Forex Trading Center

The US Federal Reserve yesterday upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession. As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The previously weakened Dollar had been propping up commodity prices. Following the US Crude Oil Inventory report yesterday, oil prices dropped nearly 4% to below $68.50 a barrel. The Fed statement, which pushed the US Dollar up, only helped extend these decreases in oil prices.

USD – Dollar Optimism High Following Fed Statements

The Dollar rallied yesterday against most of its major counterparts amid concern that the Federal Reserve is nearing the end of its efforts to lift the economy out of recession. The Dollar has been sold-off recently partially due to growing optimism about the outlook for the U.S. economy. The USD finished yesterday’s trading session 100 pips higher against the EUR at the1.4700 level.

The Federal Reserve yesterday upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession. As expected, the Fed kept its target for its federal funds rate set at a range of zero to 0.25%. The Fed repeated that it continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Fed also said it would slow its purchases of mortgage debt to extend that program’s life until the end of March, in a move toward withdrawing the central bank’s extraordinary support for the economy and markets during the contraction. Analysts had expected the move, which smoothes out the purchases.

Looking ahead to today, the most important economic indicators scheduled to be released from the U.S. are the Unemployment Claims and Existing Home Sales at 12:30 GMT and 14:00 GMT respectively. Traders will be paying close attention to today’s announcement as a stronger than expected result may continue to boost the USD in the short-term. Traders are also advised to follow FOMC member Evan’s speech at around 14:30 GMT. This speech is very important as it is likely to impact the Dollar’s volatility. Traders are advised to watch closely, as this is likely to set the pace of the Dollar’s movements going into the rest of the week’s trading.

EUR – EUR Declines as Stock Market Falls

The EUR fell to session lows against the U.S. Dollar yesterday, weighed down by declines in stocks following early gains. This came after the Federal Reserve signaled that interest rates will remain low for some time. By yesterday’s close, the EUR had fallen against the USD, pushing the oft-traded currency pair to 1.4700. The EUR experienced similar behavior against the GBP and closed at 0.9000.

Europe’s manufacturing and service industries expanded for a second month in September, suggesting that the Euro-Zone regional economy is gathering strength and showing signs of emerging from its worst recession in more than six decades after governments stepped up stimulus measures and the European Central Bank (ECB) injected billions of euros into markets.

In addition, European economic confidence rose to a 10-month high in August but rising unemployment is a reason to remain prudent about the economic outlook.

Investors may look for the unusual price volatility to continue in the EUR/USD as the pair attempts to stabilize and find new support and resistance lines. Large price jumps such as these are not common place and present terrific opportunities to take advantage of the price swings for large profitable gains.

JPY – Yen Trading Down against Currency Rivals

The Japanese Yen saw a bearish trading session yesterday, losing ground against most of its currency crosses. The JPY fell against the USD after several days of recovery, while the GBP/JPY cross also rose to around 149.40. The only economic events out of Japan yesterday were the trade balance figures; only slightly changed from forecasts as volatility was kept to a minimum.

Japan’s exports fell in August for an 11th consecutive month as recovery struggled to gain traction in the island economy. Bank of Japan Governor Shirakawa said last week that he is concerned the recovery may not outlast the worldwide stimulus packages that boosted demand for the country’s cars and electronics. The central bank cited exports as the main reason for raising its assessment of the economy last week, as record unemployment and slumping wages weaken consumer spending.

Another headwind for Japanese exporters is an appreciating currency. The yen has gained more than 7% against the Dollar in the past six months, threatening to erode companies’ profits earned abroad.

Crude Oil – Oil Drops as Inventory Rises; Demand Concern?

Oil prices dropped nearly 4% to below $68.50 a barrel during yesterday’s trading session. This drop came after a U.S. government report showed Crude Oil inventories rose more than expected, rekindling worries that energy demand in the world’s biggest consumer will be slow to recover in the wake of the recession.

The International Energy Agency (IEA) said that the inventories rose to 2.8 million barrels in the week September 18, against analysts’ expectations of a 1.5 million barrel decline.

A weak Dollar had been propping up prices recently. The greenback was narrowly mixed against the JPY, EUR and GBP on Wednesday. Oil, like other commodities, is priced in dollars so when the U.S. currency weakens, commodities become cheaper for investors holding other currencies.

As for today, traders should pay attention to the U.S Unemployment Claims report as it has tended to have an impact on Crude Oil’s prices recently, especially in the short-term.

Article Source – USD Up on Fed Statements; Oil Sinks on Demand Concerns

The Euro may see near-term gains as Germany’s IFO Survey shows that business confidence in the Euro Zone’s largest economy rose for the third straight month to hit the highest level since May 2008, but sentiment may not be supportive in the longer term.

Key Overnight Developments

• Japanese Trade Surplus Shrinks on Export Weakness
• Australia’s New Home Sales Matched Record Gain in August
• RBA Says Financial System Resilient But Risks Remain

Critical Levels

The Euro consolidated near the 1.47 level in overnight trading, yielding a flat result ahead of the opening bell in Europe. The British Pound advanced, adding as much as 0.3% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus narrowed to 185.7 billion yen in August as overseas shrank -36% from the previous year, marking the 11th consecutive contraction. Economists had expected a greater decline, calling for a 157 billion result. Export volumes shrank for the first time since May, with shipments to the European Union leading the way lower. The data may be hinting that the $12 trillion or so in fiscal stimulus spent by the world’s governments to stabilize growth that had boosted demand for Japanese products may be running out of steam. Indeed Bank of Japan chief Maasaki Shirakawa expressed concern that his country’s economic rebound may survive once worldwide expansionary policies are reversed. A stronger currency may have also contributed to the outcome: the Yen strengthened by 1.9% in trade-weighted terms in August, the most since January. While this would typically raise fears that formerly activist Japanese policymakers will intervene into the markets to drive down the currency, incoming DPJ Finance Minister Hirohisa Fujii said last week that it was not the government’s job to set exchange rates and that a stronger Yen had its advantages, clearly signaling that Japanese authorities will stand aside from here. The trade balance is expected to continue to contract in the months, with a survey of economists polled by Bloomberg forecasting that net exports will add on average 2.4% to GDP through this year and in 2010, the least since 2001.

