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Dollar Rally Likely To Stall Ahead Of US GDP Data
Thu, Jul 31 2008, 08:39 GMT
by Grace Cheng
GraceCheng.com
A leading New York-based financial portal, is a must-read for traders and investors who want high-impact financial news, market information and opinions from the ground.The US dollar’s rally against major currencies from Tuesday, as a result of better-than-forecast US consumer confidence, was carried over to Wednesday, albeit at a slower pace. EUR/USD dipped to another 1-month low of 1.5520 today while USD/CHF rose to a 6-week high of 1.0520 after the release of an unexpectedly positive jobs report from ADP which showed that private employers added 6000 jobs last month, versus an average forecast cut of 60,000 jobs.
This surprising outcome is leading many to think that maybe, just maybe, this Friday’s release of the government NFP report won’t be as bad as forecast. The estimate is for a cut of 75,000 jobs in July, following a decline of 62,000 in June. The dollar later gave up some of its gains when oil shot up $5 after US DOE oil inventories data showed crude inventories fell unexpectedly. Nymex crude oil closed at $126.77 after falling to $120.42 on Tuesday, the lowest level since May 6.
Another factor that could capped dollar’s gains for the moment has been a Fed announcement Wednesday that it will extend its emergency credit facilities, established in March, through January 30. Both the Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries will now be extended to non-banks “in light of continued fragile circumstances in financial markets”.
Such an action suggests that the financial firms are still having much difficulty and credit conditions remain very tight. Not a good sign for the US financial system as a whole, but then again, it could be seen by market players as a positive sign that the Fed is doing something concrete to help the markets. People only see what they want to see.
For now, EUR/USD has a cushion of support between 1.5480-1.5510. Further selling could pull the currency pair towards 1.5440-50. USD/CHF’s next challenge is to tackle 1.0540-50 before it can reach for 1.0600.
Watch out for Thursday’s release of US GDP estimate for the second quarter which is expected to increase 1.8%, up from 10% in the first quarter and 0.6% in the fourth quarter of 2007.
Economic Calendar For Thursday:
- Australia retail sales 0130 GMT
- Swiss CPI 0545 GMT
- Eurozone CPI 0900 GMT
- Canada GDP 1230 GMT
- US GDP, core PCE 1230 GMT
Published on Thu, Jul 31 2008, 08:39 GMT
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Near−Term Rally Of Dollar A Possibility As Fed's Plosser Voices Out Rate Hike Urgency
Wed, Jul 23 2008, 07:21 GMT
by Grace Cheng
On Tuesday, the forex and stock markets were shaken not by corporate earnings results and not by any economic releases, but by a hawkish speech from Fed’s Plosser. The Philadelphia Fed President said there should be interest rate hikes “sooner rather than later” even if employment and financial conditions haven’t improved. This renewed signal to raise rates helped push the US dollar sharply against the Euro, Swiss franc, British pound, Japanese yen, Aussie and Kiwi, and could set the dollar on a near-term rally.
How quickly things change in the financial world; one minute, bets for a near-term rate hike are off the table, and the next, everyone’s anxious to place their bets for one again. It also reminds me of how drastically people change sides: one moment the government denies the implicit guarantee given to Freddie and Fannie, then suddenly they are clearly in trouble and Uncle Sam is there to save the day.
Anyway, back to Plosser’s comments, I think it is a good thing Plosser has the sense to highlight inflation risks and the foresight to consider voting for a rate hike soon, and not be sidetracked by how bad sharebuyers are doing. Inflation is a bigger evil than a downturn.
EUR/USD fell to the lowest since July 11, touching an intraday low of 1.5760. With Euro struggling to make more new highs in spite of largely disappointing earnings from US companies, we could expect Euro bulls to get out of the market. Next bear targets for EUR/USD are around 1.5720, 1.5690, 1.5660.
USD/CHF finally broke above 1.0250 to a session high of 1.0335, with 1.0350, 1.0390 the next topside objectives.
