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US Dollar Slips as Sentiment Improves − What Impact Will the G−20 Summit Have?

Thu, Apr 2 2009, 05:50 GMT
by Terri Belkas

DailyFX

- Euro, Swiss Franc the Weakest of the Majors Ahead of ECB Rate Decision - What to Watch

- Japanese Yen Ends Wednesday Mixed Despite Worst Tankan Reading Since at Least 1974

US Dollar Slips as Sentiment Improves - What Impact Will the G-20 Summit Have?
The US dollar ended the day mostly lower against the majors - though the currency did gain against the Swiss franc, euro, and Canadian dollar – as increased risk appetite provided a boost to “riskier” assets like the New Zealand dollar and US equities, with the DJIA gaining 2.01 percent. Looking at the data on hand, the ISM manufacturing survey edged up to 36.3 in March from 35.8, which was slightly better than forecasts for a 36.0 reading. Most of the components of the survey registered small increases, including prices paid, production, new orders, employment, new export orders, and imports. That said, all of these indices remain well below 50, signaling a further contraction in activity, albeit at a slower pace. Meanwhile, the National Association of Realtors (NAR) said that pending home sales rose 2.1 percent in February, versus expectations for a flat reading. There have been a handful of housing-related indicators that have registered surprise improvements during February, which is a positive signal, but we need to see more consistent increases before judging that these moves indicate any sort of recovery.

Over the next 24 hours, the G-20 summit is easily the most important event to watch not only for risk trends, but for the US dollar in general. The biggest issue to be covered during this summit is financial regulation, which France and Germany are taking a hard line on as French President Nicolas Sarkozy has threatened to walk out if the G-20 does not draw up new standards that meet their "red lines,” which include restrictions on offshore tax havens and more hedge fund supervision. Also, while US President Obama and Chinese President Hu have reportedly not discussed replacing the US dollar as reserve currency ahead of the summit, there are concerns that this topic will be pursued, which could lead to sharp sell-offs of the greenback.

Related Article: What Are The Implications Of Quantitative Easing For Currency Markets?

Swiss Franc, Euro the Weakest of the Majors Ahead of ECB Rate Decision - What to Watch
The Swiss franc tumbled across the board on Wednesday, as interest rates in the nation are amongst the lowest in the world and ultimately, only the high-yielders saw significant moves higher. This suggests that the currency is still considered one of the prime “safe haven” assets, despite the dismal economic and financial scenario in Switzerland. In fact, data released during the European trading session showed that the SVME Purchasing Managers’ Index (PMI) held at a record low of 32.6 in March. Even worse, this was the seventh straight month that the index held below 50, which signals a deepening contraction in manufacturing activity thanks to a broad-based drop in export demand.

While the Swissie was the biggest loser, the euro was the next weakest ahead of Thursday’s European Central Bank rate decision.
According to a Bloomberg News poll of economists, the ECB will cut rates by 50 basis points to 1.00 percent on Thursday morning.
However, Credit Suisse overnight index swaps are only pricing in a 25 basis point cut to 1.25 percent, suggesting that this could be a highly market-moving event. A reduction in line with Bloomberg's estimates could exert bearish pressures on the euro, while a 25 basis point cut could actually prop up the currency. Ultimately, though, where the euro ends the day may have more to do with what ECB President Jean-Claude Trichet says during his post-meeting press conference at 08:30 ET. Trichet tends to be highly biased in his commentary, and if he signals that additional rate cuts may be on the way the euro could tumble, even if they only reduce rates to 1.25 percent. On the other hand, indications that the ECB has no intention of bringing interest rates lower in the near term could ignite a euro rally.

Related Article: Euro Zone Recession Deepens with Unemployment Rate to Hit 2-Year High

Japanese Yen Ends Wednesday Mixed Despite Worst Tankan Reading Since at Least 1974
The Japanese yen ended Wednesday on a mixed note, as the currency fell against the “risky” majors, including the British pound, New Zealand dollar, and Australian dollar, which was in line with the gains seen in the DJIA and S&P 500. Meanwhile, the Japanese yen gained against the US dollar, Canadian dollar, euro, and Swiss franc despite dismal Japanese economic releases overnight. Indeed, the Bank of Japan’s Tankan gauge of sentiment amongst large manufacturers plummeted to -58 during Q1 2009 from -24 in Q4 2008, which marks the lowest since recordkeeping began in 1974. Furthermore, the Tankan measures of planned capital expenditures fell 6.6 percent, and while this is better than the expected result of -12.0 percent, it was the sharpest decline since Q4 2002.

Overall, the data indicates that businesses are being hit hard by the combination of the global economic slowdown and appreciation of the Japanese yen, as they have led to a record contraction in exports of 49.4 percent in February from a year earlier. Over the next 24 hours, the G-20 summit presents some potential for Japanese yen volatility as comments that trigger risk aversion in the markets could spur gains for the low-yielding currency. On the other hand, if investor sentiment improves following the G-20 summit, the Japanese yen could tumble across the majors, but especially versus currencies like the Aussie, Kiwi, and British pound.

Economic Data

Support And Resistance Levels

Published on  Thu, Apr 2 2009, 05:50 GMT

Dollar Rally Cut Short As Risk Evaluated And Data Disappoints

Wed, Apr 1 2009, 06:09 GMT
by John Kicklighter

DailyFX

• Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts

• Japanese Yen Torn Between Questionable Safety, Recession Reminders

• Canadian Dollar Takes Lead On Com Bloc With GDP Numbers

Dollar Rally Cut Short As Risk Evaluated And Data Disappoints
It was bound to happen – especially with substantial event risk drawing so close. The three-day rally that pulled the US dollar up from its two-and-a-half month lows was finally put off its pace Wednesday as currency traders gauged their exposure to the events due in the days ahead (G20 meeting and NFP release ) while once again taking stock of consequential data crossing the economic docket.

With little more than 36 hours to go until the Group of 20 leaders convene in London, traders are still trying to discern which currency is best positioned to benefit from a positive outcome and which offers the greatest level of protection from a crushing disappointment. While the dollar can weather both scenarios given certain consequences, the focus and uncertainty on the US, its dollar and policies make it a risky bet. We have outlined the situation over the past few days; but circumstances are ever-changing and policy makers are taking advantage of the market’s and media’s attention to air their demands, tout their efforts and offer their forecasts ahead of the gathering. There was yet another round of this grandstanding today. Reflecting the resistance building in the Euro Zone, French Finance Minister Christine Lagarde said the country’s representatives would walk out of the April 2nd meeting if their “deliverables” are not met. While this was largely focused on beneficial, regulatory changes; it is nevertheless telling of the attitude that these officials will take to a conference that has historically fallen short in developing policy.

Along, different lines Japanese Prime Minister Taro Aso has perhaps shown his lack of confidence in a global solution by announcing he has set his ministers to work to develop a third reiteration of financial stimulus by mid-April. This is a reasonable effort however considering the likelihood that officials will be able to come to an agreement over a one-day meeting and with respect to forecasts for global growth. The World Bank lowered its growth forecast for 2009 down to a 2.1 percent slump while the OECD projected a 4.3 percent plunge for its 30 member group along with expectations for 36 million unemployed within the G7 by the end of 2010. With all this under consideration, we have to remember that the US is the world’s largest economy and likely has the most to gain from global coordination. Should the world’s largest economies work together to correct some of the underlying, global problems, it could more surely lead to positive results and remove the defacto responsibility that the United States has taken to correct a world-wide problem in addition to its own troubles. And, lest we forget, there is the Russian and Chinese proposal for a new world reserve currency. If this suggestion is shot down, it could still hurt the dollar by stalling discussion on other topics.

When everything is said and done, the G20 meeting could have a substantial and lasting impact on the dollar’s future - but so too will the more mundane data that continues to cross the wires. The indicators released this morning reminded market participants that the worst of the recession has not passed us. Topping the docket this morning, the Conference Board consumer confidence report ticked higher for its March reading; but not enough to make up for that fact that it is just off a record low. Americans saw employment and conditions deteriorating to new lows through the month, but were slightly less pessimistic about the future. This is likely due to hope placed in the government’s efforts to date, but such influence through general data has not yet been confirmed.
The S&P/ CS housing market inflation report was more straightforward on its negative bias with its 25th contraction on year-over-year data to a record low. Looking ahead to tomorrow, ISM manufacturing and construction spending data will redefine growth forecasts; but we should also take count of the preliminary jobs data ahead of Friday’s NFPs.

Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts
We were reminded today that there is more event risk on Thursday than just the G20 meeting. For the euro, there is an event that can carry just as much market moving potential and ultimately provided a clearer sense of direction: the ECB rate decision. Still a day away, we were reminded by of the pending policy announcement by around of key data that will no doubt factor into President Trichet and company’s decision. Further diminishing the argument that inflation is a realistic concern for the medium-term time frame the central bank monitors, the Euro-Zone CPI flash estimate for March cooled to a 0.6 percent pace of year-over-year growth – its slowest pace on record. And, while inflation was subtracted from the equation, the intensity of the Euro Zone’s recession was leveraged.
Germany, Europe’s largest economy, reported joblessness jumped 69,000 through the current month for the worst contraction in four years and fifth consecutive increase. With the unemployment rate rising to a nine-month high 8.1 percent, it is hard not to forecast a deepening recession for Europe and the need for further easing from the ECB.

Japanese Yen Torn Between Questionable Safety, Recession Reminders
Yen traders have historically ignored Japanese economic data because the currency was playing a larger role in the FX market (recently as a funding currency for the carry trade or a safe haven). Ever since the 4Q GDP numbers rocked confidence in the currency’s ability to offer shelter from the financial torrent though, we have seen a greater interest in fundamentals. Today’s flow reminded investors that Japan is not immune to the global financial and economic crisis; and moreover that it stands to perhaps suffer far more than many of its large counterparts. From a wide range of data, the consumer was one of the key focuses. The jobless rate rose to a four-year high 4.4 percent through February while household spending dropped for a 12th consecutive month and income contracted at its fastest pace in five years. The other highlight was factory activity. The first quarter Tankan figures generated significant surprise. The confidence gauge for manufacturers fell to a record low according to the survey owing to the severe domestic recession and plunge in export demand. This report led to an immediate 125 pip drop in USDJPY.

Canadian Dollar Takes Lead On Com Bloc With GDP Numbers
Over the past few weeks, the approach of the Group of 20 meeting has led FX traders to focus on the most liquid currencies and more vocal members of the assembly. However, we should not overlook the opportunities and threats within the commodity bloc.
Considered to be two of the strongest economies in the global rout, both Canada and Australia showed there is always reason to doubt today. From Canada, January GDP dropped 0.7 percent to maintain the longest recession on recent record and print the worst year-over-year contraction since 1991. The Aussie dollar responded to RBA Deputy Governor Battellino’s forecasts for negative growth over 2009 and a round of concerning data. Private credit growth slowed to its worst pace since 1994 while retail sales dropped the most since July of 2000.

Published on  Wed, Apr 1 2009, 06:09 GMT

Dollar Advance Struggles As Safe Haven Status And Recession Epicenter Roles Debated

Tue, Mar 31 2009, 05:31 GMT
by John Kicklighter

DailyFX

• Euro Weighed By Faltering Confidence, Retail Activity

• Pound Finds Little Support From Data, Scottish Lender Bailout

• Japanese Industrial Production Plunges But Managers’ Outlook Improves

Dollar Advance Struggles As Safe Haven Status And Recession Epicenter Roles Debated
The dollar’s rally from Friday’s began to ebb through the US session Monday as fundamental traders weighed the currency’s and economy’s exposure to risk appetite and the G20 summit only three days away. Despite the late turn to caution, though, speculators showed their general confidence in the greenback as a safe haven by leading the currency to its third consecutive advance. For an unbiased view, the Dollar Index extended its rally beyond the 84.25 breakout – now pushing 85.75. This same strength was reflected in the major crosses. EURUSD closed the session below 1.32; and despite a sharp intraday rebound, GBPUSD has pushed below 1.4275. We are now retracing the massive plunge the dollar suffered through March 18th and 19th following the Fed announcement that it was pursuing quantitative easing as another approach to its increasingly desperate rescue plan. This particular move in price action is notable; because it parallels the thematic fundamentals that are setting up the dollar’s future.

With the G20 meeting taking place on Thursday, market participants will have to decide ahead of time whether the dollar will continue to represent a safe haven for capital or if the world’s most liquid currency will be treated as the epicenter for a deteriorating financial crisis. There is a critical distinction between these two roles and the scenarios that can be developed from the outcome of the forthcoming meeting can vary dramatically depending on which way the market leans. While the debate is still ongoing, we can see that today’s event risk had more than a little influence over the outlook. Filling in for a light economic docket, traders were processing comments made by Treasury Secretary Timothy Geithner and a hardline action taken by the Obama administration against automaker GM. In an interview over the weekend, Geithner warned that some banks would still require “large amounts of assistance,” even though the Treasury only has an estimated $135 billion left in its financial-stability fund and many believe Congress will not allow another massive bailout pass through so easily. Despite the implications the Treasury Secretary’s comments have for investor confidence, it was clear that the greater and more immediate impact on price action came from another major rebuff for bailout funds. The autos task force put together by the president deemed survival plans submitted by both GM and Chrysler were unfeasible. So, instead of receiving another massive capital infusion from the government (GM was requesting up to $30 billion in loans), the US gave GM 60 days to develop a reasonable restructuring plan and Chrysler 30 days to close a deal with Fiat. If that wasn’t a clear enough sign that the US cannot fund an ongoing recession and financial crisis, officials have said expedited bankruptcy was an option.

Looking ahead to tomorrow, the market will continue to weigh the dollar’s value as a store of wealth against its exposure to another systemic seizure; but this time around scheduled event risk will be thrown into the mix. Topping the list of potential movers will be the Conference Board’s consumer confidence report. A pick up in sentiment would be an encouraging sign for consumption trends.
The other visible release will be the lagging S&P/Case-Shiller housing inflation indicators could work with recent sales data to raise expectations for a bottoming in the housing market. We will also watch out for the wildcard initial jobless claims data as a leading indicator to Friday’s NFPs as well as Fed Stern’s comments in Washington on those economic players in the past deemed “too big too fail.”

Euro Weighed By Faltering Confidence, Retail Activity
European leaders’ have taken a clear stance against US and UK calls to increase financial stimulus; but data and forecasts may yet lead authorities down this path anyway. German Chancellor Angela Merkel made her position on government stimulus going into the G20 meeting clear when she said “we must recognize that after the crisis, we need to return to solid financials policies… [or]…we run the risk of already preparing the next crisis.” However, as the largest economy in the European Union, Germany may have greater responsibilities. Today, Ireland lost its top rated S&P debt rating and Spain was forced to rescue its first bank in 16 years. Making things worse, ECB member (and President of the Deutsche Bundesbank) Axel Weber warned German 1Q GDP could be much worse than the 4Q number and growth could be down sharply for all of 2009. Data was equally discouraging. The European Commission released its confidence survey numbers for March, and the sentiment was generally discouraging. Economic, consumer, and business readings all pushed to record lows. The bleak outlook for consumers was further reflected in Bloomberg’s retail PMI number for the same period. A 10th consecutive monthly slump merely feeds the recession.

Pound Finds Little Support From Data, Scottish Lender Bailout
For fundamental pound traders, it is becoming more difficult to justify the argument that the sterling is oversold on the basis that its global counterparts are suffering from economics that are quickly catching up to meet it. Today, traders were responding to another disappointing round of data and the government’s efforts to put out another financial fire. Top news in the early London session was that the UK government was lending Nationwide Building Society 1.6 billion pounds to purchase the purchase Scotland’s Dunfermline Building Society – and thereby prevent its collapse. For most traders (who benefit from free-market economics), this move was preferable to yet another nationalization. The sentiment from the economic docket carried the disappointment through. The Hometrack home price survey fell to its lowest reading on records going back to August 2008 by accelerating its declines to a 10.3 percent pace through March. More pressing though was the credit data for February. Net consumer credit through the month fell negative (0.2 billion pounds) for the first time since in 16 years. This more than offsets the modest uptick in mortgage approvals that has developed thanks to dramatic declines in prices and inventories.

Japanese Industrial Production Plunges But Managers’ Outlook Improves
A permanent correlation to risk trends kept the yen bid through Friday’s session as equities and commodities sold off world wide.
And, though this currency’s once-indisputable place as the market’s top safe haven has been called into question through recent weeks, it is likely to shake off these doubts for the time being as concern over the outcome of the G20 meeting leaves investors few options. And, for those not prescribing to the influences of risk, the economic docket had its influence on yen price action as well. Thoughindustrial production slumped for a fifth month through February, inventories dropped a record 4.2 percent and plans to increase output grew 2.9 percent – the first rise in five months.

Published on  Tue, Mar 31 2009, 05:31 GMT

Dollar Regains Its Footing Ahead Of A Very Busy Week

Mon, Mar 30 2009, 05:41 GMT
by John Kicklighter

DailyFX

• Euro Slips As German CPI Numbers Lower The Outlook For The ECB Rate Decision

• Pound A Risky Bet For Next Week’s Focus On Financial Troubles

• Japanese Yen Finds Risk Aversion A More Influential Driver Than Weak Retail Sales

Dollar Regains Its Footing Ahead Of A Very Busy Week
After a week of chop, the US dollar was finally able to retrace some of the sharp losses suffered last week following the Fed’s decision to pursue a policy of quantitative easing. The rally was seen across the board; but the most prominent advance was made against the greenback’s most liquid counterpart: the euro. EURUSD finally slipped below 1.3415 on a more than 300-point drop through Friday’s close. So what was the bullish fuel for the US dollar? A round of second tier economic indicators crossed the wires this morning; but its influence was generally mixed. The Department of Commerce released personal income and spending figures that did little to suggest the consumer sector would generate a quick rebound for the US economy. According to the data, incomes fell more quickly than expected through February - by 0.2 percent. Alternatively, spending rose 0.2 percent following a positively revised 1.0 percent jump the previous month. This would seem to be a mild set of data with a positive edge garnered through a consumer base willing to spend its way out of its recession. However, looking more critically at the data, we can see it was far from promising. The headline numbers come out to a rate of savings that is at its highest in 14 months. What’s more, the rise in spending was largely due to inflation; as price-adjusted figures actually fell 0.2 percent.

Rather than following the lead of the economic calendar, dollar traders were keeping tabs on risk appetite. Confidence seems to have built through most of this week despite a lack of fundamentals that could genuinely bolster such sentiment. Sure there was a round of strong housing data and rebound in durable good orders in the US; but this doesn’t make up for the recent record lows much of this data is attempting to pull itself up from. At the same time, the threat of protectionism has swelled with time as policy officials run out of options to correcting their own economic difficulties, putting focus on trade agreements that may put local workers and businesses at a disadvantage. The World Trade Organization made note of this trend today and said it would encourage the world’s richest countries to avoid breaking global ties at next week’s G-20 meeting. This gathering of leaders from the world’s largest economies will no doubt be top event risk, not only for the dollar, but the entire financial market. The US currency will be fully vested in these meeting for a few reasons. First and foremost, traders will look for commentary based on the greenback’s status as the world reserve currency. A shift to a basket has distinct economic benefits and has been expressed by many influential players; yet it is still considered highly unlikely. The more general concern will be whether or not leaders can finally produce a global, coordinated plan for stabilizing the financial markets and global economy. This too is doubtful.

With all the focus on the Group of 20 meeting on Thursday, we should make it a point not to forget the NFP release the following day. As one of the primary, leading indicators for growth, this data will be analyzed for its short-term impact on volatility and long-term influence on the United State’s yawning recession. Economists are forecasting another 660,000 jobs to have been lost through March, which would bring the total losses since January of 2008 to more than 5 million. President Barack Obama’s warning of a double digit unemployment rate is gaining traction. In fact, according to Labor Department statistics released today seven states already have jobless rates above 10 percent.

Euro Slips As German CPI Numbers Lower The Outlook For The ECB Rate Decision
Where is the euro’s place in the currency spectrum? Nine months ago, fundamental traders were treating the currency as if its economy would be able to avoid the worst of the global slump and maintain a competitive benchmark lending rate in the process. This bias has clearly been exercised by serious financial troubles, round after round of recession-based data and a consistently dovish central bank. Today’s data set a disappointing pace heading into next week’s significant event risk. From the growth front, industrial new orders sank a record 34.1 in the year through January. This follows the industrial production figures for the same period which also contracted at their fastest pace on record. Data like this will no doubt be mulled over for the G 20 meeting by leaders in the US and UK who have been calling for the Euro Zone (along with others) to boost fiscal spending. Rates, however, may be the bigger issue for euro traders next week. With the ECB expected to cut its benchmark rate another 50 basis points to 1.00 percent next Thursday; the German CPI numbers released today set a bad precedence. Inflation in the region’s largest economy slowed to 0.5 percent – the slowest pace since 1999. Now we have to wonder will they even stop at 1.00 percent.

Pound: A Risky Bet For Next Week’s Focus On Financial Troubles
The scheduled UK event risk to come down through the wires was lacking in market-moving potential Friday. The Office for National Statistics reported a sharper than expected contraction in the UK’s economy through the final reading on fourth quarter GDP numbers. The 1.6 percent drop through the three month period was the worst since 1980 and included the worst levels for construction and consumer spending in over a quarter century. This data merely verifies forecasts for the United Kingdom to suffer the worst recession in the industrialized world through 2009 and thereby cements the sterling’s connection to the outcome of next week’s G 20 meeting. Should the world’s leaders come through with a coordinated rescue plan, it could relieve some of the burden on the UK economy as positive results could come more quickly rather than the global momentum behind the world-wide recession burning through Britain’s stimulus money. Otherwise, at the front of the recession curve, the pound will succumb to growing fears that Prime Minister Gordon Brown’s and the Parliament’s policy efforts are doomed to fail.

Japanese Yen Finds Risk Aversion A More Influential Driver Than Weak Retail Sales
Japanese data is frequently overlooked by currency traders; but since the yen’s safe haven status was called into question by the economy’s sharpest tumble since 1974 through the fourth quarter, the market’s interests have changed. Early in the Tokyo session, the government released inflation and retail sales data for February. Already bereft of income and sentiment, consumers spending on retail goods dropped 5.8 percent in February from a year ago. This was the worst decline in seven years. Perhaps the greater issue though was the nation’s slip back into deflationary territory. Those market participants that were around before and after the Asian financial crisis know that deflation combined with recession and financial instability have long crippled the Japanese markets and economy. However, despite all this, the yen would still finish the session much higher as traders throttled back on risky bets ahead of next week’s fundamental fireworks.

Published on  Mon, Mar 30 2009, 05:41 GMT

Dollar Edges Higher Despite Dour GDP Readings, Risk Looms

Fri, Mar 27 2009, 05:53 GMT
by Terri Belkas

DailyFX

• Pound Pulls Back After Dismal Retail Sales Figures And Darling Limits Stimulus

• Euro Sees Potential Volatility After ECB Member Mentions Policy Beyond Rate Cuts

• New Zealand Dollar Steady Despite A Sharp Drop In GDP

Dollar Edges Higher Despite Dour GDP Readings, Risk Looms
The US dollar was on-balance strong through Thursday’s close despite a round of disappointing economic data crossing the wires in the early New York session. The final reading on fourth quarter GDP was projected to be the top market-moving release for the day; but this data came with tempered expectations for volatility. The first reading of growth holds the greatest potential as the market has no grounding with which to benchmark the health of the economy. From there, the first revision is prone to substantial revisions as was seen back on February 27th when the ‘preliminary’ indicator issued an adjustment that pulled the original 3.8 percent annualized contraction down to a far-more severe 6.2 percent plunge. For the final reading, the headline number actually printed slightly better than the official consensus with a 6.6 percent tumble. This quarter-over-quarter change aside, we should not lose sight of the bigger picture. This was the worst annualized performance for the world’s largest economy since 1982. What’s more, it is worth noting the trend behind the component figures. Personal consumption fell 4.3 percent through the final quarter of 2008 – its steepest decline since 1980 – and considering the consistency in job losses, the largest component of growth is likely to weigh overall GDP down even further through 1Q. Equally disturbing was the most aggressive drop in corporate earnings (at 16.5 percent) in 56 years. These are not the indicators of confidence - even on a relative basis with a global economy in recession.

Considering the state of the lagging GDP numbers and aggressive response from policy officials recently, some have taken the opportunity to forecast a bottom. However, there is little support from more recent data to support such a theory. Despite the surprise pick up in durable goods orders yesterday and the series of positive housing numbers this past week; all of these sectors are still near their recent record lows. What may truly define expectations for growth over the first and second quarter of this year will be consumer lending and spending. As the largest driver of growth, the American populace has to overcome significant hurdles to bolster optimism, find loans and fight the growing urge to hoard their dwindling income. In the meantime, today’s rolling jobless claims jumped to a record 5.56 million. The non-farm payrolls report for March (now expected to print another 660,000 jobs lost) looms larger with each passing day.

Despite the significance of today’s data, the dollar would not produce the pressing breakouts that the majors have backed up to over the past week. With the entire global economy steeped in recession, it is clear that market participants have grown desensitized to individual growth figures. However, they have certainly not prepared for the possibility that the US dollar may lose its status as the world’s reserve currency. Today, a UN panel of economists recommended a new global reserve system, which they have said could “contribute to global stability, economic strength and global equity.” There is little chance the UN would be able to encourage the world to take such a step; but it gives legitimacy to those who bring up the same argument at the G-20 summit next Thursday. Stay tuned.

Related Article: Top 5 Market-Movers for the Week of 03/23/09, Dollar Stalled As Reserve Currency Status Threatened

Pound Pulls Back After Dismal Retail Sales Figures And Darling Limits Stimulus
How bad can the situation in the United Kingdom get? Months ago, the IMF Forecasted the European country would suffer the worst recession of the major industrialized nations through 2009. Consumer spending data released today added further weight to this outlook. Through the month of February, retail sales reportedly fell 1.9 percent on the month while receipts grew at a feeble 0.4 percent pace over the year – the worst level of activity since 1995. This is just one more piece of data that has added to the growing political strain in the United Kingdom. Leveraging yet another weight on Prime Minister Gordon Brown’s shoulders, Chancellor of the Exchequer Alistair Darling suggested today in testimony that he would be putting limits on further rounds of fiscal stimulus. Brown, along with US President Barrack Obama, has lobbied the world’s largest governments to increase spending to recharge growth. Until they do, the recovery of the global economy will depend on the actions of a few of the largest players – a situation that could end in crippling failure.

Euro Sees Potential Volatility After ECB Member Mentions Policy Beyond Rate Cuts
Price action behind the euro crosses was volatile but ultimately lacking direction Thursday as the fundamental crowd awaited the bigger event risk expected to come down the line next week and settled into the general sense of congestion taking over the rest of the market. Today’s economic calendar wasn’t empty though. The German GfK consumer confidence survey reported its first decline in seven month with its April reading. All three of the main components behind the indicator (economic outlook, income expectations and willingness to buy) fell. Of greater interest this morning though were comments made by ECB member Lucas Papademos. The central banker suggested policy officials may extend loans made to euro-region banks and begin buying corporate bonds in order to “enhance liquidity” and “improve the cost of funding.” This is an interesting step as it points to steps beyond the normal adjustment of the target rate and recurring lending facilities the ECB has stuck with in the past – steps that both the UK and US took before they dropped rates to near-zero. The central bank is expected to cut its benchmark another 50 bps at next Thursday’s meeting. Tomorrow’s German CPI numbers will likely bolster these forecasts.

New Zealand Dollar Steady Despite A Sharp Drop In GDP
The New Zealand dollar was heading into its most meaningful round of fundamental data in weeks through the open of the early Asian session. On deck were fourth quarter GDP and February trade balance numbers. Of the two, the growth report clearly took precedence. In a market vacuum, the 0.9 percent drop in economic output through the third quarter and 1.9 percent contraction through the year would send the kiwi dollar careening. This is the worst pace for the island nation since 1991 and a clear blow to the necessary safety aspect of a currency whose role is one largely rooted in its relatively high yield. However, the markets do not operate in a vacuum; and since forecasts were worse than the actual numbers while the trade balance unexpectedly surged to a near five-year high surplus, the currency held steady initially after the releases.

Published on  Fri, Mar 27 2009, 05:53 GMT

Euro Bounces from Morning Lows − Upside Potential?

Thu, Mar 26 2009, 05:39 GMT
by Terri Belkas

DailyFX

-US Dollar Dips on Geithner Comments, Japanese Yen Slips on US Data-Propelled Gains in Risky Assets

- British Pound the Weakest of the Majors as UK Gilt Sale Fails

- Euro Bounces from Morning Lows - Upside Potential?

- New Zealand Dollar Could Come Under Pressure on Thursday’s Q4 GDP Release

US Dollar Dips on Geithner Comments, Japanese Yen Slips on US Data-Propelled Gains in Risky Assets
Wednesday proved to be an altogether volatile day for the US dollar and Japanese yen, as US economic data proved to be much better than anticipated, which provided a boost to US equities in the morning, but the combination of increased risk appetite, which typically hurts “safe haven” assets, along with comments by US Treasury Secretary Tim Geithner sent the greenback plummeting.
During the Q&A session of speech Geithner gave, he said that said he was "quite open" to China’s proposal to move toward greater use of a global currency basket made up of dollars, euros, yen and sterling. “ In the past, the only comments to come from the mouth of a Treasury Secretary in regards to currencies were along the lines of “we believe in a strong dollar policy.” However, the slightest hint that demand for the US dollar may fall in the long run was enough to send the currency reeling.

Taking a look at the economic docket for the day, Durable Goods Orders surprisingly jumped for the first time in seven months at a rate of 3.4 percent in February, which was an especially positive development when you consider that the index had been forecasted to fall 2.5 percent. A breakdown of the report shows that transportation, machinery, computers, and electrical equipment all made positive contributions to the headline result. Furthermore, non-defense capital goods orders excluding aircraft - a gauge of business investment - rose by 6.6 percent. Meanwhile, data from the housing sector was similarly strong, as the Commerce Department reported that new home sales unexpectedly rose 4.7 percent in February to an annualized pace of 337,000, helping to push supply levels down to 12.2 months from 12.9 months. This comes on the tails of Monday’s existing home sales release from the National Association of Realtors (NAR), which also showed a surprise increase, though the only difference was in price. Indeed, median prices for existing homes actually rose during February, but median prices on new homes slipped to $200,900 from $206,800, which is down a whopping 18.1 percent from a year ago. That said, lower values along with improved credit conditions are just what is needed to help plant the seeds for recovery in the housing sector, but with unemployment climbing and the recession dragging on, it may take time for a true revival to come to fruition.

Looking ahead to Thursday, the 08:30 ET final reading of Q4 GDP for the US is forecasted to be revised even lower after the second round of estimates showed the index down 6.2 percent. The latest results may show a sharp 6.6 percent contraction, which would be the worst since Q2 1980. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher if flight-to-quality ensues. However, if the data is in line with expectations, the markets may brush off the news as much of this weakness has already been priced in.

Related Article: Top 5 Market-Movers for the Week of 03/23/09

British Pound the Weakest of the Majors as UK Gilt Sale Fails
The British pound saw very choppy price action on Wednesday and ultimately ended the day as the weakest of the majors. New from the UK was highly disappointing as the country’s Debt Management Office, which conducts UK Treasury bond auctions, said that there weren’t enough interested buyers for the government’s 1.75 billion pound gilt sale. This is the first time in almost seven years that such an auction has failed, which puts Prime Minister Gordon Brown in a precarious position. Indeed, the UK government wants to try to sell a record 146.4 billion pounds worth of gilts this year and up to 147.9 billion pounds in 2010 so that they can fund the tax cuts and spending efforts meant to dig the UK out of recession. However, with demand seeming to be lackluster, it will become increasingly difficult and more expensive for the government to fund these efforts, which will force them to either scale back their plans or seeking the help of the IMF.

Euro Bounces from Morning Lows - Upside Potential?
EUR/USD spent much of Wednesday trading within a channel formation that has developed over the past week, which may mark a consolidation of the rally in the pair during early March. Since this is looking more and more like a “flag” formation, there is some upside potential for EUR/USD in the near term, with the 200 SMA at 1.3870 serving as a possible target. Meanwhile, the release of European economic data was generally in line with expectations as the IFO index of German business confidence showed broadly weak sentiment on the business climate (down to a new record low of 82.1), current economic conditions (down from 84.3 to a new record low of 82.7), and the outlook for growth (up to 81.6 from the December record low of 76.9).

New Zealand Dollar Could Come Under Pressure on Thursday’s Q4 GDP Release
The New Zealand dollar benefited from increased risk appetite on Wednesday, as the currency ended the day up against the greenback. However, NZD/USD held below key trendline resistance at approximately 0.5735/50, and with upcoming GDP reports anticipated to show that the New Zealand economy contracted for the fourth straight quarter during Q4 at a rate of -1.1 percent, there a good deal of bearish potential for the pair. This is anticipated to be the sharpest decline since Q1 1991, as demand for exports declines, unemployment climbs, and consumer spending falters. As it stand, Credit Suisse overnight index swaps are pricing in a 25bp cut by the Reserve Bank of New Zealand (RBNZ) on April 29, but if New Zealand GDP falls more than expected, speculation of more aggressive rate cuts could rise and weigh on the New Zealand dollar. On the flip side, better than anticipated results could provide at least a brief boost to the currency.

Related Article: Australian and New Zealand Dollars: Risk of Major Tops Near Current Levels

Economic Data

Support And Resistance Levels

Published on  Thu, Mar 26 2009, 05:39 GMT

Euro Pulls Back From 1.3700 − German IFO Report Could Impact Trade on Wednesday

Wed, Mar 25 2009, 05:38 GMT
by Terri Belkas

DailyFX

- US Dollar, Japanese Yen Gain Amidst Broad Consolidations - US Durable Goods Orders May Fall for 7th Straight Month

- British Pound the Strongest of the Majors as UK CPI Unexpectedly Rises to 3.2%

- Euro Pulls Back From 1.3700 - German IFO Report Could Impact Trade on Wednesday

US Dollar, Japanese Yen Gain Amidst Broad Consolidations - US Durable Goods Orders May Fall for 7th Straight Month
The US dollar generally ended Tuesday higher while the Japanese yen made some headway against the highest yielding currencies amidst broad declines in risky assets. Indeed, after the DJIA surged nearly 500 points on Monday, the index subsequently backed off to end the day down by 115 points. This likely represents more of a consolidation than a turn in investor sentiment, but the moves nevertheless worked to the benefit of the safe-haven currencies even though Tuesday's US data was surprisingly strong. First, the Federal Housing Finance Agency reported that prices for homes purchased in January rose 1.7 percent, the first increase in eleven months. The index had been anticipated to fall 0.9 percent, and the increase adds to evidence that the seeds for recovery in the housing sector may have been planted. However, given the deteriorating labor market situation, a true rebound may not be possible until the US recession ends. Meanwhile, the Richmond Federal Reserve's index of manufacturing business activity jumped to a 6-month high of -20 in March, a significant improvement from the reading of -51 we saw in February. A breakdown of the Richmond Fed report shows that shipments, new order volumes, order backlogs, capacity utilization, number of employees, average workweek, and wages all increased during the same period. That said, all of these components remain negative, indicating that activity and conditions are still contracting, albeit at a slower pace.

Signs that domestic demand is showing no sign of recovery should continue to emerge as US Durable Goods Orders are forecasted to have dropped 2.5 percent and even excluding transportation is anticipated to fall 2.0 percent. All told, this would mark the seventh straight month in which the headline reading failed to rise, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The 3-month annualized figure has fallen sharply over the past few months, and combined with the weak outlook for the headline reading, the news could hurt risk appetite and thus, lead the US dollar higher. However, if durable goods orders actually rise, carry trades could gain and safe-haven currencies like the greenback may slip.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound the Strongest of the Majors as UK CPI Unexpectedly Rises to 3.2%
The release of UK inflation figures helped to support the British pound throughout much of the day on Tuesday, as the data showed that price pressures unexpectedly increased in February. Indeed, the UK’s consumer price index (CPI) surged 0.9 percent during the month, marking the first increase in six months. Even worse, the annual rate of growth accelerated for the first time in five months to 3.2 percent from 3.0 percent, leaving CPI above the central bank’s inflation target range of 1 percent - 3 percent. These indications of persistent price pressures suggest that the Bank of England may be forced to raise the Bank Rate from its record low of 0.50 percent before year end, and for what it’s worth Credit Suisse overnight index swaps are close to pricing in 50 basis points worth of rate hikes over the next 12 months. Going forward, risk trends are likely to continue serving as the primary driver of GBP/USD price action, but the pair’s break above the 100 SMA ultimately suggests that further upside potential remains.