Australia’s Housing Industry Association (HIA) reported that New Home Sales surged 11.4% in August, matching the record-setting monthly gain in January 2008. However, property sales began to rebound in May after the government extended a scheme offering an A$21,000 grant for first-time home buyers, so it still remains suspect whether momentum can remain supported after the flow of stimulus cash dries up. Indeed, unemployment continues to climb, with expectations calling for the jobless rate to approach 8% next year, while the HIA’s own Housing Affordability Index fell for the first time in 15 months in the second quarter.

Separately, the RBA’s semi-annual Financial Stability Review was broadly balanced, saying that although the Australian financial system remains resilient and funding conditions for banks have improved, recent progress can owes significantly to government guarantees on lending and loan losses may still rise in the future. The central bank also cautioned that business borrowing has continued to decline (which spells trouble for employment) and the commercial property market has weakened, contributing to the possibility of renewed problems from bad loans ahead.

Euro Session: What to Expect

Germany’s IFO Survey of business confidence is expected to show that the pessimists about the economy’s six-month economic climate outlook among polled firms outnumbered the optimists by the narrowest margin since May last year, with the Expectations index rising to 96.6 in September. A reading above 100 suggests the majority of respondents were optimistic, and vice versa. While the improvement may engineer some short-term gains for the Euro in the aftermath of the announcement, it remains questionable whether sentiment will remain supportive as the effects of fiscal stimulus both in Germany and abroad that has boosted domestic demand and exports in recent months are exhausted. As it stands, a survey of economists conducted by Bloomberg suggests that the Euro Zone’s largest economy will underperform all of the G10 excluding Japan this year and remain behind the US and commodity bloc countries (Canada, Australia, New Zealand) into 2010. This suggests the ECB will be among the laggards as central banks begin to lift interest rates from current lows, an outcome that bodes well for business climate surveys (for surely businesses prefer lower borrowing costs to higher ones) but will likely weigh on the single currency.

Article Source – Euro in Play with German IFO to Show Business Outlook Rose for Third Month (Euro Open)

Following two relatively peaceful trading days, today is filled with news publications from the major economies. Starting at 06:45 and until 09:00 (GMT) traders are advised to follow the news events from the Euro-Zone. Later on, the Crude Oil Inventories will be published at 14:30 (GMT). This indicator tends to have an instant impact on Crude Oil prices, and traders should use it with their trading. Finally, at 18:15 (GMT), the Federal Reserve will announce the U.S Interest Rates for September. This promises to create hefty volatility in the market, which should provide various opportunities for traders to enlarge profits.

USD – The Dollar Falls before Federal Reserve Meeting

The U.S Dollar’s weakness resumed, as global investors again embraced risks, reducing safe-haven demand for the U.S. currency, as traders took positions on the first day of the Federal Reserve monetary policy meeting. The U.S. Dollar also weakened on speculation that the Group of 20 leaders, meeting in Pittsburgh starting tomorrow, will call for a reduction in global trade imbalances that may cause further gains in the greenback’s counterparts. The greenback traded at $1.4794 per EUR from $1.4790 yesterday, after declining to $1.4842 earlier on, the lowest level since September 22, 2008.

The hard-pressed Dollar had gained some ground Monday as equity markets weakened, with traders tying a decline in risk appetite to caution ahead of the Fed meeting, as well as the summit of Group of 20 leaders at the end of the week. But Tuesday’s resumption of risk appetite may reflect views in the market that neither event is likely to produce meaningful changes analysts said.

Market sentiment toward the USD remains bearish. Analysts expect the Fed to signal its ultra-loose monetary policy will remain in place well into next year. Additionally, as the G20 to discusses rebalancing the global economy this will almost certainly further weaken the Dollar. The Federal Reserve is widely expected to leave Interest Rates unchanged. But markets will seek out clues on the Fed’s asset purchases. Any sign that the Fed intends to continue its quantitative easing measures beyond this year could send the U.S Dollar to record lows.

EUR – Euro Hits $1.48 for the First Time in a Year

The EUR traded at a 1 year high against a sliding Dollar on Wednesday, as traders took advantage of the U.S. currency’s rise the previous day to resume selling ahead of a Federal Reserve monetary policy meeting. The European currency advanced as hopes for a global recovery prompted investors to shift money to higher-yielding currencies from the safe-haven greenback.

In late trading, the EUR was up 0.8% at $1.4796 after options-related demand and strong Asian buying pushed it above $1.48 for the first time since September 2008. European Central Bank (ECB) Governing Council member Axel Weber said on Tuesday recent moves in currency markets were surprising given the Euro-Zone’s economic performance relative to other major economies. Traders expect the $1.4870 level may be the next target in EUR/USD cross, with many predicting an eventual move back to $1.50.

The British Pound also gained against the U.S Dollar for the first time in 4 days, as stocks rallied around the world on evidence that the global economic recovery is accelerating. The British currency advanced 1% to $1.6376. The GBP rose 0.2% against the EUR to 90.33 pence, ending a 6 day losing streak. Against the EUR, the British currency rebounded from near the lowest level in more than 5 months after Goldman Sachs Group Inc. recommended selling the common European currency against Sterling.

JPY – Yen Gains as USD Remains Under Pressure

The Japanese Yen extended its gains on Wednesday vs. the greenback as investors unloaded the U.S. currency ahead of meetings by the Federal Reserve and the G20 leaders this week. The currency gained for a 2nd day against the U.S Dollar on speculation world leaders will discuss policies to rebalance global economic growth at the G20 meeting this week. The JPY climbed to 90.82 Yen per Dollar from 91.10, and rose to 134.40 Yen per EUR from 134.76.

The Japanese currency is likely to strengthen further before new Finance Minister Hirohisa Fujii takes office this month; he said a strong Yen was generally good as it boosted the purchasing power of Japan’s economy. Fujii subsequently backed away from that comment, but speculation will remain that after sweeping to power last month, the Democratic Party of Japan may try to shift the country away from its reliance on exports and its opposition to Yen strength.