Stock Markets Charmed By Oil Decline
With the dollar up, crude oil prices in turn headed downward, dropping more than $3 to below $130 per barrel. At the same time, concerns about Tropical Storm Dolly subsided, aiding the slide of oil. US stocks initially went lower on Wachovia’s (WB: 16.79 +3.61 +27.39%) poor earnings results, but later went up as oil fell during the session.
The Dow Jones industrial average closed up more than 130 points. Even Wachovia shares later rose 27% to $16.79 - not bad for a bank that posted a $8.9 billion loss for the second quarter. Washington Mutual (WM: 5.82 +0.34 +6.20%), US’s largest savings and loan company, which released its earnings after the market close, announced a loss of $3.33 billion. CBOE’s VIX index (VIX-X.W: 23.05 0.00 0.00%) fell 8.1% to 21.18, the lowest level since June 25. It had initially gained as much as 4.5% at the beginning of trading.
How stock markets will react on Wednesday is anyone’s guess. But as for the forex markets, the US dollar seems to have the upper hand for now.
Economic Calendar For Wednesday:
- Australia CPI 0130 GMT
- Bank of England minutes 0830 GMT
- Canada CPI 1100 GMT
- Fed’s Beige Book 1800 GMT
- Reserve Bank Of New Zealand rate decision 2100 GMT (rate expected to stay at 8.25%)
Published on Wed, Jul 23 2008, 07:21 GMT
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Stay Profitable In These Volatile Market Conditions By Making Quick Trades
Mon, Jul 21 2008, 09:35 GMT
by Grace Cheng
A crazy week in the markets has gone by again, and I must emphasize the “crazy”. Sentiment has swung from one panic end to another euphoric end, and even so, investors can’t maintain each state of emotion with much conviction or get others to feel the same way they do. Many of them are confused about what to think about the “rally” that we’ve seen in the stock markets this week and the “rally” of the US dollar in the forex markets.
Early in the week, stocks kept falling on the woes of Freddie Mac (FRE: 9.18 0.00 0.00%) and Fannie Mae (FNM: 13.40 0.00 0.00%), the two largest buyers of mortgage loans in the US, and in forex, the US dollar fell to a record low against the Euro on broad pessimism about the US economy. But later, when Bernanke said on Wednesday that Fannie and Freddie are not in danger of failure, everything reversed in the markets, as if the fundamentals had changed as well. As if Bernanke can cure the disease and not just the symptoms.
US corporate earnings came in mixed; Banking giant Citigroup (C: 19.35 0.00 0.00%) reported a quarterly loss of $2.5 billion in the second quarter after writing down $7.2 billion, and even though it is a huge loss, the loss per share is not as much as what the market had predicted. Merrill Lynch (MER: 30.91 0.00 0.00%) also posted a steep second quarter loss ($9 billion writedown). Tech companies Microsoft (MSFT: 25.86 0.00 0.00%) and Google (GOOG: 481.32 0.00 0.00%) posted profits that were less than what many had expected. The drop in profit experienced by Google was actually the steepest since it went public in 2004.
The upward move in stocks could also partly be the result of a short covering, since the SEC is now making a somewhat big deal of “naked short selling”, but has done a poor job in explaining to people what is allowed and what isn’t, and to whom. The SEC can join the ranks of the Fed, the Treasury etc, for they all seem to be lacking credibility, just when it is needed the most.
Dollar is chalking up a weekly gain against the Euro even though it hit a record low on Tuesday, and also against the Swiss franc and the Japanese yen. It however has weakened against the British pound. Much focus will be on oil prices; if they fall further next week, they would be dollar-supportive, but if not, we could see dollar weakness again.
In forex trading, the Euro’s bullish steam may have temporarily stalled against the dollar, but it has resumed against the Japanese yen. After EUR/JPY dropped more than 300 pips from its high of 169.70 in the earlier part of the week, it has now gone back up above 169.00. As for EUR/USD, it first has to break above 1.5910-20 if it intends to test 1.6000 again.