Related Articles: British Pound Weekly Trading Forecast, Top 5 Market-Movers for the Week of 03/23/09

Euro Pulls Back From 1.3700 - German IFO Report Could Impact Trade on Wednesday
EUR/USD spent much of Tuesday consolidating below 1.3700, and based on the end-of-day break below immediate support at 1.3450, there may be bearish potential left for the pair. Over the next 24 hours, there will be marginal event risk on hand, as the IFO index of German business confidence is forecasted to show broadly weak sentiment on the business climate (down from 82.6 to a new record low of 82.2), current economic conditions (down from 84.3 to a new record low of 82.5), and the outlook for growth (up to 81.5 from the December record low of 76.9). As we saw with the March 17 release of the German ZEW survey, investor confidence on the economic outlook has improved somewhat, but sentiment on current conditions continues to falter. The release of this indicator at 5:00 ET tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

Related Article: Euro Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Mar 25 2009, 05:38 GMT

US Dollar, Japanese Yen Fall as Treasury's Plan Spurs Investor Optimism, 6.84% Rally in DJIA

Tue, Mar 24 2009, 05:34 GMT
by Terri Belkas

DailyFX

- Euro, British Pound Gain Versus Safe-Havens, Mixed Against Other Majors

- Australian Dollar, New Zealand Dollar the Currencies of Choice Amid Improved Risk Appetite

US Dollar, Japanese Yen Fall as Treasury’s Plan Spurs Investor Optimism, 6.84% Rally in DJIA
The US dollar and Japanese yen were the weakest of the majors as the “safe havens” didn’t stand to benefit from a rebound in risk appetite. The improvement in investor sentiment that sent high-yielding currencies surging and the DJIA up 6.84 percent was spurred Treasury Secretary Tim Geithner’s announcement of the government’s plan to remove toxic assets from the books US financial institutions. The plan includes investor financing for up to $1 trillion in purchases of illiquid real-estate assets, with a portion of the funding coming from remaining TARP funds and part relying on funding from the Federal Reserve and debt guarantees by the FDIC. The ultimate goal of the plan is to restore faith in the health of US banks so that they will not only lend to eachother, but also lend to businesses and consumers, and subsequently bring down borrowing costs. Since the plan depends on private investors stepping up to the plate, it will likely take time for any sort of results to be reflected in the credit markets, but based on the rally in US equities, especially financial shares, stock traders seem to have given this plan their seal of approval.

Meanwhile, US economic data was surprisingly strong, as the National Association of Realtors (NAR) reported that existing home sales unexpectedly rose 5.1 percent in February, bringing the annual rate of sales up to 4.72 million from 4.49 million. A breakdown of the report shows that total inventories went unchanged at 9.7 months, with single family supplies down to 9.1 months from 9.2 months and condo/co-op supplies up to 14.7 months from 13.4 months. Interestingly enough, median home prices rose slightly to $165,400 from $164,800, but in the grand scheme of things, values are still down a whopping 15.5 percent from a year earlier.
Regardless, it seems that the combination of more affordable homes along with lower borrowing costs and tax credits from the government’s fiscal stimulus plan have helped to plant the seeds of recovery in the sector. That said, climbing unemployment will impede all of those other factories and as a result, the US is unlikely to experience any sort of true rebound in home buying until the recession comes to an end.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro, British Pound Gain Versus Safe-Havens, Mixed Against Other Majors
The euro and British pound both ended Monday up against the ultra-weak US dollar and Japanese yen, but their performances were mixed against “riskier” currencies. Indeed, the commodity dollars were easily the biggest winners in light of the surge in risk appetite, as the Aussie, Kiwi, and Loonie all gained versus the euro and British pound. However, between the euro and British pound, the latter was the stronger of the two. When looking to historical data, the British pound experienced significantly more severe declines against the safe-haven currencies between July 2008 and early 2009 than the euro did, and as a result, the UK’s national currency will be prone to greater gains during times when carry trades are rallying.

Looking ahead to Tuesday, the UK’s consumer price index (CPI) reading for the month of February is expected to rise 0.3 percent, the first increase in six months. However, the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall back into the central bank’s inflation target range of 1 percent - 3 percent for the first time since March 2008 to 2.6 percent. If CPI falls more than forecasted, the British pound could pull back sharply as the markets will anticipate that the BOE will leave rates unchanged at an ultra-low 0.50 percent through the entire year.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast, Top 5 Market-Movers for the Week of 03/23/09

Australian Dollar, New Zealand Dollar the Currencies of Choice Amid Improved Risk Appetite
The high-yielding Australian dollar and New Zealand dollar were the strongest of the majors on Monday, as the commodity currencies gained roughly 3.5 percent against the Japanese yen and more than 2 percent versus the US dollar. There were few fundamental factors coming in to play here, and instead, a broad surge in risk appetite was responsible for the rally in the currencies. Indeed, the Australian dollar and New Zealand dollar were among the hardest hit at the height of the financial crisis, and now that sentiment appears to be improving, these currencies are prone to the biggest rebounds. That said, these are still the “riskiest” of the majors, so any reversals amidst risk aversion may be severe.

Related Articles: Australian Dollar Weekly Trading Forecast, New Zealand Dollar Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Tue, Mar 24 2009, 05:34 GMT

US Dollar In Jeopardy Of Losing Its Reserve Status

Mon, Mar 23 2009, 05:38 GMT
by John Kicklighter

DailyFX

The dollar was able to recover lost ground on Friday; but the rebound was more a relief rally - with shorts squaring positions - than a genuine recovery in sentiment. A look to the Dollar Index reveals the true state of the world’s most actively traded currency.
Friday’s positive close was the first in nine sessions – marking an unconvincing end to the dollar’s worst trend since February of 2008.

• US Dollar In Jeopardy Of Losing Its Reserve Status

• Euro, British Pound Lose Momentum Despite Improved Cooperation On Financial Aid

• Com Bloc Dominates Friday’s Docket, New Zealand Dollar Tops Event Risk Next Week

US Dollar In Jeopardy Of Losing Its Reserve Status
The dollar was able to recover lost ground on Friday; but the rebound was more a relief rally - with shorts squaring positions - than a genuine recovery in sentiment. A look to the Dollar Index reveals the true state of the world’s most actively traded currency.
Friday’s positive close was the first in nine sessions – marking an unconvincing end to the dollar’s worst trend since February of 2008. For fundamental traders, the trend is a bigger concern than its conclusion when preparing for next week’s action. While there are millions of small factors that go into the valuation of any currency (and millions from the opposing currency that makes up the other half of any pair); there are arguably three principal pillars of fundamental support for the greenback: growth potential and the impact it has on return; its safe haven status; and the knowledge that the US dollar is the world’s reserve currency. At this point, all three of these defining fundamental drivers are in various states of failure.

Few would dispute at this stage in the game that the US economy is weak – even on a comparative basis. Arguments can be made that perhaps early and aggressive policy action has put the world’s largest economy ahead of the recession curve; but that is a theory that won’t pan out until there are signs that conditions are bottoming out. More recently, the US has started to lose its safe haven status – a role that is has only picked up over the past six months or so. This has come thanks to the relentless deterioration in economic health and the government’s willingness to expand its balance sheet and cast doubt over the sanctity of the US Treasuries status as the “risk-free” asset of choice (even if such speculation is far-fetched). However, both of these factors are, and have been, debatable. What hasn’t been called into serious question in quite some time though is the dollar’s status as the world’s reserve currency. However, just yesterday, a member of a UN panel suggested his group would present a recommendation to a general assembly that the world substitute the US dollar for a basket of currencies as the standard for reserve. This is echoed by Russia’s plans to promote the same at the April 2nd G-20 meeting. Many have made this argument before, though they were ultimately brushed off. This time around though, the financial crisis has already desensitized policy officials to dramatic changes and desperation will encourage many to believe such a move could promote much-needed stability. In other words, there is a good chance that - put to a vote - such a proposal may actually find a popular vote.

While the bigger fundamental themes were slowly shifting, the greenback was finding modest economic fodder to work with during today’s session. There were no scheduled economic releases for Friday; but Fed Chairman Ben Bernanke was hard at working trying to talk the market out of its crisis. In a speech delivered at a conventional in Phoenix, the central banker said he was encouraged by the market’s response to the Fed’s plan to buy $300 billion in long-dated Treasuries and doubling their consumption of mortgage-backed securities to ease strains in the credit market. Looking ahead to next week, event risk will present but not pressing. The final reading for 4Q GDP may present modest revision and a swath of housing data will likely do little to turn the industry out of its deep recession. Of greater interest will be Friday’s personal spending and income numbers. The consumer will determine when the US economy recovers.

Related Article: Dollar Hit Hard After Fed Announcement of Quantitative Easing

Euro, British Pound Lose Momentum Despite Improved Cooperation On Financial Aid
Both the euro and the British pound pulled back through the early morning hours of the US session. However, this retracement wasn’t significant enough to put the massive rallies the two currencies enjoyed over the past two weeks in jeopardy. News out of the region was generally mixed. From the economic docket, the Euro Zone released disappointing industrial production numbers.
According to the data, factor output contracted 17.3 percent in the year through January – the most aggressive slump on record. As the regional and global recessions take hold, factories have little choice left but to curb production and fire workers to avoid closing their doors for good. The other market-worthy event risk for the session was news that the EU had reached an agreement to expand aid to its struggling central and eastern neighbors. Though it was not quite the broad bailout of Eastern Europe that Hungary had called for a few weeks ago, leaders agreed to boost funding to the IMF; discuss a loan to Romania (part of their case-by-case bailout effort); and double the credit line to those countries in financial stress to 50 billion euros. Perhaps this is a sign of their openness to negotiate when the G-20 meets two weeks from now.

Com Bloc Dominates Friday’s Docket, New Zealand Dollar Tops Event Risk Next Week
The global economic docket was very light today; but there was still a top market mover for the day: Canadian retail sales. It is hard to forget the massive 5.4 percent drop in the December consumption report last month. After such an aggressive decline, some tempering was inevitable; and that is how the 1.9 percent pick up in January receipts was treated. It was the biggest pickup since July of 2006, with notable increases in auto, food and clothing purchases. Given the trend this data has been through, it will take broader and more significant improvements to generate optimism about Canada’s future.

Looking ahead to next week, an otherwise anemic calendar will be dominated by the typically under-the-radar New Zealand dollar.
The top release will be the fourth quarter GDP and current account figures. This is the last of the majors to see its growth numbers; and the forecast isn’t promising. A 1.1 percent contraction through the three month period is expected to slow the annual pace to 2.0 percent – the worst pace since 1991. This will be a critical indicator for the kiwi dollar as the risk appetite wave the currency has shared with its Aussie counterpart is partially based on expectations that the currency is seeing relatively strong growth and rates. The RBNZ hasn’t curbed its cuts; so expectations are high.

Economic Data

Support And Resistance Levels

Published on  Mon, Mar 23 2009, 05:38 GMT

Canadian Dollar Could Pull Back on Retail Sales Data on Friday

Fri, Mar 20 2009, 05:36 GMT
by Terri Belkas

DailyFX

- US Dollar Still a Laggard in Light of Fed's Quantitative Easing Announcement, Surge in Jobless Claims

- Euro, British Pound Surge Against US Dollar, but Former Remains Stronger on UK’s Quantitative Easing

- Canadian Dollar Could Pull Back on Retail Sales Data on Friday

US Dollar Still a Laggard in Light of Fed’s Quantitative Easing Announcement, Surge in Jobless Claims
The US dollar remained extremely weak on Thursday following the Federal Reserve’s quantitative easing announcement on Wednesday. Indeed, the Federal Open Market Committee (FOMC) left their fed funds target range at 0.0 percent - 0.25 percent, as expected, and said that they would buy up to $300 billion worth of longer-term Treasury securities over the next six months in order to help improve conditions in private credit markets, and would also buy up to an additional $750 billion of agency mortgage-backed securities and increase purchases of agency debt by up to $100 billion.

The release of US economic data on Thursday morning certainly didn’t work in favor of US dollar strength either. Labor Department numbers were mixed, but the general sentiment of the results is decidedly disappointing. While initial jobless claims fell by 12,000 during the week ending March 14 to 646,000, continuing jobless claims jumped by 185,000 to 5,473,000 during the week ending March 7, the highest since record keeping began in 1967. The increase signals that the unemployment rate is likely to continue rising from its latest reading of 8.1 percent toward the top of the Federal Reserve's 2009 forecast range of 8.0 percent - 9.2 percent. Meanwhile, the Conference Board's leading economic index fell in February at a rate of 0.4 percent after rising in January. A breakdown of the report shows that the decline was led by the average workweek, jobless claims, stock prices, and consumer expectations. On the other hand, consumer goods orders, pace of deliveries, nondefense capital goods orders (business investment), and building permits all registered small improvements of less than 0.1 percent.

Finally, the Philadelphia Fed's measure of activity in the region's manufacturing sector rose to -35 in March from -41.3, and though this denotes an improvement, the negative readings in the headline and subcomponents all indicate that growth in the sector is still contracting. Indeed, prices paid/received, new orders, inventories, and number of employees all fell further into the red, signaling lower costs but tight profit margins, lackluster demand, and further deterioration in the labor markets. All told, the US manufacturing sector is being hit particularly hard by the recession as both domestic and foreign demand wane.

Related Article: Crowds Buy US Dollar Following Fed Announcement - Contrarian Signal to Sell

Euro, British Pound Surge Against US Dollar, but Former Remains Stronger on UK’s Quantitative Easing
The euro and British pound have been big beneficiaries of the US dollar’s weakness, but for what it’s worth, the euro is ultimately stronger than the British pound right now as EUR/GBP has made headway toward 0.9500. While both the European Central Bank and Bank of England want to avoid cutting rates to zero, there is big difference in their stance on quantitative easing. The UK has already started to do so, and while ECB President Jean-Claude Trichet said that the central bank was studying "additional non-standard measures," the ECB will have a much more difficult time embarking on quantitative easing, or as Trichet prefers to call it, “credit easing.” This is because there is no central Treasury for the Euro-zone, and thus, it will take substantial coordination to achieve the same actions.

Canadian Dollar Could Pull Back on Retail Sales Data on Friday
While the Canadian dollar ultimately ended the day up 0.59 percent against the US dollar, the currency showed very little response to the 7:00 ET release of Canadian inflation data, despite the fact that the figures were much stronger than expected. Indeed, the consumer price index (CPI) jumped 0.7 percent in February due to a pickup in prices for goods and services ranging from food to clothing to transportation. Even excluding volatile factors like food, energy, and mortgage costs, the core measure of CPI rose 0.5 percent. As a result of these moves, the annualized rate of headline CPI growth hit 1.4 percent, up from 1.1 percent, while core CPI went unchanged at 1.9 percent.

Unlike the CPI numbers, the upcoming release of Canadian retail sales could be highly market-moving for the Canadian dollar as a Bloomberg News poll of economists is calling for a small 1.0 percent increase during the month of January, but there is evidence that suggests the figure could actually fall negative. Indeed, with unemployment rates rising, business activity slowing, and the March 18 release of Canadian wholesale sales down much more than expected, continued declines in retail sales seem increasingly possible. If the indicator disappoints, the Canadian dollar could pull back sharply, especially since the Bank of Canada suggested on March 3 that they may be open to making monetary policy more accommodative even after slashing interest rates to a record low of 0.50 percent. However, if retail sales actually rise, the Canadian dollar could continue to rally.

Economic Data

Support And Resistance Levels

Published on  Fri, Mar 20 2009, 05:36 GMT

US Dollar Plummets with Treasury Yields as Fed Announces Quantitative Easing Measures

Thu, Mar 19 2009, 05:38 GMT
by Terri Belkas

DailyFX

- Euro, British Pound End Day Higher Thanks to Sharp US Dollar Declines

- Canadian Dollar Could Turn Lower on Release of Canadian CPI Figures on Thursday

- Japanese Yen Shows Little Reaction to Bank of Japan Rate Decision, Monthly Report

US Dollar Plummets with Treasury Yields as Fed Announces Quantitative Easing Measures
The Federal Reserve was easily the biggest source of volatility on Wednesday, and it wasn’t due to their rate decision. Indeed, the Federal Open Market Committee (FOMC) left their fed funds target range at 0.0 percent - 0.25 percent, as expected. What was somewhat unexpected, though, was the FOMC’s announcement that they would buy up to $300 billion worth of longer-term Treasury securities over the next six months in order to help improve conditions in private credit markets. While the FOMC has given clues in the past that they were considering such measures, the actual announcement sent demand for Treasuries skyrocketing and yields on 10-year Treasury notes down 50 basis points to 2.505 percent, while the US dollar fell sharply across the majors and the DJIA and S&P 500 surged. The FOMC also said that they would buy up to an additional $750 billion of agency mortgage-backed securities and increase purchases of agency debt by up to $100 billion. The extent of the US dollar’s drop leaves the door open for at least a brief correction higher over the next 24 hours, but with the DXY index extending its break below a key multi-month trendline, medium-term risks remain in favor of further declines for the currency.

Related Article: US Dollar Weekly Trading Forecast

Euro, British Pound End Day Higher Thanks to Sharp US Dollar Declines
The euro has gradually been gaining strength since the start of the month, but the British pound came under significant pressure on Wednesday morning following a round of disappointing UK news. First, data showed that the UK economy hemorrhaged jobs during the month of February as jobless claims surged by 138.4K, the largest single month gain since record-keeping began in 1971, which pushed the claimant count rate up to 4.3 percent from 3.9 percent. This clearly doesn’t bode well for domestic demand in the UK, but highlights why the minutes from the Bank of England’s meeting in March were so bearish. Indeed, during the March meeting, the BOE’s Monetary Policy Committee not only voted unanimously to cut the Bank Rate by 50 basis points to 0.50 percent, but also voted unanimously to pursue quantitative easing. Nevertheless, small moves on the part of EUR/USD and GBP/USD in the morning turned into massive gains later in the day due to the Federal Reserve’s announcement for its own quantitative easing plans, which adds to upside potential for both currency pairs.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Canadian Dollar: USD/CAD Likely to See Volatility on Release of Canadian CPI Figures
The Canadian dollar was generally weak against most of the majors, but the currency was able to make headway versus the US dollar as USD/CAD broke below key trendline support. The move could continue on Thursday as the 7:00 ET release of CPI for February is anticipated to rise after contracting for the fourth straight month in January by 0.3 percent. Indeed, CPI is expected to rise 0.3 percent, but the annualized pace is forecasted to slip to a more than 2-year low of 1.0 percent. Meanwhile, the Bank of Canada’s core CPI measure may fall down to a 7-month low of 1.5 percent from 1.9 percent. Given the sharp drop in commodity prices since the summer and slowing in the Canadian economy, there is potential for weaker-than-expected readings and thus, the Canadian dollar could pull back further. However, if the annualized CPI measures actually hold steady or rise, the currency could surge.

Related Article: Canadian Dollar Weekly Trading Forecast

Japanese Yen Shows Little Reaction to Bank of Japan Rate Decision, Monthly Report
The Japanese yen ended Wednesday on a mixed note, gaining against the ultra-weak US dollar, British pound, Canadian dollar, and Australian dollar but falling versus the New Zealand dollar, Swiss franc, and euro. However, most of the moves were insignificant compared the US dollar’s declines, indicating that the Bank of Japan’s latest policy meeting really had no impact on the markets. As expected, the BOJ left rates unchanged at 0.10 percent, but the central bank’s economic outlook turned increasingly bearish. Furthermore, the BOJ announced that they would increase their outright purchases of JGBs by 4.8 trillion yen to 21.6 trillion yen per year, effective this month. Ultimately, this indicates that broad interest rates in the Japanese economy should continue to fall lower, which the BOJ hopes will improve money market operations.

Related Article: Japanese Yen Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Thu, Mar 19 2009, 05:38 GMT

Euro Consolidates Latest Gains Below 100 SMA at 1.3058

Wed, Mar 18 2009, 05:37 GMT
by Terri Belkas

DailyFX

- US Dollar Falls on Improved Risk Appetite - Fed Announcement Could Impact FX Trade on Wednesday

- Euro Consolidates Latest Gains Below 100 SMA at 1.3058

- British Pound Slides Ahead of the Bank of England’s Meeting Minutes

- What to Expect - Japanese Yen Slips Ahead of Bank of Japan Meeting - Verbal Intervention Risk?

US Dollar Falls on Improved Risk Appetite - Fed Announcement Could Impact FX Trade on Wednesday
The US dollar generally ended Tuesday down against the majors, though the currency did manage to eke out some gains versus the Japanese yen and British pound. As it stands, a look at a daily chart of the DXY index shows that the greenback has likely made an important turn lower, but the outlook will likely continue to hinge upon risk trends as US fundamentals haven’t come into play for the currency in a while. In fact, US economic news was generally positive today, as data showed that both housing starts and building permits surged in February to 583K and 547K, respectively.

Looking ahead to Wednesday, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC said on January 28 that they continue “to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.” Furthermore, the last statement said that the Committee's policy focus is now “to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” As long as we see these sorts of statements continue to be published, the news shouldn’t be too market-moving. However, the statement could have an impact on risk trends if any sort of fresh initiatives are announced or if the Fed’s sentiment turns more bearish. Ultimately, any news that is positive for the stock markets may be negative for the greenback (which has been trading solely as a safe-haven asset lately), and vice versa.

Related Article: US Dollar Weekly Trading Forecast

Euro Consolidates Latest Gains Below 100 SMA at 1.3058
The euro consolidated its recent gains against the US dollar on Tuesday, holding in a tight range of roughly 1.2950 - 1.3025.
Resistance from the 100 SMA looms above at 1.3058, suggesting a further correction lower may be possible, but ultimately EUR/USD seems likely to continue gaining in light of the bearish turn lower in the DXY index. Meanwhile, the economic view of the Euro-zone remains fairly mixed, as this morning’s release of the German ZEW survey of investor sentiment reflected a divergence in opinion on current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to fall to a more than 5-year low of -89.4 from -86.2 while the outlook actually rose to -3.5 - the best reading since July 2007 - from -5.8.
Overall, the data reflects the weak status of the Euro-zone’s largest economy, but also indicates that investors hold some hope that the European Central Bank’s policy efforts will help to encourage both economic and financial market recovery.

Related Article: Euro Weekly Trading Forecast

British Pound Slides Ahead of the Bank of England’s Meeting Minutes - What to Expect
The British pound was one of the weakest of the major currencies on Tuesday, but there was little in the way of data for the UK.
This will change on Wednesday though as the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 5:30 ET. During the March meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 0.50 percent, as expected. The British pound subsequently fell, but this was due primarily to the MPC’s statement which indicated that the BOE would pursue quantitative easing. As far as the minutes go, it will be important to get a sense of the MPC’s outlook because if it is more bearish than previously perceived or if some members indicated that they were open to cutting rates to zero, the news could push the British pound down below Tuesday’s lows of 1.3965. On the other hand, comments indicating that some MPC members wanted to leave rates at 1.00 percent or signs that 0.50 percent marks a floor for the Bank Rate could lead the currency up toward Monday’s highs near 1.4230.

Related Article: British Pound Weekly Trading Forecast

Japanese Yen Slips Ahead of Bank of Japan Meeting - Verbal Intervention Risk?
The Japanese yen fell across the majors, as an increase in risk appetite only worked to the benefit of stocks and “risky” currencies, which essentially just excludes the “safe haven” US dollar and Japanese yen. Looking ahead, the Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Meanwhile, in light of the Swiss National Bank’s announcement of currency intervention on March 12, there is mounting speculation that the BOJ will announce or hint at similar measures, which would likely drive the Japanese yen even lower.

Related Article: Japanese Yen Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Mar 18 2009, 05:37 GMT

British Pound Trades in 300 Point Range as FX Volatility Remains High

Tue, Mar 17 2009, 05:45 GMT
by Terri Belkas

DailyFX

- US Dollar Joins Low-Yielding Japanese Yen, Swiss Franc in Declines as Demand for Carry Improves

- Euro Gains Despite Accelerating Job Losses as CPI Rises for First Time in 6 Months

- British Pound Trades in 300 Point Range as FX Volatility Remains High

US Dollar Joins Low-Yielding Japanese Yen, Swiss Franc in Declines as Demand for Carry Improves
The low-yielding US dollar, Swiss franc, and Japanese yen were the weakest of the major currencies on Monday, though the latter was the most sluggish of the bunch, as a solid pickup in risk appetite led higher-yielding currencies and stocks higher. Indeed, the G-20 communiqué helped to inspire confidence that the member countries will make headway in stemming the financial crisis as they outlined plans by which to strengthen the financial system and restore global growth. Meanwhile, US Treasury Secretary Geithner said that he will soon announce more specific details of his plan to help banks clean up the toxic assets that are leaving uncertainties in the financial markets to linger, while Federal Reserve Chairman Bernanke said in an interview with '60 Minutes' that the US recession would likely end this year and that the risk of a depression has been averted.

However, US economic data was broadly disappointing as industrial production fell for the fourth straight month in February at a rate of -1.4 percent . Furthermore, the release of TIC data unexpectedly showed that foreign investors were net sellers of US assets, as net long-term flows fell by $42.986 billion in January, the sharpest decline since August 2007 when flows plunge a record $72.882 billion.

Looking ahead to Tuesday, signs of easing price pressures may continue to as the US Producer Price Index is forecasted to have risen a slight 0.4 percent in February, while the annual rate may tumble to a more than 6-year low of -1.4 percent. Meanwhile, the measure that excludes volatile food and energy costs could slow to an annual pace of 3.8 percent from 4.2 percent. Overall, the news would suggest that input costs are falling dramatically with declining commodity prices, which should translate into lower consumer prices. However, the release doesn't tend to have a huge impact on US dollar price action.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast, Swiss Franc Weekly Trading Forecast

Euro Gains Despite Accelerating Job Losses as CPI Rises for First Time in 6 Months
The euro surged during the European trading session to test 1.3050, but subsequently backed off to end the day just below 1.3000.
Euro-related data was far from optimistic, but price action continues to simply reflect shifts in risk appetite. Indeed, job losses in the Euro-zone accelerated during Q4 as the quarterly rate of employment fell 0.3 percent compared to a decline of 0.1 percent in Q3. As a result, the annual rate was dragged down to 0.0 percent from 0.6 percent. Meanwhile, data showed that Euro-zone CPI rose in February for the first time since September at a rate of 0.4 percent, which pushed the annual rate up to 1.2 percent from 1.1 percent. Likewise, the core measure of CPI, which excludes volatile energy, food, alcohol and tobacco prices, accelerated to an annualized pace of 1.7 percent from 1.6 percent. All told, both of these inflation measures remain well below the European Central Bank’s 2 percent target and as they’ve said in the past, short-term fluctuations will not have much impact on their plans for monetary policy going forward. Nevertheless, the odds remain in favor of one more rate cut by the ECB on April 2 as Credit Suisse overnight index swaps are still pricing in an 80 percent chance of a 25 basis point cut 1.25 percent.

Looking ahead to Tuesday, the release of the German ZEW survey of investor sentiment for the month of March is anticipated to reflect increasing pessimism on both current conditions and the economic outlook. Indeed, the index of sentiment on the current situation is forecasted to fall to a more than 5-year low of -90.0 from -86.2 while the outlook is projected to slip down to -8.0 from -5.8. This report can be market-moving for the euro on a very short-term basis upon release at 6:00 ET, with disappointing results likely to weigh on the currency. On the other hand, better-than-expected data could provide a bit of a boost for the euro.

Related Article: Euro Weekly Trading Forecast

British Pound Trades in 300 Point Range as FX Volatility Remains High
The British pound experienced a volatile day of trading versus the US dollar, as the pair rallied for a test of 1.4200 before falling and stabilizing above Fibonacci support at 1.4065. In fact, GBP/USD implied volatility taken from 1-month OTC options remains historically high at 18.1425 percent. The fundamental view of the UK remains bleak, but with the major currencies divided into two camps - risky and safe - shifts in investor sentiment remain the primary driver of price action. For what it’s worth, the British pound falls into the “risky” category despite the fact the Bank of England has cut their Bank Rate to 0.50 percent, and as a result, we anticipate that risk trends will continue to determine where the currency goes going forward.

Related Article: British Pound Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Tue, Mar 17 2009, 05:45 GMT

Japanese Yen Losses Continue to Pile Up Ahead of G−20 Meeting

Mon, Mar 16 2009, 05:47 GMT
by Terri Belkas

DailyFX

- US Dollar Ends Friday Modestly Lower as US Import Prices Fall By Record, Consumer Confidence Rises

- Japanese Yen Losses Continue to Pile Up Ahead of G-20 Meeting

- Euro Consolidates Within Tight Range, Could Signal Breakouts Next Week

US Dollar Ends Friday Modestly Lower as US Import Prices Fall By Record, Consumer Confidence Rises
The US dollar was the strongest currency when it came to the lowest yielding currencies, which now include the Swiss franc and Japanese yen, but the greenback fell versus the commodity dollar, euro, and British pound. This ultimately kept the DXY index below former trendline support, which suggests that the currency may continue to tip lower. In economic news, US import prices fell for the seventh straight month in February, pushing the annual rate of growth down to a record low of -12.8 percent. Indeed, the appreciation of the US dollar against the Canadian dollar drove import prices from Canada down 1.6 percent during the month and though petroleum import costs rose 3.9 percent in February, the annual rate remains negative by a whopping 52.4 percent.
Meanwhile, the US trade deficit narrowed to $36 billion in January - the lowest level in six years - from $39.9 billion as oil and automobile imports fell.

However, it was news that the University of Michigan's consumer confidence index unexpectedly rose in March to 56.6 from 56.3 that provided a brief boost to risk appetite. Looking at a breakdown of the index, sentiment on current economic conditions turned increasingly pessimistic, while the outlook actually improved very slightly. Furthermore, inflation expectations for one-year ahead rose to 2.2 percent from 1.9 percent and expectations for five-years ahead slipped to 2.8 percent from 3.1 percent. Overall, the inflation expectations will be somewhat encouraging for the Federal Reserve as they suggest that the central bank has done a good job of signaling that medium and long-term price growth will remain around 2 percent, which is a common inflation target amongst many of the world's central banks.

Looking ahead, traders will need to watch for commentary from the weekend’s Group of 20 (G-20) meeting, especially given the titles of their three meeting sessions, including: The Macro-Financial Response: Short Term and Long Term, Reshaping the Global Financial System, and Role of the International Financial Institutions. All of these sessions as well as the final communiqué could yield remarks that will have an impact on risk trends, with more defined coordinated plans likely to provide a boost to risky assets (negative for the US dollar), while a lack of consensus and signs of division amongst the G-20 members has the potential to spur increased risk aversion (positive for the US dollar).

Related Article: EURUSD – Euro Forecast to Rally Against US Dollar

Japanese Yen Losses Continue to Pile Up Ahead of G-20 Meeting
The Japanese yen ended the past week off on a mixed note, as the currency gained versus the US dollar, British pound, and Swiss franc but fell against the Canadian dollar, euro, Australian dollar, and New Zealand dollar. While much of this had to do with the resurgence in risk appetite, as evidenced by the 9 percent rise in the Dow Jones Industrial Average from the March 6 close through the March 13 close, we also have to consider renewed prospects of currency intervention. This was brought back to the forefront by the Swiss National Bank, who said on March 12 that they would work to prevent any further appreciation of the Swiss franc against the euro.

The situation in Switzerland is very similar to that of Japan, as exporters have been hurt by the gains in their national currencies against the currencies of their biggest trading partners. For Japan, this refers specifically to China and the US, which are the top two importers of Japanese goods (according to the CIA World Factbook), as the Japanese yen has gained over 9 percent against both the Chinese yuan and US dollar over the past 6 months. Japanese officials have cited concerns about the yen’s appreciation in the past, but they have yet to move toward hard-lined verbal intervention, let alone physical intervention. With the G-20 meeting over the weekend, there is potential for discussion of currencies to occur, and if this is actually written into the final communiqué, the yen could pull back sharply.

However, that is not the only piece of event risk looming on the horizon for the Japanese yen. The Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Given the mounting speculation over the potential for Japanese currency intervention, there is also a risk that we could see such an announcement with this central bank meeting, which would likely drive the Japanese yen lower. However, if the markets ultimately find that neither the G-20 nor the BOJ even mention currencies, the Japanese yen could see a bit of a boost by the end of the next week.

Euro Consolidates Within Tight Range, Could Signal Breakouts Next Week
The euro spent much of Friday consolidating against the US dollar in a range of 1.2875 - 1.2935, as the early-morning release of Euro-zone retail sales didn’t have much of an impact on the currency. Retail sales rose less than projected in January at a rate of 0.1 percent, while the annual rate edged up to -2.2 percent from -2.4 percent, but since this is such a lagging indicator, it did little to change interest rate expectations. From a technical perspective, the tight consolidation of EUR/USD signals that the pair could breakout when trading resumes on Sunday, especially since the latest FXCM SSI data - a contrarian indicator - shows that traders remain net short the pair.

Looking ahead to Monday morning, Euro-zone CPI is forecasted to have risen in February for the first time since September at a rate of 0.4 percent, which could push the annual rate up to 1.2 percent from 1.1 percent. However, this is still far below the European Central Bank’s 2 percent target and as they’ve said in the past, short-term fluctuations will not have much impact on their plans for monetary policy going forward. Nevertheless, Credit Suisse overnight index swaps are still pricing in a 70 percent chance of a 25 basis point cut by the ECB during their next meeting, but if CPI rises much more than anticipated, there is a chance that the euro could pop higher upon the release.

Economic Data

Support And Resistance Levels

Published on  Mon, Mar 16 2009, 05:47 GMT

US Dollar Index Holds Below Key Resistance, Signals Further Declines

Fri, Mar 13 2009, 05:26 GMT
by Terri Belkas

DailyFX

- Swiss Franc, Japanese Yen Plunge as SNB Announces Currency Intervention - BOJ Could Follow Suit

- Euro Gains Despite Record Drop in German Industrial Output

- Canadian Dollar Rises Against US Dollar as Oil Surges More Than 10% - Watch Employment Report on Friday

US Dollar Index Holds Below Key Resistance, Signals Further Declines
US dollar fell against nearly every major currency with the exception of the Japanese yen and Swiss franc, as the DXY index held below critical former trendline support, suggesting the currency has officially made a bearish turn lower. US Advance Retail Sales fell less than expected by 0.1 percent in February, and excluding autos the results were downright optimistic as the index jumped 0.7 percent. A breakdown of the report showed that sales of motor vehicles, building materials, food, and beverages all fell while spending increased on furniture, electronics, health/personal care items, gasoline stations, clothing, and sporting goods. On the other hand, jobless claims rose more than expected, with initial claims up 654,000 during the week ending March 7 while continuing claims hit a new record of 5,317,000 during the week ending February 28. Ultimately, signs of climbing unemployment do not bode well for spending trends in the US, but since the latest retail reports have been a bit better than expected it looks like there is a chance that personal consumption could actually provide a small boost to Q1 GDP.

Looking ahead to Friday’s US-based event risk, low oil prices could help lead the trade deficit to narrow slightly to $38 billion from $39.9 billion while the annual rate of import price growth could plunge to a new record low of -13.5 percent. Meanwhile, the University of Michigan consumer confidence index is projected to fall to 55.0 from 56.3, which would mark the lowest level since May 1980. Since none of these indicators are top-tier market-movers, traders may be able to expect that risk trends will remain in the driver’s seat.

Related Article: EURUSD – Euro Forecast to Rally Against US Dollar

Swiss Franc, Japanese Yen Plunge as SNB Announces Currency Intervention - BOJ Could Follow Suit
The Swiss franc plummeted across the majors on Thursday morning after the Swiss National Bank (SNB) announced their expected rate cut and surprisingly revealed plans to intervene in the currency markets. The SNB reduced their 3-month Libor target range by 25 basis points down to 0.0 percent - 0.75 percent with the goal of getting the rate down towards the bottom of the range at “approximately 0.25 percent.” However, the bigger market-mover was the SNB’s statement that they would “purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro” and also said that they would “purchase Swiss franc bonds issued by private sector borrowers in order to bring about a relaxation of conditions on the capital markets.” As we mentioned yesterday, EUR/CHF broke above intraday trendline resistance at 1.4750 on Wednesday morning, and based on the fact that the SNB will likely continue working to prevent the Swissie from appreciating, a test of the 200 SMA at 1.5516 seems probable.