Crude Oil – Crude Rebounds as Inventories are Expected to Decline

Crude Oil prices rose Tuesday to above $72 a barrel, as pressure on the Dollar and expectations for a further drop in U.S. Crude inventories boosted market sentiment. Weekly petroleum data is likely to show that stockpiles of Crude fell again last week, as imports remained low analysts said. Last week, the EIA said Crude Oil Inventories decreased by 4.7 million barrels in the week ending Sept. 11, as imports dropped 2.1% from a week ago.

The move in Crude Oil today is likely to be supported by a fresh wave of selling of the U.S. Dollar. Traders will be waiting for U.S. Crude inventory data from the American Petroleum Institute and the U.S. Energy Information Administration. Also of interest to commodities traders is leaders of the world’s most powerful economies will convene in Pittsburgh later this week for the G20 Summit.

Article Source – U.S. Interest Rates on Tap

The British Pound may be in for a volatile session ahead as the release of minutes from this month’s Bank of England monetary policy meeting top the economic calendar in European hours. Currency markets were active in overnight after New Zealand GDP unexpectedly expanded and the Chinese central bank deputy governor sounded off against the US Dollar.

Key Overnight Developments

• Currency Surges as New Zealand GDP Unexpectedly Grows in Second Quarter
• USD Drops After PBOC’s Hu Says Dollar-Reserve System Must Change

Critical Levels

The Euro trended higher against the US Dollar in overnight trading, testing as high as 1.4842. The British Pound also advanced, adding as much as 0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Gross Domestic Product unexpectedly added 0.1% in the three months to June, snapping five consecutive quarters of losses. Economists were forecasting a -0.2% result ahead of the release. The economy shrank -2.1% from a year before, less than the expected -2.6% decline. The Reserve Bank of New Zealand was among those calling for a contraction when Governor Alan Bollard said the bank expected to “keep [interest rates] at or below the current level…until the latter part of 2010” at the monetary policy announcement earlier this month, and traders seemingly took today’s release to mean the time table will now accelerate. Indeed, a Credit Suisse gauge of priced-in rate hike expectations for the coming year jumped 13 basis points to a record high and the New Zealand Dollar surged to a fresh 2009 high against a trade-weighted basket of top currencies.

The US Dollar Index (an average of the greenback’s value against six major counterparts) spiked to a fresh yearly low after the Chinese central bank’s deputy governor Hu Xiaolian wrote in a paper posted on the G20 website ahead of the group’s summit in Pittsburg this week that the current crisis was due in part to the Dollar’s role as global reserve currency. Hu, who is also the former director of China’s foreign-exchange authority, went on to say that the world stands at risk of an asset bubble and potentially another crisis akin to the current one if the global monetary system is not changed.

Euro Session: What to Expect

The release of minutes from this month’s Bank of England monetary policy meeting headline the economic calendar in European hours. The announcement itself produced no surprises with interest rates left at 0.5% and the magnitude of quantitative easing unchanged at 175 billion pounds. Just five days later, however, BOE chief Mervyn King gave resoundingly dovish testimony to House of Commons Treasury Committee, saying poor credit growth remains a direct drag on demand and revealing that policymakers are considering cutting the interest rate they pay on bank deposits to encourage idle reserves to be channeled into lending. The latter comment in particular sent the British Pound tumbling, with traders clearly caught off guard as the BOE was seemingly preparing for more, not less, monetary easing despite the recent uptick in leading economic indicators. This creates strong potential for sterling volatility as the markets dissect tonight’s release for any clues on how serious King and company are about the deposit rate idea and when (if ever) such an outcome may be expected. For our part, we speculated ahead of the September 10 rate announcement that the bank was preparing the markets for a change in policy after the asset-buying scheme largely failed to affect lending to the real economy. Indeed, although Mervyn King has said that the BOE was “beginning to see its impact on the supply of broad money,” the M4 measure of money stock grew at an annual pace of just 12.6% in August, the slowest in a year, while central bank’s own data showed net lending shrank for the first time in at least 16 years in July.

Separately, the British Bankers Association’s measure of Loans for House Purchase is set to show that mortgage approvals rose by 40,500 in August, the most since February 2008, hinting at stabilization in the property market. Earlier this week, a report from Rightmove Plc showed that UK house prices fell the least in a year in September, saying “confidence is up, stock is down and the number of people searching is high.” However, as we noted earlier, the rebound may have a hard time retaining traction with consumer sentiment apparently tracking equities and therefore is vulnerable to a (long overdue) correction in risky assets while unemployment continues to rise, with a survey of economists polled by Bloomberg calling for the jobless rate to top 9% next year.

Turning to the continent, a handful of Purchasing Manager Index releases are expected to come in broadly positive. In Germany, the manufacturing sector is expected to expand for the first time in 14 months while the pace of expansion in the service industry picks up to the fastest since April 2008. Manufacturing will likely continue to shrink in the Euro Zone as a whole but the rate of decline is set to moderate to the slowest since the sector first began to contract in May last year. The improvement can likely be attributed to the continued rebuilding of inventories after firms cut production and exhausted their stocks of goods last year and through the first quarter of 2009 amid the global economic downturn. Still, Industrial New Orders are expected to shrink -25.9% in the year to July, suggesting the pace of demand contraction will remain within the range noted since November of last year.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound Volatility Threat High as Currency Markets Focus on BOE Minutes (Euro Open)

There is likely to be less volatility in the market today with almost no market moving data on tap from Japan Europe and Unites States. Yet, few fundamental events that are due out later today may indeed create a remarkable wave in the market, especially towards the late afternoon hours.

USD – USD Ups and Downs Result of Market Uncertainty

The US Dollar experienced an exciting trading day on Monday as a rise in risk averse trading helped add an early morning boost, followed by a retracing of Friday’s levels. Against the EUR, the greenback climbed to as high as 1.4610 before coming back down and closing the day at 1.4717. Versus the British Pound, the USD gained as much as 90 pips, with a high mark of 1.6134, before coming back up and closing out the trading day at the 1.6250 level.

