Forex Trading Center

According to a recent Merril Lynch (Bank of America) survey, Europe has officially returned to favor among investors. “A net 30% of global portfolio managers see euro-zone equities as undervalued relative to other regions, the highest reading since April 2001. A net 11% are overweight Europe, the first overweight allocation in nearly two years, said Baker.”

The numbers, meanwhile, reflect this perception. Over the last month, investors have poured a net (inflows minus outflows) $2.1 Billion into EU capital markets, an impressive sum when you consider that the figures for Japan and the US were both negative. Meanwhile, stock markets in the region are up by 50%+ since bottoming last March. When you account for currency fluctuations (i.e. Euro appreciation), stock market comparisons between the US and EU start to look pretty lopsided.

According to a WSJ report, there’s no mystery behind the European stock market rally: “Even though prices have risen sharply since March, valuations aren’t stretched. Average price-to-earnings ratios in Europe, on a trailing 12-month basis, are about 16, up from seven back in March, according to Citigroup…On a price-to-book ratio, stocks are trading about 15% below their long-term average, and dividend yields compared to government bond yields are historically still very attractive.”

At this point, you’re probably wondering, “Why the long preamble on European stocks?” Because, it’s easy to forget that there are inherently two sides to every currency pair. In the case of the USD/EUR (the most frequently traded pair in the world), most of the recent commentary has focused exclusively on Dollar-negatives, portraying the dynamic as a depreciation in the Dollar. In this context, it’s easy to forget that the Dollar’s depreciation implies an appreciation in the Euro. Duh?! But seriously, for every Dollar bear, it seems there is at least one Euro bull.

To be fair, those who don’t see much to be excited about in the Euro can be forgiven. After all, the European economy is technically still mired in recession, and isn’t projected to return to growth until 2011. While some of the intangible indicators are improving, others continue to stagnate. “Industrial output in the euro zone is 20% lower than its February 2008 peak, despite some recent improvements.” In addition, the appreciation in the Euro threatens to choke off exports and stifle the recovery before it has a chance to get off the ground.

Speaking of which, the European Central Bank (ECB) will probably hold of on raising rates because of the strong currency. A more valuable Euro keeps inflation in check (via cheap imports). Besides, higher interest rates would attract carry traders hungry for yield, and would make it even more difficult to keep the Euro in check. Many EU monetary officials (including ECB President Jean-Claude Trichet) have already made their concerns about the Euro’s appreciation clear. If they are able to succed in halting its rise, that could make investing in Europe a lot less exciting…

In its semi-annual report to Congress, the Treasury Department once again failed to officially label China (or any country for that matter) a currency manipulator. No surprise there. While it’s self-evident that China manipulates the RMB (via the peg with the US Dollar), the political implications of such a label prevent it from being used except in the most extreme cases. Nonetheless, there is mounting pressure on China, both domestic and international, to “adjust” the peg and allow the Yuan to move closer to its fundamental value.

Most of the international pressure has been soft, coming in the form of roundabout pleas for China to allow the Yuan to float “for the sake of global stability.” Said one US Senator weakly, “I hope that with strong leadership from the United States, the G-20 nations and our international institutions will undertake what has been missing — a focused, sustained and meaningful multilateral engagement to address currency manipulation and current imbalances.” At the same time, some of this rhetoric has recently been translated into action. Last month, the Obama Administration enacted a 35% tariff on Chinese tire products. Other countries have also begun to raise concerns about Chinese dumping, and bringing their cases to the WTO for good measure.

Many of these countries are in fact suffering more than the US. Since the Yuan is effectively pegged to the Dollar, the decline of the latter has been mirrored by the former. Since many other currencies of developing countries are also fixed, this leaves only a handful to absorb the shock. For example, the Euro and Yen have both risen about 15% against the RMB over the last year, in line with their appreciation against the Dollar. The handful of floating currencies in the region, such as the Korean Won, Indian Rupee, Malaysian Ringhit, etc. have also faced strong upward pressure. For them, it is not so much the weak Dollar that they fear so much as the weak RMB, since China is a direct competitor to all of them.

More importantly, there are now voices within China’s ruling Communist party that have also begun to press for a stronger Yuan. The Nationalist camp, for example, is pressing for China to make the Yuan a more prominent currency on the international trade scene. While such doesn’t inherently require a floating currency (in fact, all of the trade/swap agreements involving Yuan are based on fixed exchange rates), a loosening of capital controls and liberalizing of financial markets would probably bring about a stronger Yuan.

The other group pushing for a stronger Yuan is doing so on more fundamental, economic grounds. Just-released 2009 Q2 GDP data showed prelimenary growth estimates of a whopping 8.9%! Not bad, especially when you consider that the rest of the world remains mired in recession. Chinese economists largely ignore the political implications of the notion that this growth probably came at the expense of the rest of the world, and focus instead on the economc implications.

First is that the economy remains hopeless dependent on exports to drive growth, which can only be remedid through a stronger Yuan. Second, it heralds the coming of inflation. Many foreigners continue to pour “hot money” into Chinese asset markets hoping to reap the upside from both asset and currency appreciation. In response, “Analysts say China could let the yuan appreciate to help restrain inflation, since a stronger yuan would reduce the cost of imports. But some caution that Beijing tried a similar strategy in early 2008, but didn’t achieve great success in containing inflation or stemming the inflows.”

