss of just 13. The Fed injected 517 billion to banking system to ease liquidity needs. Short yen carry trades positions were unwounded as investors avoid risky investment in today¡¯s financial market turmoil.
As a result, high-yielding currencies, such as the Australian dollar, New Zealand dollar, and sterling, suffered steep losses. The Australian dollar fell from 0.82 to near 0.78 in intraday trading, the biggest drop in 21 years.

Dollar Fell after Fed Cut Discount Rate

2007-09-11T19:18:00.001+03:00

The dollar fell after the Federal Reserve cut the discount rate by 50 percent to 5.75 percent and said that downside risks are on the rise. The euro rose as high as 1.3550 versus the dollar, while the sterling pared its earlier loss and climbed back to above 1.98 level against the dollar.
The Fed said in the statement that it is ¡°prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.¡± The dollar rallied after the Fed cut window rates to increase liquidity in the market. The Dow Jones Industrial Average opened 300 points higher under the stimulus of the Fed¡¯s action.
Stocks pared half of its earlier gains as investors took a cautious stance and took profits before a US consumer sentiment report. The University of Michigan consumer sentiment fell from 90.4 in 83.3 in August, below the estimate of 88. The dollar edged down slightly after the below-the-expectation data.

Markets to Consolidate This Week after Fed's Discount Rate Cut

2007-09-11T19:17:00.000+03:00

Fed's 50 bps discount rate cut on Friday stabilized the markets which was in massive carry trade unwinding as the subprime mortgage crisis spread through global credit markets. But still, the ultimate carry trade pair, NZDJPY tumbled near to 10% while AUD/JPY also dropped close to 9%. High yielding currencies and European majors except the Swissy, were hammered much lower too before late Friday's recovery. Important technical levels were taken out in most pairs that signaled at least a medium term reversal. However, as a short term top/bottom should be in place after Fed stepped in, and with a rather light calendar, more consolidation could be seen this week before extending the reversed trend.
The greenback did ride on carry trade unwinding and surged against most currencies except the yen on flight-to-safety flows. Fed's unexpected discount rate cut from 6.25% to 5.75% has stabilized the financial markets and triggered some retreat in the greenback too. To be clear, the discount rate is the rate that the Fed charges to lend money directly to banks and other lending institutions. Meanwhile, the commonly talked about Fed Funds Rate is that the rate that banks ay to borrow from the marketplace. In addition to lower the rates, the Fed also allow terms of financing to extend to 30 days. Most importantly, in the statement, the Fed acknowledged that "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward". Downside risks to growth have "increased appreciably". Altogether, even though the act did stabilized the markets and suggest that Fed is openings door to turning bias to neutral and even pathing the way to a Fed Fund rate cut, it is taken as a confirmation of the acknowledgement of the seriousness of the subprime problem. In other words, more bad news could still come in the near future and markets will continue to be vulnerable to them. The discount rate cut, and even a Fed Fund rate cut could halt the current liquidation of riskier assets but the trend will likely continue.
One thing to note is that the Swiss Franc is relatively less affected by the massive carry trade unwinding due to its low yield status. Even though it ended lower against the dollar, the Swissy did rose against both Euro and Sterling. The late buying in Swissy is perhaps an indication that more carry trade unwinding with Swissy is around the corner.
Economic data played a secondary role last week. Though, housing data from the US did showed further deterioration in the housing markets. Housing starts in US dropped much fore than expected to an annual rate of 1.381m in Jul, from 1.47m. Building permits also dropped to a 10 year low of 1.373m. From the data, in addition to NAHB Housing Market Index which fell to a 20+ record low, there is no signal of bottoming of the housing market yet. Consumer inflation data from US were inline with expectation with headline CPI moderated to 2.4% yoy, core CPI staying at 2.2%. PPI was mixed with headline number accelerated to 4.0% while core PPI moderated to 2.3%.
However, Trade deficit surprised the market by dropping to -$58.1b. Capital flow remained near to record at and dropped slightly to 120.9b only, partly reflecting flight-to-safety flows. Retail sales rebounded by rising 0.3% mom with ex-autos rising 0.4%. Regional Fed survey were mixed with NY state index at 25.1 while Philly Fed index dropped to 0.
Data from Eurozone saw Q2 GDP rose 0.3% qoq, 2.5% yoy, down from prior 0.7%, 3.1%. Jul HICP confirmed to be -0.2% mom, 1.8% yoy. There were speculations that with below target inflation and risk of subprime problems' spread over to Europe, ECB could call off it's expected Sept rate hike.
In addition to carry trade unwinding, Sterling was also hammered after UK CPI eased to 1.9% in July, down from 2.4% June, and being lowest in 15 months. Most importantly, the inflation rate was below BoE's target rate of 2.0%. The quarterly inflation report released earlier this month forecasted another hike to 6% is needed to bring inflation back to 2%. However, this week's CPI report is putting much doubt to this forecasts. Also, BoE Minutes revealed MPC elected to hold its benchmark interest rate at 5.75% in August unanimously by 9-0 vote, inline with consensus. One of the main focus in the minutes was indeed that that most members had 'no firm view' on the need for further rate hike. From the employment report, unemployment held steady at 5.4% for the second month in a row in June. However, earnings growth continues to report a slowdown and moderated from 3.5% to 3.3%. Markets were paring bets on another hike in near term.
Japan's Q2 GDP rose 0.1% Q/Q only with annualized rate at 0.5%. GDP deflator remains weak and dropped -0.3% yoy. There is also speculation that BoJ will further delay another rate hike due to current turmoil in the financial markets.
Commodity currencies remains under tremendous pressure last week. In addition, Kiwi will further sold off after June retail sales dropped unexpectedly dropped -0.4%.

Yen Choppiness Resumes

2007-09-11T19:16:00.001+03:00

At 4:30 AM UK July PS net borrowing (exp –6.1 bln sterling, prev 7.443 bln sterling)
UK July PSNCR m/m (exp –11.0 bln sterling, prev 10.339 bln sterling)
At 10:00 AM US July Leading Indicators (exp 0.4%, prev –0.3%)
The foreign exchange market remained volatile in early Tokyo trading, with the yen pairs leading the movement amid lingering risk aversion. Although last week’s 50-basis point cut in the Fed’s discount rate tempered growing fears of a credit crunch and its impact on the economy, traders will remain cautious as it remains uncertain whether the FOMC will cut the Fed fund rate next month. The major currencies rebounded against the yen on Friday and continue to hover around those ranges, with dollar/yen near 114.20 and euro/dollar steady just beneath the 1.35-level.
The week ahead is light on key economic data, but some highlights include the Bank of Japan’s monetary policy decision, Japan’s trade balance, Germany’s ZEW survey, Germany’s GDP, UK GDP and US durable goods orders. However, the currency market will likely take its cues from the credit and equity markets.

More Volatility with a Busy Calendar and Subprime Credit Fears

2007-08-26T14:40:00.002+03:00

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.

$ Slid after Payrolls

2007-08-26T14:40:00.001+03:00

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.

Markets Await FOMC

2007-08-26T14:38:00.000+03:00

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.

Dollar Slipped after FOMC

2007-08-26T14:37:00.000+03:00

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.

Volatility Forces Central Banks

2007-08-26T14:36:00.000+03:00

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.

Rate Sentiment

2007-08-26T14:35:00.000+03:00

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.

Yen Rallied after BNP Froze Funds

2007-08-26T14:34:00.002+03:00

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.