With a decision regarding the Federal Funds Rate looming, traders are becoming more aware of the potential delay in any increase to short-term interest rates due to the instability of global economies recently. Britain has made similar overtures, as did the Euro-Zone in its recent discussions. However, the question still remains over whether the global economy is indeed recovering as many were expecting. This uncertainty drives many investors back into safe-havens for the short-run until things become clearer.

As far as the North-Western Hemisphere is concerned today, the United States is not due to release much data of concern. Canada, on the other hand, is going to release vital data regarding its retail sales levels, which last week caused a stir among the USD and EUR. Growth in Canadian sales may help return the Loonie back to a bullish posture, but forecasts appear modest at best. This Wednesday’s US interest rate decision appears to be this week’s primary event for Dollar traders.

EUR – EUR Benefits from USD and GBP Aversion

The EUR continued its rally against most currencies, save the USD, in yesterday’s trading; making considerable inroads against the GBP especially. Climbing as high as 0.9076 versus the Pound and upwards of 135.48 against the Japanese Yen, the EUR may indeed be one of the primary beneficiaries of market growth, and the continuing uncertainty.

Investors appear ready to make the shift into riskier assets to return to the heady days of pre-2008 growth, but market concerns make their transition move somewhat sheepishly. Regional retail sales in Europe and the US helped give a boost to consumer optimism, but only offset losses in other sectors such as housing and consumer sentiment. With the Pound under heavy selling pressure following statements from Bank of England governor Mervyn King, the EUR, as stated above, has become one of the primary beneficiaries of recent returns to strength and risk appetite.

Going into today’s trading, with little on the economic agenda, the EUR may be poised to benefit from the uncertainty surrounding the US interest rate decisions due on Wednesday. With an announcement similar to those of Britain and Europe recently regarding a delay of an interest rate hike, the EUR could be on the receiving end of further risk appetite and USD-aversion.

JPY – Japanese Bank Holiday Puts Additional Sell Pressure on Yen

The Japanese Yen appears to be returning to a bearish posture against its major currency rivals considering it ended yesterday’s trading down somewhat versus all of its major rivals. Hitting the 149.60 level against the GBP, and even dropping to the 135.50 level against the EUR, the island currency is a little worse for wear considering its latest movements.

Many economists point out, however, that the banks in Japan being closed in celebration of the autumnal equinox carries a significant role in this latest downtrend. The thinly traded JPY only appears weak momentarily until the Japanese markets come back online early Wednesday. In other Asian news, the currencies of the south Pacific (Australia and New Zealand) appear to be gaining heavily against all of their currency rivals. Their avoidance of the harshest aspects of the global downturn has made them juicy targets for risk-hungry investors. Traders would be wise to note the upward movement of these pairs and trade accordingly.

Crude Oil – Crude Falls to $70; Prices Rose too Quickly According to Investors

Investors hoping for a growth in oil prices were dismayed by news yesterday that the price for a barrel of Crude Oil may have risen too quickly from last week’s market optimism. As yesterday helped traders realize, Crude Oil may indeed be over-valued and its recent strength has come to a temporary halt. After last week’s steady yet volatile gains, the beginning of this week has started with a drop of almost $3 a barrel, closing out yesterday’s trading just above $70.

Adding to the sell pressure on Crude Oil is the surprising surge in the value of the USD in yesterday’s early trading hours, albeit offset somewhat by its retraction later in the day. But market optimism seems to have returned, but energy demand concerns persist. Crude Oil has been on the verge of reemerging as a lead investment and inflationary hedge, yet it has failed to receive the same level of support as Gold and Silver, which suggests that demand for oil is low, and precious metals are being used in its stead as a safety valve. Chances are, so long as market uncertainty remains, Crude Oil will continue to float near its current mark.

Article Source – Market Expects Low Volatility Today

Currency markets are likely to continue looking to risk sentiment to drive price action with another thin economic calendar on tap in European trading hours. Switzerland’s Trade Balance report and the SECO economic forecast update are set for release.

Key Overnight Developments

• NZ Current Account Surprises With Surplus in Q2 as Imports Fall
• US Dollar Sold in Overnight Trading as Stocks Gain on Asian Exchanges

Critical Levels

The Euro added 0.3% against the US Dollar to retake the 1.47 level in overnight trading. The British Pound followed suit, testing as high as 1.6258. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Current Account Balance unexpectedly showed a surplus of NZ$124 million in the second quarter, marking the first quarterly surplus since the first three months of 2003. Economists were forecasting a –NZ$1.98 billion result ahead of the release. In annual terms, the deficit narrowed to –NZ$10.6 billion or 5.9% of GDP, the smallest share of total output in nearly 5 years. Details behind the headline figure look far from encouraging however: imports fell -19.6% from a year earlier, outpacing a -3.5% decline in exports and painting a picture of stagnant consumer demand in the island nation. The deficit is likely to continue to narrow in the months ahead as rising unemployment weighs on spending. Indeed, the central bank expects the external gap will narrow to 5.5% of GDP while a survey of economists polled by Bloomberg predicts the jobless rate will rise to a decade high of 6.8% by the end of this year. Traders welcomed the announcement, sending the New Zealand Dollar 90 pips higher against its US counterpart in the hour following the data release as traders expressed relief that the central bank may not be pushed to lower interest rates to cheapen the currency and thereby offer exporters a boost to help narrow the current account shortfall, which has been on the forefront of policymakers’ concerns since it led to a downgrade of the New Zealand’s credit outlook by the Fitch ratings agency. An index of traders’ one-year RBNZ rate hike expectations compiled by Credit Suisse jumped 8 basis points to a record high after the figures crossed the wires.

Euro Session: What to Expect

Swiss economic data dominates a thin economic calendar in European hours. While Augusts’ Trade Balance report is likely to show that exports fell considering last week’s dismal industrial production data, the appetite for imported goods is proving difficult to gauge from leading indicators. Domestic demand may have recovered a bit considering the recent upward correction in retail sales figures, but the trend in receipts is undeniably pointing lower while unemployment rises and consumer confidence continues to set record lows. Separately, the release of updated economic forecasts from the government’s State Secretariat for Economic Affairs (SECO) will be notable in terms of how it compares to last week’s upward revisions to the growth and inflation outlook from the SNB.