While analysts don’t expect the Bank of China to allow the RMB to rise until after the Chinese New Year in January, investors are pricing in incremental appreciation every month beginning with the next. In fact, futures prices already reflect the expectation that the RMB will rise 3% over the next twelve-months. My bet is that this will be kicked off by another one-off appreciation, in the same vein as July 2005. Now as was the case then, China needs to make up for lost time.

I deliberately concluded my last post (US Dollar: Same Old Story) on a somewhat ambiguous note; even though though the deck is stacked against the Dollar, its 14% decline in 2009 has left it perilously close to record lows, and traders are nervous about pushing the limits further.

On the one hand, everyone believes that the Dollar is fundamentally still in a weak position. The US balance of trade remains deep in deficit. Government spending has exploded, with record-setting deficits and an expansion in the national debt. Interest rates are at rock bottom, and are by some measures, the lowest in the world. Despite signs of life, the economy remains mired in recession. The money supply has also expanding, to the extent that some long-term investors are wondering out loud about the possibility of future inflation.

As a result, the decline in the Dollar since last spring has suffered very few blips, with volatility declining at the same pace as the currency, itself. “There seems to be a paradigm shift underway where more and more foreign investors are becoming concerned that the long-term path of the dollar is downward,” summarized one analyst. The consensus among investors is almost eerie. “Speculators betting that the dollar index will fall outnumber those betting that it will rise by nearly 2 to 1, according to the Commodity Futures Trading Commission.”

Some (mainstream) analysts have even begun to open consider the possibility of a crash in the Dollar, a view that had previously been relegated to conspiracy theorists and doomsday scenarists. “In a run on the dollar, that thinking would create a cascade — fearful global investors would shy away from dollars, expecting further steep declines, creating a self-fulfilling prophesy.” Adds a former Chief Economist of the IMF, “Every time the dollar starts depreciating there is angst and everybody starts raising the question what happens if there is a collapse.” While the majority of Dollar-watchers still believe that a Dollar crash is unlikely, the point is that they are now discussing it actively.

Despite the fact that all of these factors are already in place, the Dollar remains relatively buoyant. Personally, I think this is because investors don’t really want to acknowledge that this is a real possibility. For one thing, the alternatives aren’t any better. While forex investors in recent years have enjoyed ganging up on the Dollar, the fact remains the fundamentals for the other major currencies remain just as weak. For example, a model of purchasing power parity developed by “the Organization for Economic Cooperation and Development finds the dollar is worth roughly 0.85 euro, compared with its market valuation of 0.67 euro, suggesting that the euro is 21% overvalued.” Likewise, the Yen is held to be 22% undervalued.

As a result, the market as a whole is having trouble pushing the boundaries. The Dollar has approached the psychologically important level of $1.50/Euro on several occasions, but has retreated each time. “People are wondering whether we’re going back to $1.46 in euro/dollar or heading toward $1.54. But one thing is for sure, as we head toward $1.50, we’re going to experience a lot of volatility,” summarized one analyst.

“Risk reversals, a measure of currency sentiment in the options market derived by looking at the difference in implied volatility between out of the money calls and out of the money puts, show a bias for euro puts, trading at a mid-market level of 0.2. That means investors are hedging their short dollar positions with bets for a euro downside even though no one expects the euro to fall.” Meanwhile, volatility has edged up slightly, reflecting an increased level of uncertainty surround the near-term direction of the Dollar. It could be the case that if the Euro breaks through $1.50, heartened investors will send the currency up even higher, while a failure to break through means investors just aren’t read to commit. A classic technical crossroads!

These days, it’s hard to offer a fresh perspective on the Dollar. The factors driving its short-term momentum – namely low interest rates and its perception as a financial safe haven – have been in place for nearly a year. It’s long-term prognosis, meanwhile, also hasn’t changed much. Since the beginning of the decade, the Greenback has been in a state of perennial decline as a result of its twin deficits and the related notion that it will be soon be replaced as the world’s pre-eminent currency.

Since the last time I posted about the Dollar (October 6: Dollar’s Role as Reserve Currency in Jeopardy), then, there haven’t been many developments. Fears that oil will one day be priced and settled in an alternative currency – such as the Euro – continue to reverberate through the markets. Several ministers from OPEC countries have already officially dismissed such claims as baseless. A parallel debate is now taking place on the sidelines as to whether or not such a shift even matters.

Dean Baker argued in a recent article for Foreign Policy magazine, that pricing oil in Dollars represents a mere “accounting convention,” adopted by most simply by default, since the US is the cornerstone of the world economy. Argues Baker, “World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.”

Unfortunately, Baker’s “simple arithmetic” is both erroneous and slightly irrelevant. Assuming a price of only $100 per barrel (pretty conservative if you believe the notion of peak oil), current consumption of 85 million barrels per day implies a daily turnover of $8.5 Billion per day, or $3+ Trillion per year. If the price doubles to $200 per barrel….well, you get the point.