Yen Crosses Could Stabilize But Short Term Risk Remains on Downside

2007-08-26T14:34:00.001+03:00

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

2007-08-26T14:33:00.000+03:00

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).

GBP/USD

2007-08-26T14:32:00.002+03:00

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.

EUR/USD

2007-08-26T14:32:00.001+03:00

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.

Dollar Down Slightly, Awaits US Payrolls

2007-08-26T14:31:00.002+03:00

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%.

Central Bank Decisions

2007-08-26T14:31:00.001+03:00

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.

$ Drifted Higher, Moving with Equities

2007-08-26T14:30:00.001+03:00

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.

Yen Buoyed, Traders Await Data

2007-08-26T14:29:00.000+03:00

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.

USD Mired Near Lows

2007-07-18T14:53:00.001+03:00

At 2:00 AM Germany June HICP m/m (exp 0.1%, prev 0.2%)
Germany June HICP y/y (exp 2.0%, prev 2.0%)
Germany June CPI m/m (exp 0.1%, prev 0.2%)
Germany June CPI y/y (exp 1.8%, prev 1.9%)
At 5:00 AM Eurozone CPI m/m (exp 0.1%, prev 0.2%)
Eurozone CPI y/y (exp 1.9%, prev 1.9%)
Eurozone CPI ex-F&E m/m (exp 0.1%, prev 0.2%)
Eurozone CPI ex-F&E y/y (exp 1.9%, prev 1.9%)
At 8:30 AM US July NY Fed Manufacturing Survey (exp 18.0, prev 25.75)
Canada May Manufacturing Shipments (exp 0.5%, prev –0.6%)
The dollar continued to struggle in a holiday-thinned Asian session, remaining mired near all-time lows against the euro shy of the 1.38-mark and 26-year lows versus the sterling. Lingering uncertainties stemming from the subprime mortgage market and potential spillover to the overall economy are the catalyst for the latest sell-off in the greenback. Although the FOMC has offered little hints of a possible shift to an easing stance, traders’ anticipation for a rate cut either later this year or in early 2008 has compounded the dollar’s woes.

Data Barrage to Set Tone in FX

2007-07-18T14:52:00.002+03:00

At 5:00 AM Germany July ZEW current conditions (exp 88.0, prev 88.7)
Germany July ZEW economic sentiment (exp 19.0, prev 20.3)
At 8:30 AM US June PPI m/m (exp 0.2%, prev 0.9%)
US June PPI y/y (exp n/f, prev 4.1%)
US June core PPI m/m (exp 0.2%, prev 0.2%)
US June core PPI y/y (exp n/f, prev 1.6%)
At 9:00 AM US May Net TICS (exp $70.0 bln, prev $84.1 bln)
At 9:15 AM US June Capacity Utilization (exp 81.5%, prev 81.3%)
US June Industrial Production (exp 0.4%, prev 0.0%)
At 1:00 PM US July NAHB Housing Market Index (exp 27, prev 28)
A flurry of economic data slated for release in the Tuesday session will set the tone for the currency market and determine whether the dollar’s woes will continue. Already mired near record lows against the euro and 26-year lows versus the sterling, traders will analyze the inflation and manufacturing outlook for the US economy to gauge the likelihood for a Fed rate cut this year, which consequently, would likely prompt further declines for the greenback.
US reports set for release include June producer price index, May Net TICS, June industrial production, capacity utilization and the July NAHB housing market index. The combination of inflation, manufacturing and housing reports will provide greater insight into the health of the US economy – given fears that the slowdown in housing has continued to drag manufacturing lower while lingering inflation keeps the FOMC on hold. We anticipate headline PPI falling in July to 0.2% from 0.9%, while the core reading is unchanged at 0.2%. Industrial production for June is expected to improve to 0.4% from a flat reading in May and capacity utilization is forecasted to edge higher to 81.5% from 81.3%. The July NAHB housing market index is seen slipping to 27 from June at 28.

$ Extended Loss, Awaits PPI

2007-07-18T14:52:00.001+03:00

The dollar extended loss against its major rivals as the market has not got rid of the scare that the subprime sector meltdown may spill over into the broader economy especially after last Friday’s surprisingly weak retail sales data. The euro hovers under 1.38 versus the dollar, while the sterling strengthened to test the 2.04 level for the first time in 26 years.
Though a report showed manufacturing activity quickened in New York State, the dollar remained under pressure as inflation and housing data to be released this week are expected to be weak. The Empire Fed manufacturing index for July rose from 25.75 to 26.46, beating the estimate of 18.
A bunch of economic reports from US are due tomorrow. PPI, a key inflation gauge, is expected to fall from 0.9% to 0.2% in June. Excluding food and energy, core index is estimated to remain at 0.2% unchanged. US net TICS is seen to decrease from 84.1 billion to 70.0 billion. Capacity utilization is forecasted to barely changed from prior month’s reading of 81.3%. Besides, industrial production may increase 0.4% in June.

Sterling Gained on CPI

2007-07-18T14:51:00.000+03:00

The sterling jumped above 2.04 versus the dollar after a report showed inflation deceleration was not as fast as expected.
UK CPI headline for June fell from 2.5% to 2.4% as expected. Excluding volatile components, food and energy, the core index rose at a rate of 2% in the year to June, the fastest pace since March 1997. Another inflation gauge, RPI came out at 4.4%, up from a reading of 4.3% in the previous month. The Bank of England may need to lift rates once more in September to curb inflation.
The sterling rallied across the board following the inflation reports. It broke through the 2.04 handle against the dollar and rose to a fresh 26-year high at 2.0474.

Kuwait drops dollar peg

2007-07-02T19:51:00.000+03:00

KUWAIT: Kuwait unshackled its dinar from the tumbling US dollar yesterday and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray. Kuwait's central bank, which battled speculators for weeks to defend the peg, said the dollar's slide against other currencies had forced it to break ranks with fellow Gulf states to contain inflation from the rising cost of some imports. The value of the dinar immediately jumped from 289.14 fils to the dollar to 288.01 fils on the news.

The move stunned Gulf currency markets and volumes dried up. The impact would be clearer today when international markets open, said Steve Brice, chief middle east economist at Standard Chartered Bank in Dubai. Oman and Bahrain, the two smallest Gulf economies, and Saudi Arabia, the largest Arab economy, said they planned to stand by their pegs. There was no comment from the central bank of the United Arab Emirates, whose currency could take centre stage today as prospects for a single currency evaporate.

Kuwait was still committed to monetary union, the central bank governor said in a statement, after changing the dinar's rate to $0.228806, an appreciation of about 0.37 percent. "The massive decline in the dollar's exchange rate against main currencies ... has contributed to the increase in local inflation rates and this step is part of the central bank's efforts to curb inflationary pressure," Sheikh Salem Abdul-Aziz Al-Sabah said in a statement carried by state news agency KUNA.

When Kuwait switched to the dollar peg in 2003 it set the exchange rate at 299.63 fils but allowed it to fluctuate 3.5 percent. The margins were set between a maximum of 310.11 fils and a minimum of 289.14 fils, a level reached last year following the sharp drop of the dollar against major international currencies. Sheikh Salem said the switch will provide more flexibility in setting the exchange rate, thus boosting the ability of the domestic economy to "absorb the impact of sharp fluctuations in the exchange rates of major currencies."