Friday’s German inflation data showed that German producer prices rose at its fastest pace since March 1982, increasing 6.7% year-on-year in June, surpassing the 6% posted in May, and was higher than expected.
To stay profitable in these uncertain times, make quick trades and remain skeptical. One day does not a market make.
Published on Mon, Jul 21 2008, 09:35 GMT
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Bernanke's Bleak Outlook Could Pressure Dollar To Further Record Lows Against Euro
Wed, Jul 16 2008, 10:10 GMT
by Grace Cheng
Indeed, Fed chief Bernanke’s testimony before the US Senate Banking Committee today has sparked off big moves in forex and stock markets, as I’ve warned yesterday. Unlike previous testimonies, Bernanke didn’t mince his words that much this time, saying that there are “significant downside risks to the outlook for growth” and “upside risks to the inflation outlook have intensified.” His much-anticipated speech came hot on the heels of the aid given by the US government and the Fed to Freddie Mac and Fannie Mae. Bernanke also said that “helping the financial markets return to more normal functioning will continue to be a top priority of the Federal Reserve.” He attributed the increased economic downside risks to “the possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets”.
Yes, it is a starkly gloomy picture of what is going on with the US, the world’s biggest economy. All in all, very bearish comments; one can sense that he has shifted from plainly reassuring the financial markets to giving a realistic overview of what could be tipping the US into recession.
Bernanke said that although the weak dollar has “contributed somewhat to the increase in oil prices”, the latter is mainly driven by basic supply and demand. When asked whether he is comfortable with the current weak dollar levels, he didn’t answer directly, but instead said that he expects the economy to strengthen next year and in doing so support a stronger USD ahead.
Will people buy that? When all we see is one financial failure after another? Can he truly expect that to happen in such a short period of time?
The Fed is not likely to raise interest rates higher this year in the midst of such a negative outlook. In fact, traders are now pricing in a 36% chance of the Fed raising rates in December, down from 60% initially.
US Retail Spending Down
US data released today was mixed but generally on the weaker end. US retail sales increased by 0.1% in June, far worse than the 0.5% increase expected by most. The numbers are disappointing because it means that there has been little positive effect spilled over into retail spending even though Americans were given tax rebate checks since late April. According to the Treasury Department, $91.83 billion in payments were given out between April 28 through July 11.
Shakeup In Forex Markets
We could see the beginning of another phase of fresh US dollar weakness in the forex markets. It may be better to sell into USD rallies and ride on the bearish USD momentum.USD/CHF fell to a near three-month low, breaking sharply below the triangle on the chart to an intraday low around 1.0010. If 1.0000 is broken, the currency pair may target 0.9960, 0.9930, and then towards 0.9890. Selling pressure may step in around 1.0100-20.
Euro will emerge the winner against the dollar, but it is still a question as to how high it can rally, given objections of a strong Euro by European ministers and a weaker-than-forecast ZEW survey. Even so, a high Euro can do some good in mitigating the effects of high oil prices in the Euro area. EUR/USD rose to a record high today, rallying to an intraday high of 1.6040. Nearest support is around 1.5840.
GBP/USD hit a near 4-month high today, rising more than 200 pips to 2.0155.
Economic Calendar For Wednesday:
- German CPI 0600 GMT
- Swiss retail sales 0715 GMT
- UK claimant count 0830 GMT
- Eurozone CPI 0900 GMT
- US CPI 1230 GMT
- US TICS 1300 GMT
- US industrial production 1315 GMT
- Bernanke Gives Semiannual Monetary Policy Testimony at House 1400 GMT
- US FOMC minutes of Jun 24/25 meeting 1800 GMT
Published on Wed, Jul 16 2008, 10:10 GMT
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US Dollar On The Defensive Ahead Of Bernanke's Testimony And Retail Sales Data
Tue, Jul 15 2008, 09:14 GMT
by Grace Cheng
The US dollar had a good start when the forex market opened in Asia on Monday and into the European trading session, inspired by the US government’s plan reported Sunday evening to help the struggling mortgage giants Freddie Mac (FRE: 7.11 0.00 0.00%) and Fannie Mae (FNM: 9.73 0.00 0.00%). But as we move into the New York session, traders are taking their profits on dollar strength for fear that the US currency may not have sustained buying interest due to continued downside pressure on the US stock markets and focus on oil prices.