It is also worth considering that the SNB’s announcement may have opened the door to potential for the Bank of Japan to intervene as well. Like the SNB, the BOJ has previously noted the negative implications of the appreciation of the Japanese yen, as the higher value hurts demand for exports in the trade-dependent economies. This is part of the reason why the Japanese yen was the second-weakest of the major currencies, falling roughly 1 percent against the Australian dollar, Canadian dollar, British pound, and euro.
One of the other factors behind the drop in the yen was the surge in risk appetite, as commodities rocketed higher with oil up over 10 percent while the Dow Jones Industrial Average rallied 3.46 percent to close above resistance at 7,000. These moves may signal further strength for traditional “risky” assets like stocks and forex carry trades, and as a result, additional declines for the Japanese yen.

Related Article: DailyFX Insight - SNB Rate Cut

Euro Gains Despite Record Drop in German Industrial Output
The euro gained against the greenback on Thursday despite dismal economic data from Germany. Indeed, German industrial output plunged 7.5 percent in January - the most since record-keeping began in 1978 - which also brought the annual rate down to a record low of -19.3 percent. The declines suggest that the export-dependent economy is feeling the impact of the recessions that their biggest trade partners are experiencing in the rest of the Euro-zone, the UK, and the US. On Friday, data is forecasted to show that retail sales in the Euro-zone rose a slight 0.2 percent in January, though the annual rate of growth is anticipated to drop to -2.3 percent from -1.5 percent. Based on Germany’s retail sales report from the same period though, Friday’s results could actually be worse than expected. As the Euro-zone’s biggest economy, Germany’s economic data can sometimes serve as a good leading indicator, and their latest retail figures show that spending unexpectedly fell 0.6 percent in January while the annual rate plunged to -1.3 percent from 0.4 percent. Disappointing Euro-zone results could have a negative impact on the euro in the short-term, though this does not tend to be a huge market-mover for the currency much beyond the release time.

Canadian Dollar Rises Against US Dollar as Oil Surges More Than 10% - Watch Employment Report on Friday
The Canadian dollar gained against the US dollar on Thursday as oil prices surged more than 10 percent to close at nearly $47/bbl on indications that OPEC will move to cut production quotas yet again. However, where USD/CAD goes on Friday may hinge upon a highly market-moving report on Friday. At 7:00 ET, data is expected to show that the Canadian net employment change fell by 55,000 during February after plunging a record 129,000 in January alone. Furthermore, the unemployment rate is anticipated to have risen to match the nearly five-year high of 7.4 percent from 7.2 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

Economic Data

Support And Resistance Levels

Published on  Fri, Mar 13 2009, 05:26 GMT

Euro Rallies for Test of 1.2850, Swiss Franc at Risk Ahead of Expected SNB Rate Cut

Thu, Mar 12 2009, 05:37 GMT
by Terri Belkas

DailyFX

- New Zealand Dollar Surges as RBNZ Signals End to Easing Cycle, Australian Dollar to Face Employment Data Overnight

- Euro Rallies for Test of 1.2850, Swiss Franc at Risk Ahead of Expected SNB Rate Cut

- British Pound Rebounds Despite Disappointing UK Trade Figures, Start of Quantitative Easing

US Dollar Takes Bearish Turn Lower - US Retail Sales Could Impact Risk Trends on Thursday
US dollar price action was primarily responsible for much of what happened throughout the forex markets on Wednesday, as the DXY index finally broke below critical trendline support, suggesting the currency is officially turning lower. There was little in the way of fundamental news for the US, but that will change on Thursday as the Commerce Department is forecasted to report that US retail sales fell negative for the seventh time during the past eight months in February, as deteriorating labor markets, tight credit conditions, and a year-long recession weighs heavy on the minds of consumers. More specifically, advance retail sales are anticipated to have contracted 0.5 percent during the month, and excluding auto sales are expected to have slumped 0.2 percent, marking what may end up being a consistent trend through the first half of 2009. As we saw with US non-farm payrolls, the impact of a disappointing result may be mixed, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further. As a result, it will be important to gauge the impact of the news on DJIA or S&P 500 futures, as a sharp decline would signal flight-to-quality and US dollar strength, while gains would suggest a pickup in risk appetite and thus, US dollar weakness.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

New Zealand Dollar Surges as RBNZ Signals End to Easing Cycle, Australian Dollar to Face Employment Data Overnight
The New Zealand dollar rallied at the end of the New York trading session after the Reserve Bank of New Zealand (RBNZ) cut their Official Cash Rate (OCR) as expected by 50 basis points to 3.00 percent.
However, it was necessarily the rate decision that had the biggest impact on the currency. Instead, traders were more interested in RBNZ Governor Alan Bollard’s comments that interest rates were now at “very stimulatory” levels and that the central bank expects the “rapid easing of monetary policy to slow.” Furthermore, Bollard said that the RBNZ does not expect to see interest rates in the nation near-zero, suggesting that the end of the central bank’s rate cutting cycle is nearing. Bollard also noted that the RBNZ expected activity to trough mid-year, and then gradually pick up through the second half of 2009. Overall, the news adds to evidence that the commodity dollars are better positioned for a rebound from a fundamental perspective as growth in the New Zealand, Australian, and Canadian economies has not been hit as hard by the financial crisis as nations like the US and UK.

That said, the Australian labor markets started to deteriorate during the second half of 2008, and this is likely to continue through 2009. Indeed, the February unemployment rate is forecasted to rise to a nearly three-year high of 5.0 percent from 4.8 percent, while the net employment change is anticipated to fall by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 20:30 EDT.

Related Articles: New Zealand Dollar Weekly Trading Forecast, Australian Dollar Weekly Trading Forecast

Euro Rallies for Test of 1.2850, Swiss Franc at Risk Ahead of Expected SNB Rate Cut
Broad-based weakness in the US dollar contributed to strength for the euro and Swiss franc, but when it comes to EUR/CHF, there’s upside potential ahead of the Swiss National Bank’s next rate decision on Thursday at 9:00 ET. Indeed, EUR/CHF broke above intraday trendline resistance at 1.4750 on Wednesday morning, adding to downside risks for the Swissie since the SNB is expected to cut their 3-month Libor target rate down to a range of 0.0 percent - 0.50 percent from 0.0 percent - 1.00 percent. Looking at the fundamentals for the region, Q4 GDP contracted for the second straight quarter at a rate of 0.3 percent while February’s CPI numbers show that inflation is barely holding positive at an annual rate of 0.2 percent. The Swiss economy has taken a severe hit from waning demand for Swiss goods by the country’s European neighbors, as exports fell 8.1 percent in Q4.
With this scenario unlikely to change anytime soon, the odds remain in favor of another rate cut by the SNB, but ultimately the news may not have a large impact on the Swiss franc because the change is so minimal and as interest rates fall lower, changes have less of an impact on the economy and financial markets. It is worth noting that the Swiss franc did tumble against most of its major counterparts when the SNB last cut rates in December, but gained against the greenback, so a repeat may not be out of the question.

Related Article: Euro Weekly Trading Forecast

British Pound Rebounds Despite Disappointing UK Trade Figures, Start of Quantitative Easing
The British pound staged a solid rebound as the greenback fell below critical support levels. However, UK news wasn’t necessarily supportive of the currency. First, the UK trade deficit widened to 7.745 billion pounds in January from 7.232 billion pounds in December as total exports fell 5.4 percent as measured by volume from the month prior. Much of the decline was due to waning demand from non-EU countries like the US, Switzerland, and China, as exports to the EU actually grew to 11.287 billion pounds from 10.663 billion. Meanwhile, the Bank of England launched its quantitative easing program in an effort to boost money supply in the UK. The start of the program was deemed as a success as the BOE received 10.5 billion pounds in offers to sell gilts, which was five times more than the central bank had wanted to buy. Ultimately, quantitative easing should bring down medium and long-term interest rates, which could weigh on the British pound.

Related Article: British Pound Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Thu, Mar 12 2009, 05:37 GMT

US Dollar, Japanese Yen End Day Lower as Bernanke Optimism, Citigroup Report Boost Risk Appetite

Wed, Mar 11 2009, 05:41 GMT
by Terri Belkas

DailyFX

- British Pound Remains a Laggard as UK Industrial Output Hits 28-Year Low

- Euro Tests 1.28, Tumbles Lower as ECB’s Weber Signals Further Rate Cuts

- New Zealand Dollar Could See Heightened Volatility on Expected RBNZ Rate Cut

US Dollar, Japanese Yen End Day Lower as Bernanke Optimism, Citigroup Report Boost Risk Appetite
Risk appetite was strong for much of the day, pushing the S&P 500 up 6.37 percent by the end of the day and weighing on the US dollar and Japanese yen on word that Citigroup was having its best quarter since posting a profit in 2007 and amidst reassuring comments by Federal Reserve Chairman Ben Bernanke. During a speech to the Council on Foreign Relations, Bernanke said that the US will ensure banks have sufficient capital, and urged the overhaul of rules for the biggest financial firms in order to “make the financial system as a whole better able to withstand future shocks, but also to mitigate moral hazard and the problem of too big to fail by reducing the range of circumstances in which systemic stability concerns might prompt government intervention.” Meanwhile, wholesale inventories fell for the fifth straight month in January at a rate of 0.7 percent, as businesses try to keep up with declining demand. Indeed, wholesale sales have been consistently falling negative since July 2008, which has led the inventory/sales ratio to climb from 1.06 in June 2008 to 1.30 in January 2009, suggesting that business are burdened with additional costs as they carry excess supplies.

Looking ahead to Wednesday, there will be no key US economic indicators released, leaving the forex markets to move with risk trends during the US trading session. Something that I’ve been focusing on in particular is the status of the DXY index, which has thus far managed to hold above support from the March 6 lows and a rising trendline. If we see a break below this level, the move will likely signal an important turn for the greenback across many of the majors. However, as long as the index holds above support, bullish potential remains for the US dollar.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound Remains a Laggard as UK Industrial Output Hits 28-Year Low
The British pound was unable to stage any recovery and subsequently dropped for a test of 1.37 against the greenback during the afternoon. Economic news out of the UK was disappointing as UK industrial production fell more than expected a rate of 2.6 percent in January, dragging the annual rate down to a 28-year low of -11.4 percent from -9.3 percent. A bulk of the decline was due to contractions in output by manufacturers as businesses compensate for weak demand. This will likely be highlighted on Wednesday as well since the UK's trade balance is forecasted to reflect a wider deficit of 7.5 billion pounds in January from 7.367 billion pound in December as exports to the EU may have declined for the fourth straight month. The only real potential for the trade deficit to improve would be for imports to continue falling rapidly for the sixth straight month, as domestic demand wanes. Overall, if the trade deficit widens more than expected, the British pound could pull back in response as it would suggest that conditions in the UK are still deteriorating.

Related Article: British Pound Weekly Trading Forecast

Euro Tests 1.28, Tumbles Lower as ECB’s Weber Signals Further Rate Cuts
The euro only ended the day slightly higher against the US dollar on Tuesday despite a surge at the start of the New York trading session up to 1.2800, as comments by European Central Bank Governing Council member Axel Weber reiterated the sentiment of ECB President Jean-Claude Trichet’s March 5 press conference and weighed on the currency. Weber said that the “bottom line” for the ECB’s main refinancing rate “should fall at 1 percent,” and went on to see that he had a “problem” with cutting the deposit rate to zero and would “prefer to leave it at 0.5 percent.” Meanwhile, ECB Executive Board member Lorenzo Bini Smaghi said that they were ready to lower interest rates to zero if economic conditions in the Euro-zone worsen and “if deflation becomes a threat.” In the end, these comments add to evidence that the ECB is open to cutting the main refinancing rate down to 1.00 percent or even 0.50 percent in coming months, but says little about what the central bank will do during its next meeting on April 2. As we’ve said repeatedly in recent days, this leaves potential open for further declines in the euro against the greenback, but because of the UK’s quantitative easing efforts, upside risks remains for the euro against the British pound.

Related Article: Euro Weekly Trading Forecast

New Zealand Dollar Could See Heightened Volatility on Expected RBNZ Rate Cut
The NZD/USD pair has spent the past few days consolidating above support at 0.4915, while Tuesday’s US trading session has shown that price hasn’t been able to break above 0.5050. However, the New Zealand dollar is likely to see heightened volatility on Wednesday as the Reserve Bank of New Zealand will announce their next rate decision at 16:00 ET. According to a Bloomberg News poll of economists, the RBNZ is forecasted to cut rates by 50 basis points to 3.00 percent. Meanwhile, Credit Suisse overnight index swaps are pricing in at least a 50 basis point cut, but are also pricing in a 68 percent chance of a 75 basis point reduction. Based on the RBNZ’s policy statement from January, the central bank is still open to making monetary policy more accommodative, but they will not seek to implement the same aggressive cuts they’ve applied in the past as they said that they would “expect any further reductions to be smaller than those seen recently.” With growth still slowing, the financial markets not yet stable, and inflation pressures receding, the odds are in favor of a 50 or 75 basis point cut at 16:00 ET on Wednesday. That said, the outlook for the New Zealand dollar will hinge upon their policy statement, as indications that they are open to further cuts could weigh on the currency. However, if the RBNZ suggests in their policy statement that they will leave monetary policy unchanged going forward, the New Zealand dollar could actually rally.

Related Article: New Zealand Dollar Weekly Trading Forecast

Ecomomic Data

Support And Resistance Levels

Published on  Wed, Mar 11 2009, 05:41 GMT

Canadian Dollar Hits 5+ Year Low Versus US Dollar as Canadian Housing Starts Plunge 12%

Tue, Mar 10 2009, 06:57 GMT
by Terri Belkas

DailyFX

- British Pound Remains Under Pressure Amidst Banking Concerns, Ahead of Expected Declines in Industrial Output

- Japanese Yen Slips Against Euro, US Dollar as Japanese Current Account Posts First Deficit in 13 Years

- Euro Down Against US Dollar, But Strong Versus British Pound on Divergent Rate Outlooks

- Canadian Dollar Hits 5+ Year Low Versus US Dollar as Canadian Housing Starts Plunge 12%

US Dollar Gains as Investor Sentiment Remains Jittery - Wholesale Inventories Likely to Fall on Tuesday
The US dollar benefited from jittery market sentiment on Monday, and with the DXY index holding above key support at 88.00, the outlook for the currency remains bullish. There were no key indicators released, but on Tuesday morning data is projected to show that wholesale inventories contracted for the fifth straight month in January at a rate of 1.0 percent as businesses try to prevent a buildup in excess supply in light of the dismal demand situation. Indeed, wholesale sales have been consistently falling negative since July 2008, which has led the inventory/sales ratio to climb from 1.06 in June 2008 to 1.27 in December 2008.
While the release of wholesale inventories doesn't tend to be very market moving for the forex markets, a continuation of the rising trend in inventory/sales will only signal further economic deterioration. Meanwhile, Federal Reserve Chairman Ben Bernanke will be speaking at 8:30 ET on bank regulation to the Council on Foreign Relations, which will also include a Q&A session. Based on the audience, there is potential for Bernanke to discuss the economic slowdown and financial crisis on a global scale, which could have a big impact on risk trends so traders should watch for biased commentary throughout the morning.

British Pound Remains Under Pressure Amidst Banking Concerns, Ahead of Expected Declines in Industrial Output
The British pound was easily the weakest of the majors, losing over 2 percent against the US dollar and 1.6 percent versus the Japanese yen, as concerns over the health of the UK’s financial sector remain high. Indeed, news over the weekend that Lloyds Banking Group will hand control to the UK government in return for state guarantees covering 260 billion pounds worth of risky assets, bringing the government’s equity stake to as much as 75 percent. This comes following Lloyds’ acquisition of HBOS Plc in October, which the government engineered in an effort to prevent HBOS’s collapse. Overall, this raises concerns that other banks may be in danger as well and will also require asset insurance deals, leaving the British pound at risk. Looking ahead to the next 24 hours, output in the UK industrial sector is forecasted to have either stagnated or contracted for the fifteenth straight month during January, which could push the annual rate down to a nearly 28 year low of -7.9 percent. The bulk of the decline should be the result of weak manufacturing growth, as the global economic slowdown weighs on export demand. A decline in line with expectations would add to evidence that the UK trade deficit is widening rapidly, and will also highlight the extent of the recession plaguing the region. As a result, there is potential for brief pullbacks in the British pound early on Tuesday morning.

Related Article: British Pound Weekly Trading Forecast

Japanese Yen Slips Against Euro, US Dollar as Japanese Current Account Posts First Deficit in 13 Years
The Japanese yen finished Monday mixed across the majors, gaining against the British pound, New Zealand dollar, Australian dollar and Canadian dollar while tumbling versus the euro, Swiss franc, and US dollar. Disappointing Japanese economic data keeps piling up as the nation saw its first current account deficit in 13 years. Indeed, the current account plunged to 172.8 billion yen in January due primarily to a 46.3 percent drop in exports from a year earlier, highlighting the plight of Japanese manufacturers who have had to grapple with a global economic slowdown and the appreciation of the Japanese yen. While the link between the Japanese yen crosses and risky assets like the DJIA has slipped, it shouldn’t be written off entirely as a strong bout of risk aversion could be enough to push the low-yielding currency higher.

Related Article: Japanese Yen Weekly Trading Forecast

Euro Down Against US Dollar, But Strong Versus British Pound on Divergent Rate Outlooks
As we mentioned on Friday, both the euro and the British pound faced 50 basis point rate cuts last Thursday, but with the interest rate outlook in favor of higher yields in the Euro-zone than in the UK, EUR/GBP may continue to see further gains. While both the European Central Bank and Bank of England want to avoid cutting rates to zero, there is big difference in their stance on quantitative easing. The UK has already said that they would pursue it with purchases of medium and long-maturity conventional gilts in the secondary market worth 75 billion pounds. However, while ECB President Jean-Claude Trichet said that the central bank was studying "additional non-standard measures," the ECB will have a much more difficult time embarking on quantitative easing, or as Trichet prefers to call it, “credit easing.” This is because there is no central Treasury for the Euro-zone, and thus, it will take substantial coordination to achieve the same actions. In the long-term, downside risks linger for the euro and British pound against the greenback, but when it comes to the euro against the British pound, the former may prove to hold up a bit better.

Related Article: Euro Weekly Trading Forecast

Canadian Dollar Hits 5+ Year Low Versus US Dollar as Canadian Housing Starts Plunge 12%
The Canadian dollar slumped against the greenback on Monday, hitting the lowest level since September 2004, as Canadian housing starts tumbled more than expected a rate of 12 percent in February, leading the annual rate to hit a more than eight-year low of 134,600 units. The declines were contained to homes in urban areas, which fell to a more than 10-year low of 107,800 from 126,700, while housing starts in rural areas held steady at 26,800. Overall, growth in Canada has taken a steep dive with the drop in oil prices from nearly $150/bbl in July as the export-dependent economy thrived off of the rally in commodities. When you also consider that it isn’t just prices that are falling, but also demand from the US – Canada’s biggest trade partner – it is easy to see why job losses have spiked, why consumption has waned in recent months, and why the Bank of Canada cut rates to a record low last week.

Related Article: Canadian Dollar Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Tue, Mar 10 2009, 06:57 GMT

US Dollar Down as US NFPs Plunge 651K, But Don't Write Off Impact of Risk Trends

Mon, Mar 9 2009, 06:03 GMT
by Terri Belkas

DailyFX

- Euro Slightly Stronger Versus British Pound One Day After Key ECB, BOE Rate Cuts

- New Zealand Dollar, Australian Dollar Hold Above Support - Watch for RBNZ Rate Cut Next Week

US Dollar Down as US NFPs Plunge 651K, But Don’t Write Off Impact of Risk Trends
The US dollar pulled back sharply during European trading, but subsequently edged higher on flight-to-quality following news that US non-farm payrolls fell in line with expectations by 651,000 in February. The results actually reflect a surprising, but very slight improvement from the previous two months due to revisions. Indeed, the January results were revised down to -655,000 from -598,000 while the December results were revised down to -681,000 from -524,000, marking the single worst monthly drop since October 1949. Job losses could be seen across the board in the manufacturing, retail, financial, business services, and hospitality sectors, while the only two to show gains were education/health at +26,000 and government at +9,000. Meanwhile, the US unemployment rate jumped more than anticipated to 8.1 percent - the highest since December 1983 - from 7.6 percent. Perhaps a more important gauge, though, is the augmented unemployment rate, which includes jobless people who aren't counted among the officially unemployed because they haven't searched for work lately, but who would take a job if offered one. This rate rose to 11.3 percent from 10.8 percent. At the same time, average hourly earnings for the month of February edged up 0.2 percent, but the annual rate of growth slumped down to 3.6 percent from 3.8 percent.

Ultimately, the steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has steadily climbed from 4.9 percent while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008, and this is likely to remain the trend through much of 2009.

From a technical perspective, the US dollar index remains above the rising trendline that has support price since the end of 2008, and unless we see a break below that point, traders should consider the possibility that the greenback retains bullish potential.
Volatility should remain pretty high over the next week as a variety of indicators provide high levels of event risk for the commodity dollars in particular. For the US dollar itself, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh time in the past eight months in February, as deteriorating labor markets, tight credit conditions, and a year-long recession weigh heavy on the minds of consumers. More specifically, advance retail sales are anticipated to have contracted 0.5 percent during the month, and excluding auto sales are expected to have slumped 0.2 percent, marking what may end up being a consistent trend through the first half of 2009. As we saw with US non-farm payrolls, the impact of a disappointing result may be mixed, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further.

Euro Slightly Stronger Versus British Pound One Day After Key ECB, BOE Rate Cuts
Both the euro and the British pound faced 50 basis point rate cuts on Thursday, but the former been marginally stronger than the latter. This suggests that the interest rate outlook may be in favor of higher yields in the Euro-zone than in the UK, which makes sense when you consider that the European Central Bank’s benchmark rate it now at 1.50 percent while the Bank of England’s benchmark rate is now at 0.50 percent. Parsing yesterday’s news for additional evidence, it’s clear that both central banks want to avoid cutting rates to zero, the obvious difference is quantitative easing. The UK has already said that they would pursue it with purchases of medium and long-maturity conventional gilts in the secondary market worth 75 billion pounds. However, while ECB President Jean-Claude Trichet said that the central bank was studying "additional non-standard measures," the ECB will have a much more difficult time embarking on quantitative easing, or as Trichet prefers to call it, “credit easing.” This is because there is no central Treasury for the Euro-zone, and thus, it will take substantial coordination to achieve the same actions. In the long-term, downside risks linger for the euro and British pound against the greenback, but when it comes to the euro against the British pound, the former may prove to hold up a bit better.

New Zealand Dollar, Australian Dollar Hold Above Support - Watch for RBNZ Rate Cut Next Week
The New Zealand dollar and Australian dollar have both managed to hold above major support levels, with 0.5000 a key level for NZD/USD while 0.6300 provides important support for AUD/USD. Where the pairs go from there may hinge upon two economic indicators next week. According to a Bloomberg News poll of economists, the Reserve Bank of New Zealand (RBNZ) is forecasted to cut rates by 75 basis points to 2.75 percent on March 11 at 16:00 ET. Meanwhile, Credit Suisse overnight index swaps are pricing in at least a 50 basis point cut, but are also pricing in a 56 percent chance of a 75 basis point reduction. Based on the RBNZ’s policy statement from January, the central bank is still open to making monetary policy more accommodative, but they will not seek to implement the same aggressive cuts they’ve applied in the past as they said that they would “expect any further reductions to be smaller than those seen recently.” With growth still slowing, the financial markets not yet stable, and inflation pressures receding, the odds are in favor of a 75 basis point cut at 16:00 ET on Wednesday. However, the outlook for the New Zealand dollar will hinge upon their policy statement, as indications that they are open to further cuts could weigh on the currency. However, if the RBNZ suggests in their policy statement that they will leave monetary policy unchanged going forward, the New Zealand dollar could actually rally.

The Australian labor markets started to deteriorate during the second half of 2008, and this is likely to continue through 2009.
Indeed, the February unemployment rate is forecasted to rise to a nearly three-year high of 5.0 percent from 4.8 percent, while the net employment change is anticipated to fall by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 20:30 EDT.

Economic Data

Support And Resistance Levels

Published on  Mon, Mar 9 2009, 06:03 GMT

British Pound Ends Day Lower as BOE Cuts Rates to 0.50%, Pursues Quantitative Easing

Fri, Mar 6 2009, 05:39 GMT
by Terri Belkas

DailyFX

- Euro Down as ECB Cuts Rates to 1.5%, Leaves Door Open to Further Reductions and ‘Non-Standard’ Measures

US Dollar, Japanese Yen Bounce as US Stocks Fall Over 4% Ahead of Friday’s US Non-Farm Payrolls (NFPs)
The US dollar and Japanese yen both gained as risk appetite faltered on news that China unexpectedly did not announce new stimulus measures and amidst indications that General Motors (GM) could be forced to file for bankruptcy protection. Indeed, GM’s auditors, Deloitte & Touche LLP, said that there is “substantial doubt” that the automaker will be able to continue operating without a massive restructuring plan due to the firm’s “recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations.” US economic data was generally mixed, but still reflected bleak economic conditions. First, US jobless claims fell less than expected, with initial claims down by 31,000 to 639,000 during the week ended February 28 while continuing claims fell 14,000 to 5,106,000 during the week ending February 21. Ultimately, though, initial jobless claims remain very close to their 1982 highs and the drop does little to suggest that employment conditions have improved, especially since continuing claims remain close their highest levels since record-keeping began in 1967.

Meanwhile, the Mortgage Bankers Association (MBA) of America said that mortgage delinquencies climbed 7.88 percent during Q4, the biggest increase since record-keeping began in 1972. Meanwhile, inventory foreclosures associated with subprime, adjustable rate mortgages were up a record 22.18 percent, which only highlights the fact that these particular types of mortgages along with lax credit standards are some of the main causes for the housing market collapse. This is much of the reason why the government has proposed their “Making Home Affordable” program where they will offer incentives to persuade mortgage-servicing companies to modify the loans of borrowers who are deemed as being at risk of foreclosure. The program would allow for mortgage-servicers to lower interest rates as low as 2 percent, extend payment periods, or make other modifications to bring the borrower’s monthly payment down to 31 percent of their income.

The big event to watch on Friday will be the release of US employment data. Based on both a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the fourteenth straight month in February. At the time of writing, Bloomberg News was calling for NFPs to plunge by 650,000, leaving 2009 to continue on a very negative note. Something that is starting to garner even more attention is the unemployment rate, which is projected to hit 7.9 percent, the highest since January 1984. The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 7.6 percent in January 2009 while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008. To find out how the US dollar may respond to this news, check out our NFP Outlook, keeping in mind that the Japanese yen will likely respond in a similar manner since the news should have an impact on overall risk trends.

British Pound Ends Day Lower as BOE Cuts Rates to 0.50%, Pursues Quantitative Easing
The British pound ended the day down slightly against the US dollar on Thursday, though the pair remains above key support at 1.40. GBP/USD initially fell sharply on news that the Bank of England cut rates in line with expectations by 50 basis points to a record low of 0.50 percent. The BOE suggested that they would hold a neutral stance going forward as their policy statement said that “a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system,” and while this provided some bullish potential for the UK’s currency, news that the BOE was about to pursue quantitative easing had the opposite effect. Indeed, the Monetary Policy Committee (MPC) decided to start purchasing assets worth 75 billion pounds, which would be financed by the issuance of central bank reserves. According to the policy statement, “Part of that sum would finance the Bank of England’s programme of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets. But in order to meet the Committee’s objective of total purchases of 75 billion pounds, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.” Ultimately, this has bearish implications for the British pound because it will bring down medium and long-term interest rates, but traders should also consider that because risk trends remain the primary driver of price action in the forex markets, a resurgence in risk appetite could lift GBP/USD.

Euro Down as ECB Cuts Rates to 1.5%, Leaves Door Open to Further Reductions and ‘Non-Standard’ Measures
The euro remains under pressure on Thursday after the European Central Bank cut interest rates in line with expectations by 50 basis points to 1.50 percent at 7:45 ET. Furthermore, when you take into consideration the content of ECB President Jean-Claude Trichet’s subsequent comments at 8:30 ET, the outlook for the euro looks increasingly bearish from an interest rate expectation perspective. The ECB staff’s macroeconomic projections were revised down sharply from December and showed that they expect annual real GDP growth in the Euro-zone to fall within a range of -3.2 percent to -2.2 percent in 2009, but then pick up slightly to between -0.7 percent and +0.7 percent in 2010. Meanwhile, inflation projections were also revised down to reflect forecasts for annual HICP inflation to slow to between 0.1 percent and 0.7 percent in 2009, and rise slightly to between 0.6 percent and 1.4 percent in 2010. During the Q&A session, Trichet refused to call 1.50 percent the floor for interest rates, suggesting the ECB may cut rates further, but also indicated that he saw zero interest rates as being "inappropriate." The big question here was Trichet's allusion to the potential for quantitative easing, which he preferred to call “credit easing,” as he said that the central bank was studying "additional non-standard measures." Given the prospect of not only rate cuts from a traditional monetary policy perspective but also lower yields on government bonds in the Euro-zone presents potential for further euro declines. In the end, a region of support for EUR/USD between 1.2330 - 1.2500 serves as a make-or-break level for the pair, and traders should watch that carefully in light of the ECB’s dovish bias.

Economic Data

Support And Resistance Levels

Published on  Fri, Mar 6 2009, 05:39 GMT

US Dollar, Japanese Yen Falter as Increased Confidence Propels S&P 2.38% Higher

Thu, Mar 5 2009, 05:49 GMT
by Terri Belkas

DailyFX

- British Pound Could Plunge of BOE Cuts Rates, Signals Move Towards Quantitative Easing

- Euro Outlook Hinges Upon ECB Rate Decision, Trichet’s Comments

US Dollar, Japanese Yen Falter as Increased Confidence Propels S&P 2.38% Higher
The US dollar and Japanese yen both tumbled on Wednesday, as improved risk appetite benefited riskier assets like the commodity dollars and stocks, with the DJIA and S&P 500 both ended the day up over 2 percent. Much of this was attributed to news that China is expected to announce a second stimulus package during Friday’s opening of the National People’s Congress, suggesting that Chinese demand may hold up enough to support other global economies. Meanwhile, the forex markets showed little response to news that conditions in the US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - worsened in February as the Institute for Supply Management (ISM) index fell to 41.6 from 42.9, which is just above the record low of 37.4 reached in November. A breakdown of the index shows that overall activity, new orders, and employment all remained well below 50, signaling a further contraction.
While we already know that the US economy fell into recession in December 2007, this data helps to gauge how long the recession will drag on for, and based on this data, the forecast looks just as bleak as what the Federal Reserve observed in their monthly Beige Book report.

Ten of the twelve Fed districts reported "weaker conditions or declines in economic activity," and the sole exceptions were the Philadelphia and Chicago Fed districts, which reported that their respective economies "remained weak." Going forward, the districts said that the outlook for "near-term improvement in economic conditions" was "poor," as growth is not anticipated to recover before late 2009 or early 2010. Furthermore, the Beige Book said that unemployment has risen in all areas due to "rising layoffs and hiring freezes," which has contributed to a reduction or elimination in "upward wage pressures." The report went on to say that multiple "reports pointed to outright reductions in hourly compensation costs, through wage reductions and reduction or elimination of some employment benefits." Clearly, this leaves potential open for yet another sharp increase in the US unemployment rate on Friday and suggests that consumption will continue to be lackluster.

Overnight, Japanese capital spending (excluding software) is projected to fall for the seventh straight quarter in Q4, as the annual rate may plunge by the most in more than seven years at a rate of 15.3 percent. Businesses, which depended heavily upon robust foreign demand, have had to come to terms with the impact of the appreciation of the Japanese yen and the global economic slowdown/recession, as the latest figures from January show that exports fell 45.7 percent from a year earlier. With the Japanese government and economists all of the world forecasting that global growth will time quite some time to recover, businesses have no reason to invest in their operations and if anything, they are looking to cut away any and all excess fat.
Overall, readings in line with expectations will signal what many already anticipate: that the Japanese recession will only deepen during the first half of 2009. The news has potential to impact investor sentiment during the Asian trading session, leading the Nikkei lower and thus, the Japanese yen higher on risk aversion.

Related Articles: US Dollar Weekly Trading Forecast, Is The Japanese Yen Losing Its Top Safe Haven Status?

British Pound, Euro Outlooks Hinge Upon Thursday’s ECB, BOE Rate Decisions

Bank of England - The already-volatile British pound is bound to face additional volatility this week as a Bloomberg News poll reflects expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 0.50 percent. This is indeed within the realm of possibilities given the exceptionally dovish commentary we’ve been hearing from BOE officials lately. On Tuesday, BOE Monetary Policy Committee (MPC) member Andrew Sentance cited an increased risk of deflation if “the recession is prolonged and deep, and though “persistent” price declines “remain an outside risk,” there is “a strong case for providing additional stimulus to the economy to head it off more decisively.” On Wednesday, BOE MPC member David Blanchflower, said that the UK recession may worsen "significantly" and that the downturn has not yet hit a "bottom," which left UK monetary policy "overly restrictive" with the Bank Rate at a record low of 1 percent. He went on to say that the central bank should cut rates to at least 0.50 percent, go neutral and then pursue quantitative easing "quickly," something that the UK Treasury has yet to approve. It is worth noting that Blanchflower is easily the most dovish member of the MPC, but his remarks obviously still hold some weight in the markets. Overall, this leaves the odds in favor of another rate cut by the BOE on March 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement. If the BOE suggests they will leave rates at 0.50 percent for the foreseeable future, the British pound could actually gain. On the other hand, indications that the central bank is open to reducing rates further, or that quantitative easing may be approved by the UK Treasury could weigh on the currency.

European Central Bank - The decline in Euro-zone CPI estimates well below the European Central Bank’s 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will cut rates on March 5 by 50 basis points to 1.50 percent. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, ECB President Jean-Claude Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation. Furthermore, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. As a result, the 7:45 ET announcement will garner quite a bit of attention, but traders should also look to Trichet’s post-meeting press conference at 8:30 ET. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB signals that they may leave rates unchanged during their next meeting, the currency could actually rally.

Economic Data

Support And Resistance Levels

Published on  Thu, Mar 5 2009, 05:49 GMT

US Dollar, Japanese Yen Consolidate Gains But Ultimately End Tuesday Lower

Wed, Mar 4 2009, 05:51 GMT
by Terri Belkas

DailyFX

- Euro, British Pound Continue Trading Above Key Support Levels

- Canadian Dollar Tumbles Following BOC Rate Cut on Potential for Further Reductions, Quantitative Easing

- Australian Dollar Strong as RBA Signals Neutral Stance, Doesn’t Cut Rates

US Dollar, Japanese Yen Consolidate Gains But Ultimately End Tuesday Lower
The US dollar and Japanese yen ended the day lower against most of the majors, but for what it’s worth, most of the major currency pairs have simply consolidated gains or losses from Monday. In economic news, the National Association of Realtors (NAR) reported that US pending home sales fell more than expected at a rate of 7.7 percent, but as one of the most lagging indicators of conditions in the housing sector, there wasn’t much in the way of reaction to this release. Instead, risk trends remained the primary driver of price action for the US dollar and Japanese yen. Ultimately, investor confidence remained on edge after Federal Reserve Chairman Ben Bernanke said during testimony on the US economy and budget that the US may need to expand the $700 billion bank-rescue fund as they have “clearly” not stabilized the banking system. Bernanke went on to say that rescuing AIG made him “more angry” than any other bailout, but that the Federal Reserve’s goal is to make the company viable enough to pay back issued rescue funds.