Kuwaiti economist Hajjaj Bukhdour said the decision will help reduce "imported inflation". "The decision will effectively reduce the value Kuwait pays for its imports from countries other than the United States, thus reducing the rate of imported inflation," Bukhdour told AFP. The planning ministry said last week that the inflation rate reached 5.1 percent in the first quarter compared to 3.1 percent last year, but Bukhdour said he believed the actual rate was higher than eight percent. Bukhdour said Kuwait's measure reflected difficulties faced by the alliance to achieve their target by 2010, especially after Oman had announced it will not be able to meet the target date.

Kuwait was named as the top candidate for a revaluation in a Reuters poll of analysts in March and markets piled pressure on the dinar, betting the central bank would allow an appreciation as the dollar slid to record low against the euro in April. But the actual decision to abandon a dollar peg adopted in 2003 to prepare for monetary union caught markets and fellow central bankers unawares. "At the Central Bank of Oman we did not know about this," the bank's Executive President Hamood Sangour Al-Zadjali told Reuters by telephone from Muscat. "There was a position by the leaders of all Gulf countries to remain pegged to the dollar and we have abided by that decision," he said.

Oman cast the first doubts on the monetary union project last year when it said it would not meet the 2010 deadline. Kuwait factored that announcement and other delays in finalising the project in its decision to drop the peg, Deputy Prime Minister Faisal Al-Hajji said. The project now appeared to be in even greater jeopardy, said Brice. "One of the criteria of monetary union was a common monetary policy. Now of course we don't have that," he said. "We didn't think the single currency was likely, at least by the 2010 deadline, and we are getting less convinced that it is going to happen at all. This move reduces even further the likelihood."

Kuwait's central bank governor said his country was still committed to monetary union and was only acting in the "national interest" to contain inflation. "Until the completion of all the requirements to achieve the currency union and the launch of the Gulf currency, the Central Bank of Kuwait will continue to adopt the basket system." The statement did not say what currencies were in the basket. "The basket would typically mean the euro, sterling, Swiss franc and the dollar," said Mazin Al-Nahedh, head of the treasury department at National Bank of Kuwait. In the past the central bank did not disclose the composition of the basket, he said.

Kuwait officials talked with nostalgia of the currency basket as the dollar slid on international markets, blaming the US currency for rising inflation, which hit 5.15 percent at the end of the first quarter. "The speed of the switch to the basket has surprised some but the direction of change is in line with expectations, said Simon Williams, economist at HSBC in Dubai. "It's been clear for some time that Kuwait wanted a stronger dinar and a more flexible regime."

The Kuwait's central bank has spent the past six weeks defending the dollar peg as it came under pressure in the run-up to an April central bankers meeting to try to revive the monetary union plan. The talks ended inconclusively. The central bank warned markets against betting on a dinar appreciation and followed up by cutting key interest rates to make dinar-denominated assets less attractive. The last policy move, a 25 basis point reduction in the repurchase rate, was announced on May 13 after market pressure had subsided.

Chairman of Kuwait Real Estate Bank's Board of Directors Abdulwahab Al-Wazzan welcomed the step, saying that it would reflect positively on the dinar and would lead to reducing inflation in the local economy. Chairman of Securities Group Company's (KSCC) Board of Directors Ali Al-Mousa said that the central bank's decision was "right on the money", stating that it would enable the bank to face many negative outcomes. "The decision does not mean that the relations between the dollar and dinar are permanently severed," said Al-Mousa. - Agencies

New Zealand Intervenes on Behalf of Kiwi

2007-07-02T19:48:00.000+03:00

After watching the New Zealand Dollar (“Kiwi”) rise to a 22-year high in trade-weighted terms, the Bank of New Zealand decided it had had enough and intervened directly in forex markets to hold down the value of the currency. Last week, the Bank was forced to raise interest rates due to soaring inflation. Strong commodity prices and a commensurately strong economy have ushered in a surge of foreign capital, which in turn, have driven the Bank to hike rates, which in turn has made New Zealand more attractive to foreign investors. This vicious cycle proved frustrating enough that the country’s Central Bank evidently felt the only way to curb the currency’s rise was to actively hold it down. The Economist reports:

A strong currency can be a curse for exporters, however. In New Zealand's case, the carry trade has given the kiwi dollar an extra upward push. With the yen nearing five-year lows against the American dollar this week, such trades may well continue.

How Does Terrorism Affect Your Trading?

2007-07-02T19:47:00.000+03:00

Most American traders know that a majority of stock market investments have become global over the past quarter century. Even homegrown companies have expanded with overseas offices or, at the minimum, overseas clients have come on board through the Internet. Currency traders aren't immune to global trading, as the Forex market has opened to any interested trader with money to invest. While investors can look forward to portfolio growth with market expansions, they can also begin to measure how terrorism has affected their trades since 9/11.

The events on 11 September 2001 seem to provide the baseline for many analysts on how terrorism can affect trading. The day before the Twin Towers fell, the Dow Jones Industrial Average (DJIA) closed at $9,605.51. One week later, when the markets reopened on September 17, 2001, the DIJA hit an intraday low of $8,755.46 and the market didn't recover for about another month. But, terrorist attacks - even the threat of an attack - can affect any market beyond Wall Street. Forex is especially susceptible to terrorism, since many targets focus on financial institutions or on major industries that represent wealthier countries.

According to one study conducted by Ohio State University, exchanges, banks, and oil companies aren't the only facilities that terrorists target. This study reveals that 75 terrorist-related attacks between 1995 and 2002 were focused on publicly traded firms and that the average loss per firm per attack was $401 million in market capitalization.

The Forex market has suffered from terrorism as well. When U.K. police foiled a plot to blow up twelve planes flying between Britain and the U.S. in August 2006, the GBP and EUR fell on the news. In January that year, the U.S. dollar fell when Arabic television station Al-Jazeera broadcast an audio tape in which Al-Qaeda chief Osama Bin Laden warned that new attacks are being prepared on the US. Recently, at the end of May this year, approximately 67 foreign currency dealers were kidnapped and tortured in Zimbabwe. The police had accused them of fueling a parallel market that has seen the Zimbabwe dollar slide to bottom levels with one America dollar fetching over Z$50,000 on the black market and $250 on the official Forex market.

The impact created by terrorism differs according to the home country of the target and the country where the incident occurred (or was foiled). Attacks in wealthier and more democratic countries result in larger negative share price reactions, according to the Ohio State University report. And, human capital losses such as executive kidnappings result in larger negative price reactions than bombings that affect public populations and buildings. The investing population seems to have become somewhat immune to the latter incidents.

When such news is directly connected to market volatility, how can the trader respond to protect his investments? The solutions often depend upon whether the individual is a long-term investor or a trader who tries to anticipate market moves on a second-by-second basis.

Long-Term vs. Day Trade Investors

The long-term investor usually doesn't need or want to check his portfolio every minute, as that investor views his holdings as business partnerships. Tough times and even tougher news will happen, as no investment is immune from problems. But, if the long-term investor diversifies his portfolio, he can ride through bad news with some confidence. In fact, those down times often represent a reason for this investor to accumulate.

The long-term investor often doesn't react as quickly to bad news as does the day trader, and he may even ride out the 'storm' if the event isn't an Enron-type disaster. This reaction is based upon a fundamental basis to investing, where the investor relies more on that company's net worth and future growth possibilities. The day trader, on the other hand, often relies on technical analysis that responds to information that arrives by the second.

Despite these differences, many savvy long-term investors (and day traders) realize that many other investors react emotionally to bad news, and often the window to respond to that negative reaction is short-lived. The day trader might want to react instantly to take advantage of the situation, but the long-term investor may not react at all, other than to keep an eye on the situation to see how the market responds to the situation over time.