On balance, risk sentiment is likely to remain the key driver for currency markets going into the US session. Stocks rose for the first in three days across Asian exchanges after Citigroup raised its price estimate for Samsung Electronics (the world’s largest computer memory chip manufacturer), Morgan Stanley upgraded their outlook for Samsung SDI Co. and LG Chem Ltd on expectations of higher car battery demand, and China Mobile Ltd (the largest global cellular provider) said it’s customer base grew 15.6% from the previous month in August. Risky assets look set to retain momentum with US equity index futures trading higher and hinting that Wall St will open 0.2% higher on Tuesday, adding to selling pressure on the safety-linked US Dollar.

Written by Ilya Spivak, Currency Analyst
Article Source – Currency Markets to Trade with Risk Sentiment on Thin Economic Calendar (Euro Open)

This month investors have increasingly moved to riskier assets like stocks, commodities and higher-yielding currencies, as concerns about a ballooning U.S. fiscal deficit and low Interest Rates have fueled Dollar selling. The Federal Open Market Committee (FOMC) is expected to hold Rates steady but markets will be interested for any guidance on whether the Fed will continue its expansionary monetary policy for a prolonged period of time.

USD – Dollar Advances on Economic Optimism

The Dollar saw quite a volatile session during last week’s trading. The Dollar dropped against the EUR, although saw a rising trend against the Yen and especially against the Pound, as the Dollar soared over 400 pips against the GBP. On Monday the U.S dollar gained in thin conditions, extending a bounce seen late last week as traders covered short positions ahead of a Federal Reserve monetary policy meet and a Group of 20 summit.

It seems that the main reason for the Dollar’s volatility is the mixes results coming from the U.S economy last week. The U.S Retails Sales continued to deliver positive figures. This means that the total value of sales at the retails level is growing, showing that consumers in the U.S might feel safer to spend these days. Also last week, the Consumer Price Index (CPI) rose by 0.4%, proving that inflation continues to rise in the U.S. This could have a significant impact on the Dollar, as the rising inflation usually leads to an interest rate hike, which may very well support the Dollar.

But on the other hand, the Long-Term Purchases publication failed to reach expectations for a 65.3B result which would have reflected a recovering economy, and the final result was 15.3B. This appears to be one of the main factors for the Dollar depreciation against the Euro.

As for the week ahead, a number of important data are expected from the U.S economy. The most significant will be the Federal Funds Rate Statement which is scheduled for Wednesday 18:15 (GMT). Analysts expected no change to the central bank’s target, but speculate whether the fed will make changes to its debt-buying programs. Traders are advised to pay close attention to the Fed’s announcement on Wednesday.

EUR – The EUR off 1 Year Highs; GBP Dips

The EUR eased against the U.S. dollar to $1.4688, having lost about 0.2% on Friday, though strong support is seen around $1.4640. On the Yen, the European currency held steady around 134.35 yen. The EUR dropped from near a 1 year high versus the U.S dollar after the European Union (EU), said yesterday that a restructuring of the banking sector must take place. According to EU policy makers Europe needs continued low Interest Rates and government stimulus measures to keep the recovery on track.

The Sterling extended losses, hitting a 4 month low against the EUR of 90 pence on news the UK had set tougher-than-expected conditions to the potential exit of Lloyd’s Bank from a state-run scheme to protect its assets. The GBP dropped to 90.53 pence per EUR from 90.40 pence on Sept. 18, after earlier touching 90.67 pence, the lowest level since Apr. 24. The British pound may weaken further against the Dollar and the EUR on speculation the Bank of England will keep borrowing costs low.

Looking ahead to this week, a batch of data is expected from the Euro-Zone’s leading economies, especially on Wednesday. Many French and German indicators are scheduled for Wednesday, as this day seems to be the day that will determine the Euro’s direction for this week. Traders are advised to follow all the main publications on this day and look for any unexpected result that may soar or tumble the Euro.

JPY – Yen Losses Strength against the Majors

The Yen continues to depreciate against the major currencies during last week’s session. The Yen dropped over 100 pips against the Dollar and the USD/JPY pair is currently traded around the 91.50 level. The Yen also saw a bearish trend against the EUR.

While the Japanese yen gained against all but one of the 16 most- actively traded currencies since early August as the Democratic Party of Japan became the likely winner in national elections, forecasters say it will decline 5.7% against the U.S dollar and 1.2% versus the EUR by year-end. The economy is too weak to support a stronger rate, according to analysts.

The main data of this week appears to be the Trade Balance report, which is expected on Wednesday 23:50 GMT. This report measures the difference in value between imported and exported goods during August, and is one of the best indications for Japan’s exports. A better-than-expected result might have the potential to support the Yen.

OIL – Crude Oil Slips On Firmer Dollar

Crude prices fell for a 3rd day on speculation further evidence of a global recovery is needed to extend the commodity’s 61% gain this year. Oil prices were also pressured by bearish comments from Sinopec, Asia’s top refiner and China’s 2nd largest oil and gas producer, that diesel demand in China continues to lag economic recovery.

Oil rose 3.9% last week, thanks to U.S. government data showing a larger-than-expected draw in crude stocks, heavy losses in the U.S. dollar and rallying stock markets. Though Crude prices have only gained about 3% so far this quarter, after shooting up 40% in the June quarter, some analysts said Oil prices were set to move higher in coming weeks amid an economic recovery and seasonal winter demand.

Looking ahead to this week, traders are advised to follow the leading publications from the U.S and the Euro-Zone, and to follow the equity markets in the major economies in order to predict crude oil’s movements. Traders should also focus on the Crude Oil Inventories report which is expected in Wednesday, as it has proven to have an instant impact on oil’s value.

Article Source – Dollar Tentatively Higher Ahead of Federal Reserve Meeting

The US Dollar may rise as stocks retreat and US equity index futures point to a lower open on Wall St with currency markets focused on trends in risk sentiment to drive price action, looking past a virtually empty economic calendar.