Looking ahead to Wednesday, conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to have worsened in February as the Institute for Supply Management (ISM) index is estimated to fall to 41.0 from 42.9, which is just above the record low of 37.4 reached in November. Indeed, consumer confidence remains exceptionally weak, as the Conference Board’s measure fell to a record low of 25.0 during the same month. We already know that the US economy fell into recession in December 2007, but this data will help to gauge how long the recession will drag on for. Since risk trends have proven to be the greater driver of price action in the forex markets, a weaker than expected result could trigger flight-to-quality and thus, gains for the US dollar. Meanwhile, a surprisingly strong result could boost equities and weigh on safe-haven assets.

Related Articles: US Dollar Weekly Trading Forecast, Is The Japanese Yen Losing Its Top Safe Haven Status?

Euro, British Pound Continue Trading Above Key Support Levels
Both the euro and British pound finished Tuesday up against the greenback, but in reality, the gains were so small that it is deceiving to say the currencies had a strong day. Instead, we’ve simply seen EUR/USD consolidate above 1.2550 while GBP/USD has consolidated above 1.4000, and where these pairs go next may hinge upon whether or not the US dollar rally can accelerate.
Speculation over upcoming rate decisions by the European Central Bank and Bank of England on Thursday could also impact price action in these pairs. The decline in Euro-zone CPI estimates well below the ECB’s 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will cut rates by 50 basis points to 1.50 percent. As a result, the 7:45 ET announcement will garner quite a bit of attention, but traders should also look to Trichet’s post-meeting press conference at 8:30 ET. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. Meanwhile, the Bank of England is expected to cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 0.50 percent. This is indeed within the realm of possibilities given the exceptionally dovish commentary we’ve been hearing from BOE officials lately.

Looking ahead to Wednesday, the Purchasing Managers’ Index (PMI) for the UK’s services sector is expected to have fallen to 41.9 in February from 42.5, as the index holds near the record low of 40.1 reached in November. This will mark the tenth straight month that PMI held below 50, signaling a continued contraction in business activity for the services sector as well as a deepening recession for the UK. Ultimately, the data may only be market-moving for the British pound if PMI hits a new record low.

Related Article: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Canadian Dollar Tumbles Following BOC Rate Cut on Potential for Further Reductions, Quantitative Easing
The Canadian dollar plunged at 9:00 ET today following the Bank of Canada’s rate decision, as they reduced their overnight target rate in line with expectations by 50 basis points to a record low of 0.50 percent and indicated that the Bank may cut rates further and implement quantitative easing measures. Indeed, the BOC's monetary policy statement said that "the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up," and because the overnight target rate was already so low, "the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures."

Australian Dollar Strong as RBA Signals Neutral Stance, Doesn’t Cut Rates
The Australian dollar was one of the strongest of the major currencies on Tuesday after the Reserve Bank of Australia unexpected left rates unchanged at 3.25 percent last night. The Reserve Bank Board noted in their policy statement that “demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere.” Furthermore, the Board left no indications that they felt the need to cut rates later on, which is much of the reason why the Australian dollar has rallied so much. Overall, the RBA’s rate decision and remarks on the economy suggest that tonight’s release of GDP will reflect relatively stable growth. According to a Bloomberg News poll, economists are forecasting that GDP in Australia picked up slightly by 0.2 percent during Q4 versus 0.1 percent in Q3, though the annual rate is anticipated to have slowed to a more than seven year low of 1.2 percent from 1.9 percent. However, if GDP unexpectedly falls negative, the currency could fall sharply as the data could change the RBA’s policy bias to a more neutral one going forward. 

Economic Data

Support And Resistance Levels

Published on  Wed, Mar 4 2009, 05:51 GMT

Euro Consolidates Above 1.2550 as EU Says ‘No' to Bailout for Eastern Europe

Tue, Mar 3 2009, 05:34 GMT
by Terri Belkas

DailyFX

- British Pound Breaks Below Support - 1.35 Next?

- Canadian Dollar Down as GDP Falls Most Since 1991, Australian Dollar at Risk Ahead of RBA Rate Decision

US Dollar, Japanese Yen Hold Strong as AIG Losses, Bailout Add to Financial Market Concerns
The US dollar and Japanese yen gained as global stock markets fell sharply on news that European Union leaders voted down a request from Hungary for 180 billion euros in aid for the banking systems of Central and Eastern Europe. Risk appetite was damaged further when AIG reported a fourth quarter loss of $61.7 billion, which encouraged the US government to offer a package of equity, new credit and lower interest rates on existing loans in order to prop up the company as they provide systemic risk for the markets.

In economic news, personal income unexpectedly rose 0.4 percent in January following a 0.2 percent decline in December, but this was not because of improved wage growth. Instead, the increase was due primarily to a 3.5 percent boost to "transfer payments", which includes retirement, disability, and unemployment insurance benefits. Meanwhile, personal spending surprisingly jumped 0.6 percent during the same period, though part of this was the result of an increase in prices from the month prior, as retailers implemented heavy discounts during the holiday shopping season. Overall, with credit conditions remaining tight and unemployment surging, the increase in spending doesn't necessarily reflect a recovery in consumer trends. The release of ISM manufacturing also showed an unforeseen rise to 35.8 in February from 35.6, but ultimately, a closer look at the report indicates broadly weak prospects for the sector. Indeed, despite the increase, this was the thirteenth straight month that the index held below 50, which signals a contraction in business activity. Furthermore, the individual components of the index showed that prices paid remain historically low at 29.0, new orders slipped to 33.1, and employment tumbled to 26.1, the lowest since record-keeping began in 1948.

Looking ahead to Tuesday, the National Association of Realtors (NAR) is expected to announce that pending home sales fell 3.5 percent in January following a 6.3 percent increase in December. This would be in line with other measures of performance in the US housing sector for the start of 2009, as the NAR's existing home sales and the Commerce Department's new home sales figures have all indicated that demand is still falling. While this isn't typically a very market-moving report, results that deviate far from expectations have the potential to shake up risk trends for at least a short time.

Related Articles: US Dollar Weekly Trading Forecast, Is The Japanese Yen Losing Its Top Safe Haven Status?

Euro Consolidates Above 1.2550 as EU Says ‘No’ to Bailout for Eastern Europe
The euro fell sharply as soon as the markets opened on Sunday, and subsequently consolidated above 1.2550 for much of the European and US trading session. The release of Euro-zone CPI, which was stronger than expected at 1.2 percent in January didn’t have a major impact on EUR/USD as risk trends were the real drivers of price action in the forex markets. As mentioned above, European Union leaders voted down a request from Hungary for 180 billion euros in aid for the banking systems of Central and Eastern Europe, triggering some risk averse selling in the stock markets. However, the EU did leave the door open to aid efforts on a country-by-country basis, suggesting that help may eventually be on the way for the nations. For much of the rest of the week, speculation over the end-result of the European Central Bank’s meeting on Thursday could impact the euro, and on a longer-term basis, resistance looms at 1.3000 while support rests at 1.2500. The decline in Euro-zone CPI estimates well below the ECB’s 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will cut rates by 50 basis points to 1.50 percent. As a result, the 7:45 ET announcement will garner quite a bit of attention, but traders should also look to Trichet’s post-meeting press conference at 8:30 ET. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower.

Related Article: Euro Weekly Trading Forecast

British Pound Breaks Below Support - 1.35 Next?
The British pound took a beating on Sunday and Monday as investor confidence remains low and as UK data remained broadly disappointing. First, the Purchasing Managers’ Index (PMI) for the UK’s manufacturing sector slipped down to 34.7 from 35.8, putting it just above the record low of 34.5 reached in November. More importantly, manufacturing PMI has now held below 50 for tenth straight month, signaling a lingering contraction in business activity and suggesting that the UK recession has only deepened in Q1 2009. Meanwhile, UK mortgage approvals held steady at 31,000 in January, but this is still just above the record low of 27,000 reached in November and doesn’t necessarily indicate any stabilization in the collapse of the UK’s housing sector. From a technical perspective, GBP/USD broke below intraday trendline support at 1.4135 today, which may leave the door open for a decline toward the January lows near 1.3500.

Related Article: British Pound Weekly Trading Forecast

Canadian Dollar Down as GDP Falls Most Since 1991, Australian Dollar at Risk Ahead of RBA Rate Decision
The Canadian dollar continues to fall against the greenback, with USD/CAD showing potential to test 1.3000 in the near term, as Canadian GDP fell an annualized 3.4 percent during Q4, the worst drop since 1991. Indeed, sharp declines in oil prices have take a toll on the export and commodity-dependent economy, and the results add to evidence that the Bank of Canada will cut rates on Tuesday morning. Meanwhile, the Australian dollar is trading at a critical point, as AUD/USD is aggressively testing a trendline that has served as support since October 2008. With the Reserve Bank of Australia (RBA) due to announce their rate decision tonight, a break in AUD/USD could occur in the near-term. The RBA is anticipated to cut rates in their sixth consecutive meeting at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 25 basis point cash rate target reduction to a record low of 3.00 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar, with signs of neutrality likely to actually boost the currency. For more on how AUD/USD may respond, check out our RBA Rate Decision Outlook.

Economic Data

Support And Resistance Levels

Published on  Tue, Mar 3 2009, 05:34 GMT

Euro Under Pressure as Drop in CPI Suggests ECB Will Cut Rates to 1.50% Next Thursday

Mon, Mar 2 2009, 05:49 GMT
by Terri Belkas

DailyFX

- Australian Dollar Falls to Key Trendline Support Ahead of Pivotal RBA Rate Decision

Japanese Yen Outpaces ‘Safe Haven’ US Dollar as Q4 GDP Falls 6.2%, S&P 500 Closes at Lowest Level Since 1996
Flight to quality resumed on Friday, leading the US dollar to gain against nearly every currency as the S&P 500 fell to its lowest closing level since December 1996. The surprising thing was that the Japanese yen was actually the bigger beneficiary of risk aversion, suggesting that the currency may not have lost its “safe haven” status. It is worth noting, though, that the Japanese yen still ended the week down sharply against the majors, so traders should be wary of depending on the currency’s fading link with risk trends. These moves started early as the US government has moved ahead with their "stress test" assessment of Citigroup, and has decided to convert up to $25 billion worth of preferred shares into common shares. Furthermore, Citigroup agreed to restructure its board of directors so that a majority of the members are new and independent. This is slowly bearing some resemblance to Sweden's nationalization efforts in the early 1990's, but as we noted in our special report, the plan may be too piecemeal to be truly effective. The other issue high on the mind of investors was the downward revision to US GDP. Indeed, growth in Q4 was revised down to -6.2 percent from -3.8 percent, which still remains just above the Q1 1982 low of -6.4 percent. A further breakdown of the Commerce Department’s summary shows that revisions to personal consumption were responsible for much of the decline, as spending fell 4.3 percent versus previous estimates of a 3.5 percent drop. Meanwhile, gross private investment was revised down to -20.8 percent from -12.3 percent thanks to dismal nonresidential and residential investment, suggesting that the commercial property market is taking a heavy hit. Finally, exports were revised down to -23.6 percent from -19.7 percent, and while the US isn’t nearly as dependent upon trade for growth as countries like Japan, the results indicate the conditions remain tough for American manufacturers.

On Sunday at 20:30 ET, Japanese labor cash earnings are forecasted to remain exceptionally low at -1.2 percent in January from a year earlier, marking the third straight month of negative results. Japanese consumption has been very low for a long time, as there was little to no wage growth to provide an increase in discretionary income. When you consider that labor earnings have recently been steadily declining, it becomes clear that there is almost no impetus for households to spend and support the economy.

Looking ahead to Monday, 8:30 ET economic releases from the US are expected to show that personal income growth contracted 0.2 percent in January, while spending may have actually increased 0.4 percent. This would be in line with the surprise increase in Advance Retail Sales for the same period, but may simply reflect an increase in prices following the heavy discounting implemented in December for the holiday shopping season. The 10:00 ET release of the ISM Manufacturing index, however, will give a more timely view of conditions in the economy. The index is anticipated to fall toward the nearly 29-year lows of 32.9 to 34.0 in February from 35.6. This would mark the thirteenth straight month of contraction in business activity, suggesting that the recession could continue throughout 2009. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.

Related Articles: Can Confidence in the Dollar Improve Even as the US Recession Deepens?, Is The Japanese Yen Losing Its Top Safe Haven Status?

Euro Under Pressure as Drop in CPI Suggests ECB Will Cut Rates to 1.50% Next Thursday
The euro slumped throughout much of Friday, breaking below immediate support at 1.2690, as Euro-zone CPI slowed in line with expectations to an annual rate of 1.1 percent, the lowest since 1999. On a longer-term basis, resistance looms at 1.3000 while support rests at 1.2500, and either of these levels could be tested next week as the European Central Bank (ECB) will announce their next rate decision on March 5. The decline in Euro-zone CPI estimates well below the ECB’s 2.0 percent target, steady increases in unemployment, and increasingly pessimistic consumer and business confidence all suggest that the central bank will cut rates by 50 basis points to 1.50 percent. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, ECB President Jean-Claude Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation. Furthermore, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. As a result, the 7:45 ET announcement will garner quite a bit of attention, but traders should also look to Trichet’s post-meeting press conference at 8:30 ET. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB signals that they may leave rates unchanged during their next meeting, the currency could actually rally.

Australian Dollar Falls to Key Trendline Support Ahead of Pivotal RBA Rate Decision
Signs of risk aversion in the markets weighed on the commodity dollar, including the Australian dollar. Focusing on AUD/USD, declines in the pair took price down for a test of a rising trendline that connects the October, November, and February lows. Where AUD/USD goes from there hinges upon both risk trends and the Reserve Bank of Australia upcoming rate decision on Monday at 22:30 ET. Looking to the rate decision, the RBA is anticipated to cut rates in their sixth consecutive meeting, with a Bloomberg News poll of economists calling for a 25 basis point cash rate target reduction to a record low of 3.00 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar, with signs of neutrality likely to actually boost the currency. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.

Economic Data

Support And Resistance Levels

Published on  Mon, Mar 2 2009, 05:49 GMT

Japanese Yen Drops Further as Correction Continues

Fri, Feb 27 2009, 05:37 GMT
by Terri Belkas

DailyFX

- Euro Could Fall Under Pressure as Euro-zone CPI May Cause Shift in ECB Rate Expectations

- British Pound Bounced From Trendline Support- Make of Break Point for Bears Sits at 1.4150

- Japanese Yen Drops Further as Correction Continues

US Dollar Slips But Remains Within Critical Range - Potential for Break Before End of Week
The US dollar ended the day modestly lower against most of the majors, with the exception of the ultra-weak Japanese yen, as the currency consolidates within an ultra-tight range. Indeed, the DXY index has been consolidating within an ascending triangle, and while these are typically bullish continuation patterns, price would first need to break above the 2008 highs as a confirmation of such a bias (see chart at bottom of page). However, if price dips below rising trendline support, the outlook for the US dollar could turn decidedly bearish as the currency would likely correct lower versus most of the majors.

In economic news, Durable Goods Orders failed to improve for the sixth straight month as they fell more than expected at a rate of 5.2 percent during January. Transportation led the decline in the overall index, contracting a whopping 13.5 percent, but even excluding this component orders were down 2.5 percent. Furthermore, by looking at the results from a longer-term perspective, conditions appear incredibly bleak as Durable Goods Orders are down 26.4 percent from a year earlier while non-defense capital goods orders excluding aircraft – a gauge of business investment – tumbled 5.4 percent during the month and 20.2 percent from a year ago. All told, the declines suggest that the US economy is suffering at the hands of waning demand on both the consumer and business level. Meanwhile, Initial Jobless Claims rose by 36,000, or 5.7 percent, during the week ending February 21 to a more than 26-year high of 667,000. Even worse, Continuing Jobless Claims increased by 114,000, or 2.3 percent, to 5,112,000, the highest level since recordkeeping began in 1967. The sharp deterioration in the labor markets has only accelerated more in recent months, indicating that the unemployment rate is very likely to reach the Federal Reserve’s expected levels for 2009 sooner rather than later. Furthermore, as long as unemployment levels are climbing, purchases of services, homes, and any other non-essential goods are sure to lag as discretionary income contracts. Indeed, sales of new homes plummeted by 10.2 percent in January to a record low of 309,000, which is in line with the dismal existing home sales results we saw yesterday. A breakdown of the report shows that supply levels rose steadily by 1.1 months to 13.3 months, as a 13.5 percent drop in median prices from a year earlier to $201,100 hasn't helped to spur demand.

Looking ahead to Friday, the 08:30 ET preliminary reading of Q4 GDP for the US is forecasted to be revised even lower after initial estimates showed the index down 3.5 percent. The latest results may show a sharp 5.4 percent contraction, which would still be the worst since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher despite the disappointing fundamental scenario.

Related Article: Can Confidence in the Dollar Improve Even as the US Recession Deepens?

Euro Could Fall Under Pressure as Euro-zone CPI May Cause Shift in ECB Rate Expectations
The euro started Thursday on a strong note, but ultimately ended the day little changed due to US dollar price action. Ultimately, EUR/USD remains contained to a fairly well-defined range on a short-term and long-term basis. In the short-term, resistance sits at 1.2800 while support sits at near 1.2690. On a longer-term basis, resistance looms at 1.3000 while support rests at 1.2500.
Meanwhile, economic news was mixed, as German unemployment levels rose by 40,000, marking the fourth straight increase, which pushed the unemployment rate up to a 9 month high of 7.9 percent. Meanwhile, GfK consumer confidence for the Euro-zone largest economy rose for the sixth straight month to 2.6 in March, but since this is the initial reading, there is potential for revisions. Looking ahead, Eurostat inflation estimates for the Euro-zone have shown that CPI may have fallen to a 1.1 percent annual pace during January, which would mark the lowest since 1999 but more importantly, remains below the European Central Bank’s 2.0 percent inflation target. If Eurostat confirms this at 5:00 ET, the euro could pull back, especially ahead of the ECB's expected rate cut on March 5. On the other hand, if CPI is higher than anticipated, the currency could gain as the markets will speculate that the central bank may pause in their efforts to make monetary policy more accommodative.

British Pound Bounced From Trendline Support - Make of Break Point for Bears Sits at 1.4150
The British pound bounced from trendline support early on Thursday and subsequently gained throughout much of the day, despite the release of disappointing news. UK Nationwide house prices fell for the sixteenth straight month in February at a rate of 1.8 percent, bringing the annual rate down to -17.6 percent, the lowest since recordkeeping began in 1992. However, the GBP/USD outlook may depend on if the greenback breaks higher or lower. In order to accommodate for this uncertainty, I’ve noted potential ways by which to take advantage of both bullish and bearish GBP/USD scenarios.

Japanese Yen Drops Further as Correction Continues
The Japanese yen continued succumbing to negative fundamental pressures, as the currency loses its correlation with the stock markets. This has left many wondering if the Japanese yen has lost its safe haven status, as Japan faces a deepening recession amidst dismal domestic demand and plunging foreign demand, as exports fell a record 45.7 percent in January from a year earlier. Data will likely reflect this sentiment overnight as Japanese household spending may have contracted for the eleventh straight month in January, with the annual index forecasted to have dropped 5.5 percent from a year earlier after falling 4.6 percent in December from a year earlier. Furthermore, Japanese industrial output is anticipated to have plummeted a record 30.7 percent in January from a year earlier, and a whopping 10 percent during the month alone. Producers in Japan have faced hard times as the appreciation of the Japanese yen combined with the global economic slowdown has sapped demand for Japanese exports. Overall, the release of these indicators are likely to add to evidence that the recession in Japan's economy is only deepening after Q4 GDP fell by the most since 1974, and may also exacerbate weakness in the Japanese yen.

Economic Data

Resistance Levels

Published on  Fri, Feb 27 2009, 05:37 GMT

Euro Falls Back to 1.27 as Data Highlights Impact of Global Slowdown on Germany

Thu, Feb 26 2009, 05:48 GMT
by Terri Belkas

DailyFX

- British Pound the Weakest of the Majors as BOE’s Blanchflower Says UK Recession May Worsen ‘Significantly’

- Japanese Yen Down and Out Despite Signs of Risk Aversion

US Dollar the Strongest of the Majors, Continues Consolidation - Nearing a Breaking Point?
The US dollar surged against the major currencies amidst persistent risk aversion and as fundamental releases from other regions made conditions in the US seem relatively solid. However, technical analysis is proving to be increasingly important at this juncture, as the US dollar index is still in the midst of a tight consolidation within an ascending triangle formation, with a break above the 2008 highs likely to signal a continuation of the currency’s uptrend. On the flip side, a drop below Monday’s lows would indicate a reversal of the dollar rally that started in December.

In economic news, the National Association of Realtors (NAR) reported that US existing home sales for January unexpectedly fell 5.3 percent from the month prior down to a record low of 4.49 million. A breakdown of the report shows that median home prices were down 14.8 percent from a year earlier at $170,300 while supply levels edged up to 9.6 months from 9.4 months. Meanwhile, MBA mortgage applications for the week ending February 20 plunged 15.1 percent following a massive 45.7 percent increase the week prior. Though the MBA’s release is highly volatile, it only adds to evidence that the US housing collapse has yet to end.
Federal Reserve Chairman Ben Bernanke was also on the wires as he testified in front of the House Financial Services Committee, and while most of the remarks were similar to what we saw yesterday, he did make a concerted effort to say that the government isn’t planning “anything like” nationalization, which he said means “zeroing out shareholders” and causing disruptions in the markets. Though this provided a brief boost to the stock markets, it obviously was not enough to warrant outright optimism as both the DJIA and S&P 500 ended the day down over 1 percent.

Looking ahead to Thursday, signs that domestic demand is showing no sign of recovery should continue to emerge as US durable goods orders are forecasted to have dropped 2.5 percent and even excluding transportation is anticipated to fall 2.2 percent. All told, this would mark the sixth straight month in which the headline reading failed to rise, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The 3-month annualized figure has fallen sharply over the past few months, and combined with the weak outlook for the headline reading, risk aversion could linger and ultimately lead the US dollar higher.

Related Article: Is the Japanese Yen Losing Its Safe Haven Status?

Euro Falls Back to 1.27 as Data Highlights Impact of Global Slowdown on Germany
The euro fell throughout the day on Wednesday, and while the final reading of German GDP for Q4 was unchanged at -1.7 percent, it also showed that a sharp 7.3 percent drop in exports were the primary reason for the nation’s recession. Indeed, though domestic demand (-0.1 percent), private consumption (-0.1 percent), capital investment (-2.7 percent), and construction investment (-1.3 percent) all fell lower during Q4, their declines didn’t even come close to the contraction in foreign demand for German goods. This suggests that the Euro-zone’s largest economy is unlikely to show any signs of recovery until the demand from their major trading partners (France, US, UK, Italy, Netherlands, Austria, Belgium, and Spain) picks up. The euro was also under pressure on news that S&P downgraded Ukraine’s credit rating down to CCC+/C, leaving it seven notches below investment grade and the lowest in Europe. There are concerns about financial stability in Eastern Europe, as banks there face major difficulties financing their operations, which puts their Western European partners at risk as well. Looking ahead to Thursday, the Purchasing Managers' Index (PMI) for the Euro-zone's retail sector is likely to have remained well below 50 - signaling a contraction in activity - during the month of February. This would mark the ninth straight month that PMI remained below 50, and is similar to what we've seen in the manufacturing and services PMI results published by Markit Economics, adding to evidence that the region's recession continues to deepen. The release of retail PMI doesn't tend to be a huge market-mover, but can influence price action for the euro on a very short-term basis.

Related Article: Euro Pulls Back on S&P Ukraine Downgrade (Morning Slices)

British Pound the Weakest of the Majors as BOE’s Blanchflower Says UK Recession May Worsen ‘Significantly’
The British pound The headline result of UK GDP for Q4 went unrevised upon the second reading of the index at -1.5 percent.
However, the individual components were released and reflected a bleak picture, as private consumption was released at -0.7 percent in Q4 compared to -0.2 percent in Q3, exports slumped down to -5.5 percent from 0.5 percent in Q3, and imports fell to -5.9 percent from -0.5 percent in Q3. Losses in the British pound were only exacerbated by comments from Bank of England (BOE) Monetary Policy Committee (MPC) member David Blanchflower, who was extremely bearish on the UK economy. Blanchflower said that the UK recession may worsen "significantly" and that the downturn has not yet hit a "bottom," which left UK monetary policy "overly restrictive" with the Bank Rate at a record low of 1 percent. He went on to say that the central bank should cut rates to at least 0.5 percent, go neutral and then pursue quantitative easing "quickly," something that the UK Treasury has yet to approve. It is worth noting that Blanchflower is easily the most dovish member of the MPC, but his remarks obviously still hold some weight in the markets.

Japanese Yen Down and Out Despite Signs of Risk Aversion
The Japanese yen has finally started to succumb to negative fundamental pressures, as the currency has continued to lose its correlation with the stock markets. This has left many wondering if the Japanese yen has lost its safe haven status, as Japan faces a deepening recession amidst dismal domestic demand and plunging foreign demand, as exports fell a record 45.7 percent in January from a year earlier. However, the decline in the currency will serve as good news for Japanese officials since the yen’s prior appreciation was one of the big reasons why exports contracted so sharply, along with the global economic slowdown.

Economic Data

Resistance Levels

Published on  Thu, Feb 26 2009, 05:48 GMT

Euro Up Despite Record Declines in Euro−zone Industrial Orders, German Investor Sentiment

Wed, Feb 25 2009, 05:49 GMT
by Terri Belkas

DailyFX

- British Pound Slips as BOE’s Sentence Cites Deflation Risks - UK GDP Revisions on Wednesday

US Dollar, Japanese Yen Tumble as Fed’s Bernanke Stokes Risk Appetite, S&P 500 Gains 4%
US economic news was very disappointing this morning, as the S&P/Case-Shiller home price index tumbled by a record 18.23 percent in Q4 and the Conference Board’s consumer confidence index hit the worst level since record keeping began in 1967.
Meanwhile, Federal Reserve Chairman Ben Bernanke’s prepared remarks before the Senate Banking Committee didn’t reflect much in the way of new updates, as he essentially just provided a timeline of the development of the financial crisis. Bernanke reiterated the Federal Open Market Committee’s (FOMC) stance that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” suggesting that the fed funds target will remain at a record low range of 0.0 percent - 0.25 percent through 2009. He also noted that the financial markets have stabilized somewhat in recent months, but that some stresses still remain, as evidenced by the fact that “most securitization markets remain shut, other than that for conforming mortgages, and some financial institutions remain under pressure.” Bernanke expressed optimism that the initiatives discussed by Treasury Secretary Tim Geithner on February 10 would eventually work to “further stabilize our financial institutions and markets, improving confidence and helping to restore the flow of credit needed to promote economic recovery,” but that there is currently a "painful adjustment" going on toward more saving. Indeed, most businesses thrived off the tendency of consumers to leverage themselves to the hilt with credit card debt in order to obtain a better quality of life. However, with everyone becoming increasingly conservative, that sort of risk appetite may become a thing of the past as individuals spend less and save more, which will hurt the sectors that benefited most from once-robust consumption.

During the Q&A session, Bernanke brushed off the notion of nationalization, but also said that the US lacks a “regime for closing big, critical firms” and that any reforms should include a way to do so. Bernanke also said that "there are some banks that are too big to fail,” but refused to commit to never shutting down a big bank. With the Federal Reserve saying that they want to learn the "true positions" of US banks, it seems like things could get worse before they get significantly better, but based on the surge in equities and forex carry trades on Tuesday, the markets seem to be believing otherwise. If this sentiment intensifies, both the US dollar and Japanese yen may be in for further declines, with the outlook for the former hinging upon a break below Monday’s low.
Meanwhile, the yen may be at even greater risk due to its closer link to risk trends.

Looking ahead to Wednesday, Bernanke will testify again, this time in front of the House Financial Services Committee at 10:00 ET. Most of the commentary will likely consist of repeats from today, but biased or unexpected remarks could impact risk trends.
At the same time, the National Association of Realtors' (NAR) existing home sales report is expected show that they rose for the second straight month at a rate of 1.3 percent in January to 4.8 million. However, this is still fairly close to the record low of 4.45 million reached in November, which may not even describe the true extent of the weakness in the housing sector as record keeping only goes back to 1999. Nevertheless, another increase would suggest that lower home prices and mortgage rates are helping to provide a small boost to demand for previously-owned homes.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Up Despite Record Declines in Euro-zone Industrial Orders, German Investor Sentiment
The euro rallied throughout much of the US trading session thanks to a rise in risk appetite, and despite the fact European economic data was broadly disappointing. Euro-zone industrial new orders fell for the fifth straight month in December at a rate of 5.2 percent, making the worst string of declines since record keeping began in 1994. The annual rate showed a sharp contraction of 22.3 percent, and while this is up from the record low of -27.4 percent in November, the outlook for European producers looks gloomy as both domestic and foreign demand wane. Meanwhile, the IFO index of German business confidence moved in line with expectations, as there was broadly weak sentiment on the business climate with the index down at a new record low of 82.6, while the index gauging current economic conditions fell to nearly match the 6-year low at 84.3. On the other hand, the outlook for growth improved, with the index up to 80.9 from the December record low of 76.9, amidst prospects for recovery in the long run thanks to intervention efforts by European governments and the European Central Bank’s past rate cuts.

Related Article: Euro Weekly Trading Forecast

British Pound Slips as BOE’s Sentence Cites Deflation Risks - UK GDP Revisions on Wednesday
The British pound ended Tuesday modestly lower against the greenback, as it was one of the weakest of the major currencies and gained only against the Japanese yen. Comments by Bank of England Monetary Policy Committee member Andrew Sentance certainly did not help the British pound, as he cited an increased risk of deflation if “the recession is prolonged and deep, and though “persistent” price declines “remain an outside risk,” there is “a strong case for providing additional stimulus to the economy to head it off more decisively.” Sentence’s remarks added to speculation that the BOE will move to buy gilts in order to increase the money supply and bring down broad interest rates. Looking ahead to Wednesday, the preliminary reading of Q4 GDP for the UK is forecasted to revised even lower, down to -1.6 percent from -1.5 percent, which would still mark the lowest level since Q2 1980. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds the Bank of England will cut rates again on March 5. On the other hand, if GDP is a bit better than forecasts, the currency could gain.

Related Article: British Pound Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Feb 25 2009, 05:49 GMT

Euro Rally Loses Steam as Risk Appetite Dissipates During US Trading Session

Tue, Feb 24 2009, 05:36 GMT
by Terri Belkas

DailyFX

- British Pound Ends Day Slightly Higher as UK’s Darling Orders Northern Rock to Lend

- Canadian Dollar Slumps Lower as Retail Sales Fall by Most Since 1991

US Dollar, Japanese Yen Recoup Some Losses as US Stocks Fall to Lowest Levels Since 1997
The US Treasury, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the Federal Reserve issued a joint statement this morning clarifying some of the government’s plans, as first discussed by Treasury Secretary Tim Geithner on February 10. Like Geithner’s speech, the announcement did little to boost investor sentiment as the S&P 500 and Dow Jones Industrial Average bother closed at their lowest levels since 1997. While the US dollar and Japanese yen did end the day lower across most of the majors compared to Friday’s close thanks to sharp declines on Sunday, they strengthened throughout most of the New York trading session. The joint statement tried to suggest that the government had no intentions to nationalize banks, as it said that “the strong presumption of the Capital Assistance Program is that banks should remain in private hands.” Nevertheless, the government is clearly stepping up their intervention efforts, noting that it would evaluate institutions to see if they are sufficiently capitalized, and if they are not the government will offer a “temporary capital buffer” in exchange for convertible preferred shares for banks that were are not able to build a buffer with capital from private sources. As mentioned in our Forex Weekly Trading Forecast, the outlook for the US dollar hinges upon where the DXY index goes next, as price could go higher for a bullish break above the 2008 highs, or a bearish drop below trendline support near today’s lows.

Looking ahead to Tuesday at 10:00 ET, the Conference Board’s consumer confidence index for the month of February is forecasted to reach a fresh record low of 36.0, down from 37.7. With record keeping having begun in 1967, the plunge in sentiment makes the extent of the recession even more clear. However, with Federal Reserve Chairman Ben Bernanke due to testify before the Senate on the economic and Fed policy at the same time, the consumer confidence result may have little impact on the markets. Instead, traders will be listening closely for more detailed outlooks on growth, unemployment, inflation, and the financial markets. Bearish commentary could weigh heavily on risk appetite, and as a result it will be important to keep an eye on the link between the currency markets and stocks, as the Japanese yen hasn’t been responding as strongly to shifts in equities while the US dollar still tends to benefit from flight-to-quality.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Rally Loses Steam as Risk Appetite Dissipates During US Trading Session
The euro rallied on Sunday, only to retrace the move and end Monday lower as a brief pick up in risk appetite – as evidenced by a jump in US stock market futures during the European trading session – was followed by a reversal lower. There was little in the way of European news on hand, but a speech by European Central Bank President Jean-Claude Trichet did suggest that they will become more instrumental in financial regulation, as Trichet said that the financial crisis was a “loud and clear call to extend regulation and oversight to all systemically important institutions,” such as hedge funds, credit rating agencies, and the OTC derivatives market.. Looking ahead to Tuesday at 4:00 ET, the IFO index of German business confidence is forecasted to show broadly weak sentiment on the business climate (steady at 83.0, just above the record low of 82.7), current economic conditions (down to a nearly 6-year low of 84.9 from 86.8), and the outlook for growth (up to 81.1 from the December record low of 76.9). As we saw with the February 17 release of the German ZEW survey, investor confidence on the economic outlook has improved somewhat, but sentiment on current conditions continues to falter. The release of this indicator tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

Related Article: Euro Weekly Trading Forecast

British Pound Ends Day Slightly Higher as UK’s Darling Orders Northern Rock to Lend
The British pound pulled back against the greenback after testing 1.4650 during European trading, but ultimately managed to end the day up slightly from Friday. In UK news, Chancellor of the Exchequer Alistair Darling ordered Northern Rock, which was nationalized last year, to expand lending by 14 billion pounds in order to fill a “gap” left by withdrawals by foreign-based banks.
The move is meant to increase the availability of mortgages, as the credit crisis led to financial institutions holding on to as much cash as possible as fears about counterparty risks intensified. The release of the British Bankers’ Association’s (BBA) measure of mortgage lending on Tuesday morning may highlight the persistent tightness in the consumer credit markets, as mortgage approvals are likely to remains near 16-year lows.

Related Article: British Pound Weekly Trading Forecast

Canadian Dollar Slumps Lower as Retail Sales Fall by Most Since 1991
The Canadian dollar fell versus the greenback on Monday as data showed that Canadian consumer spending plunged by the most since 1991. Indeed, Statistics Canada reported that retail sales fell for the third straight month at a rate of 5.4 percent, which was far worse than expectations for a 2.7 percent decline, as job losses continue to climb and the economy encounters its first recession in 17 years. As we discussed last week, cheaper oil has extremely negative repercussions for the Canadian economy as a whole. Combined with last Friday’s inflation data, which showed that the annual rate of CPI growth tumbled to a 2-year low of 1.1 percent in January, the odds remain in favor of further rate cuts by the Bank of Canada, even though interest rates are already at a record low of 1 percent.

Related Article: Canadian Dollar Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Tue, Feb 24 2009, 05:36 GMT

US Dollar, Japanese Yen Down as CPI Shows the US is Teetering on Brink of Deflation

Mon, Feb 23 2009, 05:39 GMT
by Terri Belkas

DailyFX

• Euro Jumps as ECB’s Nowotny Says Zero Rates ‘Neither Desirable Nor Needed’

• British Pound Gains as UK Retail Sales Rise, UK GDP Revision Could Weigh Next Week

• Canadian Dollar Shows Little Reaction to Bigger Than Expected Drop in Canadian CPI

US Dollar, Japanese Yen Down as CPI Shows the US is Teetering on Brink of Deflation
The US dollar and Japanese yen ended Friday mostly lower despite clear signs of risk aversion as evidenced by gold's test of $1000/oz, sharp drops in global stock markets, and a rally in government bonds, including US Treasuries. However, with the majors generally still contained to ranges and near their spike highs/lows, it may be a bit early to say that the US dollar and Japanese yen have lost their status as “safe havens,” as correlations have a tendency to fade in and out over time. Looking at charts of the DXY Index, price pulled back from resistance at the 2008 highs and the outlook for the greenback for the next few weeks may hinge upon whether or not the drop signal a reversal or ultimately yields a break higher.