Taking this line of reasoning further becomes somewhat problematic, however. First of all, while OPEC members currently hold the majority (70%+) of there reserves in Dollar-denominated assets, it’s unclear how this would change in the event that oil was no longer priced in Dollars. It’s conceivable that just as many of these Central Banks currently diversify their Dollar-denominated proceeds into other currencies, that they would “diversify” Euro-denominated proceeds back into the Dollar. Of course, it’s also conceivable that a combination of inertia and investment strategy would cause them to hold a larger portion of there reserves in Euros.

If OPEC Central banks continue to prefer Dollars, than Baker is right in arguing that the currency in which oil is priced has no implications outside of accounting. If, on the other hand, he is wrong, and a change in pricing causes/coincides with changing preferences, then the implications for the Dollar would be disastrous. [Consider that $3 Trillion/per year which is at stake currently represents more than 15% of total foreign ownership of US assets.] The problem is that we just don’t know.

Regardless, the status quo favors the Dollar, since creating a new reserve currency would take at least a decade, if not more. For that reason, the World’s Central Banks (we’re not just talking about OPEC anymore) continue to prefer Dollars. “In the five weeks through Oct. 7, foreign central banks bought more than $48.55 billion in Treasury securities, an average of $9.71 billion per week, according to the latest data from the Federal Reserve.” In addition, “Finance Minister Hirohisa Fujii said he expects the dollar will remain the key reserve currency for some time to come.” Private foreign investors, meanwhile, are dragging their heals a bit, perhaps waiting for the Dollar to fall further before jumping in. Asks one columnist rhetorically, “Why buy now if the dollar might be even weaker in six months’ time?”

What else is new? The US budget deficit came in at $1.4 Trillion for the fiscal year, the highest level since World War II. On the bright side, the deficit was $200-400 Billion less than earlier estimates. Meanwhile, members of the Federal Reserve’s Board of Governors restated the unlikelihood of higher rates in the immediate future. “Richard Fisher, president of the Dallas Fed and thought to be a rare hawk on the Fed’s Open Market Committee, chimed in that no one at the Fed thinks this is the time to raise interest rates.” Finally, the US trade deficit is once again narrowing, due in no small part to the declining Dollar.

At this point, it seems reasonable to assume that much of the bad news has already been priced into the Dollar. Sure, the Australian rate hikes came as a surprise and forced many to rethink their calculations. Investors have already begun to separate the healthy currencies from the sick (to borrow an analogy from a previous post), but that the Dollar would be grouped with the “sick” currencies has long been anticipated. Given that the currency has already fallen by double digits in 2009 and is nearing the record lows of 2008, some are wondering how long it can continue.

In my report on last month’s Japanese election, I noted that the newly-appointed Japanese finance minister, Hirohisa Fujii, had spoken out against forex intervention. With that, it seemed the matter was closed.

But not so fast! Over the following few weeks, Fujii (as well other members of the new administration) moved to clarify his position, backtracking, sidestepping, contradicting, but never going forward. The following is a summary of selected remarks, beginning with the original statement against intervention and ending in what seems like a promise to intervene:

September 15: “I basically believe that, in principle, it’s not right for the government to intervene in the free-market economy using its money, either in stock or foreign-exchange markets.”
September 27: [The Yen's rise is] “not abnormal…in terms of trends.”
September 28: “That’s not to say I approve of the yen’s rise.”
September 28: “I don’t think it is proper for the government to intervene in the markets arbitrarily.”
September 29: “If the currency market moves abnormally, we may take necessary steps in the national interest.”
October 3: “As I have said in Tokyo, we will take appropriate steps if one-sided movements become excessive.”
October 5: “If currencies show some excessive moves in a biased direction, we will take action.”

Confused? I know I am. Is it possible to glean any semblance of meaning from these remarks? Summarized one columnist, “Hirohisa Fujii has gone through several cycles of remarks that first appeared to favor a strong yen and then seemed to backpedal after markets took him at his word and sent the Japanese currency soaring.”

I think this encapsulates the regret that Minister Fujii must have felt, after his original comments were taken a little too seriously. In hindsight, it appears that Fujii attempted to convey the new administration’s stance on forex, in a nutshell, and certainly didn’t expect that investors would run wild and send the Yen up another 4%, bringing the year-to-date appreciation against the Dollar to 15%. In the words of the same columnist cited above, “Japan’s finance minister has been rudely reminded of the cardinal rule when speaking to markets — less is more.”

So where does Fujii actually stand? I would personally hazard to guess that his original explication is still the most accurate portrayal of how he will tend to the Yen while in office. The former Liberal Democratic Party (LDP) administration intervened several times while in office (once under the direction of Fujii himself!) and most recently in 1994. Despite spending trillions of Yen, the campaign only marginally stemmed the rise of the Yen.

Meanwhile, the Japanese economy has been mired in what could be termed the “world’s longest recession, dating back to the 1980’s. It’s clear that the cheap-Yen policy, designed to promote exports, hasn’t benefited the Japanese economy. The new administration, hence, has indicated a shift in strategy, away from export dependence and towards domestic consumption.

Ironically, the nascent Japanese economic turnaround is once again being driven by exports. Fujii is no doubt cognizant of this, and doesn’t want to jeopardize the recovery for the sake of ideology. For example, Toyota Corporation has indicated that a 1% appreciation in the Yen against the Dollar costs the company $400 million in operating income. In addition, while a strong Yen increases the purchasing power of Japanese consumers, an overly strong Yen can lead to deflation, as consumers forestall spending in anticipation of lower prices down the road.