The US dollar will play defense this week, how could it not? The US subprime crisis is rearing its beastly head, and instead of talking about economic recovery, we are talking about an economic disaster that has to be averted or cushioned to some extent. George Soros is suggesting that there could be further weakness for the greenback.
EUR/USD dipped to an intraday low around 1.5840, but now is trading above 1.5900 again. If it can break successfully above 1.5980, it could retest 1.6020, its all-time high. Nearest support is around 1.5840. USD/CHF’s resistance lies around 1.0280 and support is around 1.0110.
Whether you trade currencies or stocks, you must not miss Fed chief Bernanke’s testimony before the Senate Banking Committee on Tuesday. If what he says is reassuring to stock investors, or if he explicitly mentions the weak US dollar exchange rate, the US dollar could get a respite. If not, dollar will play defensive. US stock performance this week will also be decided by Q2 earnings results from tech giants like IBM (IBM: 121.54 0.00 0.00%) and Microsoft (MSFT: 25.15 0.00 0.00%).
Today Freddie Mac initiated sale of $3 billion worth of bonds, and its treasurer said just a little while ago that today’s bond auction was “business as usual” with “very, very strong” foreign investment. According to the treasurer, Freddie has not seen a “crisis of confidence” when it comes to raising capital. Sure, bond sales may be business as usual and demand for their notes are supposedly higher than average, but I’m not sure if stockholders feel the same degree of confidence as bond buyers. These days, “reassuring” words mean very little.
As for Freddie and Fannie stocks, Goldman Sachs (GS: 158.67 0.00 0.00%) said Monday they may fall another 35%, estimating that Fannie Mae may drop to $7 from $18 and Freddie Mac to fall to $5 from $17. With regards to the government bailout plan of these publicly traded companies (Treasury’s Paulson is seeking Congress approval for unlimited authority for 18 months to buy as much stock of these companies as he deems necessary), veteran investor Jim Rogers said:
- “I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae. So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.”
I have to agree with him.
Economic Calendar For Tuesday:
- Italian CPI 0800 GMT
- UK CPI, retail price index 0830 GMT
- German Zew 0900 GMT
- US PPI, retail sales, Empire manufacturing 1230 GMT
- Bank of Canada rate decision 1300 GMT (rate expected to stay at 3%)
- Fed Bernanke gives semi-annual monetary policy testimony before Senate 1400 GMT
Published on Tue, Jul 15 2008, 09:14 GMT
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The Freddie/Fannie Saga: Short Sellers Of Dollar And Financial Stocks Profit
Mon, Jul 14 2008, 13:47 GMT
by Grace Cheng
Early this year there has been talk about how the US economy could experience a V or W or L shaped economic situation, and now it seems that the economy could indeed be heading towards further deterioration. Although this past week has been one bereft of much major economic releases from the US or Eurozone, traders and investors have been subjected to more negative news coming from the US financial sector.
On Friday, the US dollar fell sharply against the Euro, Swiss franc, British pound and the Japanese yen in the currency markets as crude oil futures reached another all-time high of $147.27 on worries that Israel may be preparing to attack Iran, and on concerns that Fannie Mae (FNM: 12.98 +2.73 +26.63%) and Freddie Mac (FRE: 9.39 +1.64 +21.16%) - the two biggest sources of financing of home loans in the US- are insolvent, owing more money than what their assets are worth, and are having problems with raising enough capital to stay afloat. If you don’t know these two catchy-sounding entities, it’s time you do as these listed companies (they are actually Government-Sponsored Entities or GSEs) own or guarantee almost of the $12 trillion worth of US home loans, owning $5 trillion of debt.