Key Overnight Developments

• NZ Service Sector Expands For Second Month on Inventories; Sales Decline
• UK House Prices Fell Least in a Year in September, Says Rightmove
• Euro, British Pound Sold Against US Dollar as Most Stocks Fall in Asia

Critical Levels

The Euro trended lower to start the trading week, testing as low as 1.4678 to the US Dollar in overnight trading. The British Pound followed suit, dropping as much as -0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Performance of Services Index rose to 51.3 in August, showing the sector expanded for the second consecutive month. The details of the report are not nearly as encouraging as the headline figure would suggest, however. Inventory growth led the metric higher, adding 5.9% from the previous month, while Sales fell -1.2% to register the first decline in four months. On balance, this looks to be a reflection of the same dynamic we have seen throughout the apparent economic recovery of recent months: companies are restocking, all the while cutting costs and shedding jobs, which boosts relative output readings but says very little about the sustainability of the rebound once government stimulus is withdrawn and private demand (increasingly ravaged by unemployment as it is) has to step in and pick up the slack. Separately, Credit Card Spending fell -1.9% in the year to August, in line with the average noted over the past four months.

UK House Prices fell -1.5% in the year to September, registering the smallest decline in over a year according to Righmove Plc, an online listing of for-sale properties. Righmove commercial director Miles Shipside said, “Confidence is up, stock is down and the number of people searching is high.” The rebound says little about the health of the economy, however, with low supply being the dominant force behind higher home values according to a report from the Royal Institution of Chartered Surveyors (RICS) released last week. Consumer confidence has tracked the rebound in the FTSE 100 benchmark UK equity index with a correlation of over 90% since March, making this part of the equation highly vulnerable to any reversal of the recent rally in risky assets. For our part, we have long argued that the markets have done too much, too fast over the past six months, with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall.

Euro Session: What to Expect

With next to nothing on the economic calendar, risk sentiment is likely to be the primary catalyst driving currency markets in European hours. Risk appetite retreated at the start of the trading week: most Asian markets sold off, led by finance and mining companies, and US equity index futures suggested Wall St will open as much as -0.5% lower on Monday. This points to continued gains for the safety-correlated US Dollar after the greenback rose against the spectrum of major currencies in overnight trading.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar May Gain as Currency Markets Follow Risk Trends in European Hours (Euro Open)

US Dollar Overdue for a Technical Bounce, But Fundamental Reversal…

Fundamental Outlook for US Dollar: Neutral

- Speculation for rate hikes deferred as fundamentals temper exuberant risk appetite
- The steady charge in risk appetite keeps the dollar on the short side of carry interests
- Sentiment can often run askew of fundamentals; but what do technicals say about the dollar?

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play. The pace of the economic recovery, growing financial concerns and a Fed struggling to keep pace are all prominent concerns when gauging the long-term health of the dollar; but all of that is overshadowed by the immediate and market-wide preoccupation of risk appetite.

Last week, a Bloomberg survey of investors found the market was the most bearish on the dollar in 18 months. Where does this speculative grade come from? The economy is still dealing with an economic recovery and government deficits are a genuine concern; but most of the world’s largest economies are suffering with the same dilemma. The real weight on the dollar is the steady revival of risk appetite over the past six months. Following the necessary period of consolidation after the worst of the financial crisis, capital started to slowly work its way back into the speculative arena. Initially, interest was from early adopters; but the draw of capital gains was strong enough to start the flow from deeper pools of wealth in “risk free” areas. Where do these funds go? It certainly finds its way to US equities and other relatively-risky assets; but when it comes to the yield bearing instruments, the American products can’t compete. The benchmark, 3-month Libor rate dropped to a new record low (0.28948 percent) this past week and subsequently was depreciated to a discount against its Japanese (0.34875 percent) and Swiss (0.29667 percent) counterparts. Does the dollar realistically make the ideal funding currency? No. The Fed will certainly turn to a hawkish policy stance well before the other two, it has the potential to take a more consistent hawkish path, deficits are a problem amongst all three and the foundation for a true recovery is most stable in the US. As soon as US rates recover, risk-seeking capital will once again flow into the world’s financial center.

In the meantime, we may see a shift in sentiment that could benefit the dollar’s safe haven status. The broader markets have rallied consistently for months – despite a fundamental picture that has changed pace little since the initial reversal. Naturally, a wave of profit taking is highly probable. And, considering the advance to this point has been heavily dependent on steady capital gains, a correction could be sharp and aggressive. There are many different potential catalysts for such a turn; but in the end, the shift in optimism will likely develop naturally. Nonetheless, we should keep an eye on a few specific developments. Reports suggest that lending to consumers has dropped at its fastest pace since the Great Depression; yet leverage has returned to levels last seen since before the 2007 meltdown. This is an imbalance that will lead to problems later down the line if not corrected. Also, the Federal Reserve and White House have both voiced concern over the commercial real estate debt market. The former is looking into major banks’ exposure to this asset class; but the term ‘stress test’ is not being used.

Though it is vital to keep abreast of the health of risk appetite; we shouldn’t ignore the influences of data and growth forecasts. The economic docket is light next week; but durable goods orders and housing data (existing sales, new home sales) can supply short-term volatility. It is the FOMC that tops the list – not with a possible change in the benchmark, but commentary that can move up the time table for a hike. Data aside, the US/China trade spat hints at a growing concern with protectionism which may come under scrutiny at the September 24/25 G20 Meeting. Exit strategies, financial regulation, banking compensation are all on the topic list; but not currencies.

Euro: Not as Strong as the EURUSD’s Trend Suggests

Fundamental Forecast for Euro: Neutral

- Investor confidence hits its highest level since April 2006 as growth, equities recover
- Slow global recovery translates into the biggest trade surplus for the Euro Zone in seven years
- Has a push above December’s highs cleared the way for a EURUSD extension rally?