On Thursday we noted that surprisingly strong producer price growth suggested that consumer price growth would be similarly high. This proved to be the case on Friday morning as the US consumer price index (CPI) unexpectedly rose 0.3 percent in January, while the core index, which excludes volatile food and energy costs, rose 0.2 percent. The more important factor though, was that these moves helped to prevent the annualized CPI reading from falling into negative territory for the first time since 1955. Instead, the figure eased to 0 percent, signaling that prices have essentially gone unchanged from January 2007, while the core figure stayed afloat at 1.7 percent, down from 1.8 percent in December. It appears that producers aren’t passing on lower input costs to consumers, as they struggle to maintain profits as demand falters, but with CPI still historically low, the Federal Reserve is highly unlikely to be concerned about upside risks to inflation, as contracting demand and credit creates greater risks for deflation.

Looking ahead to next week there will be a handful of events that US dollar traders will need to watch. On February 24 at 10:00 ET, the Conference Board’s consumer confidence index for the month of February is forecasted to reach a fresh record low of 36.0, down from 37.7. With record keeping having begun in 1967, the plunge in sentiment makes the extent of the recession even more clear. However, with Federal Reserve Chairman Ben Bernanke due to testify before the Senate on the economic and Fed policy at the same time, the consumer confidence result may have little impact on the markets. Instead, traders will be listening closely for more detailed outlooks on growth, unemployment, inflation, and the financial markets. Bearish commentary could weigh heavily on risk appetite, and as a result it will be important to keep an eye on the link between the currency markets and stocks, as the Japanese yen hasn’t been responding as strongly to shifts in equities while the US dollar still tends to benefit from flight-to-quality. On February 26 at 8:30 ET, signs that domestic demand is showing no sign of recovery should continue to emerge on February 26 as US Durable Goods Orders are forecasted to have dropped 2.3 percent and even excluding transportation is anticipated to fall 2.0 percent. Finally, on February 27, the 08:30 ET preliminary reading of Q4 GDP for the US is forecasted to be revised even lower after initial estimates showed the index down 3.5 percent. The latest results may show a sharp 5.4 percent contraction, which would still be the worst since Q1 1982.

Euro Jumps as ECB’s Nowotny Says Zero Rates ‘Neither Desirable Nor Needed’
The euro jumped during the US trading session as European Central Bank Governing Council member Ewald Nowotny said that cutting interest rates down to zero was “neither desirable nor needed,” suggesting that the ECB’s dovish bias may be fading quickly. However, the markets are still expecting a 50 basis point cut by the ECB on March 5, as various other ECB members have signaled such a move in recent weeks. Furthermore, data continues to disappoint as the composite Purchasing Managers' Index (PMI) for the Euro-zone's manufacturing and services sectors unexpectedly fell to a new record low in February or 36.2 from 38.3, which also signals a contraction in activity for the ninth straight month since the index remains below 50. Looking ahead to next week, Eurostat inflation estimates for the Euro-zone have shown that CPI may have fallen to a 1.1 percent annual pace during January, which would mark the lowest since 1999 but more importantly, remains below the European Central Bank’s 2.0 percent inflation target. If Eurostat confirms this at 5:00 ET on February 27, the euro could pull back, especially ahead of the ECB's meeting the following week. On the other hand, if CPI is higher than anticipated, the currency could gain as the markets will speculate that the central bank may pause in their efforts to make monetary policy more accommodative.

British Pound Gains as UK Retail Sales Rise, UK GDP Revision Could Weigh Next Week
The British pound gained on Friday after UK retail sales figures showed another rise in spending during the month of January amidst heavy discounting. However, the BOE said a few months ago that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales. Next week on February 25, the 04:30 ET preliminary reading of Q4 GDP for the UK is forecasted to revised even lower, down to -1.6 percent from -1.5 percent, which would still mark the lowest level since Q2 1980. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds the Bank of England will cut rates again on March 5. On the other hand, if GDP is a bit better than forecasts, the currency could gain.

Canadian Dollar Shows Little Reaction to Bigger Than Expected Drop in Canadian CPI
The Canadian dollar showed a relatively muted reaction to inflation figures, despite the fact CPI fell more than expected, as sharp declines in the US dollar across the majors determined price action for the USD/CAD pair. Taking a closer look at the data, CPI slumped for the fourth straight month in January at a rate of 0.3 percent, bringing the annual rate down to match the two-year low of 1.1 percent. Meanwhile, the Bank of Canada’s core measure slipped another 0.4 percent, dragging the annual rate down to 1.9 percent from 2.4 percent. Overall, weaker commodity prices are dragging broader prices lower, but as we discussed yesterday, cheaper oil has extremely negative repercussions for the Canadian economy as a whole.

Published on  Mon, Feb 23 2009, 05:39 GMT

Canadian Dollar Mostly Lower Ahead of Canadian CPI

Fri, Feb 20 2009, 06:23 GMT
by Terri Belkas

DailyFX

- US Dollar, Japanese Yen Fall Back to Key Levels on European-Led Jump in Risk Appetite - US CPI on Friday

- Euro Surges on Hopes EU Will Coordinate Efforts to Bail Out Member Nations, Eastern European Banks

- British Pound Retraces Bulk of Gains as Risk Appetite Wanes - UK Retail Sales on Friday

- Canadian Dollar Mostly Lower Ahead of Canadian CPI

US Dollar, Japanese Yen Fall Back to Key Levels on European-Led Jump in Risk Appetite - US CPI on Friday
The US dollar and Japanese yen ended the day mostly lower on Thursday after sharp declines during the European trading session, but it was clear that risk appetite in the forex markets was on edge during US trading as US economic data r was broadly disappointing, with one "better than expected" indicator proving to actually be somewhat deceptive. Indeed, after pairs like EUR/USD, EUR/JPY, and GBP/USD ran into key resistance around 9:00 ET and 10:00 ET, the JPY crosses simply consolidated while the USD crosses pulled back.

In economic news, the US producer price index jumped by the most in 6 months during the month of January at a rate of 0.8 percent due primarily to an increase in consumer good costs, including women’s apparel, residential electricity, gasoline, prescriptions, passenger cars, and tobacco goods. However, the cost of crude and intermediate goods actually fell in January, at rates of -2.9 percent and -0.7 percent, respectively. This suggests that producers aren’t necessarily passing these lower costs on, and may also indicate that Friday’s release of the US Consumer Price Index (CPI) could be a bit stronger than anticipated. On the labor front (see chart), US initial jobless claims for the week ending February 14 held steady at 627,000 while continuing jobless claims for the week ending February 7 surged to a fresh record high of 4,987,000, signaling that the deterioration in the labor markets is sure to continue in line with the Federal Reserve’s forecasts that the unemployment rate may rise as high as 8.8 percent this year, if not higher. In the meantime, the Philadelphia Fed’s manufacturing activity index tumbled to -41.3 for the month of February, marking the lowest since October 1990. The decline is in line with the drop in the New York Fed’s “Empire” manufacturing index, which also reflected contracting prices, falling new orders, and hefty job losses. Finally, the Conference Board’s leading economic indicator index rose for the second straight month by 0.4 percent in January to 99.5. This was much better than forecasted, but in reality there were few high points in this actual report since the bulk of the gain was due to a 0.54 percent rise in M2 money supply, which has only ballooned over the past 5 months because of the Federal Reserve’s efforts to boost liquidity. Indeed, most other components were disappointing, including the average workweek, jobless claims, building permits, and stock prices.

Looking ahead to Friday at 8:30 ET, the release of the January reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months. Indeed, CPI is forecasted to have edged a slight 0.3 percent higher during January, while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent. Excluding volatile food and energy prices, though, core CPI may have risen 0.3 percent during the month, leaving the annual rate to fall to a nearly 5-year low of 1.5 percent. At the same time, we have to consider the risk that CPI will be stronger than expected. As mentioned above, there is evidence that producers aren’t passing on lower input costs to consumers, and this could translate into a strong enough month-over-month gain to keep the annual rate in positive territory.

Euro Surges on Hopes EU Will Coordinate Efforts to Bail Out Member Nations, Eastern European Banks
The euro surged higher on Thursday to test former support at 1.2725 amidst news that the Euro-zone’s largest economy, Germany, would step up to the plate and help another member nation if they fell into a dire financial situation. During a press conference, German Finance Minister Peer Steinbrueck was asked if the country would risk seeing the Euro-zone break up rather than assist one of its 16 member-states if they were not able refinance its debt. In response, Steinbrueck said, “Could you imagine anyone would be willing to put up with this? We would have to take action.” Meanwhile, ten international banks, including Commerzbank and Unicredit, pledged $2 billion and seven Ukrainian-controlled banks pledged $1 billion in order to recapitalize their subsidiaries in Ukraine as eastern European banks face ratings downgrades and financing difficulties. Overall, these signs that various governments and financial institutions are willing to coordinate their efforts for the greater good, but ultimately, indications of distress in the financial sector will still have very negative repercussions for risk appetite. Looking ahead to Friday morning, Markit Economics is expected to report that the composite Purchasing Managers' Index (PMI) for the Euro-zone's manufacturing and services sectors edged up to 38.5 in February from 38.3. However, since the index may hold below 50 - signaling a contraction in activity - for the ninth straight month in February, it should remain clear that the recession is still deepening. This doesn't tend to be the most market-moving report for the euro, though extremely disappointing figures could exacerbate any weakness in the currency.

British Pound Retraces Bulk of Gains as Risk Appetite Wanes - UK Retail Sales on Friday
The British pound rallied with the euro during the European trading session, but subsequently retraced most of the gains during the US trading session as investor sentiment deteriorate. UK economic news was disappointing, as the UK’s budget surplus was the smallest during January in 14 years at 3.3 billion pounds. Indeed, the January surplus is typically very high as the government collects more than 10 percent of its annual tax revenue that month, and these low results suggest that budget deficits will spiral higher amidst job losses and continued declines in home values. Looking ahead to Friday, UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

Canadian Dollar Mostly Lower Ahead of Canadian CPI
The resilience of Canada’s economy has nosedived with oil prices, as the commodity served as the lifeblood of growth for the nation, boosting its trade surplus and providing thousands upon thousands of jobs. However, the combination of lower oil prices and the US recession has led Canada's trade balance to plunge into a deficit for the first time since 1976, according to December’s data. As a result, the Canadian government announced a C$39 billion stimulus plan last month, but from a monetary policy perspective there isn’t much more that the Bank of Canada (BoC) can do as they’ve already slashed rates to a record low of 1.00 percent. Nevertheless, the BoC has left the door open to further reductions, which makes Friday’s inflation numbers important for the country’s interest rate outlook and the Canadian dollar. At 7:00 ET, CPI for January is anticipated to contract for the fourth straight month at a rate of 0.3 percent while the annualized pace is forecasted to slip to a 2-year low of 1.1 percent. Meanwhile, the BoC’s core CPI measure may actually hold relatively high at 2.2 percent, though this would be down from a 1.5 year high of 2.4 percent. Given the sharp drop in commodity prices since the summer and slowing in the Canadian economy, there is potential for weaker-than-expected readings and thus, the Canadian dollar could pull back further. On the flip side, stronger than expected results could lead to increased speculation that the BoC is done cutting rates and subsequently drive the currency higher.

Economic Data

Support And Resistance Levels

Published on  Fri, Feb 20 2009, 06:23 GMT

Japanese Yen Down as Carry Trade Gain, Threat of Risk Aversion Lingers Ahead of BOJ Rate Decision

Thu, Feb 19 2009, 06:34 GMT
by Terri Belkas

DailyFX

-US Dollar Mixed as Obama Announces Housing Program, Fed Releases Bleak Economic Outlook

- Euro Consolidates Losses, British Pound Remains Range Bound Despite BOE Minutes Signaling BOE Buying of Gilts

- Japanese Yen Down as Carry Trade Gain, Threat of Risk Aversion Lingers Ahead of BOJ Rate Decision

US Dollar Mixed as Obama Announces Housing Program, Fed Releases Bleak Economic Outlook
The US dollar saw a mixed day of trading on Wednesday, gaining against the euro, Swiss franc, and Japanese yen while falling versus the commodity bloc. Based on broad losses for the Japanese yen, the moves signaled slight improvements in risk appetite.
There was a flurry of economic releases, as well as news from President Obama and the Federal Reserve. First, US housing starts and building permits both fell by more than 50 percent in January from a year earlier to their lower levels ever, with record keeping having begun in 1955. At the same time, import prices fell negative for the sixth straight month in January while the annual rate hit a fresh record low of -12.5 percent, thanks to a stronger US dollar and lower commodity costs. Additionally, industrial production contracted for the third straight month at a rate of 1.8 percent while capacity utilization hit a nearly 26-year low of 72 percent, as manufacturers slashed output on the back of waning demand.

Meanwhile, President Obama announced a $275 billion program that will move to cut mortgage payments by matching reductions lenders make to interest payments to 31 percent of the borrower’s monthly income. The Treasury will also buy up to $200 billion of preferred stock in Fannie Mae and Freddie Mac, and detailed guidelines are due to be released on March 4. Finally, the Federal Open Market Committee's (FOMC) meeting minutes from January yielded few surprises, but in an effort to be more transparent, the central bank started to issue longer-term forecasts for growth, unemployment, and inflation. FOMC members apparently discussed on January 16 the prospect of creating an inflation target, and while they did not make a decision, today's press release shows that many FOMC members "judged that a longer-run PCE inflation rate of 2 percent would be consistent with the dual mandate," which is in line with the inflation targets of other central banks, such as the Bank of England and European Central Bank. Another notable factor was that “some FOMC members saw some risk for deflation,” which is a timely comment because Friday's release of US CPI is forecasted to fall negative for the first time since 1955.

Looking ahead to Thursday, signs of deflation may continue to emerge at 8:30 ET as the US Producer Price Index (PPI) is forecasted to rise a slight 0.3 percent in January, while the annual rate may tumble to a nearly 7-year low of -2.4 percent. Meanwhile, the measure that excludes volatile food and energy costs could slow to an annual pace of 3.8 percent from 4.3 percent. Overall, the news would suggest that input costs are falling dramatically with declining commodity prices, which should translate into lower consumer prices. At 10:00 ET, the Conference Board’s US leading indicator for the month of January is forecasted to fall flat, after rising 0.3 percent in December. However, any strength in the index may be contained to M2 money supply as a result of the Federal Reserve’s efforts to boost liquidity. As a result, the headline reading may ultimately be deceiving and it will be important to look at the breakdown as well, including the components gauging average workweeks, jobless claims, consumer goods orders, orders for non-defense capital goods, and building permits. At the same time, the Philadelphia Fed index for the month of February could slump to -25.0 from -24.3, but if the report fares as the Empire Fed index, it could break below the November lows of -39.8.
Indeed, the US manufacturing sector has been hit particularly hard by the recession, as both domestic and foreign demand has fallen.

Related Article: US Dollar Weekly Trading Forecast

Euro Consolidates Losses, British Pound Remains Range Bound Despite BOE Minutes Signaling BOE Buying of Gilts
The euro and the British pound both drifted lower for much of the day Wednesday, with EUR/USD consolidating losses after breaking below key support at 1.2725 on Tuesday while GBP/USD remains contained to a tight range of 1.4150 - 1.4300. There were few key European economic releases, though data showed that Euro-zone construction output failed to rise for the tenth straight month during December. However, the British pound faced major event risk on the release of the minutes from the Bank of England’s February meeting, and immediately plunged to the bottom of its latest trading range. The minutes showed that all Monetary Policy Committee (MPC) members voted for a cut, though David Blanchflower dissented in favor of a more aggressive 100 basis point cut (the BOE only cut by 50 basis points to 1.00 percent), but the more notable factor was that all MPC members agreed that BOE Governor Mervyn King should ask Chancellor of the Exchequer Alistair Darling for permission to buy gilts in order to boost money supply. At the same time, the MPC suggested that they may avoid cutting rates to zero since it may discourage lending as bank profit margins would be cut dramatically. By the end of the day, UK gilt yields tumbled amidst prospects for lower interest rates, and with the odds increasing for additional rate cuts by the BOE, there is still potential for GBP/USD to break below noted support at 1.4150.

Related Articles: British Pound Weekly Trading Forecast, Euro Weekly Trading Forecast

Japanese Yen Down as Carry Trade Gain, Threat of Risk Aversion Lingers Ahead of BOJ Rate Decision
As mentioned in the US dollar section, the Japanese yen ended Wednesday broadly lower, signaling at least a slight improvement in sentiment. However, event risk will pick up overnight, leaving the currency prone to volatility. The Bank of Japan is widely expected to leave rates unchanged overnight at 0.10 percent, but subsequent commentary will be watched closely for clues as to where the central bank thinks the economy and financial markets are headed next. As we saw on Sunday, the Japanese economy contracted in Q4 by the most since 1974 as exports fell a record 13.9 percent, and things are only expected to get worse. However, with few options available for dealing with the economy, the Japanese government and BOJ have been trying to grapple with liquidity issues. Currently, the BOJ is buying corporate debt and banking shares in an attempt to get them to lend, while the ruling Liberal Democratic Party proposed issuing zero-interest bonds last week in return in exchange for a cut to future inheritance taxes so that they can fund stimulus measures. Overall, the rate decision shouldn’t be hugely market-moving, though extremely dour forecasts or signs of concerns about the appreciation of the Japanese yen could spur volatility.

Economic Data

Support And Resistance Levels

Published on  Thu, Feb 19 2009, 06:34 GMT

Euro Under Pressure Amidst Eastern European Banking Risks, Signs of Distress

Wed, Feb 18 2009, 05:39 GMT
by Terri Belkas

DailyFX

- British Pound Holds Up as UK CPI Remains Well Above 2% Target, BOE Minutes Could Impact Trade on Wednesday

US Dollar, Japanese Yen Up as Financial Concerns Spark Sell-Offs in Risky Assets Around the World
The US dollar and Japanese yen maintained their strength against the majors, with the exception of the British pound, as Moody’s ratings agency warned that the eastern European banking system was increasingly vulnerable to a “steep and long economic downturn,” and that western European banks with locations in eastern Europe may face ratings downgrades. The decline in risky assets, like equities, was not helped by President Obama’s signing of the $787 billion stimulus package at the end of the day, as details for the reformed version of the Troubled Asset Relief Program (TARP) have yet to be revealed. In US economic news, the New York Fed’s “Empire” index plummeted to a new record low of -34.65 in February from -22.2, adding to indications that the manufacturing sector is suffering at the hands of weakening demand both domestically and abroad. The breakdown of the report followed similar trends to what we’ve seen over the past 6 months: declining prices, persistent contractions in new orders, and signs of additional layoffs. Meanwhile, net long-term TIC flows for the month of December rose a greater than expected $34.8 billion, up from -$25.6 billion in November, as foreign investors increased purchases of equities, notes, and bonds. A closer look also shows that net foreign purchases of Treasury notes and bonds were $14.9 billion, compared with sales of $25.8 billion a month earlier, while net Treasury bill purchases were at $25.3 billion in December, down from $82.1 billion in November. Despite dismal US trade and fiscal deficits, demand for “safe haven” Treasuries are far from falling off a cliff. However, as we’ve been discussing in the DailyFX Forums, there are long-run risks for the US dollar if foreign demand ultimately takes a hit.

Looking ahead to Wednesday, the concurrent releases of the US import price index, housing starts, and building permits at 8:30 ET could stoke volatility in the forex markets. First, import prices are forecasted to have fallen for the sixth straight month at a rate of -1.3 percent, while the annual rate may hit a fresh record low of -11.2 percent, as the stronger US dollar as well as lower commodity prices contributes to sharp declines in the price of foreign goods shipped to the US. Meanwhile, US housing starts and building permits are forecasted to have dropped to new record lows in January of 530K and 525K, respectively. While much of this news has already been priced into the markets, the combination of signs of deflation and indications that the end of the housing collapse isn’t in sight could weigh on risk appetite during the start of the US trading session.

Finally, the 14:00 ET release of the minutes from the January Federal Open Market Committee (FOMC) meeting, when they left the fed funds target range at 0.0 percent - 0.25 percent, are likely add to indications that they will leave the target unchanged throughout much of 2009. In fact, the FOMC said in their post-meeting statement that their focus had shifted to “support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” The minutes may have an impact on risk trends if the Committee’s outlook proves to be more bearish than currently perceived. However, if the news happens to be positive for the stock markets, it may also be negative for the greenback, which has been trading solely as a safe-haven asset lately.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound Holds Up as UK CPI Remains Well Above 2% Target, BOE Minutes Could Impact Trade on Wednesday
The British pound was actually one of the stronger currencies in the forex markets on Tuesday, slipping only against the greenback, as the latest inflation data suggests that the Bank of England may be hesitant to slash rates to zero in the near-term. Though UK CPI fell 0.7 percent in January, the annualized pace remained well above the BOE’s 2 percent target at 3.0 percent, down from 3.1 percent in December. The BOE has indicated that they expect inflation to fall much further this year, but the direction of interest rate expectations for the UK may hinge upon the release of the BOE’s meeting minutes on Wednesday at 4:30 ET. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected. However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back.

Related Article: British Pound Weekly Trading Forecast

Euro Under Pressure Amidst Eastern European Banking Risks, Signs of Distress
The EUR/USD pair broke below key support at 1.2700 on Tuesday morning, suggesting the pair could target the 2008 lows of 1.2329 as signs of distress in the Euro-zone continue to emerge. First, Moody’s rating agency warned that the eastern European banking system was increasingly vulnerable to a “steep and long economic downturn,” and that western European banks with locations in eastern Europe may face ratings downgrades. According to a report in the Financial Times, “Euro-zone banks have the largest exposure to central and eastern Europe, with liabilities of $1,500 billion,” which works out to be “about 90 percent of total foreign bank exposure to the region.” Next, German Finance Minister Peer Steinbrueck said on Monday evening that European countries may have financially assist EU member nations, but with no firm structure in place, it may prove to be an arduous task to construct a feasible bailout plan. Indeed, there are concerns that European banks have yet to announce massive writedowns, which leaves systemic risks lingering for the world’s financial markets. Until everything is out in the open and toxic assets are removed from the books for financial institutions, risk aversion is likely to remain a persistent issue.

Related Article: Euro Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Feb 18 2009, 05:39 GMT

US Dollar Down as Consumer Confidence Nears 28−Year Lows

Tue, Feb 17 2009, 05:40 GMT
by Terri Belkas

DailyFX

- Euro Ends Day Lower as Euro-zone GDP Falls by Most Since at Least 1995

- Japanese Yen: Watch for Reactions to G7 Statements, Dismal Japanese GDP Results

US Dollar Down as Consumer Confidence Nears 28-Year Lows
After a conspicuously choppy session, the US dollar would finish the week with a modest buffer from major breakout levels (the exception being USDJPY). The University of Michigan's consumer confidence index fell more than expected in February to 56.2 from 61.2, nearing the 28-year lows, as expectations for the future of the economy remain dour. However, the component of the index gauging sentiment on current conditions rose to 67.1 from 66.5, suggesting that aggressive discounting by retailers and hopes for a successful fiscal stimulus plan are having a temporary impact. Indeed, as we saw on Thursday, US retail sales surprisingly rose 1 percent in January, but with the index still down 9 percent from a year earlier and job losses climbing, the increase marks little more than a blip on the radar. In the very near-term, the US dollar

Looking ahead to next week, the February 18 release of minutes from the January Federal Open Market Committee (FOMC) meeting, when they left the fed funds target range at 0.0 percent - 0.25 percent, are likely add to indications that they will leave the target unchanged throughout much of 2009. In fact, the FOMC said in their post-meeting statement that their focus had shifted to “support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” The minutes may have an impact on risk trends if the Committee’s outlook proves to be more bearish than currently perceived. However, if the news happens to be positive for the stock markets, it may also be negative for the greenback, which has been trading solely as a safe-haven asset lately. On February 20 at 8:30 ET, the release of the January reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months. Indeed, CPI is forecasted to have edged a slight 0.1 percent higher during January, while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent.

Euro Ends Day Lower as Euro-zone GDP Falls by Most Since at Least 1995
The advanced reading of Q4 GDP for the Euro-zone showed that growth in the economy contraction for the third consecutive quarter and by the most since record keeping began in 1995 at a rate of -1.5 percent. Likewise, the annual measure fell negative for the first time ever at a rate of -1.2 percent. While European Central Bank President Jean-Claude Trichet essentially wrote off the possibility of cutting rates to zero in comments following the bank’s February meeting, noting that such a level was "not appropriate" as there are a number of drawbacks, the GDP news only raises the odds that the ECB will cut rates during their next meeting on March 5. Indeed, Mr. Trichet refused to say the ECB would not reduce rates further, while a variety of ECB members have said that further cuts were “very probable.” Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that the latest price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

British Pound Down Ahead of UK CPI, BOE Minutes Next Week
Looking ahead to next week, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England’s target range of 1 percent - 3 percent.
However, with the BOE expecting that CPI could fall “well below” 2 percent in the first half of the year, such a decline may only be the first in a series. Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected.
However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back. Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

Japanese Yen: Watch for Reactions to G7 Statements, Dismal Japanese GDP Results
The Japanese yen outlook remains contingent upon risk trends, and keeping this in mind, traders should watch out for the forex market’s reaction to both the G7 statement, Japanese GDP results, and word on final votes on the US fiscal stimulus place. The G7 statement has potential to include hawkish comments on currencies like the Japanese yen, which could help drive it lower on speculation that the government will physically intervene, but it is worth noting that previous G7 meetings have yielded little in the way of market-moving news.

Meanwhile, on Sunday at 18:50 ET, Japan's Cabinet Office will release preliminary growth readings, and after two consecutive quarters of contraction in Q2 and Q3, the outlook doesn't look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has been climbing slowly, and perhaps even worse, pre-tax earnings growth has actually fallen negative compared to a year earlier, according to the latest figures. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 23.1 percent in Q4 2008, according to preliminary figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 3.1 percent in Q4, with the annualized rate forecasted to plummet by the most since 1974 at a rate of 11.7 percent. This could hurt risk appetite during the Asian trading session, lead the Nikkei lower, and thus push the Japanese yen higher amidst deleveraging.

Finally, there’s the status of the US fiscal stimulus plan. At the time of writing, the plan seemed likely to pass final votes by the House and Senate by either the end of Friday or the weekend, which would allow President Obama to sign the bill into law on Monday. To a certain degree, the passage of the bill may be priced into the markets, but if for some reason one of the bodies of Congress votes the bill down, the news could hurt investor confidence significantly.

Economic Data

Support And Resistance Levels

Published on  Tue, Feb 17 2009, 05:40 GMT

US Dollar Down as Consumer Confidence Nears 28−Year Lows

Mon, Feb 16 2009, 05:46 GMT
by Terri Belkas

DailyFX

- Euro Ends Day Lower as Euro-zone GDP Falls by Most Since at Least 1995

- Japanese Yen: Watch for Reactions to G7 Statements, Dismal Japanese GDP Results

US Dollar Down as Consumer Confidence Nears 28-Year Lows
After a conspicuously choppy session, the US dollar would finish the week with a modest buffer from major breakout levels (the exception being USDJPY). The University of Michigan's consumer confidence index fell more than expected in February to 56.2 from 61.2, nearing the 28-year lows, as expectations for the future of the economy remain dour. However, the component of the index gauging sentiment on current conditions rose to 67.1 from 66.5, suggesting that aggressive discounting by retailers and hopes for a successful fiscal stimulus plan are having a temporary impact. Indeed, as we saw on Thursday, US retail sales surprisingly rose 1 percent in January, but with the index still down 9 percent from a year earlier and job losses climbing, the increase marks little more than a blip on the radar. In the very near-term, the US dollar

Looking ahead to next week, the February 18 release of minutes from the January Federal Open Market Committee (FOMC) meeting, when they left the fed funds target range at 0.0 percent - 0.25 percent, are likely add to indications that they will leave the target unchanged throughout much of 2009. In fact, the FOMC said in their post-meeting statement that their focus had shifted to “support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level.” The minutes may have an impact on risk trends if the Committee’s outlook proves to be more bearish than currently perceived. However, if the news happens to be positive for the stock markets, it may also be negative for the greenback, which has been trading solely as a safe-haven asset lately. On February 20 at 8:30 ET, the release of the January reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months. Indeed, CPI is forecasted to have edged a slight 0.1 percent higher during January, while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.1 percent.

Euro Ends Day Lower as Euro-zone GDP Falls by Most Since at Least 1995
The advanced reading of Q4 GDP for the Euro-zone showed that growth in the economy contraction for the third consecutive quarter and by the most since record keeping began in 1995 at a rate of -1.5 percent. Likewise, the annual measure fell negative for the first time ever at a rate of -1.2 percent. While European Central Bank President Jean-Claude Trichet essentially wrote off the possibility of cutting rates to zero in comments following the bank’s February meeting, noting that such a level was "not appropriate" as there are a number of drawbacks, the GDP news only raises the odds that the ECB will cut rates during their next meeting on March 5. Indeed, Mr. Trichet refused to say the ECB would not reduce rates further, while a variety of ECB members have said that further cuts were “very probable.” Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that the latest price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

British Pound Down Ahead of UK CPI, BOE Minutes Next Week
Looking ahead to next week, the release of UK CPI could weigh on the British pound as the annual rate of growth is anticipated to slow to 2.6 percent from 3.1 percent, putting inflation back within the Bank of England’s target range of 1 percent - 3 percent.
However, with the BOE expecting that CPI could fall “well below” 2 percent in the first half of the year, such a decline may only be the first in a series. Meanwhile, the Bank of England’s meeting minutes tend to be a huge market-mover for the British pound upon release at 4:30 ET, and the February 18 report is unlikely to be any different. During the February meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to yet another record low of 1.00 percent, as expected.
However, the British pound subsequently rallied as the MPC suggested that they may not cut rates again on March 5. Since then, though, BOE Governor Mervyn King’s comments have signaled otherwise and if the MPC’s comments and outlooks signal that the central bank will reduce the Bank Rate further, the British pound could pull back. Finally, Friday’s UK retail sales figures are forecasted to show another rise in spending during the month of January, and while this could initiate a reaction from the British pound - especially if the reading is significantly higher or lower than estimates - traders shouldn’t read too much into the actual figure. A few months ago, the BOE said that they would not put too much stock into these government statistics as they are often volatile, and instead they look toward private surveys like BRC retail sales.

Japanese Yen: Watch for Reactions to G7 Statements, Dismal Japanese GDP Results
The Japanese yen outlook remains contingent upon risk trends, and keeping this in mind, traders should watch out for the forex market’s reaction to both the G7 statement, Japanese GDP results, and word on final votes on the US fiscal stimulus place. The G7 statement has potential to include hawkish comments on currencies like the Japanese yen, which could help drive it lower on speculation that the government will physically intervene, but it is worth noting that previous G7 meetings have yielded little in the way of market-moving news.

Meanwhile, on Sunday at 18:50 ET, Japan's Cabinet Office will release preliminary growth readings, and after two consecutive quarters of contraction in Q2 and Q3, the outlook doesn't look good. There are signs that businesses are suffering considerably at the hands of waning domestic and foreign demand. Consumers have very little to work with these days, as the jobless rate has been climbing slowly, and perhaps even worse, pre-tax earnings growth has actually fallen negative compared to a year earlier, according to the latest figures. Meanwhile, Japanese exporters have had to grapple with not only slowing global growth, but also the appreciation of the Japanese yen, all of which has led foreign-bound shipments to tumble a whopping 23.1 percent in Q4 2008, according to preliminary figures published by the Ministry of Finance. As a result, a Bloomberg News poll of economists shows expectations for GDP to fall 3.1 percent in Q4, with the annualized rate forecasted to plummet by the most since 1974 at a rate of 11.7 percent. This could hurt risk appetite during the Asian trading session, lead the Nikkei lower, and thus push the Japanese yen higher amidst deleveraging.

Finally, there’s the status of the US fiscal stimulus plan. At the time of writing, the plan seemed likely to pass final votes by the House and Senate by either the end of Friday or the weekend, which would allow President Obama to sign the bill into law on Monday. To a certain degree, the passage of the bill may be priced into the markets, but if for some reason one of the bodies of Congress votes the bill down, the news could hurt investor confidence significantly.

Economic Data

Support And Resistance Levels

Published on  Mon, Feb 16 2009, 05:46 GMT

British Pound Remains Under Pressure as Markets Bet on BOE Rate Cuts

Fri, Feb 13 2009, 05:47 GMT
by Terri Belkas

DailyFX

- Euro to See Increased Volatility on Friday as Euro-zone Q4 GDP May Fall by Most on Record

US Dollar Stronger, Japanese Yen Mixed Ahead of Final Fiscal Stimulus Vote, G7 Meeting Feb 13-14
The US dollar surged across the majors, while the Japanese yen ended the day mixed as equities plunged throughout the day but staged a last minute rebound on reports that the US government would assist homeowners struggling with mortgages. The only thing clear right now is that there is serious indecision amongst market participants, and perhaps the biggest question mark in regards to investor sentiment is what will happens with the US fiscal stimulus bill, as the House and Senate could bring a final vote before the end of the week, which has potential to provide a big boost to risky assets and subsequently weigh on the US dollar and Japanese yen.

Data-wise, the picture looked mixed for the US on Thursday. Advance Retail Sales unexpectedly rose for the first time in seven months during January at a rate of 1.0 percent, and excluding autos, rose 0.9 percent. A breakdown shows increased spending on vehicles, electronics, food and beverages, gasoline stations, clothing stores, and internet retailers. The data suggests that aggressive discounting by retailers has helped to boost consumption, but it's also worth noting that retail sales remain down 9.0 percent from a year earlier as consumers cut back on their use of credit and the labor markets contract by the most since 1971. On the flip side, initial jobless claims for the week ending February 7 fell slightly to 623,000 from 631,000, but this is still near the highest since 1982. Likewise, continuing jobless claims for the week ending January 31 hit a fresh record high of 4,810,000 from 4,799,000, and on the housing front, the National Association of Realtors (NAR) said that median home prices fell a record 12 percent in Q4 from a year earlier.

Looking ahead, the University of Michigan’s consumer confidence survey for the month of February is forecasted to reflect the worst sentiment since 1980, as the index could dip to 60.2 from 61.2 in January. However, based on the latest release of US retail sales, there is potential for a bit of an improvement. If this is the case, the rise in the index could boost risk appetite, at least temporarily. Nevertheless, the greater risk for the forex markets rests in the hands of the status of the US fiscal stimulus. Another event to watch is the G7 meeting, which starts on Friday and goes on through Saturday, as they will reportedly discuss currencies. Hawkish comments about the Japanese yen could help drive the currency lower on speculation that the government will physically intervene, but it is worth noting that previous G7 meetings have yielded little in the way of market-moving news.

Related Article: Top 5 Market Movers for the Week of 2/9/09

Euro to See Increased Volatility on Friday as Euro-zone Q4 GDP May Fall by Most on Record
The euro saw very choppy price action on Thursday, ending the day down against the US dollar but up against the rest of the majors, including the Japanese yen and British pound. Things could take a more broadly bearish turn for the currency on Friday though, as Euro-zone GDP will be released. In 2008, the release of Euro-zone CPI drew significant attention and sparked major volatility for the euro. However, indicators of growth have now become more important, as the European Central Bank has shifted its focus away from inflation and on to the global and regional economic slowdown. The advanced reading of Q4 GDP is forecasted to slump 1.3 percent from the previous quarter, marking the third consecutive period of contraction and the worst drop since record keeping began in 1995. Likewise, the annual measure is anticipated to fall negative for the first time ever. Such data would only raise the odds that the ECB will move to cut rates at their next meeting on March 5, which could trigger steep losses for the euro. On the other hand, better-than-expected results could provide a solid boost for the currency.

Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that Tuesday’s price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

British Pound Remains Under Pressure as Markets Bet on BOE Rate Cuts
The British pound remained under pressure, along with other risky assets, following Wednesday’s news that Bank of England Governor Mervyn King said that the UK economy was in for a “deep recession” during opening remarks for his inflation report press conference regarding the UK economy. King was highly dovish, saying that "further easing in monetary policy may well be required.” Indeed, forecasts in the BOE’s Quarterly Inflation Report were based on market expectations for a drop in the Bank Rate to 0.75 percent by mid-year, with GDP projections showing growth remaining negative throughout 2009 followed by a rebound in 2010, while CPI is anticipated to fall well below the BOE's 2 percent target in the first half of 2009, though the outlook beyond that appears uncertain. However, the BOE’s dour outlook has led expectations to shift for the Monetary Policy Committee’s next rate decision on March 5, as some anticipate that they could slash rates to zero and signal a move to quantitative easing. There are no economic indicators for the UK due to be released through the end of the week, but traders should see continued volatility in GBP/USD, especially since the pair has been trading in line with risky assets like equities.