In other words, Fujii is certainly not a proponent of Japan’s recent runup, but his stance is more nuanced than initially understood. “Fujii is basically saying currencies should reflect economic fundamentals and that it is wrong to manipulate their moves to lower the yen for the sake of exporters,” offered one strategist. This, the markets finally seem to understand, and the Yen has actually reversed course over the last week. After all, “A yen in the 80s is excessive,” given the context of record low interest rates and a economy that is still contracting.

In the near-term, then, it doesn’t even make sense to talk about intervention. It seems the markets were getting ahead of themselves in this regard. It doesn’t make sense to price out the possibility of intervention when interevention shouldn’t be a factor in the first place. If on the other hand, the Yen continues to appreciate, then Fujii may have consider how fixed his principles really are.

The Yen rose to a 7 month high versus the Dollar as Japan’s new government reiterated its opposition to pursuing deliberate currency devaluation strategy. The Sterling dropped to a 3 month low versus the Dollar last week after Bank of England Governor Mervyn King was quoted as saying the Pound’s weakness is aiding in stabilizing the U.K.’s economy. Today’s trading day will likely experience the markets reaction to the G20 leaders’ decisions, mainly their pledge to continue supporting the stimulus efforts.

USD – USD Falls below 90.00 Yen

The Dollar weakened on Friday after a set of mixed U.S economic reports as well as reports that the G20 leaders will continue to provide support for the global economy. The Dollar index fell to 76.774 Friday, down from 76.901 late Thursday. The Dollar remained down more than 1% versus the Japanese Yen after statements by Japan’s Finance Minister Hirohisa Fujii that he opposes intervening in the currency markets to curb the rise in the Yen.

Orders of durable goods unexpectedly fell 2.4% in August. Sales of new homes rose 0.7% to a 429,000 pace in August, much slower than the expected 442,000. On the other hand, the Reuters-University of Michigan consumer sentiment index was revised to 73.5 in September, compared to a previous estimate of 70.2 and 65.7 in August, beating analysts expectations.

No news events are expected today form the U.S; therefore, it is likely that Dollar sentiment will be determined by investors’ reactions to the G20 concluding statements.

EUR – Sterling Trades at a 3 Month Low vs. USD

The Sterling dropped to a 3 month low below $1.60 last week after Bank of England (BOE) Governor Mervyn King was quoted stating the Pound’s weakness is aiding in the recovery of the U.K economy. The EUR traded at $1.4665, up 0.2% from Thursday.

The Sterling slid 2.1% versus the Dollar last week following very dovish announcements by BOE Governor Mervyn King, calling the Pound’s recent drop “very helpful.” The Pound fell Friday to $1.5918, the lowest level since June 8, and depreciated to 91.19 per ERU, the weakest level since April 1.

While a rather slow news day is expected today, ECB president Trichet’s speech at 2:30 GMT is likely to provide volatility to the EUR as interest rate targets and exit strategies are likely to be discussed.

JPY – Yen at a 7 Month high versus the Dollar

The Yen registered sharp gains Friday, breaching the significant Y90.00 barrier against the Dollar and reaching the highest levels versus the greenback in over 7 months. Japan’s currency benefited from supportive comments from Japan’s finance minister Hirohisa Fujii who said that he opposes intentional devaluation of the Yen.

The JPY advanced 1.8% this week to 89.64 per Dollar from 91.29 on Sept. 18, briefly touching 89.51 Friday, the strongest level since Feb. 5. The currency also gained 2% to 131.70 per ERU, from 134.33.

Crude Oil – Crude Prices up Slightly on Mixed Data

At the end of a very volatile trading day Friday, Crude Oil futures rose slightly, for the first session in 3, following the release of mixed economic data from the U.S as well as on increased odds of broad based sanctions against Iran, the world’s 4th largest Oil producer. Crude for November delivery rose 13 cents, or 0.2%, to end at $66.20 a barrel on the New York Mercantile Exchange, after dropping as low as $65.05, the lowest level since July 30. Overall futures tumbled more than 8% this week, the biggest weekly loss in more than two months.

The unexpected jump in the Reuters/UoM Consumer Sentiment Index to 73.5 in September helped push up Oil prices; however, concerns over weak demand dampened Friday’s gains. Furthermore, several worse than expected economic data from the U.S stemmed further Oil’s Gains.

With last Wednesday’s report by the Energy Information Administration (EIA) stating that inventories of Crude Oil, gasoline and other petroleum products all rose last week and a lack of any significant economic news today, Oil prices will likely continue to stay subdued throughout today’s trading day.

Article Source – Japan’s Currency Hits a 7 Month High

The US Dollar surged higher to start the trading week as stocks sold off across Asian exchanges, boosting demand for the safety-linked currency. The British Pound bore the brunt of the greenback’s assault as risk aversion compounded last week’s dovish rhetoric from the Bank of England.

Key Overnight Developments

• Pound Tumbles Despite BOE Backtracking on King’s Comments
• Japanese Yen Surges on Safety Demand as Stocks Plunge in Asia

Critical Levels

The British Pound and the Euro both suffered sharp losses in overnight trading as stocks tumbled in Asia, driven lower by Friday’s disappointing US economic data, sending the MSCI Asia Pacific regional benchmark index down 1.2% and boosting demand for the safety-linked US Dollar.