With that said, terrorism has created a new environment that has put all investors on alert. To examine how some markets react to terrorism, I've leaned on an Investopedia article where they examined how terrorism affected four industries: oil and gas, airlines, auto, and exchange and bank stocks. Some of their material, however, is outdated, so I've included insights from current conditions to show how these markets have changed within the past few years. Additionally, I've sprinkled the following commentaries with information on why Forex investors might take note about changes in these industries.

Oil and Gas

A 2004 Washington Post article warned that energy experts predicted a continued rise in gas and oil prices after foreigners were attacked in Saudi Arabia. At that time, U.S. crude oil futures prices increased by nearly $2.50 a barrel to close at a record $42.33 on the New York Mercantile Exchange. Additionally, gasoline futures jumped six cents per gallon. Crude oil futures in London rose by a similar amount. As of this writing three years after that event, crude oil futures stand at $68.94 per barrel.

Hindsight is always 20/20, but the long-term investor would look at the difference in the prices between 2004 and 2007 and realize that crude oil futures have increased by close to 30% per year (although this past year has been basically flat...). While crude oil futures took a $15.00 hit this morning, the long-term investor would shrug that drop off as a temporary glitch, one that comes amid caution that a U.S. fuel supplies report due later in the current session will show increases in oil product inventories but a drop in crude oil stocks.

Part of this consistent rise in price arrives on the heels of the laws of supply and demand. Demand will continue to push prices up, but terrorism adds a special twist that focuses many investors' attention to the MidEast. In reality, supplies are generated worldwide. A drop in Iraqi supplies shouldn't create a huge dent in worldwide supply, but it will continue to create volatility when news about interruptions surfaces.

In the long run, anyone who goes short on crude oil futures would be considered either a day trader who can pull out in an instant or simply insane. The Iraqi War, increased tensions among all other countries in the MidEast, further hostility from Venezuela, and opposition to home-grown drilling will continue to buoy this commodity until a viable alternative comes to light. No, it's not ethanol - at least not in this decade - as otherwise the price of gas and oil would drop precipitously as demand trends change dramatically.

Forex traders might take note to follow oil and gas activity, as many times currency is intertwined with this industry. For instance, the Canadian dollar typically responds well to higher oil prices, and political tension in the Middle East and concerns over gasoline stocks in the US can tend to support this trend. An active hurricane season in the Gulf of Mexico can add to this support. And, a few terrorist threats focused on corporate oil executives should make any trader nervous about shorting the Canadian dollar.

Airlines

High oil prices often spill over into other industries, such as airlines and automotive. The airline industry also suffers a double whammy from the fact that this means of transportation has been favored for terrorist acts in the past. While consumers viewed airlines as unsafe shortly after 9/11, and as the price of jet fuel continues to rise, airlines have had to drop back and regroup.

As a result, many airlines have come forward as contenders in the stock market once again, but not without some continued problems. This upsurge comes six years after 9/11 - a long time for any investor to wait, even long-term investors. Expect more mergers, continued efforts to reduce capacity, and an increase in the use of materials and processes that make aging fleets more fuel-efficient. Add surcharges that customers pay for checked baggage and other services to help compete against lower fares offered by upstarts, and rising costs for maintaining an airline fleet might be mitigated.

Even while airlines seemed to be stabilizing, it would only take one terrorist incident to shake that market about 7.0 on the Richter scale. The resultant tidal wave could eliminate some carriers from the market totally. If you use the findings from Ohio State University to understand how another terrorist airline attack could affect Forex markets, you can look at currencies to fall in countries where the flight begins and where it was supposed to end. You might add another currency if that plane ends up in a country other than one scheduled on that flight's itinerary.

Auto Industry

The automotive industry is in a shambles, but only if you look at it from the American perspective. This is another industry affected by oil and gas prices, and the trends to alternative fuel sources have met resistance from both manufacturers and consumers. Additionally, private equity and the upcoming labor negotiations this fall could make prices shudder even more. But, SUV and Pickup sales - some of the most profitable products for Detroit in the past - are declining thanks to gas prices. In response, Toyota has entered the American market with gusto.

This industry will change so dramatically over the next two decades that it's impossible to speculate where to go or what to do on a long-term basis. Short-term trends, however, will focus on mergers, buy-outs, and shutdowns of what seem to be perfectly functional operations. China has also emerged as a leader in automotive manufacturing and has become a factor to consider. But, while this industry will be swayed by the money, it isn't powerful enough to affect currencies. Car bombs are so much part of the daily news that the make of the car used for an attack doesn't seem important anymore to the average person.

If you invest in Toyota, you might watch for online hysteria about how terrorists seem to prefer this make of automobile over any other for car bomb attacks. If fear overrides common sense in the future, Toyota could face limits or a ban in the U.S. (which means NASCAR will need to change a few things...). This is just one example of how emotions could affect investments.

Exchanges and Banks

This industry is ripe for volatility as the American dollar continues to drop and as other countries drop the American dollar. Sometimes it seems that other currencies appear strong in comparison, especially when a weak dollar challenges U.S. power. But, strength is measured by day-to-day activities, monthly and quarterly reports, and commodities. While the Ohio State University report indicates that investors rarely respond to public bombings, another attack on market exchanges or banks and their infrastructures could cripple global markets.

With that said, the investor needs to consider that many exchanges and banks operate online as well as through brick-and-mortar facilities. The possibility of an online attack, or "cyber-terrorism," aimed at shutting down company databases and IT infrastructures is a real possibility. Even more devastating would be attacks on regional infrastructure that would limit access to online markets and banks across a broad area. Even if you aren't affected directly by such an act, you can expect negative reactions that force prices down like a brick dropped from the Tower of Pisa. And, until that infrastructure is repaired, you can expect prices to rise like a feather.

Ever see a feather rise? It takes a strong updraft...

What To Do?

As the Investopedia article indicates, one of the best ways to protect yourself against negative reactions to terrorism is to avoid investing all your assets into vulnerable targets and to diversify your investments. Learn how to set stop-losses if you're a day trader, as they can protect you against a sharp drop on news. But you might think long and hard about stop-losses if you're a long-term investor. Terrorism events can equate to short-term volatility that may cost you more in the long run. It would be a shame to loose some long-term investment profits to bad news if that news is based upon a false alarm. Those investments could bounce back sharply and create a situation that will cost you unnecessary brokerage fees as well as any interest earned in the past.

But, while you can avoid risk by investing in software companies that protect Internet infrastructure, nothing will protect against a terrorist who cuts a cable that supplies Internet service to an entire region. And, while you can invest in defense stocks that respond well to fear and terrorism, you might choose those investments with an eye to how well those companies would do outside that environment. Environments often change with politics, and American politics are in flux.

Several ways to avoid high risk in currency trading are to avoid day trading in a volatile atmosphere and to avoid trading currencies from countries where volatility is the norm. Day trading is especially susceptible to cyber-terrorism, whereas some long-term investors might not blink if their Internet connection is lost for a few days. While no one can predict when or where a terrorist act will occur, the long-term investor might find the gumption to ride out a negative response to a threat or an actual event. It helps, however, if that investor has done his research and understands how investments respond historically to previous terrorist events.

If anything can be considered positive about random acts of violence, it's that investors now have access to histories that can help define future market movements. The ability to measure past activity to future possibilities is an advantage, but the intelligent investor — whether short- or long-term — realizes that there's no safety net in today's trading environment. Staying informed, perhaps, is the only way to shield profits from losses that occur from terrorism.