Economic Data

Support And Resistance Levels

Published on  Fri, Feb 13 2009, 05:47 GMT

Australian Dollar Could Slip Overnight as Unemployment Rate May Hit 2+ Year High

Thu, Feb 12 2009, 05:39 GMT
by Terri Belkas

DailyFX

- British Pound Drops as BOE’s King Signals Further Rate Cuts, UK Jobless Claims Hit Nearly 10-Year High

- Euro Continues Consolidation Despite ECB Comments Noting ‘Very Probable’ Rate Cut in March

US Dollar, Japanese Yen End Mixed as House and Senate Agree on Fiscal Stimulus, Ahead of US Retail Sales
The US dollar and Japanese yen ended the day mixed versus the majors as equities traded within narrow ranges, signaling indecision in the markets. Nevertheless, both the DJIA and S&P 500 finished the day mildly higher, suggesting risk appetite may be able to pick up in the near-term. Perhaps the biggest question mark in regards to investor sentiment, though, is what happens with the US fiscal stimulus bill. The House and the Senate have come to agreement on respective difference in the bill, bringing the total cost down to $789.5 billion over two years from $930 billion last week. A final vote could come before the end of the week, and has potential to provide a big boost to risky assets and subsequently weigh on the US dollar and Japanese yen.

Meanwhile, Federal Reserve Governor Elizabeth Duke's speech this morning focused on the housing crisis and cited methods by which to address the problem. Duke noted that foreclosures extend beyond home owned by individuals who reside there, as "one in five foreclosures appears to be affecting renter-occupied units," suggesting that foreclosures are becoming increasingly difficult to prepare for and manage. As a result, there is a great need to tackle foreclosures before they start, including modifying more loans of distressed borrowers. Duke cited a need to act soon, because lingering uncertainty on the "scope and terms of the additional steps that likely will be offered" tends to result in hold-outs by borrowers, lenders, and servicers "in hope of securing a better deal." This leaves potential open for benefits of foreclosure prevention efforts to be outweighed by the "cost of delay." A comprehensive plan may not be introduced until next month, as Treasury Secretary Tim Geithner said yesterday that President Obama's economic team will be formulating and announcing one "within the next few weeks."

Looking ahead to Thursday, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh straight month in January, as even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. More specifically, advance retail sales are anticipated to have contracted 0.8 percent during the month, and excluding auto sales are expected to have slumped 0.4 percent, initiating what may end up being a consistent trend through the first half of 2009 as well. As we saw with US non-farm payrolls, the impact of a disappointing result may be limited, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further

Related Article: Top 5 Market Movers for the Week of 2/9/09

British Pound Drops as BOE’s King Signals Further Rate Cuts, UK Jobless Claims Hit Nearly 10-Year High
The British pound tumbled on Wednesday as UK jobless claims rose for the twelfth straight month in January to a nearly 10-year high of 1.23 million, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time. Even worse, Bank of England Governor Mervyn King said that the UK economy was in for a “deep recession” during opening remarks for his inflation report press conference regarding the UK economy. King was highly dovish, saying that "further easing in monetary policy may well be required.” Indeed, forecasts in the BOE’s Quarterly Inflation Report were based on market expectations for a drop in the Bank Rate to 0.75 percent by mid-year, with GDP projections showing growth remaining negative throughout 2009 followed by a rebound in 2010, while CPI is anticipated to fall well below the BOE's 2 percent target in the first half of 2009, though the outlook beyond that appears uncertain. However, the BOE’s dour outlook has led expectations to shift for the Monetary Policy Committee’s next rate decision on March 5, as some anticipate that they could slash rates to zero and signal a move to quantitative easing. There are no economic indicators for the UK due to be released through the end of the week, but traders should see continued volatility in GBP/USD, especially since the pair has been trading in line with risky assets like equities.

Euro Continues Consolidation Despite ECB Comments Noting ‘Very Probable’ Rate Cut in March
There was little in the way of key economic data released form the Euro-zone, but comments from multiple European Central Bank members indicating that they will likely cut rates on March 5 helped to weigh on the euro. Indeed, ECB Governing Council member Miguel Angel Fernandez Ordonez said that it was "very probable" that they would reduce rates next month, and these sentiments were echoed by Executive Board member Jose Manuel Gonzalez Paramo and Governing Council member Guy Quaden. Following these statements, Credit Suisse overnight index swaps shifted closer to pricing in a 50 basis point cut to 1.50 percent. Looking ahead to Thursday, the ECB’s Monthly Bulletin can be market-moving in that it provides deeper insight into what the central bank’s monetary policy committee is looking at from an economic and financial market perspective. However, ECB President Jean-Claude Trichet has already stated that they would be issuing new forecasts for growth and inflation in March, suggesting there won’t be much news of importance coming from this report. Nevertheless, traders should keep this report in mind if they are holding euro positions on Thursday morning, as any portions of the report that impact interest rate expectations should shake up the currency. Ultimately, though, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that Tuesday’s price action reflected high volatility. This leaves breakout potential open, so it will be important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

Australian Dollar Could Slip Overnight as Unemployment Rate May Hit 2+ Year High
The Australian dollar faces bearish potential overnight, as data may show that the labor market deterioration that started during the second half of 2008 will extend through 2009. Indeed, the January unemployment rate is forecasted to rise to a more than two-year high of 4.7 percent from 4.5 percent, while the net employment change is anticipated to fall for the third straight month by 18,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 19:30 EDT.

Economic Data 

Support And Resistance Levels

Published on  Thu, Feb 12 2009, 05:39 GMT

British Pound Tumbles Ahead of Bank of England's Quarterly Inflation Report

Wed, Feb 11 2009, 05:44 GMT
by Terri Belkas

DailyFX

- Euro Slides But Holds Within Defined Trading Ranges as EU Signals Coordinated Plans for Banks

US Dollar, Japanese Yen Surge as Geithner’s Lack of Clear Policy Actions Stoke Risk Aversion
The US dollar and Japanese yen rocketed higher on Tuesday due to a jump in risk aversion, a threat that has continued to linger in the markets for months. The driver? Comments by Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke failed to suggest that a quick fix for the woes in the credit market was in the works. The reality of the situation is that there is no silver bullet to reverse the damage done to the financial markets, and instead, it will take a significant amount of time to even begin to see a semblance of true stability. Indeed, Mr. Geithner's speech provided more of a broad outline for policy actions, rather than clear cut plans.

The first goal was to enact regulations in which banking institutions would have to go through comprehensive stress tests and would subsequently receive capital if needed with a facility that uses funds from the Treasury as a “bridge to private capital.” The second goal was to establish a Public-Private Investment Fund, which would target toxic assets and provide a mechanism for valuing them. The third goal was to expand the Federal Reserve’s Term Asset Backed Securities Loan Facility (TALF) in order to create the Consumer and Business Lending Initiative, which should lower borrowing costs and improve access to small business lending, student loans, consumer and auto finance, and commercial mortgages. Finally, Mr. Geithner said that President Obama’s economic team will formulate and announce a comprehensive plan to address the housing crisis over the next few weeks. Meanwhile, Mr. Bernanke's speech focused primarily on the Federal Reserve’s efforts to improve transparency of their various lending facilities, but there was little in the way of new information announced.

Looking ahead, a series of speeches and testimony are scheduled for Wednesday starting with Federal Open Market Committee (FOMC) Governor Elizabeth Duke at 9:50 ET, who will speak in New York on stabilizing the housing market. At 10:00 ET, Treasury Secretary Timothy Geithner will testify on TARP in front of the Senate Budget Panel. At 13:00 ET, Chicago Fed President Charles Evans will speak on the US economic outlook. For the most part, comments by these individuals should be innocuous for price action in the forex markets. However, any sort of biased commentary or extreme opinions on the outlook for the economy has the potential to impact risk sentiment and thus forex carry trades, with improved risk appetite likely to weigh on the US dollar and Japanese yen while benefiting high-yielding currencies like the Australian dollar and New Zealand dollar.

Related Article: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound Tumbles Ahead of Bank of England’s Quarterly Inflation Report
The British pound fell hard on Tuesday, as did all “risky” assets, following the market’s disappointment in speeches by Treasury Secertary Geithner and Federal Reserve Chairman Ben Bernanke spurred flight to quality. Meanwhile, the British pound may encounter additional bearish pressure on Wednesday as jobless claims in the UK are anticipated to rise for the twelfth consecutive month in January, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time. Indeed, the jobless claims change is anticipated to rise by 88K, the largest single-month gain since 1991, and while this could impact the British pound upon release at 4:30 ET, the announcement of the Bank of England’s Quarterly Inflation Report at 5:30 ET may be more important. The BOE’s latest policy statement suggests that the Monetary Policy Committee may opt to leave rates unchanged at 1 percent going forward, but if the report shows that this isn’t the case, the British pound could sell-off.

Related Article: Top 5 Market Movers for the Week of 2/9/09

Euro Slides But Holds Within Defined Trading Ranges as EU Signals Coordinated Plans for Banks The Euro initially started the European and US trading sessions on a strong note as European Union finance ministers agreed that they should coordinate efforts to clear toxic assets off of their bank’s balance sheets. However, the euro subsequently reversed course as a pick up in risk aversion led nearly every major currency to fall against the US dollar and Japanese yen. Focusing on the EU’s plans, the European Central Bank released a statement noting that finance ministers wished to maintain level playing field and wanted to avoid an influx of protectionist measures. EU Monetary Affairs Commissioner Joaquin Almunia also said that they intend to publish, perhaps by the end of the month, “a clear framework for the evaluation of the assets, for the list of assets eligible for these schemes, for the conditionality of those banks who will get support, for purchases of impaired assets and for restructuring when needed.”

Ultimately, EUR/USD remains within relatively well-defined trading ranges on a short-term and medium-term basis despite the fact that Tuesday’s price action reflected high volatility. This leaves breakout potential open, so it will be increasingly important to keep an eye on risk trends as well as key technical levels, such as support at 1.27 and resistance at 1.32.

Related Article: Euro Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Feb 11 2009, 05:44 GMT

Euro Ends Monday Mixed as Yield Differentials Drive Price Action

Thu, Jan 29 2009, 05:56 GMT
by Terri Belkas

DailyFX

- US Dollar Slumps Amidst Uncertainty Over Fiscal Stimulus, Ahead of Testimony by Treasury's Geithner, Fed's Bernanke

- British Pound Nears Resistance at 1.50, Key Event Risk Looms on Wednesday

- Canadian Dollar Still the Weakest of the Commodity Bloc as Housing Starts Tumble to 7-Year Low

US Dollar Slumps Amidst Uncertainty Over Fiscal Stimulus, Ahead of Testimony by Treasury’s Geithner, Fed’s Bernanke
The greenback ended Monday broadly lower against the majors, as the US dollar index continues its nearly month-long consolidation below the January highs. There was little in the way of news to help drive price action, but the outlook for the currency continues to hinge upon the status of risk appetite. The biggest unknown that could impact risk trends is the status of the $800+ billion fiscal stimulus bill that has been passed by the House, but still needs approval by the Senate. A vote is expected early this week, but even if it does pass, the bill must be reconciled with the House version as many changes have been made. Nevertheless, a failure of the bill in the Senate could have particularly nasty repercussions for sentiment, and could translate into a sharp US dollar rally.

As far as defined event risk goes, US Treasury Secretary Timothy Geithner is scheduled to testify on the oversight of the Troubled Asset Relief Program (TARP) in front of the Senate Banking panel at 10:00 ET on Tuesday, but the most market-moving commentary could come later on. At 11:00 ET, Mr. Geithner is due to speak about the White House’s financial rescue plan and new guidelines for TARP. Then, at 13:00 ET, Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs. If Mr. Geithner’s or Mr. Bernanke’s comments reflect bearish prospects for the financial markets and global economy, flight-to-quality and deleveraging could spark demand for Treasuries, the US dollar, and Japanese yen. A more likely scenario, though, may be for Mr. Geithner’s plans to deal with troubled assets to boost risk appetite, and subsequently lead stocks and equities higher.

Related Article: US Dollar Weekly Trading Forecast

Euro Ends Monday Mixed as Yield Differentials Drive Price Action
The euro started out this week just as it ended Friday: down against the Australian dollar, New Zealand dollar, and British pound but up versus the Japanese yen, US dollar, Swiss franc, and Canadian dollar. There was little in the way of European releases, but improved forex market risk appetite has benefited currencies with central banks that either maintain relatively high interest rates (Australia, New Zealand) or banks that have signaled that they will leave rates steady going forward (UK). On the other hand, currencies associated with interest rates near zero (US, Japan, Switzerland) or with interest rates that have the potential to fall lower (Canada) tumbled. The euro happens to fall right in the middle of this spectrum since the European Central Bank left rates at a relatively high 2 percent last Thursday, but suggested that they may cut rates in March. This dynamic will likely hold over the next few weeks, making risk trends increasingly important to watch, as well as technical levels.

Related Article: Euro Weekly Trading Forecast

British Pound Nears Resistance at 1.50, Key Event Risk Looms on Wednesday
The British pound was very strong against the US dollar and Swiss franc on Friday, though the currency fell against the New Zealand dollar. There were no major economic releases on hand, but news that second-half profits by Barclays’ - the third largest UK bank by assets - beat forecasts certainly bodes well for the UK’s financial sector. Looking ahead, the next major piece of event risk looms on Wednesday as jobless claims in the UK are anticipated to rise for the twelfth consecutive month in January, adding to evidence that the combination of a slowing global economy, sharp declines in domestic consumption, and the continuous collapse of the UK housing sector are bound to make the UK economic contraction extend for a lengthy amount of time. Indeed, the jobless claims change is anticipated to rise by 88K, the largest single-month gain since 1991, and while this could impact the British pound upon release at 4:30 ET, the announcement of the Bank of England’s Quarterly Inflation Report may be more important. The BOE’s latest policy statement suggests that the Monetary Policy Committee may opt to leave rates unchanged at 1 percent going forward, but if the report shows that this isn’t the case, the British pound could sell-off.

Related Article: Top 5 Market Movers for the Week of 2/9/09

Canadian Dollar Still the Weakest of the Commodity Bloc as Housing Starts Tumble to 7-Year Low
The Australian and New Zealand dollars have been some of the strongest of the major currencies as risk appetite seems to be thriving in the forex markets. However, the Canadian dollar ended the day virtually unchanged from Friday’s close as Canadian housing starts tumbled 11 percent in January to an annualized rate of 153,500, marking a more than seven year low. The building of single family homes in urban areas took the biggest hit as they fell 20.3 percent during the month, while multi-family starts dropped 12.2 percent. This report comes on the tails of Friday’s labor market report, which showed that the number of employed Canadians fell a record 129,000 in January, suggesting that the economy is in for a deep slowdown and lower interest rates since the Bank of Canada left the door open for more accommodative monetary policy after reducing their target overnight lending rate in January.

Related Article: Canadian Dollar Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Tue, Feb 10 2009, 05:52 GMT

US Dollar Pulls Back as Americans Lose Most Jobs Since 1971, Stocks Rally − Why?

Mon, Feb 9 2009, 05:46 GMT
by Terri Belkas

DailyFX

• Euro Ends Friday Mixed as Yield Differentials Drive Price Action

• British Pound Gains as Dismal UK Data Broadly Priced In to Currency

• Canadian Dollar the Weakest of the Commodity Bloc as Economy Loses Record Number of Jobs in January

US Dollar Pulls Back as Americans Lose Most Jobs Since 1971, Stocks Rally - Why?
The US dollar fell versus most of the majors on Friday as US non-farm payrolls fell in line with expectations by 598,000 in January, while the December reading was revised down another 53,000 to -577,000, indicating that the US economy lost a total of 3.57 million jobs in 2008. As a result, the unemployment rate has now climbed to a nearly 17-year high of 7.6 percent in January from 4.7 percent the month before the US recession began in December 2007. This clearly does not bode well for consumption and broad economic growth going forward, and also puts additional pressure on Congress to pass the stimulus plan currently being debated. In fact, much of the __ percent gain in the DJIA was attributed to hopes that the bill will successfully pass a vote by the Senate, as an $819 billion version of the bill has already passed in the House. In a similar vein, consumer credit fell for the third straight month in December by $6.604 billion as Americans seek to pay down debt and cut back on credit card spending.

All of this data is clearly negative from a fundamental perspective, but much of evidence of recession is already priced in to the US dollar. Judging by the similarly sharp drops we saw in the Japanese yen and the surge in equities, the decline in the greenback likely had more to do with improved risk appetite, and traders will need to keep these correlations in mind next week as Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs at 13:00 ET on Tuesday. Part of this will probably include explanations as to why the Federal Reserve announced on Friday that they would delay plans to start lending under a $200 billion program called the Term Asset-Backed Securities Lending Facility (TALF). TALF will allow the central bank to lend to holders of AAA rated debt backed by newly and recently originated loans, including education, car, credit-card loans, and loans guaranteed by the Small Business Administration. For more on news that could impact the forex markets this week, check out our look at the Top 5 Market Movers for the Week of 2/9/09.

Related Article: US Non-farm Payrolls Insight

Euro Ends Friday Mixed as Yield Differentials Drive Price Action
The euro ended Friday down against the Australian dollar, New Zealand dollar, and British pound but gained versus the Japanese yen, US dollar, Swiss franc, and Canadian dollar. There was little in the way of European releases, but a surge in risk appetite benefited currencies with central banks that either maintain relatively high interest rates (Australia, New Zealand) or have signaled that they will leave rates steady going forward (UK). On the other hand, currencies associated with interest rates near zero (US, Japan, Switzerland) or with interest rates that have the potential to fall lower (Canada) tumbled. The euro happens to fall right in the middle of this spectrum since the European Central Bank left rates at a relatively high 2 percent on Thursday, but suggested that they may cut rates in March. This dynamic will likely hold over the next few weeks, making risk trends increasingly important to watch, as well as technical levels.

Looking ahead to Monday, the release of the German trade balance is forecasted to reflect a smaller surplus in December from a month earlier of 8.2 billion euros, down from 9.7 billion euros. This will likely be the result of further declines in exports, which are forecasted to fall for the third straight month at a rate of 4.0 percent, following a record 10.8 percent plunge in November. However, imports are also anticipated to slump further at a rate of 3.9 percent amidst weaker energy prices and waning demand, which could provide a somewhat-artificial boost to the overall surplus. This report does not tend to be extremely market-moving for the euro, but should nevertheless provide a good gauge of conditions in the Euro-zone since Germany is the region’s largest economy. The biggest event risk for the euro looms on Friday, as Q4 GDP for the Euro-zone is forecasted to fall by the most since record keeping began in 1995.

British Pound Gains as Dismal UK Data Broadly Priced In to Currency
The British pound was very strong against the US dollar and Japanese yen on Friday, though the currency faltered against the indomitable Aussie and Kiwi dollars, suggesting that most deeply disappointing data has already been priced in to pound. UK industrial production fell 9.4 percent in December from a year earlier, the most since January 1981, thanks to a 2.2 percent drop in manufacturing output during the month alone. Indeed, the combination of waning domestic and foreign demand has proven to be a toxic mix for UK’s manufacturers. Adding to this gloomy news, the government reported that corporate bankruptcies rose 11.9 percent during the fourth quarter and 51.6 percent from a year earlier, while individual insolvencies increased 8.2 percent in the fourth quarter to 29,444, highlighting the impact of the credit crunch on businesses and consumers alike. As a result, the Bank of England announced measures to improve liquidity on Friday, saying that it may start buying commercial paper on February 13 through its asset purchase facility.

Related Article: Top 5 Market Movers for the Week of 2/9/09

Canadian Dollar the Weakest of the Commodity Bloc as Economy Loses Record Number of Jobs in January
The commodity dollars were the strongest of the majors on Friday, but compared to the high-yielding Australian dollar and New Zealand dollar, the Canadian dollar was a laggard. The currency initially fell sharply as the Canadian net employment change fell by a record 129,000 in January, compared to expectations for a -40,000 print. Risk trends seem like to drive the Aussie and Kiwi going forward, but the Loonie could be a bit more data-drive. On Monday, Canada Mortgage and Housing Corporation is anticipated to report that housing starts slowed to an annual pace of 169.3K in January, down from a revised 172.2K in December. This would mark the fifth straight month of weaker results, as well as the lowest reading in over 7 years. Keeping the sharp deterioration in the Canadian labor markets, as reflected in Friday’s net employment change of -129K, disappointing housing reports will only add to evidence that the nation’s economy is in the midst of recession. This leaves potential open for Canadian dollar declines, though a stronger-than-expected result could lift the currency on a short-term basis.

Published on  Mon, Feb 9 2009, 05:46 GMT

US Dollar, Japanese Yen Mixed Ahead of US Non−Farm Payrolls, Outlook Remains Dicey

Fri, Feb 6 2009, 05:27 GMT
by Terri Belkas

DailyFX

- Euro: European Central Bank Unlikely to Cut Rates, but Watch Trichet’s Comments

- British Pound Rallies as BOE Suggests They May Be Done Cutting Rates

- Commodity Dollars Hold Up on Surge in Risk Appetite, Canadian Dollar May Come Under Pressure on Friday

US Dollar, Japanese Yen Mixed Ahead of US Non-Farm Payrolls, Outlook Remains Dicey
The Japanese yen ended the day sharply lower as a rise in risk appetite lifted carry trades and equities, with the DJIA up 1.34 percent at 8,063.07. The US dollar, on the other hand, was far more mixed as the currency fell against the New Zealand dollar, Australian dollar, and British pound but gained against the euro, Swiss franc, and Japanese yen. Indeed, days like these provide great opportunities to see what sort of interest rate expectations the forex markets holds. The pick up in risk appetite will itself be at risk on Friday, and based on both a Bloomberg News poll of economists and a variety of leading indicators, the release of US non-farm payrolls (NFPs) is likely to show job losses for the thirteenth straight month in January.

At the time of writing, Bloomberg News was calling for NFPs to plunge by 540,000, leaving 2009 to start as 2008 left off: negative. However, based on leading indicators like Challenger job cuts and the ISM employment indices, we think there’s potential for payrolls to fall by 450,000 - 550,000 in January. The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 7.2 percent in December 2008 while personal consumption has slowed from 1 percent in Q4 2007 down to -3.5 percent in Q4 2008. The reaction of the US dollar and Japanese yen could be very formulaic, as risk trends remain one of the primary drivers of price action in the forex markets. If we see that NFPs fall more than expected and the unemployment rate climbs above 7.5 percent, the news could trigger losses in risky assets like stocks, trigger flight-to-safety, and thus, boost the US dollar and Japanese yen. On the flip side, if job losses and the unemployment rate don’t climb quite as much as anticipated, the news could spark enough optimism to boost demand for stocks and forex carry trades, and subsequently lead the dollar and yen lower.

Euro: European Central Bank Unlikely to Cut Rates, but Watch Trichet’s Comments
The European Central Bank said this morning at 7:45 ET that they would leave rates unchanged at 2.00 percent, as expected. As usual, though, it was ECB President Jean-Claude Trichet's subsequent news conference at 8:30 ET that drove price action for the euro. Mr. Trichet's comments initially came across as being very dovish, as he noted that the Euro-zone economy was in a period of downturn, and that economic weakness would persist in coming quarters. On the inflation front, he maintained confidence that the ECB would keep mid-term inflation close to 2 percent, but overall, the level of uncertainty was exceptionally high and the risks to growth were "clearly on the downside." In terms of interest rate expectations, Mr. Trichet left the door open for a rate cut during their March 5 meeting, when the ECB will publish new inflation and growth outlooks. However, he essentially wrote off the possibility of cutting rates to zero, noting that such a level was "not appropriate" as there are a number of drawbacks that come with bringing rates to such low levels. In light of the Bank of England's more neutral stance on monetary policy following their rate cut to 1 percent, there is increased potential for EUR/GBP declines in the near-term, which could skew EUR/USD price action.

Related Article: Euro Sentiment Forecasts Turn Following ECB Rate Decision

British Pound Rallies as BOE Suggests They May Be Done Cutting Rates
The Bank of England pulled no surprises when they cut the Bank Rate by 50 basis points to a record low of 1.00 percent this morning, as the UK economy grapples with a recession characterized by declines in consumption and by businesses “running down inventories, cutting production, scaling back investment plans and shedding labor.” So why did the British pound rally after the announcement? There were indications in the Monetary Policy Committee’s policy statement that the BOE has reached the end of their rate cutting cycle. Indeed, the Committee’s note that the past reductions to the Bank Rate “would in due course…have a significant impact” and mentions that these efforts along with recent fiscal policy measures would “provide a considerable stimulus to activity as the year progressed” sounded very conclusive. With other central banks like the European Central Bank leaving the door open to lower interest rates, the British pound is likely to continue trading in a volatile manner similar to other forex carry trade. Looking ahead to Friday, output in the UK industrial sector is forecasted to have contracted for the tenth straight month during December, which could push the annual rate down to a nearly 28 year low of -7.8 percent. The bulk of the decline should be the result of weak manufacturing growth, as the global economic slowdown weighs on export demand. A decline in line with expectations would add to evidence that the UK trade deficit is widening rapidly, and will also highlight the extent of the recession plaguing the region. As a result, there is potential for brief pullbacks in the British pound early on Friday morning.

Commodity Dollars Hold Up on Surge in Risk Appetite, Canadian Dollar May Come Under Pressure on Friday
The Australian dollar, New Zealand dollar, and Canadian dollar all held up well on Thursday as a jump in risk appetite lifted the currencies against the US dollar. The Loonie was the weakest of the bunch, as the Ivey Purchasing Managers’ Index showed that business activity in Canada slowed for the third consecutive month through January. The indicator unexpectedly fell to a reading of 36.1, indicating that more managers reported a drop in spending for things like equipment, raw materials and labor than those indicating an increase. This report is just another piece of evidence that the economy has entered its own recession, as some market participants had initially believed it would weather the global slump and financial crunch, and data due to be released on Friday at 7:00 ET could exacerbate this sentiment. The Canadian net employment change is forecasted to fall by 40,000 for the month of January while the unemployment rate is anticipated to have risen to a three and a half year high of 6.8 percent from 6.6 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

Economic Data

Support And Resistance Levels

Published on  Fri, Feb 6 2009, 05:27 GMT

US Dollar, Japanese Yen Rally on Russian Credit Downgrade, Mounting US Job Losses

Thu, Feb 5 2009, 05:27 GMT
by Terri Belkas

DailyFX

- British Pound: Bank of England Rate Decision May Be Market-Mover of the Day

- Euro: European Central Bank Unlikely to Cut Rates, but Watch Trichet’s Comments

- Commodity Dollars Struggle to Hold on to Gains, Canadian Dollar Faces Ivey PMI on Thursday

US Dollar, Japanese Yen Rally on Russian Credit Downgrade, Mounting US Job Losses
US stock markets initially opened higher this morning, but investors were unable to shake off the news that Fitch downgraded Russia’s credit rating to triple-B, just two rungs above junk grade, while deeply disappointing earnings from Time Warner and Kraft Foods helped lead the DJIA down 1.51 percent by the end of the day while flight-to-quality and deleveraging sent the US dollar and Japanese yen higher. US economic data was mixed as ISM non-manufacturing, a gauge of business conditions in the retail, services, and finance sectors, rose slightly to 42.9 in January from a revised 40.1. However, this marks the fourth straight month that the index held below 50, signaling a consistent contraction in activity. Furthermore, a breakdown of the index shows that new orders continued to fall, albeit at a slower pace, while the employment component slipped very slightly to 34.4, boding ill for Friday’s US employment reports. There were additional indications that job losses climbed, as layoffs rose 222.4 percent rise in January from a year earlier amidst heavy layoffs in the retail, industrial, computer, and pharmaceutical sectors, according to an index published by Challenger, Gray, & Christmas. Meanwhile, ADP’s private payrolls estimate fell for the twelfth straight month in January by 522,000, suggesting that the Labor Department’s release of US non-farm payrolls could indeed reflect national job losses of another half million or more.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound: Bank of England Rate Decision May Be Market-Mover of the Day
The already-volatile British pound is bound to face additional volatility this week as both Credit Suisse overnight index swaps and a Bloomberg News poll reflect expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent. This is indeed within the realm of possibilities since the UK has tipped into recession and the BOE, and UK government, anticipate that things will only get worse. In fact, Bank of England Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued very dovish comments on January 29, saying that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission on the same day to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement, as suggestions that they will leave rates unchanged next month could lead the currency to rally. On the flip side, a greater-than-expected rate cut or indications that they may eventually bring the Bank Rate to zero could weigh heavily on the British pound, especially against the euro.

Related Article: British Pound Weekly Trading Forecast

Euro: European Central Bank Unlikely to Cut Rates, but Watch Trichet’s Comments
The decline in Euro-zone CPI estimates well below the European Central Bank’s 2.0 percent target, steady gains in unemployment, and increasingly pessimistic consumer and business confidence all indicate that the central bank will cut rates again. However, evidence suggests that the ECB will wait until March 5, and this is exactly what a Bloomberg News poll of economists is forecasting as well. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, Mr. Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation, suggesting they have no plans to adjust interest rates in February. However, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. As a result, the 7:45 ET announcement may not garner as much attention as ECB President Jean-Claude Trichet’s post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB signals that they may leave rates unchanged during their next meeting, the currency could actually rally.

Related Article: Euro Weekly Trading Forecast

Commodity Dollars Struggle to Hold on to Gains, Canadian Dollar Faces Ivey PMI on Thursday
The commodity currencies saw a volatile day of trading but ultimately ended the day down against the US dollar as risk appetite remains weak.. Data released last night showed that Australian Retail Sales jumped 3.8 percent in December, the most in over 8 years as holiday shopping helped boost spending at department stores.

Looking ahead though, the Canadian dollar could come under pressure as Ivey PMI will likely continue to show a further contraction in business activity as the nation grapples with a recession in the US and ever-declining commodity prices. The index is forecasted to hold below 50 for the third straight month in January at 40.0, up from 39.1. If this reading proves to be disappointing, the Canadian dollar could pull back and push USD/CAD up above 1.2350. On the other hand, a surprising rise in PMI above 50, which would signal a resurgence in business activity, could lead the Loonie to jump.

Related Article: Australian Dollar Weekly Trading Forecast, Canadian Dollar Weekly Trading Forecast

Eeconomic Data

Support And Resistance Levels

Published on  Thu, Feb 5 2009, 05:27 GMT

Euro Bounces from Key Support, Breaks Above 1.30

Wed, Feb 4 2009, 05:30 GMT
by Terri Belkas

DailyFX

- British Pound Rockets Higher Against Dollar, Japanese Yen as Darling Indicates UK is Open to Bad Bank Plan

- Australian Dollar Holds Up Despite RBA Rate Cut

US Dollar, Japanese Yen Pull Back as Evidence Points Toward Some Stabilization in Housing
The US dollar was easily the weakest of the major currencies on Tuesday, as the DXY Index pulled back from key resistance. Looking at the major currency pairs, both EUR/USD and AUD/USD rebounded from rising trendlines extending from their October lows at 1.2705 and 0.6300, respectively, while USD/CAD pulled back from the combination of psychological and Fibonacci resistance at 1.2500. The Japanese yen was also a laggard, suggesting risk trends are still driving price action in the forex markets but that the weak US dollar was the greater driver today. There was a bit of positive news on the US economy, as the National Association of Realtors (NAR) reported that contract signings for the purchase of previously owned homes surprisingly jumped 6.3 percent in December, which was much better than forecasts for a flat reading. This is the first time in 4 months that the index has improved, and as we noted yesterday, the rise is in line with the gains in the NAR's existing home sales release last week which also reflected sharp declines in prices. While it is far too early to say that the US housing collapse may be nearing an end, these indicators do suggest that we’re starting to see a stabilization in demand for previously owned homes. New home sales, on the other hand, are likely to remain dismal.

Looking ahead to Wednesday, data is likely to show that conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - worsened in January. The Institute for Supply Management’s services index is estimated to fall to another record low of 39.0 from 40.1, just above the record low of 37.4 reached in November. Indeed, consumer confidence remains exceptionally weak, as the Conference Board’s measure also fell to a record low of 37.7 during the same month. We already know that the US economy fell into recession in December 2007, but this data will help to gauge how long the recession will drag on for. Since risk trends have proven to be the greater driver of price action in the forex markets, a weaker than expected result could trigger flight-to-quality and thus, gains for the US dollar. Meanwhile, a surprisingly strong result could boost equities and weigh on safe-haven assets.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Bounces from Key Support, Breaks Above 1.30
The euro surged throughout the day on Tuesday due primarily to US dollar weakness, as the currency actually fell against the high-yielding Aussie and New Zealand dollars and ended the day virtually unchanged versus the British pound. There was little in the way of news released from the Euro-zone, but looking ahead to Wednesday, Euro-zone retail sales will be released for December and are expected to decline by as much as 0.2 percent for the month while the annual rate could remain negative at -1.4 percent. With job losses climbing and credit conditions still tight, retail sales are expected to weaken throughout the first half of 2009. If the release proves to be more disappointing than forecasts, the news could push the Euro lower on speculation that the European Central Bank will cut rates on Thursday. On the other hand, a holiday-spending boost to the index could lead to stronger-than-expected results and gains for the currency. As it stands, Credit Suisse overnight index swaps are pricing in virtually no chance of a rate cut, as comments by ECB President Jean-Claude Trichet following their last meeting signaled that the ECB will hold off until March before considering reducing rates again. From a technical perspective, falling trendline resistance could come into play near 1.3200/50 and may be the next target for EUR/USD as long as risk appetite remains stable.

Related Article: Euro Weekly Trading Forecast

British Pound Rockets Higher Against Dollar, Japanese Yen as Darling Indicates UK is Open to Bad Bank Plan
The British pound surged versus the US dollar and Japanese yen on Tuesday due primarily to increased demand for “risky” assets, and the moves have left the door open for potential GBP/USD gains toward 1.50. Meanwhile, Chancellor of the Exchequer Alistair Darling said during a during testimony to the House of Lords Economic Affairs Committee that the government has “not closed the door on a bad bank scheme” as they continue to grapple with how to deal with toxic assets. At this point, the UK is working with a scheme to have banks take up government insurance against their expected bad debts in the hope that this will lead them to lend at more normal levels. The introduction of new measures would not be surprising though, as Mr. Darling said that they must consider “a range of options.”

Related Article: British Pound Weekly Trading Forecast

Australian Dollar Holds Up Despite RBA Rate Cut
The Australian dollar held up quite well following the Reserve Bank of Australia’s 100 basis point rate cut on Monday night, as the reduction was in line with expectations. Furthermore, the RBA’s subsequent policy statement contained a decidedly neutral policy bias, as RBA Governor Glenn Stevens said that their past rate cuts and “fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad.” This indication that the central bank would leave rates unchanged at 3.25 percent going forward led AUD/USD to bounce from support at 0.6350 up to 0.6500 during the US trading session. There will be some event risk on hand for the Australian dollar overnight as retail sales in Australia are forecasted to have grown 0.3 percent during December, confirming that 2008 was a year of lackluster consumption for the economy. Any increases are likely to be solely the result of spending on food, as sales of apparel, household goods, and at restaurants have been consistently weak throughout the second half of the year. Regardless, a reading in line with or more than expectations could lead the Australian dollar to rise overnight, but if the index unexpectedly falls negative, the currency could tumble as the markets will shift to price in greater potential for further rate cuts by the Reserve Bank of Australia.