If Fannie and Freddie are finding it difficult or too expensive to borrow money, they won’t be able to buy mortgages from mortgage lenders, which are firms or banks who lend you, the consumer, money to purchase your house, and that in turn makes home loans more difficult to obtain for the people in the street. And if loans are hard to come by, the already anemic US housing market could sink into a coma - without much activity going on.
Panic about these two giants grew on Thursday after the New York Times said the Bush administration discussed the possibility of placing the companies into a conservatorship if their problems worsened. To cut it short, that could result in almost worthless stock for people who hold their shares. Former St Louis Fed’s Poole said on Friday that “it would produce a worldwide financial crisis of unspeakable magnitude if they were allowed to default.”
Fannie shares fell as much as 49% on Friday but ended the day 22% down. Freddie finished 3% lower. Expect a rollercoaster ride with these stocks. The Dow, S&P 500 and Nasdaq all ended the week lower again; the Dow briefly fell below the 11,000 level Friday for the first time in two years, but ended the day at 11,100.54.
Profit From Dollar Weakness
Fresh concerns about another eruption of financial crisis in the US are leading traders to short the US dollar in the forex markets against other currencies. Even a narrowed US trade deficit reported Friday did little to soothe the dollar’s pain. The US dollar’s fate doesn’t look well at all now, and bearish sentiment is likely to haunt the currency in the near-term. The Fed’s ability to raise interest rates by the end of the year is now being questioned seriously in the face of an already weak economy.
EUR/USD rose to a 11-week high of 1.5950, just 70 pips away from its record high of 1.0620 reached in April. The Euro also reached a record high against the yen at 169.65. USD/CHF fell to a low of 1.0135. Next bear targets around 1.0090, 1.0110. 1.0200-10 could attract more shorts.
Published on Mon, Jul 14 2008, 13:47 GMT
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Dollar Slips On News of Iran's Missile Tests and Merrill's Potential Downgrade
Thu, Jul 10 2008, 09:31 GMT
by Grace Cheng
There is simply no direction in the financial markets, especially the currency markets, in the absence of major US economic data releases. Major currency pairs such as EUR/USD, USD/CHF and USD/JPY have been moving more or less sideways since Monday with the US dollar on the stronger side, but today the US currency is looking a bit vulnerable as US stocks dip into the red after Tuesday’s “rally”, and on news that Iran has test fired long and medium range missiles, capable of reaching Israel. The world - and the US dollar - doesn’t really need a combination of Middle-East tensions and high oil prices to feel more skittish. Traders are still not willing to go long on the dollar as the latter is still haunted by the possibility of more turmoil in the US financial sector.
Today Fitch announced that it has placed its A+ rating of Merrill Lynch (MER: 29.74 0.00 0.00%) on Rating Watch Negative, and said it expects Merrill to have another loss in Q2 due to ongoing writedowns, mainly those associated with residential mortgage, bond insurance and ABS-CDO positions. Merrill Lynch is due to report its earnings next week.
Oil fell more than $5 on Tuesday, but has since edged higher to above $137 a barrel, not far from its record high of $145.85.
This week we are likely to see consolidative moves in the markets. EUR/USD is trapped between 1.5750 and 1.5650; USD/CHF’s nearest resistance is around 1.0370. As of last Tuesday, the number of net Euro long speculative contracts held by large speculators on the IMM rose to 27,683, the highest since April 8 this year. .
Economic Calendar For Thursday:
- Australia unemployment rate 0130 GMT
- Bank of England rate decision 1100 GMT (rate expected to stay at 5%)
- US initial jobless claims 1230 GMT
- Bernanke and Paulson testify on markets before House Committee 1400 GMT
Published on Thu, Jul 10 2008, 09:31 GMT
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Could This Be The Start Of The Next Wave Of Dollar Strength?