Yen Falls to Record Lows Today

2007-07-02T19:44:00.000+03:00

Sterling and the New Zealand dollar were also beneficiaries of the carry trade, with the former approaching $2 for the first time since late April. Both were at multiyear highs against the yen. Unlike the yen, the Swiss franc surged higher on Friday, with the dollar plunging 0.8 percent to 1.2310 francs and the euro down 0.4 percent at 1.6565 francs . The Swiss government revised up its growth forecasts for this year and next and its 2008 inflation outlook, while the central bank let overnight repo rates rise a week after lifting the benchmark lending rate to 2.5 percent. After the yen, the Swiss franc was a favored funding currency for carry trades, but on Friday, it approached a 15-year high against the Japanese currency.

Divyang Shah, strategist at Commonwealth Bank in London, said the price action marks "an important turning point for the carry trade." "It seems that central banks of the carry trade currencies are starting to do something about what they see as excessive risk taking," he said. Earlier this month, the Reserve Bank of New Zealand tried to weaken its currency -- a favorite target of carry traders -- by intervening in the market, though speculators continued to pour money into the market to reap 8 percent interest rates. The kiwi rose above $0.7680 on Friday, the highest since being floated in 1985, sparking market talk that the central bank could re-enter the market at or above $0.77.

How to Value a Currency

2007-07-02T19:43:00.000+03:00

udging whether a currency is seriously undervalued is much harder than you think

“MISALIGNMENT” is all the rage. A new bill introduced into America's Senate proposes to punish countries where the exchange rate is found to be “fundamentally misaligned”. It would require the Treasury to identify seriously undervalued currencies, and then, if the culprits do not take action, would allow American firms to ask for protective anti-dumping duties. If a culprit persisted with its “manipulation”, the Treasury would have to lodge a formal complaint at the World Trade Organisation. The bill, which is clearly aimed at China, follows a flurry of China-bashing proposals over the past year. But this one is different: it has widespread support and is likely to be passed before the end of this year.

Congress is hoping that it will be much easier to show that a currency is misaligned than manipulated. On June 13th, the day that this legislation was introduced, the Treasury decided yet again not to brand China a currency “manipulator” in its semi-annual report on exchange rates, but confidently declared that the yuan was “undervalued”. And on June 18th the IMF also announced a new framework for monitoring countries' exchange-rate policies. I

t will track indicators such as heavy foreign-exchange intervention and “fundamental exchange rate misalignment” in order to identify countries that are unfairly manipulating their currenciesThis activity is based on the widespread assumption that the Chinese yuan is hugely undervalued against the dollar. Yet the awkward truth is that it is almost impossib

There are three main ways of determining the “correct” value for a currency. The oldest is based on the theory of purchasing-power parity (PPP): the idea that, in the long run, exchange rates should equalise prices across countries (The Economist's Big Mac index is a crude version of this). More sophisticated PPP models adjust for differences in productivity or income per head, because it is natural for prices to be lower in low-income countries. They usually find that the yuan is undervalued. The biggest weakness of PPP is that the equilibrium is only a very long-run one, as it completely ignores capital flows.

A more popular definition of the fair value of a currency is the exchange rate that corresponds to a trade position considered “sustainable”. Thus China's large and rising current-account surplus is seen as hard evidence that the yuan is severely undervalued. A related approach is to estimate the fundamental equilibrium exchange rate (FEER). This is the rate consistent with both a sustainable current-account balance and internal balance (ie, full employment with low inflation). But many FEER studies of the yuan focus only on trade and assume that China is close to internal balance—despite its vast pool of underemployed rural workers. Even if the trade surplus requires a big revaluation, the internal-balance criterion may call for a lower exchange rate.

The FEER approach is flawed in two ways. First, a large current-account surplus does not necessarily prove that a currency is unfairly cheap; it may just reflect countries' different savings and investment rates. Second, it is increasingly difficult to define the sustainable level of a current account in a world of mobile capital. Yet the equilibrium value of a currency is highly sensitive to this assessment.

For this reason, Stephen Jen of Morgan Stanley prefers a third method of calculating the fair value of a currency: the so-called behavioural equilibrium exchange rate. This does not attempt to define long-term economic equilibrium. Instead it analyses which economic variables, such as productivity growth, net foreign assets and the terms of trade, seem to have determined an exchange rate in the past, and then uses the current values of those variables to estimate a currency's correct value.

Pick a number

Morgan Stanley uses no fewer than 13 models to value currencies. Its latest update offers a wide range for the euro's fair value against the dollar from $1.02 to $1.29, with a median value of $1.15. By all measures the euro's current rate of $1.34 looks overvalued. Sterling and the New Zealand, Australian and Canadian dollars also all look too expensive (see chart). Most striking is the New Zealand dollar that is 29% overvalued.

Fed Unlikely to Raise Rates

2007-07-02T19:41:00.000+03:00

The Federal Reserve is back in conclave. The Federal Open Market Committee, which sets monetary policy, convenes today for its first meeting since the bond market sell-off drastically raised long-term interest rates.

Bonds remain volatile, but the yield on the benchmark 10-year bond seems to be stabilising at about 5.1 per cent, after briefly passing 5.3 per cent. Confusion reigns over what this sell-off implied about growth, inflation, and the Fed’s intentions.

Indian Rupee Surges Unexpectedly

2007-07-02T19:39:00.000+03:00

The Reserve Bank of India follows a policy of managed float vis-à-vis the external value of the rupee. Till recently, it was mostly buying dollars from the market, adding to its foreign exchange reserves which have now crossed the $200-billion mark.

If the RBI did not buy dollars, the additional inflows — primarily from remittances, export of services and capital flows — would have sent the rupee spiralling in terms of dollars thanks to the forces of demand and supply. This would have made Indian goods and services more expensive relative to foreign goods and services and affected India's balance of trade.

CHANGED APPROACH

But in the last few weeks, the RBI policy seems to have changed. The rupee has been allowed to rise and is currently at a nine-year high against the dollar. One important trigger for the reversal of policy has been the concern about the rising inflation rate. An appreciation of the rupee would make imported foreign goods (such as crude oil and petroleum products) cheaper (in rupees) in India. But, conversely, the rise in the rupee would make Indian goods costlier abroad and cut into exports.

Alternatively, if the dollar price of exports is kept fixed, the corresponding rupee realisation would be less. Either way, exports would become less profitable, relative to home sales. This, it was hoped, would divert some export products to the domestic market. Consequently, the availability of goods would increase at home, pushing down prices, helping the Government tame inflation.

There is yet another way by which the recent reversal of the policy on supporting the rupee is expected to bring down inflation. Under the earlier policy of buying dollars with rupees, an equivalent amount of rupees was being put into circulation. Other things remaining the same, this would push up the inflation rate. Of course, the RBI did not let other things remain the same. Quite often, it carried out "sterilisation" operations — that is, it sold government bonds to mop up the extra money going into the hands of the public as a result of the RBI buying up dollars from the market.

But there are some problems with this policy. Borrowing more from the market with government bonds would push up the interest rate. This, in turn, would attract more funds from abroad and the RBI would have to do more sterilisation. A point may come when the public — financial institutions, in particular — may not be willing to buy more government paper.

Indications are that such a point may have been reached in India where many banks are more willing to lend to private investors and consumers in a booming economy, rather than to the government at lower rates of return. In addition, the RBI has been running out of the stock of government bonds as it has for long been a net seller of bonds to the market. Together, all these factors (perhaps) forced the RBI to change its policy of artificially keeping the value of rupee low.