Related Article: Australian Dollar Weekly Trading Forecast

Economic Data

Support And Resistance Levels

Published on  Wed, Feb 4 2009, 05:30 GMT

British Pound Pummeled by Moody's Downgrade of Barclays' Debt

Tue, Feb 3 2009, 05:53 GMT
by Terri Belkas

DailyFX

- Australian Dollar Under Pressure Ahead of RBA Rate Decision

- Euro Bounces from Technical Support Versus US Dollar, British Pound

- British Pound Pummeled by Moody’s Downgrade of Barclays’ Debt

US Dollar, Japanese Yen Gain on Concerns About Financial Stability, Signs of Deepening Recession
The US dollar and Japanese yen were some of the strongest of the major currencies as lingering risk aversion led Asian, European, and US stock markets lower. Indeed, financial market news was dismal around the globe, as Japan’s Hitachi and Nippon Paper Group slashed earnings targets, Moody’s downgraded Barclays debt rating on potential credit writedowns, while US industrial shares plunged as manufacturing reports reflected a deepening recession in the sector. Indeed, while the Institute for Supply Management’s (ISM) manufacturing index rose slightly to 35.6 in January from 32.9, the index has remained below 50 since February 2008, signaling a contraction in business activity. A breakdown of the report shows that the employment component held at a more than 26-year low of 29.9, boding ill for Friday’s US non-farm payrolls, while the production and new order components remain just above the record lows reached in December.

Meanwhile, US personal spending fell a greater-than-expected 1 percent during the month of December, marking the sixth straight month of declines. At the same time, personal income slipped 0.2 percent to cap off the longest stretch of declines since November 1953 - January 1954. It is already clear that consumption growth took a heavy hit in the second half of 2008, as a 3.5 percent drop in personal consumption helped drag Q4 GDP down to a nearly 27-year low of 3.8 percent. However, in light of the sharper-than-anticipated slump in December spending, there is increased potential for downward revisions to GDP upon on February 27 (preliminary) and March 26 (final).

Looking ahead to Tuesday, the National Association of Realtors' (NAR) pending home sales report is forecasted to show that contract signings for the purchase of previously owned homes stagnated in December following three straight months of contraction and a 9.6 percent drop in November from a year earlier. Indeed, last week NAR reported that existing home sales actually jumped 6.5 percent in December to 4.74 million from 4.45 million as median prices tumbled 15.3 percent from a year earlier to $175,400, though new home sales continue to fall to record lows. As a result, there is potential for a better than expected result on Tuesday morning, which could help to boost investor sentiment and thus, currency pairs like USD/JPY.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Australian Dollar Under Pressure Ahead of RBA Rate Decision
Despite a rally during the first half of the US trading session, the Australian dollar remains under pressure and could see further declines toward 0.6075 as the Reserve Bank of Australia is anticipated to cut rates in their fifth consecutive meeting at 22:30 ET, with a Bloomberg News poll of economists calling for a 100 basis point cash rate target reduction to a record low of 3.50 percent. This would be similar to what the New Zealand dollar experienced on January 28, but only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.

Euro Bounces from Technical Support Versus US Dollar, British Pound
The euro was one of the only currencies to gain against the US dollar on Monday, but only after EUR/USD bounced from rising trendline support at 1.2705 while EUR/GBP recovered from Fibonacci support near 0.8800. There was little in the way of news released from the Euro-zone, but looking ahead to Tuesday morning’s reports, producer prices in the Euro-zone are forecasted to have fallen for the fourth straight month at a rate of 1.2 percent during December, while the annual rate could slow to 2.1 percent. We've already seen Eurostat's estimates for January CPI plunge to a nearly 10-year low of 1.1 percent, and if this upcoming release of input costs fall more than anticipated, the markets may shift to price in a rate cut by the European Central Bank on Thursday and thus lead the euro lower. As it stands, Credit Suisse overnight index swaps are pricing in a 77 percent chance of a 25bp cut, but based on comments by ECB President Jean-Claude Trichet following their last meeting, a Bloomberg News poll shows that economists expect that the ECB will hold off until March before considering reducing rate again.

Related Article: Euro Weekly Trading Forecast

British Pound Pummeled by Moody’s Downgrade of Barclays’ Debt
The British pound is easily one of the most volatile currencies in the market right now, as it tumbled against the US dollar, euro, and Japanese yen amidst heightened financial market concerns. This trigger this time around was news that Moody’s lowered Barclays’ debt rating, saying that it expected “significant further losses” on credit-related writedowns. As one of the UK’s largest banks, this has spurred already strong fears that the worst is not over yet for the UK financial sector. Furthermore, the news adds to speculation that the Bank of England will indeed cut rates again on Thursday, especially since both Credit Suisse overnight index swaps and a Bloomberg News poll reflect expectations that they will reduce the Bank Rate to a new record low of 1 percent. This is within the realm of possibilities since the UK has tipped into recession and the BOE, and UK government, anticipate that things will only get worse. In fact, Bank of England Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued very dovish comments on January 29, saying that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.”

Related Article: British Pound Weekly Trading Forecast

Published on  Tue, Feb 3 2009, 05:53 GMT

Australian Dollar Bound to See High Volatility Ahead of RBA Rate Decision

Mon, Feb 2 2009, 05:46 GMT
by Terri Belkas

DailyFX

- Euro Tumbles as Euro-zone CPI Falls to 1999 Low, Adds to Speculation the ECB Will Cut Rates on February 5

- British Pound Dominates Against the Majors on Massive Retracement - Can This Continue?

- Australian Dollar Bound to See High Volatility Ahead of RBA Rate Decision

US Dollar, Japanese Yen Gain as US GDP Figures Push the DJIA Down to Critical 8,000 Level
The US dollar and Japanese yen remained in demand on Friday, second only to the British pound, as US economic data fueled risk aversion in the markets and actually led the Dow Jones Industrial Average to fall 1.82 percent to close just above critical support at 8,000. According to advanced reports, the US economy contracted in Q4 by the most since Q1 1982 at a rate of 3.8 percent, marking the second consecutive quarter of contraction. This was actually a bit better than forecasts, as a Bloomberg News poll shows that economists had expected a decline of 5.5 percent. All told, US real GDP for 2008 slowed to a 1.3 percent pace of growth, the lowest since 2001. The decline in GDP could be attributed to a variety of factors, including a 3.5 percent drop in personal consumption, a 12.3 percent decline in gross private investment, and a 19.7 percent plunge in exports. We already know that the US has been in recession since December 2007, per the National Bureau of Economic Research (NBER), but one of the bigger questions now is how long the recession will last for. It will be important to watch gauges of employment and business activity for the early months of 2009, as the latest trends suggest that GDP could continue to fall sharply in Q1 and Q2. Also worth keeping in mind that today's GDP report is simply the advanced reading, and with two more revisions due out on February 27 (preliminary) and March 26 (final), these figures could ultimately change dramatically.

The release of personal income and personal spending figures for the month of December is likely to highlight the dismal status of consumption in the US. Income is forecasted to contract for the second consecutive month at a rate of 0.4 percent, and perhaps even worse, spending is anticipated to contract for the sixth straight month at a rate of 0.9 percent. The impact of the reports on the markets may be limited since Q4 GDP has already been announced. Unlike these releases, the ISM Manufacturing index will give a more timely view of conditions in the economy. The index is anticipated to fall to a nearly 29-year low of 32.5 in January from an upwardly revised 32.9. This would mark the twelfth straight month of contraction in business activity, suggesting that the recession could continue through at least the first half of 2009. Weaker than expected results could lead flight-to-safety to push the US dollar higher, while surprisingly strong numbers could weigh the currency down.

Euro Tumbles as Euro-zone CPI Falls to 1999 Low, Adds to Speculation the ECB Will Cut Rates on February 5
The euro remained under heavy pressure on Friday as Euro-zone CPI estimates fell further below the European Central Bank’s 2.0 percent target to a nearly 10-year low of 1.1 percent from 1.6 percent., and when considering that the Euro-zone has experienced steady increases in unemployment, and increasingly pessimistic consumer and business confidence, there is potential that the central bank will cut rates again. However, evidence suggests that the ECB will wait until March 5, and this is exactly what a Bloomberg News poll of economists is forecasting as well. Indeed, after the ECB cut rates to a record low of 2.00 percent on January 15, Mr. Trichet said that the next "important" meeting would be in March when they release new projections for growth and inflation, suggesting they have no plans to adjust interest rates in February. However, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. As a result, the 7:45 ET announcement may not garner as much attention as ECB President Jean-Claude Trichet’s post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, if the ECB signals that they may leave rates unchanged during their next meeting, the currency could actually rally.

British Pound Dominates Against the Majors on Massive Retracement - Can This Continue?
The British pound was the strongest of all the majors not only on Friday, but during the entire week, as the currency trades in a highly speculative manner. Indeed, over the past 5 days, the British pound has rallied 8.6 percent against the New Zealand dollar and roughly 6.3 percent against the euro and Japanese yen in an attempt to recoup the massive losses accumulated between October 2008 and January 2009. However, with both Credit Suisse overnight index swaps and a Bloomberg News poll reflecting expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent., it’s worth wondering how far this British pound rally can extend. There are few doubts that the BOE will at least consider slashing rates again since the UK remains in a deep recession and officials anticipate that things will only get worse. In fact, BOE Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued very dovish comments on January 29, saying that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement.

Australian Dollar Bound to See High Volatility Ahead of RBA Rate Decision
The Australian dollar could face bearish pressures on Monday night, similar to what the New Zealand dollar experienced on January 28, as the Reserve Bank of Australia is anticipated to cut rates in their fifth consecutive meeting at 22:30 ET, with a Bloomberg News poll of economists calling for a 100 basis point cash rate target reduction to a record low of 3.50 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.

Published on  Mon, Feb 2 2009, 05:46 GMT

US Dollar, Japanese Yen Remain Strong Ahead of US Q4 GDP Data − How Bad Will It Be?

Fri, Jan 30 2009, 05:40 GMT
by Terri Belkas

DailyFX

- Euro Pulls Back as Evidence Continues to Point Towards Further ECB Rate Cuts - Watch CPI on Friday

- British Pound Surges 2% vs. Euro Amidst Mixed Comments from Outspoken BOE Member Blanchflower

US Dollar, Japanese Yen Remain Strong Ahead of US Q4 GDP Data - How Bad Will It Be?
The US dollar started the New York trading session off on a weak note today, only to rebound with the Japanese yen following the release of broadly disappointing US economic data, which added to lingering risk aversion in the markets. Durable goods orders fell for the third month in a row at a rate of 2.6 percent in December, while the annual rate of growth shows that orders are down 19.7 percent from a year earlier. A breakdown of the index shows that demand for nondefense aircraft was down a whopping 43.6 percent, as Boeing orders slumped to 44 in Q4 from 148 in Q3. Meanwhile, non-defense capital goods orders excluding aircraft fell 2.8 percent, bringing the 3-month annualized rate to -32.5 percent. As a gauge of business investment over the next 6 months, this does not bode well for growth and job prospects going forward. Indeed, labor market conditions already remain abysmal, as continuing jobless claims climbed to 4776K during the week ending January 17, which is the highest level since record-keeping began in 1967. As it stands, a Bloomberg News poll shows that economists expect that the February release of non-farm payrolls will show another half million job losses and a rise in the unemployment rate to a more than 16-year high of 7.5 percent from 7.2 percent. Finally, new home sales for the month of December proved to be very disappointing, as they plunged 14.7 percent to 331K, the lowest since record-keeping began in 1963. There had been a bit of optimism about the prospects for this release given the surprise jump in existing home sales, but it appears that the 9.3 percent drop in median home prices to $206,500 hasn't been enough to spur an increase in demand.

Looking ahead to Friday, there’s potential for the US dollar and Japanese yen to gain further, as the 08:30 ET advanced reading of Q4 GDP for the US is forecasted to contract for the second straight quarter at a rate of -5.5 percent, which would mark the worst decline since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar (and Japanese yen) higher despite the disappointing fundamental scenario.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Pulls Back as Evidence Continues to Point Towards Further ECB Rate Cuts - Watch CPI on Friday
The euro came under significant pressure on Thursday, as the currency fell 1.5 percent versus the greenback and roughly 2 percent against the British pound and Japanese yen. Economic data certainly wasn’t working in the currency’s favor, as the German economy lost twice as many jobs as expected in January. Indeed, the net unemployment change rose for the second consecutive month by 56,000, which was the sharpest increase since March 2005, while the jobless rate rose slightly more than expected to 7.8 percent. Meanwhile, Bloomberg’s retail Purchasing Managers’ Index (PMI) actually rose to 44.0 in January, but with the index still below 50 and thus signaling a contraction in business activity for the eighth straight month, there was little optimism to be gleaned from the report. Finally, various measures of sentiment in the Euro-zone - including consumer, economic, industrial, and services – turned increasingly pessimistic in January as all of the indexes fell to the worst levels since record-keeping began in 1985.

All of Thursday’s news added to speculation that the European Central Bank will continue cutting interest rates, but Friday’s release of Eurostat’s estimate for Euro-zone CPI may go a long way to add to these expectations or negate them. The estimate is projected to show at 5:00 ET that inflation growth eased to a nearly 10-year low of 1.4 percent in January from 1.6 percent. Given ECB President Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 225 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on February 5, and weigh on the euro. On the other hand, if CPI does not fall further, the currency could gain as the markets assume the central bank will leave rates unchanged next month and wait until March to make monetary policy more accommodative. From a technical perspective, my bias for EUR/USD remains bullish in the near-term, though a break below 1.2861 would force me to reconsider.

Related Article: Euro Weekly Trading Forecast

British Pound Surges 2% vs. Euro Amidst Mixed Comments from Outspoken BOE Member Blanchflower
The British pound held up fairly well compared to many of the other majors, as the currency gained 2 percent against the euro and a slight 0.34 percent versus the US dollar. UK economic data released at 2:00 ET didn’t work in favor of the British pound, as Nationwide house prices fell for the fifteenth straight month in January, bringing the annual rate down to fresh record low of -16.6 percent. Meanwhile, Bank of England Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, issued conflicting comments for the UK’s national currency. From a bearish perspective, Mr. Blanchflower said that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was a timely comment when you consider that Chancellor of the Exchquer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. On the other hand, Mr. Blanchflower claimed that the British pound is undervalued and that he himself is bullish the currency. Given the outlook for further BOE rate cuts, these comments seem more like an attempt to prevent the currency from plummeting in response to the central bank’s dovish bias than anything else. Check out what the DailyFX analysts chose as their British pound trading picks.

Published on  Fri, Jan 30 2009, 05:40 GMT

Euro Fails to Break Above Resistance at 1.33 Yet Again

Thu, Jan 29 2009, 05:56 GMT
by Terri Belkas

DailyFX

- New Zealand Dollar Down as RBNZ Slashes Rates More Than Expected

-US Dollar Ends Day Mixed, Japanese Yen Tumbles as Risk Appetite Surge on 'Bad Bank' Initiative

US Dollar Ends Day Mixed, Japanese Yen Tumbles as Risk Appetite Surge on ‘Bad Bank’ Initiative
Risk appetite was strong on Wednesday, leading the S&P 500 to rally 3.36 percent higher and trigger sell-offs in Treasuries. This environment would normally be ripe for sharp US dollar declines, but we’re started to see the correlation between risk trends and the currency fall apart. Instead, the greenback ended the day up against the Japanese yen, New Zealand dollar, and euro while falling against the British pound, Australian dollar, and Canadian dollar. Focusing on the weak yen, today’s price action showed that the currency continues to move in lockstep with risk aversion, and today’s increase in investor confidence led the low-yielding yen to plunge 1.4 percent versus the euro and over 2 percent against the British pound and Australian dollar.

What was behind the surge in sentiment? Bad banks. Believe it or not, this is a good thing. According to reports, the Obama administration may be moving toward setting up a “bad bank” in conjunction with the Federal Deposit Insurance Corp. (FDIC), which would buy toxic assets off the books of financial institutions. This has the potential to go a long way to boost confidence in the financial system and thus, loosen up credit conditions, as there would be fewer concerns about counterparty risk. Though this isn’t a silver bullet for all the issues plaguing the financial markets, it is certainly a bit of good news. Meanwhile, the Federal Reserve left the fed funds rate target range unchanged at 0.0 percent - 0.25 percent, as expected, but with little in the way new information revealed in the Federal Open Market Committee’s policy statement, this announcement didn’t spark much price action. However, the FOMC did appear to be signaling potential for deflation to take hold of the US, as they said “inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.”

Looking ahead to Thursday, there will be a bevy of US economic indicators on hand. At 8:30 ET, durable goods orders are forecasted to fall negative for the third straight month in December at a rate of -2.0 percent. Given the extent of the recession plaguing the US, there is downside risk for this release as both consumer and business demand are relatively non-existent. At the same time, continuing jobless claims for the week ending January 17 are projected to climb to 4620K from 4607K, which is just a stone’s throw away from 4713K, the highest level since record keeping began in 1967. At 10:00 ET, new home sales are estimated to fall by 2.5 percent to a nearly 27-year low of 397K, but it will be very interesting to see if the index actually rises in light of Monday’s surprise increase in existing home sales.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

New Zealand Dollar Down as RBNZ Slashes Rates More Than Expected
The Reserve Bank of New Zealand (RBNZ) cut their Overnight Cash Rate more than expected by 150 basis points to 3.50 percent, the lowest since the introduction of the mechanism in 1999. This marked the fifth straight meeting where the RBNZ slashed rates, and brings the cumulative total of cuts to a whopping 475 basis points since August 2008. Prior to the release, the markets had only been anticipating a 100 basis point cut, which is part of the reason why the New Zealand dollar fell sharply upon the announcement. Additional bearish pressures were waged on the currency as RBNZ Governor Bollard said that the market may be "correct' to price in further reductions to the OCR, though they likely won't be as aggressive in size. NZD/USD charts showed that the pair plummeted for a test of support at 0.5185/0.5200 before subsequently recovering a bit to end the day near 0.5250. For obvious reasons, this put my analyst pick from this morning in some danger, but with NZD/JPY still well above my noted stop levels, I still think there’s potential for the pair to climb higher in the near-term thanks to continued improvements in investor sentiment.

Related Article: New Zealand Weekly Trading Forecast

Euro Fails to Break Above Resistance at 1.33 Yet Again
The euro was not able to break above yesterday’s high or falling trendline resistance at 1.33 on Wednesday, and price action overnight may determine whether EUR/USD will break above the noted level, or if the pair is in for a deeper decline. The key level to watch is 1.3120, as a decline below this support level would be a bearish sign. There is some event risk for the euro on hand on Thursday morning, as the German unemployment change and Euro-zone consumer confidence will be release. The former is anticipated to show that the German economy lost jobs for the second month in a row during January while the latter is projected to drop to the lowest since record-keeping began in 1983, adding to evidence that growth in the region is slowing sharply. Such news could add to speculation that the European Central Bank will continue cutting interest rates, but nevertheless, my bias for EUR/USD remains bullish in the near-term.

Related Article: Euro Weekly Trading Forecast

Published on  Thu, Jan 29 2009, 05:56 GMT

Euro Gains on Strong German IFO Results, Reverses from Resistance at 1.33

Wed, Jan 28 2009, 06:27 GMT
by Terri Belkas

DailyFX

• US Dollar Could See Volatile Day on Wednesday Ahead of FOMC Rate Decision, Policy Statement

• Euro Gains on Strong German IFO Results, Reverses from Resistance at 1.33

• Japanese Yen Ends Tuesday Mixed as Risky Assets Consolidate Within Tight Ranges

• Australian Dollar Could Gain Overnight on Australian CPI Figures, New Zealand Dollar Faces RBNZ Rate Decision

US Dollar Could See Volatile Day on Wednesday Ahead of FOMC Rate Decision, Policy Statement
The US dollar ended Tuesday broadly mixed across the majors, as the currency consolidates its recent decline. Economic data from the US remained bleak, as the Conference Board's consumer confidence index fell to a new record low of 37.7 during the month of January from 38.6, missing expectations of a slight rise to 39.0. A breakdown of the report showed that sentiment on the present situation and on economic expectations both turned more pessimistic with an increasing number of consumers believing that business conditions were bad (versus good and normal). However, there was a bit of stabilization regarding outlooks for employment and income, as more consumers thought that prospects would remain the same in 6 months. That said, the majority of those surveyed (over 50 percent) said that employment was currently either "not so plentiful" or "hard to get," suggesting that the next round of non-farm payrolls (NFPs) should be disappointing, creating additional downside risks for consumption going forward.

Looking ahead to Wednesday, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. In fact, the FOMC said in December that their focus going forward will shift to supporting “the functioning of financial markets” and the stimulation of “the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.” Thus, the only important part of this meeting will be to watch the FOMC’s subsequent monetary policy statement to see if they announce any new efforts meant to improve credit conditions. The statement may have an impact on risk trends, and any news that is positive for the stock markets may be negative for the greenback, which has been trading solely as a safe-haven asset lately. Furthermore, the Committee is anticipated to issue news forecasts for GDP and CPI, which has the potential to shake up volatility.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Gains on Strong German IFO Results, Reverses from Resistance at 1.33
The euro started the day off on a strong note following the release of better-than-expected German IFO results, which showed a rise in the expectations component to 79.4 in January from 76.8 while the measure gauging the business climate edged up to 83.0 from 82.6. Indeed, four rate cuts by the European Central Bank since October and the announcement of a 50 billion euro stimulus plan by German Chancellor Angela Merkel, which was approved today, have provided a few reasons to believe that there’s a light at the end of the tunnel. However, the current assessment index fell to a nearly 6-year low of 86.8 from 88.8, as economic conditions remain bleak and the financial markets are still relatively unstable. Shortly after the economic report, EUR/USD reversed from resistance at 1.33 to form a bearish gravestone doji on the hourly charts, and the pair ultimately ended the day down slightly. Looking ahead to Wednesday, rising trendline support at 1.3150 should be able to keep EUR/USD from falling lower, as there will be little in the way of event risk for the currency in the morning.

Related Article: Euro Weekly Trading Forecast

Japanese Yen Ends Tuesday Mixed as Risky Assets Consolidate Within Tight Ranges
The Japanese yen ended Tuesday mixed across the majors, gaining against the US dollar and euro while falling against the British pound. Currently, many risky assets, such as the Dow Jones Industrial Average, are trading within very tight ranges, leaving potential open for breakouts. One factor that helped to boost sentiment in Japan last night was the announcement of a plan to inject state money into ailing companies in exchange for equity stakes and will most likely be designed to target smaller and mid-size companies that employ some 70 percent of the country’s work force. Looking ahead, the Federal Reserve’s upcoming rate decision and policy statement could have a large impact on risk trends, so traders should beware the event risk on Wednesday afternoon.

Related Article: Japanese Yen Weekly Trading Forecast

Australian Dollar Could Gain Overnight on Australian CPI Figures, New Zealand Dollar Faces RBNZ Rate Decision
Australia's headline consumer price index is forecasted to have fallen 0.4 percent during the fourth quarter, bringing the annual rate down to 3.6 percent from 5.0 percent. The quarterly contraction would be the first in two years and the sharpest drop in eleven years, and may also add to speculation that the Reserve Bank of Australia will cut rates aggressively during their next meeting on February 2. As it stands, a Bloomberg News poll of economists is forecasting a 50 basis point reduction to 3.75 percent, while Credit Suisse overnight index swaps are closer to pricing in a 100 basis point reduction to 3.25 percent, and combined with a sharp drop in CPI, this sentiment could weigh on the Australian dollar. However, there is significant potential for these results to reflect resilient price pressures, as the producer price index for the same period showed that input cost growth rose to a record high of 6.4 percent (year-over-year). If this is indeed the case, the Australian dollar could rally sharply overnight.

Meanwhile, a decline in New Zealand's consumer price index during Q4 for the first time in two years and by the most in ten years has added to speculation that the Reserve Bank of New Zealand will cut interest rates on Wednesday at 15:00 ET, despite the fact the annual rate remains above the central bank’s 1-3 percent inflation target at 3.4 percent. As it stands, both a Bloomberg News poll of economists and Credit Suisse overnight index swaps are forecasted a 100 basis point reduction to 4.00 percent, and such a move could weigh on the New Zealand dollar. However, if the RBNZ suggests in their policy statement that they may refrain from cutting rates any further, the currency could actually rally.

Related Article: Australian Dollar Weekly Trading Forecast, New Zealand Weekly Trading Forecast

Published on  Wed, Jan 28 2009, 06:27 GMT

US Dollar, Japanese Yen Pull Back from Key Resistance as Volatility Cools

Tue, Jan 27 2009, 05:30 GMT
by Terri Belkas

DailyFX

- Euro Breaks Higher - More Gains to Come?

- British Pound Rebounds as UK Mortgage Approvals Rise, Barclays News

- Australian Dollar: PPI Release to Set the Stage for Market-Moving CPI Release on Tuesday Night

US Dollar, Japanese Yen Pull Back from Key Resistance as Volatility Cools
The US dollar and Japanese yen both slipped against their major counterparts on Monday, and as usual, the moves had more to do with risk trends rather than any major fundamentals factors. In fact, the US economic data released at 10:00 ET was broadly better-than-expected. First, the National Association of Realtors (NAR) reported that existing home sales jumped 6.5 percent in December to 4.74 million from 4.45 million as median prices tumbled 15.3 percent from a year earlier to $175,400. According to bankrate.com, rates on 30-year fixed mortgages fell throughout November and December, and combined with lower home values, the combination may be helping to plant the seeds of stabilization in the housing sector. Nevertheless, it will take far more evidence than one month of improvement to call this any sort of bottom, and if anything, with employment conditions remaining bleak, risks remain to the downside for the sector as a whole. Meanwhile, the Conference Board’s US leading indicator index for the month of December unexpectedly rose 0.3 percent to 99.5. This was the first improvement in 6 months, but looking at a breakdown of the report, it is clear that the rise in the index doesn’t necessarily warrant cheer. The primary reason for the gain was a 0.99 percent rise in M2 money supply, which is a result of the Federal Reserve’s efforts to boost liquidity. Meanwhile, the components measuring the average workweek, jobless claims, pace of deliveries, building permits, and stock prices all weighed on the overall index. While the Fed’s actions have yielded slightly better credit conditions, they haven’t done much for growth, suggesting that the Conference Board’s measure does not give a very realistic view of prospects for the US economy.

Looking ahead to Tuesday, the Conference Board’s consumer confidence index for the month of January is forecasted to edge up to a reading of 39.0 from 38.0. While a bigger-than-expected increase could spark a bit of optimism in the markets, it is necessary to keep in mind that last month's figure represents the lowest since record keeping began in 1967. When trading this sort of news in the forex markets, traders should watch the impact on risk trends, as building investor confidence could actually lead the "safe haven" US dollar lower even though the figures are positive from a fundamental perspective.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro Breaks Higher - More Gains to Come?
EUR/USD broke out of its falling wedge formation on Monday morning, leaving a considerable amount of bullish potential open for the currency pair. This was much of the reason why I chose “long EUR/USD” as my analyst pick of the week, and assuming risk appetite continues to pick up, the trade should work out well in the near-term. There will be a bit of event risk on hand for the currency on Tuesday morning though, as the IFO index of German business confidence is forecasted to show broad declines in sentiment on the business climate (from 82.6 to a record low of 81.0) and current economic conditions (from 88.8 to a 6-year low of 85.0). However, the outlook component is actually anticipated to rise slightly from a record low of 76.8 to 77.5, which is in line with the latest ZEW results. Indeed, while the German economy is in the midst of recession and the financial markets remain relatively unstable, four rate cuts by the European Central Bank since October and the announcement of a 50 billion euro stimulus plan by German Chancellor Angela Merkel has helped to boost sentiment on the future a bit. This figure can be market-moving on a very short-term basis, so traders should watch for volatility in the euro around the 4:00 ET release time.

Related Article: Euro Weekly Trading Forecast

British Pound Rebounds as UK Mortgage Approvals Rise, Barclays News
The British pound rallied toward 1.40 on Monday amidst a broad improvement in risk appetite and mixed news from the UK. The announcement from Barclays that the firm would report full-year profits “well ahead” of expectations on February 9 helped to lift equities in Europe, which translated into gains for US shares and risky assets in general. Meanwhile, according to the British Bankers’ Association (BBA), outstanding loans to non-financial businesses fell for the second month in a row by 2.9 billion pounds to 345 billion pounds in December, suggesting that the credit crunch is having a large impact on the ability of businesses to expand and invest. On the other hand, the number of mortgage applications approved rose to 22,051 in December from 17,339, signaling an increase in consumer loan issuance. However, we’ve seen gains like this in the past, so the move does little to instill confidence that the UK housing market will bottom in the near-term.

Related Article: British Pound Weekly Trading Forecast

Australian Dollar: PPI Release to Set the Stage for Market-Moving CPI Release on Tuesday Night
The Australian dollar climbed against the US dollar and the Japanese yen, thanks to a shimmer of investor confidence that also lifted equities and other forex carry trades higher. There will be one release from Australia overnight, and while the Australian Producer Price Index (PPI) isn't necessarily the biggest market-mover for the Australian dollar, but it will be useful as a gauge for the 01/27 release of the Consumer Price Index (CPI), which does tend to spark significant volatility. PPI is forecasted to have slowed from a record pace of 2.0 percent in Q3 down to 0.4 percent pace during Q4. This should help to weigh the annual rate of growth down to 5.2 percent from 5.6 percent, and if the indices fall more than anticipated, the Australian dollar could slip as the market will shift to price in a soft CPI reading the next day. On the other hand, if PPI reflects resilient price pressures, the currency could gain.

Related Article: Australian Dollar Weekly Trading Forecast

Published on  Tue, Jan 27 2009, 05:30 GMT

US Dollar, Japanese Yen End Friday Mixed − Risk Appetite to Improve Next Week?

Mon, Jan 26 2009, 05:47 GMT
by Terri Belkas

DailyFX

- Euro Recovery Seems Increasingly Possible, Euro-zone CPI Expected to Fall to Nearly 10-Year Next Week

- British Pound Ends Day Lower as UK Economy Contracts by Most Since 1980

- Canadian Dollar Jumps Despite CPI Slump, Commodity Dollar Outlook Hinges Upon NZ, Australian Data Next Week

US Dollar, Japanese Yen End Friday Mixed - Risk Appetite to Improve Next Week?
The US dollar and Japanese yen ended Friday mixed across the majors, as early morning rallies were following by steep declines during the afternoon. This is very much in line with what we’ve seen in the stock markets, as DJIA and S&P 500 futures were down over 2 percent before the US open, but subsequently recovered over the course of the day, with the former ending the day down a slight 0.56 percent and the latter up 0.54 percent. From a technical perspective, declines in the US dollar and Japanese yen from key resistance levels suggest the currencies could be due for deeper retracements, but it’s also worth keeping in mind that US news due to be released next week has the potential to impact risk sentiment.

On Wednesday the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent and this should remain the case throughout much of the year. In fact, the FOMC said in December that their focus going forward will shift to supporting “the functioning of financial markets” and the stimulation of the economy “through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.” Thus, the only important part of this meeting will be to watch the FOMC’s subsequent monetary policy statement to see if they announce any new efforts meant to improve credit conditions. On Friday at 08:30 ET, the advanced reading of Q4 GDP for the US is forecasted to contract for the second straight quarter at a rate of -5.4 percent, which would mark the worst decline since Q1 1982. The National Bureau of Economic Research (NBER) has already declared that the US has been in recession since December 2007, but a plunge in GDP in line with expectations will only suggest that the contraction in growth will continue to be worse than previously expected. The Federal Reserve really has no room to make monetary policy more accommodative, so traders should watch for the impact of this report on equities, as a surge in risk aversion may only lead the US dollar higher despite the disappointing fundamental scenario.

Euro Recovery Seems Increasingly Possible, Euro-zone CPI Expected to Fall to Nearly 10-Year Next Week
The euro has been consolidating within a falling wedge formation, with support now looming at 1.2750. This is lower than the levels noted in previous day as support comes in the form of a falling trendline. With falling wedge formations typically signaling bullish reversals, the latest consolidation may warrant the consideration of buying EUR/USD. The one major piece of event risk for the euro next week comes on January 30, as Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a nearly 10-year low of 1.4 percent in January from 1.6 percent. Given European Central Bank President (ECB) Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 225 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on February 5, and weigh on the euro. On the other hand, if CPI does not fall further, the currency could gain as the markets assume the central bank will leave rates unchanged next month and wait until March to make monetary policy more accommodative.

British Pound Ends Day Lower as UK Economy Contracts by Most Since 1980
The British pound plummeted toward support at the psychologically important 1.35 level this morning, before rebounding 300 points, as UK figures reflected the sharpest economic contraction since 1980. Indeed, Q4 GDP was worse-than-expected at -1.5 percent, marking the second straight quarter of contraction. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. The data raises the odds that the Bank of England will cut rates further in coming months and may also add to speculation of a possible downgrade of the UK’s AAA credit rating by Standard & Poor’s, especially in light of the latest downgrades of Spanish, Portuguese, and Greek debt.

Canadian Dollar Jumps Despite CPI Slump, Commodity Dollar Outlook Hinges Upon NZ, Australian Data Next Week
The Canadian dollar surged nearly 2 percent against the greenback and Japanese yen on Friday as the currency managed turned up from key support. The move ran counter to the initial impact of Canadian CPI, as the headline index fell 0.7 percent during December, bringing the annual rate down to a 2-year low of 1.2 percent. The decline was a bit more than forecasted, but given the Bank of Canada’s forecast for negative CPI readings for 2 quarters this year, it seems like this reading could have actually reflected far sharper declines. Meanwhile, the Australian dollar and New Zealand dollar have shown signs of stabilizing, but event risk next week could shake the high-yielding currencies up.

On January 27, the release of Australia's headline consumer price index is forecasted have shown a 0.4 percent drop during the fourth quarter, bringing the annual rate down to 3.6 percent from 5.0 percent. The quarterly contraction would be the first in two years and the sharpest drop in eleven years, and may also add to speculation that the Reserve Bank of Australia (RBA) will cut rates aggressively during their next meeting on February 2. As it stands, a Bloomberg News poll of economists is forecasting a 50 basis point reduction to 3.75 percent, while Credit Suisse overnight index swaps are close to forecasting a 100 basis point reduction to 3.25 percent, and this sentiment could weigh on the Australian dollar. However, if inflation pressures prove to be stronger than anticipated, the currency could actually rise.

On January 19, data showed that New Zealand's consumer price index fell during Q4 for the first time in two years and by the most in ten years at a rate of 0.5 percent, bringing the annual rate down to 3.4 percent from 5.1 percent. While the annual rate is still above the Reserve Bank of New Zealand’s 1 percent - 3 percent target band, the news added to speculation that the RBNZ will cut rates aggressively on January 28. As it stands, both a Bloomberg News poll of economists and Credit Suisse overnight index swaps are forecasted a 100 basis point reduction to 4.00 percent, and this sentiment could weigh on the New Zealand dollar. However, if the RBNZ suggests in their policy statement that they may refrain from cutting rates any further, the currency could actually rally.

Published on  Mon, Jan 26 2009, 05:47 GMT

US Dollar Gains Despite Worst Housing Conditions in At Least 50 Years, Climb in Jobless Claims

Fri, Jan 23 2009, 05:29 GMT
by Terri Belkas

DailyFX

- British Pound Outlook May Hinge Upon Friday’s UK GDP Results

- Euro Ends Day Lower as Industrial Orders Fall By Record - Buying Opportunity?

- Japanese Yen Holds Near Record Highs, Verbal Intervention or Pick Up in Risk Appetite Could Trigger Reversals

- Canadian Dollar: USD/CAD Could Break Below 1.25 If CPI Fails to Fall as Expected

US Dollar Gains Despite Worst Housing Conditions in At Least 50 Years, Climb in Jobless Claims
On DailyFX.com, we’ve been talking about the impact of risk aversion on the forex markets for months, and this trend continues to this day as low-yielding currencies remain the safe-havens of choice. Indeed, the US dollar ended Thursday up against higher-yielding currencies like the euro, British pound, Australian dollar, and New Zealand dollar, but slipped versus the Japanese yen, Swiss franc, and Canadian dollar. From a fundamental perspective, current conditions and the outlook for the US remains dismal. Despite broadly lower borrowing costs, MBA new mortgage applications fell 9.8 percent during the week ended January 16 while housing starts and building permits tumbled to the worst levels since the Commerce Department start keeping records almost 50 years ago. More specifically, housing starts were down 15.5 percent during the month of December and 45 percent from a year earlier to 550K, while new permits slumped 10.7 percent during the month and 50.6 percent from a year ago to 549K. Adding to the mix, initial and continuing jobless claims continued to climb toward the 1982 highs, a day after the New York Times reported that New York State’s unemployment insurance system is effectively insolvent and is issuing unemployment checks by borrowing from the federal government. According to New York’s labor commissioner M. Patricia Smith, claims are up 50 percent each week from a year ago. Assuming similar trends are occurring throughout the country, this does not bode well for the next release of non-farm payrolls in February.