Asia Session Highlights

The British Pound raced sharply lower in early trading as currency markets seemingly concluded that the Bank of England suspiciously “protests too much” after the UK Times Online cited unnamed sources at the central bank as saying King was trying to talk down sterling last week. The Pound began to accelerate lower last Monday after the BOE released an article titled “Interpreting Recent Movements in Sterling” as part of its quarterly bulletin which argued that the inability of drying up capital inflows to finance the current account deficit could mean a fall in the “the long-run sustainable real exchange rate”. Sterling bears were given extra fuel last Thursday when Governor Mervyn King said rebalancing the UK economy was “very necessary [and] the fall in the exchange rate that we have seen will be helpful to that process” in an interview with The Journal.

Reserve Bank of Australia Governor Glenn Stevens struck a hawkish tone at a testimony to the Senate Committee in Sydney. Stevens said that Australia’s recession has been mild and the economy has done “quite well” as government stimulus “materially” supported growth, adding 2-3% to local demand. On interest rates, Stevens said that benchmark borrowing costs are “unusually low” and will need to go back to normal levels, adding that inflation targeting will guide the timing of adjustment to “more normal levels”.

Euro Session: What to Expect

A preliminary estimate of Germany’s Consumer Price Index is set to show that prices fell -0.2% in the year to September, marking the third consecutive month that the EU-harmonized metric has printed in negative territory. A reading in line with expectations is unlikely to prove market-moving: economists have called for year-on-year CPI to shrink -0.3% through the third quarter, and averaging September’s would-be reading with those recorded in the previous two months yields just about that outcome. The coming months present an opportunity for volatility, however: consensus forecasts have inflation coming back into positive territory in the fourth quarter and averaging around 1.2% through 2010; if this proves too rosy as the economy falters anew after the boost from fiscal stimulus (both at home and abroad) and the inventory cycle fizzles out, a drop in inflation expectations stands to prolong the slump in the Euro Zone’s largest economy. Indeed, consumers and businesses have little incentive to spend and invest in the present if they reckon prices will be lower in the future, bringing economic activity to a standstill. This will mean the ECB will keep interest rates at current lows longer than nearly all of its major counterparts (with the exception of Japan and Switzerland), weighing down the Euro.

Written by Ilya Spivak, Currency Analyst
Article Source – Pound Tumbles, Dollar Surges as Risk Aversion Hits Currency Markets (Euro Open)

US Dollar: Optimistic Economic Outlooks to Meet Hard Facts This Week

Fundamental Outlook for US Dollar: Bullish

- The Federal Reserve left rates unchanged, but signaled a more optimistic outlook
- University of Michigan consumer confidence jumped to a 21-month high in September
- US durable goods orders tumbled 2.4% in August, marking the steepest drop since January

The US dollar ended the past week marginally higher after the Federal Reserve issued a more optimistic outlook on the economy. In the coming week, though, there will be a variety of growth indicators on hand that may help to signal whether the US recession really ended in Q2. That said, the US dollar index will have to contend with resistance just above 77.00 at the start of the week, but a break above there will likely coincide with a EURUSD drop below 1.4615.

Looking to the upcoming event risk, on Tuesday, the September reading of the Conference Board’s measure of US consumer confidence is expected to rise up to a one-year high of 57 from 54.1 in August, but overall, there are some upside risks for this report. Indeed, the final reading of the University of Michigan’s consumer confidence index show that sentiment improved greatly in September, with the index hitting a 21-month high of 73.5 from 65.7.

On Wednesday, the third round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see surprising revisions. The final reading is forecasted to be revised down to -1.2 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Readings in line with expectations may not have a very big impact on price action, but better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2.

On Thursday, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. The last release didn’t have much of an impact on the US dollar, as risk aversion dominated the day, leading the currency higher. However, the report will still be useful because of its employment component as a leading indicator for the big news on Friday: US non-farm payrolls.

The US non-farm payrolls (NFPs) index is forecasted to show job losses for the 21st straight month in September, though the rate of decline is anticipated to slow further. At the time of writing, Bloomberg News was calling for NFPs to decline by 187,000, which would be the smallest drop since August 2008. Meanwhile, the unemployment rate is projected to edge up to 9.8 percent from 9.7 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality.

Euro Shows Early Signs of Reversal – Week Ahead Critical to Trends

Fundamental Forecast for Euro: Neutral

- Euro breaks key technical short-term trendline
- Candlesticks likewise point to a potential Euro reversal
- German IFO improves for sixth month
- Risk trends remain most important EURUSD driver

The Euro showed early signs of technical reversal through an eventful week of trading, setting fresh yearly peaks versus the US Dollar yet finishing lower through Friday’s close. Strong rallies in the US S&P 500 and other key risk barometers led the single currency to impressive highs against most major counterparts. Yet a late-week breakdown in risk sentiment sparked a flight to safety across forex markets—much to the Euro’s detriment. Near-term Euro forecasts will very much depend on the trajectory of said asset classes, and a busy global economic calendar promises no shortage of volatility through the week ahead.