THE IMPACT

What are the likely consequences of this policy change? As already explained, the rupee appreciation should exert a downward pressure on the inflation rate. The profitability of exports is going to be affected. Up to a point, exporters can absorb the loss, if the profit margin is high enough to start with. But if the appreciation in the rupee continues unabated, they will feel the pinch and exports will suffer.

Another important consideration is the exchange rate policy of competing countries. Since, at this time, the currencies of China and other East Asian countries are still virtually pegged to the dollar, suppliers from those nations will enjoy a competitive advantage over Indian exporters. For example, the dollar price of Chinese textiles in the US market will remain the same when that of competing Indian products is tending to rise. If the growth rate of our exports slows down (the average growth rate of exports was an exceptionally high 25 per cent per cent over the last 5 years), GDP growth rate would also suffer to some extent.

All Indian companies are not going to be affected the same way. If a company is both an importer and an exporter and its foreign exchange inflows and outflows largely cancel out, the rupee appreciation would affect it much less than firms that are either large net exporters or importers. Thus, the impact for the gems and jewellery sector, which imports most of the raw materials and then exports the finished product, should be much less. But many Indian software and pharmaceutical companies ( lion's share of whose revenues is fixed in dollar terms) will find their rupee revenue and profit margins under strain. Indian exporters of textiles and commodities (such as steel), who have to compete with Chinese products could find their competitive position undermined.

Indian tourists will find their foreign trips a little less expensive while the opposite would be the case for foreign travellers in India. As a result, the Indian tourism industry — especially its high-end segment — would have a negative impact.

Because of higher interest rates at home, many Indian companies have been borrowing heavily from the international markets at lower rates, especially for financing their recent acquisition drives. The resulting foreign exchange inflows are an additional factor pushing up the value of the rupee.

ECBs ATTRACTIVE

If the Indian borrowers feel that the rupee is going to appreciate even more, they would surmise that the debt servicing cost in rupees would go down. This would make External Commercial Borrowings (ECB) more attractive, even at unchanged interest rate differential. On the other hand, if they believe that the rupee is overvalued and can fall , then the balance would tip the other way.

If the RBI wants to limit the appreciation of the rupee in the interest of exporters, it has to discourage ECB. Given the higher and rising interest rates in India, it is difficult to do so, unless the RBI puts more restrictions on ECB. But the RBI is unlikely to do this. For one, the Government wants to develop Mumbai as an international centre for financial services.

To achieve that goal, the central bank will have to gradually remove restrictions on international capital flows and move towards full capital account convertibility. In fact, the last Credit Policy further increased the limit for Indians investing abroad. The RBI is hoping that the additional inflows will be offset by more outflows as a result of the raised ceiling on foreign investments by Indians. However, this is unlikely to happen given the huge interest rate differential in favour of India. To the extent companies are using ECBs to finance capacity expansion, this would also help both growth and inflation control (by removing supply constraints) in the long run.

So, the RBI has a difficult policy choice at hand. In which direction it will move will depend on which objective — inflation control, maintaining export growth or capital account convertibility — is given more importance. Policy instruments — including the exchange rate — would naturally have to adjust as the weights assigned to different objectives change over time.

(The author is a Professor of Economics, Indian Institute of Management, Calcutta.

Canada Dollar Reaches 30-Year High on Outlook for Rate Increase

2007-07-02T19:38:00.000+03:00

The Canadian dollar reached a 30- year high on speculation the Bank of Canada will raise its benchmark interest rate as soon as next month.

The currency gained 0.3 percent in June after the central bank said the prior month that it may lift rates ``in the near term'' from 4.25 percent. A quarterly survey by the central bank yesterday showed Canadian companies reported the most difficulty meeting new orders in almost seven years, and most expect inflation to exceed the central bank's 2 percent target.

``Inflation is a concern for the Bank of Canada,'' said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets. ``The Canadian dollar is going to gain again.''

The Canadian currency rose 0.2 percent this week to 93.87 U.S. cents. The currency yesterday touched 95.51 U.S. cents, or C$1.0471, the strongest since May 1977, as oil prices rose above $70 a barrel. The last time the Canadian currency and U.S. dollar traded at par was November 1976, the same month Jimmy Carter was elected U.S. president.

Canada's financial markets are shut on July 2 for a national holiday.

The central bank, which next meets on July 10, has kept the benchmark rate steady since May 2006. All five economists surveyed by Bloomberg predict the central bank will lift the rate to 4.5 percent next month.

Pared Bets

Futures contracts show investors are betting the central bank will raise rates once more after lifting them in July. September bankers' acceptances futures, a gauge of interest rates in Canada in that month, yield 4.765 percent, down from the June high of 4.81 percent. Bankers' acceptances futures have settled at a three-month lending rate averaging 16 basis points, or 0.16 percentage point, above the central bank's rate target since Bloomberg started tracking the difference in 1992.

Seventy percent of companies in yesterday's central bank survey predicted the consumer price index would advance by between 2 percent and 3 percent in the next year, the highest in the six years the bank has asked the question. Another 14 percent said inflation would be faster than 3 percent, the top end of the central bank's 1 percent to 3 percent target range.

``There are still legs supporting the Canadian dollar,'' said David Powell, currency strategist at research firm IDEAglobal in New York. ``The market is very optimistic that the central bank will raise interest rates twice this year.''

Exporters Squeezed

Canada's dollar has risen from a record low of 61.76 U.S. cents on Jan. 21, 2002, when oil was about $18 a barrel. Commodities including oil make up about half of Canada's exports.

The currency's 9.4 percent rally this year is squeezing exporters' profits, prompting provincial finance ministers to argue against rate increases.

``A 93 or 94 cent dollar has very severe consequences to the Ontario economy,'' Ontario Finance Minister Greg Sorbara said in an interview earlier this month. Provincial finance ministers are urging the Bank of Canada Governor David Dodge not to raise rates, Sorbara said.

Vancouver-based Canfor Corp., North America's fourth- biggest lumber producer by market value, posted a first-quarter loss of C$42.7 million. The company gets about 85 percent of sales in U.S. dollars.

A Statistics Canada report yesterday showed the nation's economic growth unexpectedly stalled in April, pushing the currency down from a 30-year high.

Zero Growth

The economy registered zero growth in April, after a 0.3 percent increase the prior month, Statistics Canada said. The median forecast in a Bloomberg News survey was for 0.2 percent growth in April. The economy expanded for six straight months before April.

The report ``suggests a strengthening currency has started to adversely affect the country's growth, especially the manufacturing sector, which may raise concern the BOC needs to keep rates on hold,'' said Robert Fullem, vice president of U.S. corporate currency sales at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Canada's economy, the world's eighth-largest, grew at a 3.7 percent annual rate in the first quarter, the fastest since the third quarter of 2005. The Bank of Canada forecast that growth would slow this quarter, before accelerating in the second half of the year.

The yield on Canada's benchmark 10-year bond due June 2016 fell 10 basis points this week to 4.55 percent. It reached 4.76 percent this month, the highest since August 2004. The price, which moves inversely to yield, rose 74 cents to C$96.01.