Is the euro the fundamental powerhouse that the EURUSD would suggest or is the euro merely playing the compliment to the rest of the market. If we were to look at the world’s most liquid currency pair alone, we see a six month trend, recent rally and the highest overall level for the exchange rate in nearly a year. However, the easy read on the major is clouded when we look at the crosses. Against the pound, the euro was set in its biggest rally since March (a move that was mirrored in most of those pairs denominated in sterling). Elsewhere, EURJPY was stuck in a contracting range; EURCHF was virtually unchanged in its 100-point range; and the commodity group consolidated within bigger trends. It seems the case that the market is influencing the euro rather than the euro influencing the market. And, while there are fundamental concerns building beneath the surface, this relationship isn’t likely to change much in the coming week.

Few would argue that risk appetite (and its influence in currencies through carry interest) is a primary driver for the market at large; but what does that mean for the euro? To gauge any currency or asset’s response to sentiment, you need to determine where it stands in the scale of risk. High interest rates, strong growth prospects and progressive policy are a few factors that build a positive correlation to a rising demand for yield. Naturally, the opposite considerations count as traits for a safe haven or funding currency. On either side of this spectrum, we have an asset that is sensitive to the underlying fundamental currency. However, the euro fits comfortably in the middle of the range. The benchmark lending rate in the Euro Zone is relatively high; but the outlook for hawkish progress is reserved. Growth is colored not only by the positive turn from Germany and France; but there have also been downgrades for Italy and Spain. Overall, despite the confidence of politicians and some policy officials, the economy is on the same playing field as the US, Japan and many others. Until the ECB turns up the heat on the target rate or financial troubles (like the ability for some Eastern European economies to repay their debt), this will remain the case.

Outside the vagaries of sentiment, there are a few notable economic events on the docket to supply short-term volatility and perhaps a moderate shift on the bearing for growth forecasts. Top event risk is the series of service and manufacturing sector PMI data. While this series covers specifically the business sector of growth, it is inclusive and timely enough to act as a meaningful leader for growth speculation. Being the September round of data (the ‘Advanced’ or first measure), this will round out the forecast for third quarter activity. All of the regional, German and French numbers are expected to produce month-over-month improvement and most are seen offering ‘expansionary’ readings. This would support the central banks and government’s outlook for growth; but it still does not paint a clear picture for a return to a true expansionary trend.

Other indicators like the Euro Zone industrial new orders and German factory inflation gauge threaten little more than a meager shift; but the IFO business sentiment gauge could generate some fundamental interest. Sensitive to economic health, consumer spending, access to credit, export demand, optimism among German firms acts as its own unique report on the general health of the economy. The headline and expectations readings have been most prized recently; but a closer eye should be kept on the difference between expectations and current conditions. The outlook after a financial crisis and steep recession will certainly improve quickly; but actual health in the economy and markets will be more measured. One will have to give way to the other sooner or later.

Japanese Yen Forecast Bullish on Lack of Intervention Threat

Fundamental Forecast for Japanese Yen: Bullish

- What happens to the Japanese Yen when threat of intervention is removed?
- Yen tumbles as S&P 500 continues to set fresh highs
- ‘September effect’ not having much of an effect on Japanese Yen

The Japanese Yen finished the week lower against all but the British Pound and the US Dollar, as impressive rallies in the US S&P 500 and broader financial market risk sentiment pushed the safe-haven currency sharply lower against major counterparts. A mediocre week of economic data hardly helped matters, and hawkish rhetoric from the Ministry of Finance pushed the Yen even lower. Vice Finance Minister Yasutake Tango stated that the administration was watching currency moves closely—implying that forex market intervention was a distinct possibility. Indeed, the Japanese Ministry of Finance has historically been an active participant in the Japanese Yen exchange rate and has repeatedly intervened in instances of excessive Yen strength. The very fact that the US Dollar/Japanese Yen exchange rate reached the psychologically significant 90 mark was enough reason to fear MoF intervention, and Tango’s comments were enough to fuel a rapid USDJPY pullback. Later commentary from newly-appointed Finance Minister Hirohisa Fujii quickly dispelled the short-term threat to JPY stability, but the damage had been done and the Japanese Yen remained on offer through the week’s close.

The legitimate threat of MoF FX intervention served as a clear warning to JPY bulls, but recent rhetoric suggests that there will be little in the way of further Yen strength. This leaves the currency to trade purely off of financial market risk sentiment. The fact that the S&P 500 recently registered fresh 2009 highs hardly bodes well for the risk-linked currency, but no market can rally indefinitely. Given the overwhelmingly bearish trend in the USDJPY (bullish trend for the JPY), it seems momentum is plainly in the Yen’s favor. Yet it remains critical to watch any and all moves in key financial market risk barometers.

We previously claimed that the “September Effect” could lead the S&P 500 lower and the Japanese Yen higher. Recent weeks have produced impressive equity market strength yet the JPY has remained relatively stable. We believe that the Yen stands to gain on any subsequent pullbacks in stocks, and recent experience shows that it can hold its own despite major S&P strength. Thus we would argue that risks remain fairly bullish for the Yen. If stocks continue their seemingly interminable rally, the JPY could pull back slightly. If stocks fall, the Yen will in all likelihood continue its previous ascent. Things are never quite this simple in currency markets, but we believe JPY risks favor near-term rallies.

The wild card will come on Wednesday’s Trade Balance report. The export-dependent Japanese economy has taken a massive hit on the sharp drop in foreign demand for its own production. Any signs of continued exporter duress will once again raise political pressure on the Ministry of Finance to counteract Japanese Yen strength. Though we clearly believe that risks of intervention are remote, a truly shocking trade balance result could rekindle market speculation on MoF intervention.

The coming week may prove significant in determining more medium-term direction in the Yen. If nothing else, markets will definitely watch for signs that the USDJPY may finally break below the psychologically significant 90 mark.