Fri, Jul 4 2008, 12:44 GMT
by Grace Cheng
Here are today’s market-moving numbers in a nutshell: the US non-farm payrolls showed a loss of 62,000 jobs and the unemployment stood at 5.5%, close to what the majority of the market had expected. And over in the Euro area, the European Central Bank has raised its main interest rate by 25 bp to 4.25%, as predictable as receiving a present on your birthday (from yourself that is).
Traders who had positioned themselves ahead of these releases to be long on the Euro and short on the US dollar were all wrong. In a press conference following the rate announcement, ECB chief Trichet did not give any timetable of further rate increases, unlike the previous time. Instead, he was ultra-dovish in his speech, saying that “today’s decision will contribute to achieving our objective”, which basically means “we think the current 4.25% is enough to contain high inflation in the Eurozone for now”.
Trichet’s use of words such as “no bias” or “pre-commitment” to more rate hikes basically swept all the bets off the table, right into the hands of Trichet, the dealer. Futures traders have already priced in a least two more rate hikes from the ECB later this year, so when they hear “no bias”, it’s like hearing a fire alarm to evacuate the crowded office building. Trichet is playing real smart: He has no desire to see the Euro currency going higher, like many other European policymakers. Even French Finance Minister Christine Lagarde said today that higher rates may hurt Europe’s competitiveness by pushing the Euro higher against the dollar. She is right.
The US dollar rose nearly 200 pips against the Euro following Trichet’s speech, and frankly, since the US NFP blew over like a drizzle, traders are very likely to get out of dollar short positions and establish new long ones. That could be the beginning of a next wave of dollar strength.
Economic Calendar for Friday:
- US financial markets closed for Independence Day
- Canada Ivey PMI 1400 GMT
Published on Fri, Jul 4 2008, 12:44 GMT
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Iranian Threats Keep Oil Elevated; US Stocks and Dollar Slip
Wed, Jul 2 2008, 08:26 GMT
by Grace Cheng
Oil continues to trade near elevated levels (above $143 as at the time of writing) on Iranian verbal threats, and the Dow Jones Industrial Average is down more than 130 points. Iranian Deputy Oil Minister was reported as saying Iran is ready to repel any attack, and said that an attack would disrupt oil exports and disrupt the entire oil industry in the Middle East. Middle-East tensions are at the forefront again. Meanwhile, OPEC president said that oil prices reflect war risk, and to keep oil prices down, the US needs to stabilise the US dollar.
For the dollar to be stabilized, that’s not an impossible task. Further dollar decline could be prevented if traders can see a commitment by the Fed to fight rising inflation, but alas, the Fed thinks that inflation is likely to moderate later this year.
US Manufacturing Improves
What a surprise to see a totally unexpected expansion in US manufacturing activity, that is according to the ISM report released Tuesday. The headline purchasing managers index went up to 50.2 in June (48.6 expected) from 49.6 in May, and since it is above the 50 mark, it indicates growth, not contraction, in the important manufacturing sector. Although this is the first growth in four months, it may not be a harbinger of more growth ahead.
Forex Trading
In the currency markets, major currencies have been trading sideways, without any strong push to break out of the recent trading range. The US dollar is slightly weaker against the Euro, Swiss franc, British pound and the Japanese yen; after all, there’s no incentive for dollar bulls to jump into the market before the Great Lottery of the Month (that is, the US NFP) is unleashed on Thursday. EUR/USD oscillates between 1.5720 and 1.5820. USD/CHF’s nearest support is around 1.0100-20, then 1.0080.
GBP/USD Hits 2.0000
The British pound rose to the highest level against the dollar in more than 2 months, reaching an intraday high around 2.0005, but is now trading below 1.9950. Any reasons for Sterling strength today? None actually, in fact, UK data released today was quite a turn-off, so traders could be having a more depressed view of the US dollar when it comes to Cable trading.