Dollar Rose Above 123 Yen

2007-06-16T16:47:00.002+03:00

EST Exp Prev00:00 Japan Bank of Japan Monetary Policy Decision 0.5% 0.5%01:00 Japan BoJ June Monthly Report n/a n/a01:00 Japan April Leading Indicator n/f 20.008:30 US Q1 Current Account Deficit $201.0 bln $195.79 bln08:30 US May Real Earnings 0.1% -0.5%08:30 US June NY Fed Manufacturing Survey 10.8 8.0308:30 US May CPI y/y 2.6% 2.6%08:30 US May CPI-x y/y 2.3% 2.3%08:30 US May CPI-x m/m 0.2% 0.2%08:30 US May CPI m/m 0.6% 0.4%09:00 US April TICS n/f $67.7 bln09:15 US May Capacity Utilization 81.6% 81.6%09:15 US May Industrial Production m/m 0.2% 0.7%10:00 US June University of Michigan Survey prelim 88.0 88.3The dollar rose above a technical resistance at 123 versus the yen on Thursday. After breaking the key level at 122.20 yesterday, the pair initiated an upward trend with next target at 123.50.The Bank of Japan is widely expected to leave interest rates unchanged at 0.5% on it policy meeting tonight. US interest rate futures indicated that traders have already priced out a chance of a Fed rate cut within the year. The US bond yield premium over Japan equivalents widened further, pushing the dollar trade higher versus the yen.

Euro Rebounded Versus Dollar

2007-06-16T16:47:00.001+03:00

The euro and sterling rebounded against the dollar as traders almost finished adjusting positions according to recent changes in expectations for the Fed rate outlook. The euro broke a technical obstacle at 1.3340, and initiated an upward trend to reverse recent loss. Should the pair stand firm above the 1.3260 base of the decline from 1.3680 to 1.3260, the upward trend holds with next targets at 1.3430 and 1.3520.The US CPI report for May came in basically in line the consensus forecast, and had no impact on the market perception that the inflation tends to be moderate and the Fed is likely to hold interest rates unchanged at 5.25%. The CPI rose 0.7%, above the estimate of 0.6%. The core index rose 0.1%, below the forecast of 0.2%. The euro gained after the ECB council member Axel Weber said the bank is ready to contain inflation, signaling further rate increase. Futures market indicated traders priced in at least one more rate hike by the ECB within the year.

The deficit of US international trade unexpectedly declined in April

2007-06-14T13:46:00.001+03:00

The deficit of US international trade unexpectedly declined in AprilThe Ministry of Trade reported today that US international trade deficit unexpectedly declined in April to $58.5bln. Positive data on US international trade is most likely to consolidate dollar against major currencies. The deficit of international trade for March was revised from $63.9bln to $62.4. The analysts expected deficit increase to $64.0bln. Imports fell in April to $187.98bln from $191.63bln in March. Exports increased to $129.49bln from $126.24 in the preceding month.

$ Rallies On Rising Bond Yield

2007-06-14T13:45:00.002+03:00

The greenback rallied across the board as global equity market and US bond market declined. The euro broke a resistance at 1.3370 to as low as 1.3320 versus the dollar. The sterling fell sharply below last month¡¯s low at 1.9675 and reached 1.9624 against the dollar. US 10-year Treasury notes yield rose to 5.2%, the highest in 11 months. Also, the yield differential between US 10-year notes and German equivalents widened to a 2 month high. There are two main factors that pushed the yield up and drove bond prices down. Firstly, New Zealand central bank unexpectedly raised interest rates to 8% and the European central bank lifted rates to 4%. This indicates an upward trend in the global interest rates. Secondly, the market finally eliminated speculations about a Fed rate cut within this year under recent robust US data. The dollar remained firm after a report today showed US trade deficit narrowed from 63.5 billion to 54.9 billion in April.

UK industrial production rose by 0.3% in

2007-06-14T13:45:00.001+03:00

The index of industrial production in Great Britain rose by 0.3% in April, the National Office of Statistics reported today. The index was expected to increase by 0.1%. In March UK industrial production also increased by 0.3%. Manufacturing output rose in April by 0.3%, which was up to analysts’ estimates, but below the preceding reading (0.6%).The annual increase of industrial production was in April 0.3%, compared with the decrease by 0.2% in March. According to previous economists’ estimates annual increase of industrial production was 0.5%. Annual manufacturing output rose by 1.3%, compared with the preceding reading 1.4% and estimates 0.9%

USD $ Buoyed on Interest Rates

2007-06-14T13:44:00.002+03:00

At 2:00 AM Eurozone April Trade Balance (exp 15.4 bln euros, prev 15.5 bln euros)At 4:30 AM UK April Industrial Production m/m (exp 0.2%, prev 0.3%)UK April Industrial Production y/y (exp 0.6%, prev -0.2%)UK April Manufacturing Production m/m (exp 0.2%, prev 0.3%)UK April Manufacturing Production y/y (exp 1.4%, prev 0.9%)At 7:00 AM Canada May Unemployment Rate (exp 6.1%, prev 6.1%)Canada May Jobs-Change (exp 19.0k, prev –5.2k)At 8:30 AM US April Trade Deficit (exp $63.5-bln, prev $63.89 bln)Canada April Trade Balance (C$4.9bln, prev C$4.64bln)The greenback remains supported against the majors following yesterday’s jump in yields for US Treasuries – with the yield on the 10-year edging to its highest level in almost a year at 5.14%. The bond market is pricing in no change in the Fed Funds rate for the remainder of the year, thereby providing support for the dollar – in which prior expectations for a rate cut were detrimental for the currency. Meanwhile, the sterling remains under pressure following the Bank of England’s announcement to leave rates unchanged despite being inline with expectations due to hopes for a surprise 25-bp hike to tame inflation. Economic data from North America consist of Canada’s May unemployment rate, job-change, April trade Balance and US April trade deficit. Canada’s unemployment rate is forecasted to remain unchanged for May at 6.1%, with an increase of 19.0k in jobs-change versus a 5.2k decline in the previous month. The US trade deficit for April is expected to be largely unchanged, moving down slightly to $63.5 billion compared with $63.89 billion from March.

AUD Jump$, GBP Awaits BoE

2007-06-14T13:44:00.001+03:00

At 7:00 AM Bank of England Rate Decision (exp 5.5%, prev 5.5%)At 8:30 AM US Weekly Jobless Claims (exp 310k, prev 310k)The greenback is predominantly lower across the board, struggling near 17-year lows versus the Aussie and 30-year lows against the Loonie. The recent weakness is largely a result of strength in the overseas economies rather than weakness in the US economy, particularly given the recent bout of mixed economic reports. Sentiment over interest rate differentials will remain a key factor in the currency market, as traders continue to observe the growing disparities between US economic growth and its overseas counterparts – with the US’ clearly lagging.

Euro Creep$ Higher, Awaits ECB

2007-06-14T13:43:00.000+03:00

At 6:00 AM Eurozone April Industrial Orders m/m (exp –1.0%, prev 2.4%)At 7:45 AM ECB June Monetary Policy Decision (exp 4.00%, prev 3.75%)At 8:30 AM ECB President Trichet’s Press Conference US Q1 Productivity (exp 1.1%, prev 1.7%)US Q1 Labor Cost (exp 1.2%, prev 0.6%)The dollar is lower across the board, weighed by yesterday’s comments from Fed Chairman Bernanke. Direction in the foreign exchange market remains largely dictated by sentiment over global interest rate differentials. With Bernanke setting the tone for an unchanged stance for the remainder of the year, traders will scrutinize rate decisions and comments from global central banks this week. Earlier in the session, the Reserve Bank of Australia announced its policy decision, leaving rates unchanged at 6.25%.US economic data slated for release later will see Q1 productivity and labor cost. Productivity in the first quarter is expected to fall to 1.1%, down from 1.7% in the previous quarter. Meanwhile, labor cost is seen climbing higher to 1.2% versus 0.6% from the last quarter.