The Euro remains in fairly well-defined 6-month uptrend, and we would hardly argue that several days of declines signal that it has set a major top. Yet it is undeniable that the EUR/USD lost much of its short-term momentum—having broken below short-term technical support and threatening further declines. Fundamentals will likely play a fairly significant role in the days ahead as the combination of German and US Employment figures will shed a great deal of light on economic conditions in both key countries. The reports may confirm recent waves of economic optimism or cut celebrations short. Reasonably steady improvements in fundamental data have made for lofty market forecasts across most economic releases, and a string of disappointments could easily force noteworthy corrections across major financial markets.

Early-week German Consumer Price Index numbers and Euro Zone Consumer Confidence figures could produce surprises, but most traders look forward to market-moving German Unemployment Change figures due Wednesday. Previous results showed unemployment actually fell for the second consecutive month through August, but the numbers were clouded by government stimulus payments inducing firms to keep workers on their payrolls. Forecasts for September results call for a far less sanguine 20k jump in unemployment. Given that Germany is largely considered the bellwether for the broader Euro Zone economy, any disappointments could led to a noteworthy correction in the Euro exchange rate.

Friday’s US Nonfarm payrolls result could likewise have a pronounced effect on Euro pairs. US and European markets have proven especially sensitive to major surprises in the monthly payrolls number. Consensus forecasts call for the eighth-consecutive improvement in the jobs release, and any disappointments could clearly make a dent in broader forecasts for growth out of the world’s largest economy.

The critical question remains whether we can expect further equity market gains. Much like the Euro, the S&P 500 showed early signs of reversal through late-week trade. A continuation of said tumbles could easily force the Euro to move in kind.

Japanese Yen Momentum a Combination of Risk, Intervention and Data

Fundamental Forecast for Japanese Yen: Bullish

- Finance Minister Fujji reiterates his opposition to FX intervention
- Policy officials start reining in the stimulus that has supported the most aggressive rally in decades
- Exports shrink 36 percent in the year through August, exacerbated by sharp appreciation of the yen

The Japanese yen was the biggest mover and gainer amongst the majors this past week – by a long shot. However, we can’t idly attribute this appreciation to risk appetite alone. Indeed, we can see while other risk sensitive assets (equities, bonds funds, commodities, high-yield currencies) have pulled back over the same period; they certainly didn’t do so with the same gusto as the yen. Underlying sentiment no doubt prompted the trend; but early signs of policy withdrawal and confirmation from the new Japanese Finance Minister suggesting the days of FX intervention has passed provided the fuel for momentum. Will the market maintain its bearing and pace? That will depend on three dominant factors: interpretation of the G-20 commitments; weighing the fair value of the yen; and the outlook for the domestic recovery.

While the first concern is related to the G-20 meeting and commitments that were announced this past week, the fundamental relation to the yen is risk appetite. In the six-month rally from anything and everything that can bear a yield above the risk-free assets that traders took shelter in during the worst of the crisis, we have seen an early upsurge in demand for return and an elemental redistribution of capital. There have certainly been earlier adopters to the market reversal and those lured in by the steady capital gains; but most of the inflow of wealth is simply coming from the market sidelines and is seeking an investment with stability and steady returns. It wouldn’t take much to spark fear of a reversal and catalyze a wave of profit taking; but it is the money that is flowing back in for the long haul that will decide the larger trend. Both these short-term and long-term dynamics can be impacted by the G-20’s joint statement and individual government’s efforts going forward. The impressive recovery in market levels this past year is in large part due to the guarantees, liquidity injections and bailouts by the world’s policy makers. It is unclear whether speculator confidence in the balance of risk and reward will be anywhere as strong as it has been without the government safety net. However, with German and the US cutting down its programs last week while the global call for ‘exit strategies’ grows to a roar; we may well be testing those waters soon.

It is generally true that the majors are free-floating currencies and economics indeed sets exchange rates; but perfection only exists in academic theory. In reality, the Japanese yen has carried the burden for potential intervention from the Bank of Japan for years. As a major export nation, the former DPJ administration considered a ‘weak yen’ policy essential to economic stability. However, regimes have changed and new LDP Finance Minister Fujii has explicitly said that the currency should reflect economics. The first time, the policy makers made this statement the week before last, the yen responded with a sharp appreciation. With a reiteration of the same this past week (despite the yen being at relative highs), the currency moved on to another leg of its rally. How much pressure has been priced in due to intervention fears? Only time will tell. What’s more, how will the economy handle this steady appreciation? Domestic demand has long been lacking for Japan.

And, so we round out the story with more domestic considerations. As the currency appreciations, a critical artery of growth is slowly pinched off. In line with the G-20’s commitment to balance savings, domestic demand and trade; Japan will have to compensate for the potential loss in exports with domestic demand at a critical time for the economy. In the midst of a fragile recovery, we will now low to key economic data due over the coming week to see if Japan can lift itself out of its worst recession on record. The 3Q Tankan surveys, industrial production, employment, household spending, housing activity and inflation will offer a thorough assessment.