British Pound Decline May Be Indicative of Long-Term UK Macro Outlook

Fundamental Forecast for British Pound: Bearish

- UK RICS house prices rise for first time in 2 years
- The number of people looking for jobs in the UK rose the highest level since 1995
- FXCM SSI results suggest GBPUSD could be in for further declines

The British pound was easily the weakest of the majors last week as the currency fell more than 3 percent against the euro, Swiss franc, and Canadian dollar. Likewise, the British pound slumped 2.4 percent against the US dollar and 1.7 percent versus the Japanese yen. While some indicators from the nation have shown signs of improvement, such as the RICS house price index, fiscal data has done nothing but deteriorate, adding pressure on the British pound. In fact, public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling’s full-year forecasts for a deficit of 175 billion pounds.

According to the Financial Times, the corrosion of the UK’s fiscal state has “been a result more of a collapse in revenues – total tax receipts have fallen by 11.4 percent so far this financial year compared with a year earlier – than of a jump in spending” of just 5.3 percent this year. Going forward, the further the UK’s fiscal state deteriorates, the greater the risk will grow that ratings agencies will question if the nation deserves the golden AAA credit rating, especially after Standard & Poor’s downgraded the UK’s credit outlook to “negative” from “stable” because of their budget woes back in May. Nevertheless, Standard & Poor’s has also said that they would reserve any judgment on potential downgrades until the next general election, which may be held in May or early-June 2010. On the downside, this leaves a long period of time open for speculation on the prospects for the UK’s credit rating to reign supreme, which may make the already-volatile British pound even choppier.

In more immediate event risk, the minutes from the BOE’s September meeting will be released on Wednesday at 8:30 ET. However, they may not expose new information as the BOE’s Quarterly Inflation Report has already revealed dour outlooks by the Monetary Policy Committee. That said, following the latest UK CPI results, which were stronger than anticipated, Credit Suisse overnight index swaps have shifted to price in 78 basis points worth of hikes by the BOE over the next 12 months, up from 66.7 basis points on Tuesday. As a result, if the minutes highlight a clearly dovish bias by the BOE, the market’s focus may shift back toward the central bank’s liberal stance on quantitative easing, and the British pound could fall sharply.

Written by John Kicklighter, David Rodriguez, Terri Belkas, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source – Forex Weekly Trading Forecast – 09.21.09

The Dollar took a break from its bearish run versus the EUR yesterday, but the long term trend could continue today. Driving yesterday’s reversal were losses in U.S. equities and stronger manufacturing data from the U.S. Today’s trading will be highlighted by key data releases from Europe and Britain, perhaps returning the EUR/USD to its bullish streak.

USD – USD Profits as Stocks Sell Off

The U.S. Dollar held small gains late Thursday as pessimism about the strength of the economic outlook put selling pressure on stocks and higher-yielding currencies. The currency had been lower earlier with stocks rising after the Federal Reserve Bank of Philadelphia’s index on manufacturing jumped far more than forecast this month.

The U.S Dollar also traded higher against the Yen at 91.21, up from 90.84 yen Wednesday. The Dollar sank to a seven-month low against the Japanese currency on Wednesday. The Dollar’s slide against the yen picked up pace after Japan’s Finance Minister Hirohisa Fujii said a strong yen had advantages for the nation’s economy.

The Dollar has been on the ropes in recent weeks, with the Dollar index losing 2.41% this month. Pressure has been tied in part to rising risk appetite, which has seen investors shun the greenback’s safe-haven status in favor of equities and other assets.

Still analysts expect the U.S Dollar to resume its more traditional relationship with economic data, rising with positive economic news and falling when the outlook for the U.S. turns gloomier.

EUR – Euro Hit 1-year Peak vs. the U.S Dollar

The European currency held onto gains to hover near a 1-year highs against the U.S. Dollar on Friday, as equities and commodities advanced on expectations of economic recovery, putting pressure on the greenback. It advanced a 3rd day to $1.4716 and yesterday reached $1.4737, the strongest level since last September. The EUR has gained more than 2.5% this month, riding improved investor confidence and expectations that U.S. rates are likely to stay at rock bottom for some time.

The EUR also traded near a 4 month high versus the Pound before a German report today that may show the pace of decline in producer prices slowed, providing more evidence the 16-nation region’s economy is emerging from the recession. The pound traded near its lowest since May as a report yesterday showed the jobless rate in the U.K. rose to the highest since 1995.

The 16-nation currency rose above 98 pence for the first time on Dec. 30. It advanced a third day to $1.4716 and yesterday reached $1.4737, the strongest level since Sept. 25, 2008. The Sterling is likely to weaken in the coming months as the government needs to rein in spending and its central bank is likely to retain an expansionary monetary policy, analysts said.

JPY – Yen Gains after BOJ’s Shirakawa Comments

The Japanese yen had gained after Japan’s new finance minister said currencies were not moving rapidly and that he opposed currency intervention as long as market moves were moderate. The Yen rose to the day’s high against the Dollar pushing the U.S. currency down more than 0.2% on the day to around 90.60 yen. The pair traded around 90.90 yen before the comments.

The yen also got a boost after Bank of Japan (BOJ) Governor Masaaki Shirakawa said a stronger yen would push down prices in the near term but might support the economy in the longer run. The Japanese currency jumped versus the EUR, which trimmed earlier gains and slid to the day’s trough of 133.54 yen, down slightly on the day.

OIL – Crude Oil Trades Lower as USD Firms

Crude Oil finished slightly lower after a volatile session Thursday, as the U.S Dollar firmed and traders digested upbeat economic news and a bigger-than-expected drop in U.S. stockpiles in the previous session. Crude earlier rose to a high of $73.16 a barrel and fell to a low of $70.40 a barrel.

On Wednesday, Oil rose more than 2% after the Energy Department reported a bigger-than-expected drop of 4.7 million barrels in U.S. stockpiles of the commodity in the week ended Sept. 11. Oil remains unable to top the upper end of its trading range at $73 a barrel without a new trigger, analysts said.

Oil has tracked equities markets closely in recent months as dealers look to stocks as a leading indicator of an economic recovery that could boost ailing energy demand. What happens to the Dollar, stock market and Gold are now driving the Oil market on a daily basis. A weaker Dollar can fuel purchases of Oil and other Dollar-denominated commodities, as they become relatively less expensive to non-Dollar holding investors.

Article Source – Dollar Edges Up Against EUR, Crude Falls with Stocks