Euro Fell on ECB Trichet Comments

2007-06-14T11:02:00.001+03:00

The euro fell below 1.35 against the dollar after ECB President Trichet talked down the possibilities of further rate hikes in 2008. The European Central Bank lifted interest rates from 3.75% to 4.00% as expected on its monetary policy meeting ended today. Trichet said on the post meeting conference that in medium term risks to prices are on the upside, reinforcing the expectations for two more rate increased this year. He added that the inflation is likely to fall in coming months and risks significantly towards end year. He also pointed out that inflation projections for the year 2008 remain unchanged, leading investors price down the likelihood of rate hikes in 2008 to 60% from 80% a day ago. The dollar was supported after robust US data confirmed the view that the nation¡¯s economy is still in good shape. US productivity index fell from 1.7% to 1.0% in the first quarter. The labor cost rose from 0.6% to 1.8% in the first quarter, above the estimate of 1.2%.

The $ Under Pressure on Bernanke Comment$

2007-06-14T11:01:00.000+03:00

The greenback dipped further against its major rivals following the Fed Chairman Ben Bernanke’s comments on the US economy. The euro extended its rally to 1.3553 versus the dollar, while the sterling edged higher to 1.9966. Bernanke said the inflation is very well anchored and the cored inflation seems somewhat elevated. He also said the slowdown in housing market will be a drag on the whole economy for a longer period of time than expected. The expectations of a Fed rate cut have been lowered after a run of robust fundamental data recently. Bernanke’s dovish remarks on the housing market put more pressure on the dollar. The dollar edged up slightly after a report showed US non-manufacturing ISM unexpectedly rose from 56 to 59.4 in May.

Inflation Data in Focu$ Thi$ Week

2007-06-13T12:16:00.002+03:00

At 4:30 AM UK May core PPI m/m (exp 0.3%, prev 0.1%)UK May core PPI y/y (exp 2.3%, prev 2.4%)At 8:30 AM Canada Q1 Capacity Utilization (exp 83.5%, prev 82.5%)The dollar remains supported heading into the week against the euro, sterling and yen – as traders continue to price in an unchanged Fed for the rest of the year. Yields on US Treasuries climbed higher last week as the 10-year yield jumping past the 5% mark. The outlook for US growth and inflation remains mixed, resulting in increased scrutiny over incoming economic data. The coming week will see several key pieces of data, consisting of May retail sales, business inventories, producer price index, NY Fed manufacturing survey, consumer price index, current account deficit, capacity utilization, TICS, and the University of Michigan sentiment survey. Traders will closely analyze US inflation reports as well as bond market reaction to gauge market sentiment of the Fed’s interest rate outlook.

NZD $lumped After RBNZ Intervention

2007-06-13T12:16:00.001+03:00

The New Zealand $ posted its largest decline in more than a year on Monday after the Reserve Bank of New Zealand intervened the foreign exchange market by selling its currency in the thin trading session.This is the first time the RBNZ intervened the market since it allowed the currency freely float in 1985. The kiwi hit a 22-year high against the dollar last week after a surprise rate hike by the central bank. The governor of the RBNZ, Alan Bollard, said that current level of the exchange rate was unjustifiably high in terms of economic fundamentals. The currency today tumbled 1.9% to 0.7495 versus the dollar, while fell 1.6% to 91.27 against the yen.

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2007-06-12T13:29:00.000+03:00

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EUR/USD daily outlook

2007-06-11T12:27:00.002+03:00

EUR/USD
The dollar advanced Vs the Euro on Friday and the daily low has been set at 1.3320, this way setting a fresh multi-week low. Support is currently noticed at 1.3320 backed by 1.3285 and 1.3250. Resistance emerges at 1.3370 followed by 1.3390 and 1.3430. Daily sentiment remains bearish, hourly momentum being neutral at the time of this writing. The pair continues to stay into the downward channel formed on the daily charts starting at 04/23 low's and 04/30 high's, extended right. The current lower barrier of the said channel is noticed in the 1.3330 area and it may hold a potential greenback test within the next trading sessions. A break would accelerate the current Euro decline towards the 1.3250 mid-term support which is the March's 26 low. We are looking forward for a trend correction which may push the Euro towards the 1.34 zone. Current quote is 1.3350 @ 06:15 GMT

FOREXYARD: Daily Forex Analysis

2007-06-11T12:27:00.001+03:00

Economic New$ USD
It has been a very impressive move for the greenback on Friday as it appreciated about 0.5% against the EUR and across most of the board. It started early in the trading session and culminated at the release of the US Trade Balance which narrowed down to -58.5B, a much better figure than the expected 63.5B. The move on Friday caused traders to understand that this might be the first signal to a wider move and the notion on the market is slowly turning into a USD bullish one. Whether this is just local profit liquidation or in fact the beginning of the change, will probably be resolved in the following two weeks. The expectations for an interest rate change have been lowered by the Federal Reserve officials, and we will probably not see any cuts or hikes for the remainder of 2007. As for this week, it is not expected to be heavy with news from the US but there are several key points; the US Retail Sales on Wednesday, the PPI on Thursday, and the Consumer Sentiment and industrial Production on Friday. Most of the figures are expected to help the Greenback on its bullish move.
EUR
Last week ended with some mixed figures coming from the European market causing the EUR and the GBP to depreciate against the USD during the Friday trading session. The French Trade Balance went further down to -2.8B together with the German Trade Balance which also went down but remained in positive grounds of 15.0B. The positive data release came from the UK as the Industrial Production came out higher then the expected 0.2% on 0.3%, which made the GBP depreciation against the USD softer. As for today the most significant news event will come from the UK with the PPI Input expected to be released at 0.6%, and the PPI Output at 0.4%. The important events that are expected to come this week are the UK CPI, the UK Retail Sales, and the Swiss Interest Rate Release.
JPY
It has been a relatively quiet trading session in Asia after the release of the JPY Gross Domestic Product revision, which caused no price shaking. The economy expanded by a revised 0.8% in Q1 from the previous quarter, growing at a faster rate than the preliminary estimate of 0.6%, as the corporate sector continued to spend on new plants and other assets to meet demand abroad for Japanese-made goods. “Today's revised GDP data confirmed that Japan's economic recovery remains intact,” said Masayuki Gotoh, senior economist at the Cabinet Office. Although the picture looks pink for the JPY, it appears that most of the trading bias will come from US and EUR derived events, as most focus this week will be concentrated on the USD movement.
Technical News EUR/USD
The pair is breaking through major key levels as the 1.3400 barrier was broken; we see that a 1.3350 breach has already been made. The daily charts are bearish and the hourlies are unwinding to support the bearish notion. 1.3300 is the next target price.
GBP/USD
There is a very strong support level forming at 1.9620, as the pair was shy of a breach at the early stages of the trading session. If a breach will be made we will probably see the April 1st low of 1.9550.
USD/JPY
The pair is showing moderate sign of a local correction, as we might see it touch the 121.00 levels again before the next move up will occur. The dailies are very bullish, and the hourlies delicate bearish cross indicating that buying on dips might be preferable today.
USD/CHF
A massive 200 pip move on Friday caused the pair to close the week at 1.2350. The daily charts are bullish with plenty of room to run, together with the hourlies which are unwinding from overbought levels to support the bullish notion.
The Wild Card CAD/CHF
The pair is touching record levels of 1.1650 as there is a very clear bearish pattern forming on the 4 Hour chart allowing forex traders to jump into what looks like a very interesting downward move. If the dailies will approve we might see a reverse move that provides a great entry point for a short position.