British Pound Outlook May Hinge Upon Friday’s UK GDP Results
The British pound remains under pressure, and looking ahead to Friday, the advanced reading of Q4 GDP for the UK is forecasted to contract for the second straight quarter at a rate of -1.2 percent, which would match the worst decline in 18 years. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds the Bank of England will cut rates further in coming months and may also add to speculation of a possible downgrade of the UK’s AAA credit rating by Standard & Poor’s, given the latest downgrades of Spanish, Portuguese, and Greek debt. On the other hand, if GDP is a bit better than forecasts, the currency could surge, even if the index is still negative.

Related Article: Cross Related Sterling Interest Sets Up GBP/USD Basing

Euro Ends Day Lower as Industrial Orders Fall By Record - Buying Opportunity?
We’ve been noting for the past few days that the euro has been consolidating within a falling wedge formation, with support looming just below at 1.2850/60. Though the currency ended the day down slightly against the greenback, EUR/USD has still managed to hold above that key support level despite dismal European released during the morning. Euro-zone industrial orders plummeted by a record 26.2 percent in November from a year earlier as the combination of waning domestic and foreign demand proves to be toxic for manufacturers. As we said yesterday, though, technical developments are proving to be more important at this juncture as the US dollar rally seems to be losing steam, and with falling wedge formations typically signaling bullish reversals, the latest consolidation may warrant the consideration of buying EUR/USD.

Related Article: Euro Technical Outlook

Japanese Yen Holds Near Record Highs, Verbal Intervention or Pick Up in Risk Appetite Could Trigger Reversals
The Japanese yen ended the day up across the majors as persistent risk aversion also weigh on the stock markets, with the Dow Jones Industrial Average slumping 1.28 percent. However, it is worth noting that the yen remained well below the record highs reached yesterday, suggesting that a top could be forming. Last night, the Bank of Japan (BOJ) left rates unchanged at 0.10 percent as expected, and their subsequent Statement on Monetary Policy didn’t reveal much in the way of new information. The statement noted the sharp slowdown in the economy and the dismal prospects for growth going forward as the BOJ expects to fall back into deflation this year. Meanwhile, we saw a bit of jawboning of the Japanese yen, as Vice Finance Minister for International Affairs Naoyuki Shinohara said that they were “closely monitoring movements in the currency market” while BOJ Governor Masaaki Shirakawa mentioned that the currency’s gains were negative for Japanese exporters and the economy in the short term. Nevertheless, there is still potential for Japanese officials to step up verbal intervention efforts or even physically currency intervention if the Japanese yen strengthens further.

Related Articles: Top Forex Trades for 2009

Canadian Dollar: USD/CAD Could Break Below 1.25 If CPI Fails to Fall as Expected
The Canadian dollar initially plunged on news that Canadian retail sales plunged more than expected by 2.4 percent during November, the sharpest drop since January 1998, led primarily by a 7.1 percent drop in automotive sales. While there is little doubt that domestic demand is starting to falter, the bulk of the decline in automotive sales was due to a 14.9 drop in spending at gas stations, and when you consider the steady drop in gasoline prices in both Canada and the US during November, it is clear that since this index is not adjusted for inflation, the figures actually skew the picture a bit. Nevertheless, according to the Bank of Canada's Monetary Policy Report, the outlook for spending, and the economy in general, remains bleak. Going forward, the Bank expects GDP to fall by 1.2 percent in 2009, and then stage a recovery of 3.8 percent in 2010. According to the report, this is faster than the recoveries following the recessions of 1981-82 and 1990-92, and because the Bank has already cut rates aggressively and Canada maintains "greater fiscal flexibility and stronger corporate balance sheets" compared to the 1990's, the economy is in a far better position relative to the past and to other nations. This hint of optimism is part of the reason why the Canadian dollar was able to stage a rebound from this morning's lows. Looking ahead to Friday, since the BOC has forecasted such sharp declines for inflation this year, the upcoming release of the Canadian Consumer Price Index (CPI) will be quite important. At 7:00 ET, CPI for December is anticipated to contract for the third straight month at a rate of 0.4 percent while the annualized pace is forecasted to tumble to a nearly 2-year low of 1.3 percent. Meanwhile, the Bank of Canada’s core CPI measure may actually hold steady at a 1.5 year high of 2.4 percent. Given the sharp drop in commodity prices since the summer and slowing in the Canadian economy, there is potential for weaker-than-expected readings and thus, the Canadian dollar could pull back further.

Published on  Fri, Jan 23 2009, 05:29 GMT

US Dollar Drops as Rise in Risk Appetite Saps Demand for Safe−Havens

Thu, Jan 22 2009, 05:35 GMT
by Terri Belkas

DailyFX

-Euro Shows Signs of Bullish Reversal Despite S&P Downgrade of Portugal’s Credit Rating

-Japanese Yen Increasingly Volatile Ahead of BOJ Rate Decision

-Swiss Franc Pulls Back as SNB’s Hildebrand Says ’I’ Word

-British Pound Plunges as BOE Minutes Show Potential for Further Rate Cuts, Bounces From 1985 Lows

US Dollar Drops as Rise in Risk Appetite Saps Demand for Safe-Havens
The US dollar, as usual, traded more in line with risk trends than anything else. At the start of the day, the currency was trading a bit stronger, but a rebound in risk appetite later in the day sent the greenback tumbling against nearly everything, excluding the Swiss franc. There was no data on hand, but comments by New York Fed President and US Treasury Secretary-designate Timothy Geithner garnered quite a bit of attention. During his confirmation hearing before the Senate Committee, Mr. Geithner primarily faced questions and criticism about his failure to pay all necessary taxes from 2001 - 2004 while working for the IMF. In his prepared remarks, he focused on the economy, which faces "extraordinary challenges," including a "severe recession…catastrophic loss of trust and confidence in our financial system. Unprecedented foreclosure rates, small businesses struggling to stay afloat, millions of Americans worried about losing their jobs and savings, growing job losses, a deep uncertainty about what tomorrow holds." Mr. Geithner went on to say that in “a crisis of this magnitude, the most prudent course is the most forceful course,” which he cited as being the American Recovery and Reinvestment Plan, President Barack Obama's stimulus plan. The $825 billion plan, which could be passed by Congress next month, includes $550 billion in targeted investments and $275 billion in tax cuts for individuals and businesses. There are no major US indicators scheduled to be released on Thursday making it all the more important to watch risk trends and signs of investor optimism will only weigh on the currency.

Related Article: Top 5 Market Movers for the Week of January 18, US Dollar Weekly Outlook

Euro Shows Signs of Bullish Reversal Despite S&P Downgrade of Portugal’s Credit Rating
We’ve been noting for the past few days that the euro has been consolidating within a falling wedge formation, with support looming just below at 1.2850/60 (this is slightly under the level noted yesterday due to the change in slope of the trendline). There has been no fundamental change regarding the economic scenario for the Euro-zone, as European Central Bank (ECB) President Jean-Claude Trichet suggested during their last meeting that additional rate cuts may be on the way, but just not in February. Meanwhile, Portugal became the third European nation to see their credit rating downgraded by S&P, following Spain on Monday and Greece last week, highlighting one of the major problems associated with monetary unions: monetary policy is not always going to suit the economies of all participants. Looking ahead to Thursday, the ECB’s Monthly Report is likely to highlight the bleak outlook for the Euro-zone economy and expectations for a decline in inflation pressures in the near-term. Given the broadly bearish expectations for the Euro-zone in general, the report has potential to weigh on the euro. However, since the ECB will not be issuing updated growth and inflation projections until March, the news may not be very market-moving. Overall, technical developments are proving to be more important at this juncture as the US dollar rally seems to be losing steam, and with falling wedge formations typically signaling bullish reversals, the latest consolidation may warrant considering buying EUR/USD.

Japanese Yen Increasingly Volatile Ahead of BOJ Rate Decision
The Japanese yen saw a surge in volatility on Wednesday, as the currency rocketed higher across the majors during the morning to touch record highs versus the British pound, 13-year highs against the US dollar and Canadian dollar, and 6-year highs versus the euro. However, the yen reversed course throughout the afternoon, and by the end of the day the yen was down nearly 2 percent against the New Zealand dollar and Australian dollar and slipped roughly 0.50 percent versus the euro and Canadian dollar. The move in the Japanese yen crosses corresponded with a 3.5 percent rally in the Dow Jones Industrial Average and a decline in the ultimate safe-haven asset: Treasuries.

Overnight, the Bank of Japan (BOJ) is forecasted to leave rates unchanged at the conclusion of their policy meeting, but with interest rates already at an ultra-low 0.10 percent, there isn't much room to make monetary policy more accommodative without going back to zero-interest rate policy (ZIRP) anyway. Thus, it will be important to gauge comments by BOJ Governor Masaaki Shirakawa and to look at the BOJ's Monthly Report on January 23 at 0:00 ET, but the outlook doesn't look good. Indeed, Japan's Cabinet Office issued an assessment of the economy during the month of January last night, and indicated that conditions were "worsening rapidly" as exports and industrial output plunge, corporate profits fall "substantially," business investment declines, the employment situation deteriorates "rapidly," and private consumption takes on a "weak tone." Mr. Shirakawa's comments on the economy ultimately may not have a huge impact on the Japanese yen, but it will be very important to look for comments regarding the currency, as the use of verbal intervention could push the yen even lower.

Related Articles: Top Forex Trades for 2009

Swiss Franc Pulls Back as SNB’s Hildebrand Says ’I’ Word
Speaking of intervention, the Swiss franc tumbled across the majors as Swiss National Bank (SNB) Vice-Chairman Philipp Hildebrand brought up the “I” word during speech this afternoon, noting that the SNB could sell francs in the market to halt the currency’s gain, and in an “extreme case,” could even go so far as to fix the exchange rate. Furthermore, Mr. Hildebrand left the door open to quantitative easing, in line with what the ideas introduced by the Federal Reserve and Bank of England over the past month. Efforts to verbally boost the currency may help to quell speculative buying in the near-term, but if risk aversion drives carry trades lower once again, the SNB may be forced to attempt physical means.

British Pound Plunges as BOE Minutes Show Potential for Further Rate Cuts, Bounces From 1985 Lows
The British pound plummeted across the majors on Wednesday, reaching the lowest levels since 1985 against the US dollar and hitting record lows versus the Japanese yen. Economic data from the UK certainly didn’t help the currency, which has been trading more like a speculative carry trade than currencies with similarly low yields, like the Canadian dollar. UK jobless claims rose by a whopping 77.9K during December, leading the total number of job losses to reach 1.16 million and the claimant count rate to match the June 2000 high of 3.6 percent. Furthermore, the minutes from the Bank of England’s last meeting showed that the decision to cut rates by 50 basis points was on an 8-1 vote, as perennial Monetary Policy Committee member David Blanchflower - easily the most dovish on the Committee - called for a full 100 basis point reduction. Other members showed interest in a deeper rate cut as well, but refrained on fears it would seriously impact confidence. Nevertheless, the persistent fear amongst investors to borrow and lend leaves the odds in favor of further action by the BOE in coming months. There are no major indicators for the UK due to be released on Thursday, but given the sheer extent of the British pound’s recent declines and quick reversal from its multi-decade and record lows, the currency may be in store for further gains in the near term.

Published on  Thu, Jan 22 2009, 05:35 GMT

US Dollar, Japanese Yen Surge as Risk Aversion Triggers 4% Decline in DJIA, Jump in Volatility

Wed, Jan 21 2009, 05:42 GMT
by Terri Belkas

DailyFX

- British Pound Tumbles as Core CPI Hits 2 Year Low, BOE’s King Forecasts ‘Marked’ Contraction in H1 2009

- Euro Tumbles Despite Slight Improvement in Investor Sentiment, France’s Auto Industry Bailout

- Canadian Dollar Continues to Slip as Bank of Canada Slashes Rates to Record Low of 1.00%, May Cut Further

US Dollar, Japanese Yen Surge as Risk Aversion Triggers 4% Decline in DJIA, Jump in Volatility
While many people were watching the inauguration of President Barack Obama, equity traders were focused on the sharpest drop in State Street Corp’s shares since 1984 as the world’s largest money manager for institutions reported a doubling in unrealized bond losses. With the exception of a few weeks in December, the US dollar and Japanese yen have both been driven primarily by risk appetite since mid-2008, as flight-to-safety and deleveraging work to strengthen the currencies. As a result, we must credit the gains in the greenback and the yen on Tuesday to lingering risk aversion, which was only exacerbated by State Street’s losses, as we also saw the Dow Jones Industrial Average end the day down a whopping 4.01 percent while the CBOE’s VIX volatility index surged higher. Over the next 24 hours, news that may impact risk trends will generally remain contained to the stock markets, as a variety of S&P 500 companies will be issuing earnings releases, including banks like Northern Trust and computer powerhouse Apple.

Related Article: Top 5 Market Movers for the Week of January 18, US Dollar Weekly Outlook

British Pound Tumbles as Core CPI Hits 2 Year Low, BOE’s King Forecasts ‘Marked’ Contraction in H1 2009
The UK consumer price index contracted for the third straight month in December at a rate of 0.4 percent, helping to drag the annual rate down to 3.1 percent from 4.1 percent. The index’s decline was far less than expected, as the annual rate was actually forecasted to plunge to 2.6 percent, and the actual rate leaves inflation well above the BOE’s 2 percent inflation target and just above their 3 percent ceiling. However, the core measure of CPI, which excludes volatile food, energy, alcohol, and tobacco costs, plunged to a more than 2-year low of 1.1 percent from 2.2 percent, suggesting that broad price pressures are indeed cooling. This leaves the odds in favor of further reductions to the UK’s Bank Rate, especially as BOE Governor Mervyn King said in a speech this afternoon that the contraction of GDP during the first half of 2009 may be “marked” and there was is still potential for inflation to fall below 2 percent. Mr. King also left the door open to the use of “unconventional” measures, and that in coming weeks, the BOE may purchase securities such as corporate bonds and commercial paper in an effort to boost liquidity and lending to companies and consumers.
Not all is said and done when it comes to gauging the BOE’s policy bias going forward, though, as the minutes from the Monetary Policy Committee’s (MPC) meetings tend to be a huge market-mover for the British pound upon release at 4:30 ET, and this Wednesday’s announcement is unlikely to be any different. During the January meeting, the MPC slashed the Bank Rate by 50 basis points to a record low of 1.50 percent, as expected. However, the British pound subsequently rallied as the MPC did not give any indication that they would cut rates again during their February 5 meeting. The British pound’s response to the release of the minutes will depend on if the MPC’s comments and outlooks signal the same thing: that the BOE will hold a more neutral stance going forward. If, on the other hand, the MPC seems to hold a more dovish stance, the British pound could pull back sharply.

Related Article: British Pound Weekly Forecast

Euro Tumbles Despite Slight Improvement in Investor Sentiment, France’s Auto Industry Bailout
The euro continues to tumble within a falling wedge formation, and ended the day trading just above trendline support at 1.2875. Economic data from the Euro-zone hasn’t helped the currency very much, especially since the EUR/USD and EUR/JPY pairs in particular have been weighed down by deleveraging and flight to quality. Looking at the European data on hand for the day, while the ZEW survey showed that German investor sentiment on current conditions remained dismal during January, confidence in the economic outlook was better than expected as the index rose to -31 from -45.2. This increase marked the third improvement in a row, following four rate cuts by the European Central Bank since October and the announcement of a 50 billion euro stimulus plan by German Chancellor Angela Merkel last week. Meanwhile, French Prime Minister François Fillon said that the government would set aside 5 - 6 billion euros worth of loans for the French auto industry, primarily for Renault and PSA Peugeot Citroën, though the plan would still need the approval of the European Commission. Over the next 24 hours, there will be no key economic indicators released, but with risk trends still the dominant driver of price action in the forex markets, it is necessary to keep an eye on the stock markets and volatility gauges, since risk aversion works in favor of US dollar strength and thus, euro weakness. As mentioned above, immediate support looms at 1.2875, but additional support at a rising trendline connecting the October and November lows may come into play at 1.2600/25.

Related Articles: Top Forex Trades for 2009, EUR/USD Forecast After the ECB Rate Decision

Canadian Dollar Continues to Slip as Bank of Canada Slashes Rates to Record Low of 1.00%, May Cut Further
The Canadian dollar ultimately ended the day lower against the US dollar after the Bank of Canada cut rates in line with expectations by 50 basis points to 1.00 percent, which marks the lowest level since the bank was founded in 1934. Meanwhile, the bank's concurrent press release left the door open for further rate cuts as they said that further monetary stimulus may be needed since total CPI is expected to fall negative for two quarters in 2009 due to falling energy costs while Canada's economy is forecasted to contract through mid-2009. However, the bank also said that they would continue monitoring "economic and financial developments" in order to judge how to reach their 2 percent inflation target "over the medium", suggesting they may not be rushing to slash rates again in March if data between now and then signals that inflation pressures are actually holding up. This leaves Friday's Canadian CPI report all the more critical to Canadian dollar price action later this week.

Published on  Wed, Jan 21 2009, 05:42 GMT

US Dollar, Japanese Yen Dominate as RBS Woes Weigh on Risk Appetite

Tue, Jan 20 2009, 05:37 GMT
by Terri Belkas

DailyFX

• British Pound Declines Could Continue as UK CPI is Forecasted to Drop by Most in 7 Years

• Euro Falls Sharply as S&P Downgrades Spain’s Credit Rating, European Commission Forecasts Sharp Drop in Growth in 2009

• Canadian Dollar Outlook Depends Not on Bank of Canada’s Rate Decision, but Press Release Policy Bias

US Dollar, Japanese Yen Dominate as RBS Woes Weigh on Risk Appetite
The US stock markets were closed on Monday for the Martin Luther King, Jr. holiday, but that doesn’t mean that risk aversion couldn’t feed through from Europe into US trading. Indeed, Monday’s most exciting price action was contained to the European trading session, as news that the Royal Bank of Scotland may report the biggest recorded annual loss in UK corporate history sparked a bout of selling in stocks and heavy buying in the US dollar and Japanese yen. In fact, both the greenback and the yen ended the day up over 1 percent against the euro and nearly 2 percent versus the British pound. With no data due to be released from the US on Tuesday, the outlook for safe-aven currencies and carry trades depends heavily on risk trends.

Related Article: Top 5 Market Movers for the Week of January 18, US Dollar Weekly Outlook

British Pound Declines Could Continue as UK CPI is Forecasted to Drop by Most in 7 Years
Risks for the UK economy and financial markets remain high as the Royal Bank of Scotland (RBS) said that they may report the biggest recorded annual loss in UK corporate history, amounting to as much as 28 billion pounds. The news led European equities and the British pound to tumble lower as it remains clear that the banking sector is far from stable, even after the UK government enacted a 50 billion pound recapitalization plan in October. As a result, UK Prime Minister Gordon Brown has announced another bank rescue package which will give the Bank of England (BOE) the power to lend up to 50 billion pounds directly to businesses, and the UK Treasury has agreed to swap its RBS investment of 5 billion pounds in preference shares - which provide dividends - for ordinary shares. All in all, the move could bring the government’s stake in RBS up from roughly 58 percent to 70 percent.

Looking ahead to Tuesday, UK data is forecasted to reflect a sharp drop in inflation pressures, which should allow the BOE additional leeway to cut rates this year. The Consumer Price Index (CPI) for the month of December is expected to drop 0.9 percent - the most in seven years - dragging the annual rate down to 2.6 percent. Likewise, the core measure, which excludes volatile food, energy, alcohol, and tobacco costs, is anticipated to fall to an annual rate of 1.3 percent from 2.0 percent. If CPI cools more than forecasted the GBP/USD could pull back toward falling trendline support at 1.4300/50, especially since the BOE suggested in their last policy statement that they may leave rates unchanged next month. On the other hand, indications that price pressures are not falling sufficiently could lead the British pound to gain.

Related Article: British Pound Weekly Forecast

Euro Falls Sharply as S&P Downgrades Spain’s Credit Rating, European Commission Forecasts Sharp Drop in Growth in 2009
The euro fell more than 1 percent against the US dollar on Monday amidst deteriorating investor confidence and dour forecasts by the European Commission. The Commission said that the Euro-zone’s economy will contract by 1.9 percent in 2009, which would mark the first negative result since the inception of the euro, before growing by 0.4 percent in 2010. Furthermore, the unemployment rate is anticipated to climb from 7.5 percent to 9.3 percent in 2009 and 10.2 percent in 2010. Finally, inflation pressures are likely to cool substantially as CPI is expected to fall from 3.3 percent in 2009 to 1 percent in 2009, following by a pickup to 1.8 percent in 2010. Nevertheless, it is clear that some regions are suffering more than others as S&P lowered Spain’s long-term sovereign credit rating to AA+ from AAA, citing “expectations that public finances will suffer in tandem with the expected decline in Spain's growth prospects, and that the policy response may be insufficient to effectively counter the related economic and fiscal challenges.” This downgrade will make it more expensive for the country to borrow and thus, more difficult to invest in measures meant to boost the economy, and also highlights one of the major problems associated with monetary unions: monetary policy is not always going to suit the economies of all participants.

Looking ahead to Tuesday, the German ZEW survey of investor sentiment is forecasted to show a slight improvement in opinion on the economic outlook, but a continued deterioration in confidence in the current situation. This is similar to what we saw with the US Reuters/University of Michigan consumer confidence index, which reflected a rise in the economic outlook as the government is likely to come to agreement on a fiscal stimulus plan amounting to $825 billion within weeks. The ZEW survey doesn’t tend to be a huge market-mover for the euro on a long-term basis, but can have a very short-term impact and as a result, remains an indicator worth watching.

Related Articles: Top Forex Trades for 2009, EUR/USD Forecast After the ECB Rate Decision

Canadian Dollar Outlook Depends Not on Bank of Canada’s Rate Decision, but Press Release Policy Bias
The Canadian dollar could see a pickup in volatility on Tuesday at 9:00 ET as the Bank of Canada is widely expected to cut interest rates for the fourth time since October. A Bloomberg News poll of economists reflects consensus forecasts for a 50 basis point cut to 1.00 percent, but as of Friday, Credit Suisse overnight index swaps were pricing in a slight chance of a 75 basis point cut to 0.75 percent. As it stands, economic conditions deteriorated rather rapidly in December, as the Canadian unemployment rate rose to a nearly 3-year high of 6.6 percent while Ivey PMI fell to a record low of 39.1, marking the second straight month that the indicator signaled a contraction in business activity. Likewise, surveys published by the BOC reflected bleak scenarios for both sales and the credit markets, suggesting the central bank will cut rates to at least 1.00 percent. However, as we so often see when it comes to rate decisions, the Canadian dollar’s reaction may hinge more upon the policy bias contained within the Bank’s concurrent press release. Any indications that they may leave rates unchanged at their next meeting in order to await more data could send the Canadian dollar spiraling higher.

Published on  Tue, Jan 20 2009, 05:37 GMT

US Dollar, Japanese Yen Pull Back as DJIA Ends Day in Positive Territory

Mon, Jan 19 2009, 05:41 GMT
by Terri Belkas

DailyFX

- US Dollar, Japanese Yen Pull Back as DJIA Ends Day in Positive Territory

- British Pound Holds Solid Link with Carry Trades

- BOE Minutes, Q4 GDP Could Make or Break GBP/USD Next Week

- Euro Edges Higher Despite Thursday’s ECB Rate Cut - 1.34 the Level to Watch

US Dollar, Japanese Yen Pull Back as DJIA Ends Day in Positive Territory
The US dollar and Japanese yen both saw sharp reversals of their rallies from Thursday, as a pickup in risk appetite worked in the favor of higher-yielding currencies and “riskier” assets like stocks. There were a few aids to the rise in investor sentiment, as the government provided a package of guarantees, liquidity access, and capital to Bank of America worth $138 billion in order to help them along with their acquisition of Merrill Lynch. Meanwhile, the US Consumer Price Index (CPI) slowed to an annual rate of 0.1 percent, the lowest since 1955, but was actually higher than forecasts for a decline to -0.2 percent. While this is still clearly a very low figure historically, the fact that the index remained positive helped to assuage concerns that the economy had fallen into deflation.

Finally, the Reuters/University of Michigan consumer confidence index unexpectedly rose to 61.9 in January from 60.1. Sentiment on current conditions and the economic outlook remained bleak, but the latter did see a slight increase as the US is likely to come to agreement on a fiscal stimulus plan amounting to $825 billion within weeks. However, inflation expectations for 1-year ahead and 5-years ahead both rose to 2.0 percent and 3.0 percent, respectively, as gasoline prices started to climb again at the start of the month. Looking ahead to the next week, there will be no top tier indicators released from the US, leaving risk trends as the dominant driver of the forex markets.

Related Article: Top 5 Market Movers for the Week of January 18

British Pound Holds Solid Link with Carry Trades - BOE Minutes, Q4 GDP Could Make or Break GBP/USD Next Week
The British pound may have fallen through most of the US trading session, but it still managed to end the day higher against the greenback. The UK’s currency has been one of the most volatile of the majors, which is unsurprising once you consider the British pound’s rising correlation with the G10 carry trades. Event risk will pick up significantly next week as two indicators will provide key insight into whether or not the Bank of England will cut rates again in February. On January 21 at 4:30 ET, the Bank of England’s meeting minutes will hit the wires and tend to be a huge market-mover for the British pound, and this time is unlikely to be any different. During the January meeting, the BOE’s Monetary Policy Committee (MPC) slashed the Bank Rate by 50 basis points to a record low of 1.50 percent, as expected. However, the British pound subsequently rallied as the MPC did not give any indication that they would cut rates again during their February 5 meeting. The British pound’s response to the release of the minutes will depend on if the MPC’s comments and outlooks signal the same thing: that the BOE will hold a more neutral stance going forward.

On January 23 at 4:30 ET, the advanced reading of Q4 GDP for the UK is forecasted to contract for the second straight quarter at a rate of -1.2 percent, which would match the worst decline in 18 years. The UK has been hit particularly hard by the credit crunch, especially since the country became one of the biggest financial centers in the world. This has translated into a full-on collapse of the housing market, climbing job losses, and weak consumption. Furthermore, with growth slowing around the world, demand for British exports has declined as well, putting a large burden on manufacturers. Overall, a greater-than-expected decline could lead the British pound lower as the data would raise the odds the BOE will cut rates further in coming months. On the other hand, if GDP is even just a bit better than forecasts, the currency could surge.

Related Article: A Broad GBPUSD Range Meets The Promise Of Volatility Next Week

Euro Edges Higher Despite Thursday’s ECB Rate Cut - 1.34 the Level to Watch
The euro crept higher throughout the day on Friday, despite the release of disappointing European trade results early in the day. The Euro-zone trade deficit widened to a seasonally adjusted 4.9 billion euros in November as exports declined at the fastest pace in more than eight years. Indeed, the global economic slowdown is taking a hefty toll on Europe’s manufacturers, as they also have to contend with waning domestic demand. On the hourly charts of EUR/USD, the pair has established a bear trend from the December highs, but it will be very important to watch where price stands relative to trendline resistance at 1.3400, as a break higher would suggest additional gains are to come.

Looking ahead to the next week, event risk will be relatively low but there are still a handful of indicators worth watching. On January 20, the German ZEW survey of investor sentiment is forecasted to show a slight improvement in opinion on the economic outlook, but a continued deterioration in confidence in the current situation. This is similar to what we saw with the US Reuters/University of Michigan consumer confidence index, which reflected a rise in the economic outlook as the government is likely to come to agreement on a fiscal stimulus plan amounting to $825 billion within weeks. On January 22, the European Central Bank’s Monthly Report is likely to highlight the bleak outlook for the economy and expectations for a decline in inflation pressures in the near-term, all of which created bearish potential for the euro. Finally, on January 23, the Purchasing Managers’ Index (PMI) for the Euro-zone’s services and manufacturing sectors are forecasted to reflect a contraction in business activity for the eighth straight month in January, while the composite index is anticipated to the worst level since recordkeeping began in 2005, highlighting the extent of the recession plaguing the region.

Related Articles: Top Forex Trades for 2009, EUR/USD Forecast After the ECB Rate Decision

Published on  Mon, Jan 19 2009, 05:41 GMT

British Pound Consolidates Above 1.45 − Breakout Potential?

Fri, Jan 16 2009, 06:06 GMT
by Terri Belkas

DailyFX

-Euro Ends Day Modestly Lower as ECB Cuts Rates to Record Low of 2.00%, Leaves Door Open to Further Reductions

- Euro Tumbles as ECB Cuts Rates to Record Low of 2.00%, Leaves Door Open to Further Reductions

- US Dollar, Japanese Yen Holds Inverse Correlation with DJIA as Risk Trends Dominate Price Action

- British Pound Consolidates Above 1.45 - Breakout Potential?

Euro Ends Day Modestly Lower as ECB Cuts Rates to Record Low of 2.00%, Leaves Door Open to Further Reductions
Trading throughout the forex markets was particularly volatile on Thursday as risk appetite shifted wildly. Meanwhile, the European Central Bank’s 50 basis point rate cut to a record low of 2.00 percent exacerbated moves for the euro, as the 7:45 ET reduction initially sent the currency plummeting. ECB President Jean-Claude Trichet’s 8:30 ET press conference subsequently sparked even more volatility, though. While there is another policy meeting scheduled in 3 weeks, Mr. Trichet said that the next "important" one will be in March when they release new projections for growth and inflation, suggesting they have no plans to adjust interest rates next month. However, he refused to call 2 percent the lower limit for interest rates, leaving the door open to further reductions in coming months. In the longer-term, Mr. Trichet indicated that inflation rates may rise against during the second half of 2009, but that it wasn’t necessarily relevant to rates as the Euro-zone is likely to experience a severe slowdown as global economic weakness weighs on export demand.

Looking ahead to Friday, the Euro-zone’s trade balance is forecasted to reflect a deficit for the seventh straight month in November, and may even widen to -4.8 billion euros (seasonally adjusted) from -1.3 billion euros in October. Exports face especially large downside risks as slowing foreign growth limits demand for European goods. However, imports have been weaker as well, especially given the decline in energy costs, which could help to prevent the balance from plummeting more than anticipated. This isn't typically a major market-mover for the euro, barring significant deviations from forecasts, but is nevertheless worth watching as a measure of the health of the Euro-zone's economy.

Related Articles: Top Forex Trades for 2009, EUR/USD Forecast After the ECB Rate Decision

US Dollar, Japanese Yen Holds Inverse Correlation with DJIA as Risk Trends Dominate Price Action
Following a breakdown of correlations in December, the inverse link between currencies like the US dollar and Japanese yen and the Dow Jones Industrial Average has become tight once again. Indeed, intraday movements in the forex markets were in sync with those of the stock markets, as a roughly 2.5 percent drop in the DJIA at the start of the day translated into strength for the greenback and yen. However, once the DJIA moved back up into positive territory, the currencies pulled back across the majors. One factor that may have helped alleviate market fears of a government takeover of Citigroup was a comment by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair, who said that she would be “very surprised” if the government had to nationalize any large banks. This also helped to offset concerns that Bank of America will need more funding from the government in order to absorb losses stemming from their acquisition of Merrill Lynch.

There was also quite a bit of US economic data on hand as well at 8:30 ET. First, the Labor Department's US producer price index showed a 1.9 percent drop in costs during December due primarily to weaker energy prices, which compose 21.65 percent of the index and tumbled 9.3 percent. This led the annual rate of price growth down to a two year low of -0.9 percent, but core costs (excluding food and energy) actually rose 0.2 percent in December. Overall, the data does suggest that inflation is indeed moderating in the US thanks to the decline in commodity prices since the summer, but core prices may take a bit longer to cool. Meanwhile, initial jobless claims rose 11.5 percent to 524,000 for the week ended January 10. While this is down from the record high of 589,000 reached in the week ended December 19, it is still a very historically high number and suggests that job losses and the unemployment are sure to climb further in the New Year. Finally, the New York Fed's "Empire" manufacturing activity index edged slightly higher but remained negative for the ninth straight month at -22.2 in January. A breakdown of the index shows that every single component denoted a contraction, including prices paid/received, new orders, shipments, and number of employees. With both foreign and domestic demand slowing, manufacturers will remain at a great disadvantage going forward.

On Friday, the release of the December reading of the US Consumer Price Index (CPI) could lead the term “deflation” to be used abundantly in coming weeks and months (one that became very popular in November, according to Google Trends). Indeed, CPI is forecasted to have plunged 0.9 percent during December while the annual rate is anticipated to have fallen negative for the first time since 1955 by 0.2 percent. Excluding volatile food and energy prices, though, core CPI may have risen a slight 0.1 percent during the month, leaving the annual rate to edge down to a more than 4-year low of 1.9 percent from 2.0 percent. Overall, the news could weigh on the US dollar if CPI does indeed fall negative, but it may be more important to watch the impact of the data on investor sentiment, as increased risk aversion tends to benefit the US dollar and Japanese yen.

Related Article: Top 5 Market Movers for the Week of January 11

British Pound Consolidates Above 1.45 - Breakout Potential?
The British pound ended the day broadly higher on Thursday, thanks to a last-minute pickup in risk appetite that drove equities and carry trades higher at the very end of the US trading session. However, when looking at GBP/USD on intraday charts, the pair appears to be consolidated within a range of 1.4500 - 1.4670/1.4700, suggesting price may be bound to break either higher or lower in the near term. Which direction GBP/USD goes may depend most on risk trends, but the pair seems to be forming a bottom and leaves price more likely to break to the upside.

Related Article: British Pound Weekly Outlook

Published on  Fri, Jan 16 2009, 06:06 GMT

US Dollar, Japanese Yen Remain Strong as DJIA Tumbles 2.94%, Retail Sales Plunge

Thu, Jan 15 2009, 05:50 GMT
by Terri Belkas

DailyFX

- Euro Down Ahead of ECB Rate Decision, But Could EUR/USD Ultimately Rally in Response?

- Canadian Dollar, New Zealand Dollar, Australian Dollar All Tumble on Deleveraging, Risk Aversion

- British Pound Gains Across the Majors as British PM Brown Announced Loan Guarantees

US Dollar, Japanese Yen Remain Currencies of Choice as DJIA Tumbles 2.94%, Retail Sales Plunge
The US dollar and Japanese yen remained strong on Wednesday as risk aversion remains a very real theme in the markets. The biggest piece of evidence of this: increased demand for Treasuries, the 2.94 percent drop in the Dow Jones Industrial Average, and the nearly 6 point rise in the CBOE’s VIX volatility index. Meanwhile, the release of the US Advance Retail Sales index proved to be even worse than expected, as it fell 2.7 percent during the month of December alone. This marked the sixth straight month of contraction and the worst string of declines since recordkeeping began in 1992, but is particularly negative because the holiday shopping season is supposed to be a boon for retailers, but even the most aggressive discounting wasn’t able to offset the impact of a deteriorating labor market, tighter credit conditions, and a year-long recession. With job losses continuing to climb, the dismal retail sales results may be just a part of a rather consistent trend through the first half of 2009.

Going forward, risk trends may continue to determine price action for both the US dollar and Japanese yen, as we’ve seen that at this point, fundamentals have little impact on the currencies. Throughout the day on Thursday, multiple members of the Federal Open Market Committee (FOMC) will be speaking on the economy and monetary policy, including Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, and San Francisco Fed President. Comments by FOMC members tend to be very market-moving, especially when it comes to interest rate expectations, so traders should keep an eye on the news wires as they could have negative or positive implications for risk sentiment.

Related Article: Top 5 Market Movers for the Week of January 11

Euro Down Ahead of ECB Rate Decision, But Could EUR/USD Ultimately Rally in Response?
The euro slipped for yet another day versus the US dollar and Japanese yen, as a combination of risk aversion and speculation of a rate cut by the European Central Bank (ECB) on Thursday morning weighs on the currency. According to Credit Suisse overnight index swaps and a Bloomberg News poll of economists, the ECB is likely to cut interest rates by 50 basis points to match the 2005 record low of 2.00 percent. This easily leaves the 7:45 ET announcement as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that the ECB will continue to cut rates have the potential to lead the euro far lower. On the other hand, a more probable scenario