British Pound Losing its Risk Appeal as Conditions Deteriorate

Fundamental Forecast for British Pound: Bearish

- BoE Mervyn King says the weak pound “will be helpful” in supporting a feeble recovery
- Upcoming spending cuts and speculation of a cut in the deposit rate means the BoE is running out of options
- The Bank of England minutes show a unanimous vote to keep the bond purchasing program at 175 billion pounds

Some of the major currencies are showing strength against some pairs and weakness against others – a sign of underlying currents like risk appetite. However, the British pound was down across the board this past week, and in dramatic fashion. Prominent breakouts are starting to look the establishment of new trends as the struggling fundamental health of the United Kingdom begins to override the appeal the currency once held as a source for high yields. The next few weeks will be critical in establishing where the pound will head, and more importantly, where it fits in the market.

There is no doubt that risk trends will have an impact on what kind of direction and pace the British currency takes. However, it will likely start to be more of a one sided influence. Should risk tumble in the wake of the G-20 meeting as investors worry the capital markets can’t support their own weight without a government safety net, the pound will likely tumble. There is still a latent build up of risk appetite behind this currency that was fed by the belief that the recovery in the global economy and markets would be exceptionally beneficial for the United Kingdom which is generally considered to be the industrialized nation in the worst shape. As the outlook for a speedy recovery and fades, so too does the picture of London retaking its title of financial center of the world. Yet, what happens should sentiment actually improve? Even then, the pound will likely lag or even fade despite the positive turn.

Over the past weeks and months, it has become blatantly clear that Europe’s second largest economy is struggling to pull itself out of its deep recession; and the time frame for a return to growth is being continuously pushed back. Not only did the 2Q GDP numbers tell us that the slump was more intense than initially though; but we have also seen that policy officials are running out of options to support an orderly recovery. This past week, the minutes seemed to have a positive tilt in that there was a unanimous vote to keep the bond purchasing program at 175 billion pounds (whereas in the previous vote, the was minority dissention headed by Governor Mervyn King for a greater amount). Nonetheless, the central bank kept open the possibility of further expansion of this unorthodox policy. Another step that was speculated to under consideration was a cut to the deposit rate paid to banks that hold their capital with the BoE. This too was written off; but commentary by King and other MPC members continues to stoke speculation that either or both is still a considerable possibility. Without doubt, the central bank is running out of options to jump start the economy. The further the policy authority extends itself without a commensurate response from financial health or economic activity, the more dire the nation’s condition. Considering the government will have to follow through on a serious round of spending cuts in the near future (expected to be the biggest reduction in over three decades), time is certainly working against policy officials.

In the grand scheme of things, economic data is vital at this point; but a meaningful improvement in the outlook will come with time and a wide array of indicators. Nonetheless, there are a slew of indicators to account for next week – and perhaps even a few of them could help jump start optimism. Most prominent, but least likely to surprise, is the final reading of the 2Q GDP numbers. There is rarely a meaningful adjustment in this last recalculation of the data; but the new current account numbers, some spending adjustments or capital investment alterations would be notable. Among the other notable figures, mortgage approvals, net consumer credit and the money supply are important gauges for financial health. The BoE home equity withdrawal figure and PMI factory and construction data is growth focused.

Written by Terri Belkas, David Rodriguez, John Kicklighter, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source – Forex Weekly Trading Forecast – 09.28.09

The Dollar snaps a two week decline versus the EUR after disappointing U.S Home Sales data and ahead of the G20 meeting. The USD and JPY are benefiting from the recent surge in risk aversion ahead of the G20 meeting and a concern that the group’s leaders will pose stricter regulations on financial markets. The drop in Oil prices, which began Wednesday, only exacerbated yesterday as equity markets tumbled and the Dollar strengthened, putting pressure on the commodities market.

USD – Dollar Rebounds on Return to Risk Aversion

The Dollar came roaring back yesterday against its rivals as poor housing data and falling equity markets sapped traders appetite for risk. Existing home sales numbers were released to an unspectacular reception with the numbers failing to reach their expected targets. Only 5.10M existing homes were sold as compared with economists forecasts of 5.36M. This sent traders running from higher-yielding currencies and into long Dollar positions.

Yesterday’s trading was notably volatile, with the EUR/USD climbing in early European trading hours to a daily high of 1.4789, only to end the day at 1.4650 from 1.4721. Driving the early appreciation for the EUR was a lower number of U.S. Unemployment Claims. These gains were later eroded after less than spectacular housing data was released. Against the Yen the Dollar was down as traders looked for the less risky currency. The pair closed at 90.82 from 91.30.

Looking ahead to today’s trading, we can expect further volatility of the Dollar. The Group of Twenty (G20) meets for a second day today. Comments made by the global heads of finance can move the market fast so traders should be aware of their impact. U.S. New Home Sales data is due at 2:00pm GMT time. If the New Home Sales is anything like the Existing Homes Sales data from yesterday, the EUR/USD could continue its decline for the second day in a row to finish the week near the 1.4550 mark.

EUR – Pound Crumbles on Currency Comments

The Pound took a thrashing during yesterday’s trading as comments by the Bank of England sank the British currency. A report surfaced that Bank of England (BOE) Governor Mervyn King stated a weaker Pound could be beneficial to the U.K. economic recovery. It is assumed the BOE prefers a weak Pound. The weaker currency could help boost British exports, making them relatively cheaper than their foreign counterparts.

Traders immediately began bidding the Pound lower, sinking the GBP/USD to 1.5947 from 1.6353, for a single day decline of 2.5%. The EUR also rose 2% on the Pound as the EUR/GBP ended at 0.9816 from 0.9004, and the GBP/AUD fell to 1.8467 from 1.8803.

If the BOE does prefer the Pound to depreciate, this could create an opportunity for those traders who feel the British currency is not properly valued. Perhaps the BOE sees the possibility for further weakening of the Pound. Will the bank take future action to help artificially deflate the nation’s currency?

JPY – Yen Rises on Negative U.S. News

As the rally of riskier currencies puts on the breaks, demand for the Yen is increasing. Yesterday’s news of lower U.S. housing data helped slow the rally for riskier assets, thereby boosting the Yen. This trend continues to go unabated, with the USD/JPY rising alongside riskier assets, and falling when risk sentiment diminishes. This was the case yesterday as the USD/JPY fell to 90.82 from 91.30

Traders should be watching today’s data releases from the U.S. for today’s direction of the Yen. If the negative news will continue further into the day, we could have another pullback of some of the higher yielding currencies. If so the USD/JPY could be looking to drop below the 90.00 support line.

Crude Oil – Economic Data Lowers Demand for Crude

The price of Crude Oil was significantly lower yesterday as poor U.S. housing data and a strong Dollar weighed on the commodities market. Traders took the information as a pullback to economic growth and a sustained economic recovery, thereby reducing demand for the commodity. Oil fell below a significant support line of $66 and finished the day down at $65.85 from $68.36.

Yesterday’s 3.6% drop in price was the second day in a row for a pullback in Crude prices. The valuation seems to be taking hints from reported economic data. If this is the case, traders will be wise to follow today’s U.S. Core Durable Goods Orders and New Home Sales numbers. We could see Crude Oil trading at $65 by the end of today.

Article Source – Dollar, Yen up Ahead of the G20 Meeting

Currency markets will be focused on the outcome of the G20 summit of world leaders in Pittsburg to guide directional momentum. A leaked draft communiqué hinted policymakers were in no rush to withdraw fiscal stimulus, but concerns remain about what measures will be taken against risk-taking in the financial markets.

Key Overnight Developments

• NZ Annual Trade Deficit Shrinks as Imports Fall for Fifth Month
• Bank of Japan Says Recovery After Stimulus, Restocking is “Uncertain”

Critical Levels

The Euro initially sold off but prices recovered late into the overnight session, adding much as 0.2% against the US Dollar. The British Pound continued to be sold, though prices recovered most of the drop in early trading that saw GBPUSD test as low as 1.5918, trading just below 1.60 ahead of the opening bell in Europe.

Asia Session Highlights

New Zealand’s annual Trade Balance deficit contracted to the narrowest in over six years, revealing a shortfall of –NZ$2.37 billion in August following a revised –NZ$2.49 billion result in the previous month as imports fell for the fifth straight month, shrinking -21.6% from a year before. The outcome speaks ill of domestic demand in the smaller antipodean nation, especially considering that the Kiwi Dollar has become considerably stronger over recent months, which should boost New Zealanders’ purchasing power of foreign goods and encourage imports. More of the same is likely going forward as unemployment continues to push higher, trimming incomes and discouraging spending. Indeed, a survey of economists conducted by Bloomberg forecasts the trade gap will shave just -6.6% on average off GDP this and next year, the smallest since 2004. To be fair, however, exchange rate movements take a long time to be reflected in trade figures, so it is possible that the currency’s recent gains may surface to widen the shortfall in the months ahead. The deficit grew –NZ$725 million from July, more than the –NZ$329 million expected, but monthly figures tend to be volatile and looking at annualized readings offers better gauge of trade flows’ direction.

Minutes from the August policy meeting of the Bank of Japan revealed that while policymakers agreed that “overseas economic conditions have stopped worsening,” but expressed concern that the pace and sustainability of recovery after the effects of fiscal stimulus and the inventory restocking cycle run their course “remained highly uncertain.” Members concurred that exports will probably continue to improve for the time being as overseas markets stabilize, but domestic consumption will remain weak as unemployment continues notwithstanding isolated policy-induced spikes in purchases of specific items such as cars and electrical appliances. On inflation, members concluded that year-on-year consumer price figures will remain weak largely because of the correction in high oil costs seen last year. On financial conditions, policymakers said that while funding access had improved for large firms, credit for small enterprises remained limited.

Euro Session: What to Expect

With little of importance on the economic calendar, currency markets will be focused on the outcome of the ongoing Group of 20 (G20) summit of world leaders going on in Pittsburg. Traders’ concerns are two-fold: first, there are worries that policymakers will take recent signs of economic stabilization to agree on a path to withdrawing fiscal stimulus measures, nipping the recovery in the bud; second, it remains unclear what, if anything, will be agreed upon regarding regulations of risk-taking in the financial markets. On the former point, a draft G20 communiqué leaked by Reuters contained language saying leaders will maintain expansionary policies until the global recovery is secured, alleviating at least some concern. Little is known on the latter point, however, and any actions that are perceived to be too strong (which, in fact, would be any kind of broad-based agreement considering the difficulty of building consensus in the G20) are likely to send capital feeing out of risky investments and into safety-correlated assets like the US Dollar and the Japanese Yen.

Article Source – Currency Markets Look to G20 Summit Outcome to Guide Price Action (Euro Open)