UK PMI manufacturing for June printed a low reading of 45.8, much worse than the 49.8 expected, and that was the lowest since 2001. As for the UK housing market, Nationwide reported today that UK house prices fell 0.9% month-on-month in June, slightly better than the 1% fall expected, and a slower pace of decline from May’s 2.5% decline.
Economic Calendar for Wednesday:
- Australia retail sales 0130 GMT
- Eurozone PPI 0900 GMT
- US ADP employment change 1215 GMT
- US factory orders 1400 GMT
- Paulson speaks about capital markets, global economy 1500 GMT
Published on Wed, Jul 2 2008, 08:26 GMT
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Where There Is Blood, There Are Also Opportunities To Be Had
Mon, Jun 30 2008, 13:24 GMT
by Grace Cheng
This coming week will be a shortened trading week in the US due to the celebration of Independence Day on Friday. Quite a number of key economic releases and data will be packed into these 4 days, so there won’t be rest for traders at least till late Thursday. The currency market will turn its attention to the rate announcement by the European Central Bank on Thursday whereby the central bank is almost guaranteed to raise the main refinancing rate from the current 4% to 4.25%.
So far this expectation has served as a bouncy mattress for the Euro in forex trading last week, and could be positive for the currency going into the ECB policy meeting. Complacency is not a luxury that can be afforded to traders, so while Euro has got some bullish steam on its tail, keep a lookout for any break of important technical levels since much has already been factored into the EUR/USD exchange rate, and Euro bulls may take profits ahead of the meeting or after.
Eurozone’s fundamentals have deteriorated based on recent data, in particular the German IFO survey, and last week we saw that the French consumer confidence fell to a record low in June. If we get any indication from Trichet on Thursday that this rate hike is a solo one and not to be followed by more, that could weigh on the Euro and cause EUR/USD to retreat.
Don’t tie yourself to a single opinion.
It’s Time To Learn Shorting
If you have been trading the stock markets, you’d be glad for the upcoming long weekend. People who buy stocks for long-term investment have been cut deeply by the growing decline of US stocks (stocks in Europe and Asia too). More pain comes in when oil’s relentless surge doesn’t reverse.
Crude oil closed above $140/barrel ($140.21 to be exact) for the first time in history, and the Dow is now down 20.1% from its record intraday peak formed last October. The Dow is quite “officially” in a bear market now. Stock investors or traders might want to learn about shorting stocks or hop over to the currency markets (spot forex or forex options) if they want to stay profitable.
Think financial stocks are attractive buys as they fall? Only if you find blood on falling knives attractive. Investment banks stocks are hurt by downgrades by one another. Merrill Lynch (MER: 32.70 0.00 0.00%) is expected to write down $5.4 billion for its second quarter, due to recent credit downgrades of giant insurers MBIA (MBI: 4.17 0.00 0.00%) and Ambac (ABK: 1.61 0.00 0.00%).
For people who choose to see the positive, Nasdaq isn’t “officially” in the bear zone as it is so far down 19% from its 2007 high, not past the 20% mark. Same goes for S&P 500, which is down 18.3% from its record close in October.
Economic Calendar for Monday:
- Italian PPI 0800 GMT
- UK mortgage approvals 0830 GMT
- Eurozone CPI estimate 0900 GMT
- Canada GDP 1230 GMT
- US Chicago PMI 1345 GMT
- Japan Tankan survey 2350 GMT
Published on Mon, Jun 30 2008, 13:24 GMT
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Fresh Shorting Of Dollar Amid Oil Jump And Slide In US Stocks
Fri, Jun 27 2008, 13:32 GMT
by Grace Cheng
When oil jumps, you can expect the US stock markets to react badly and the US dollar to succumb to shorting pressure from traders. At one point on Thursday, crude oil futures leaped more than $4 to above $138 a barrel after a slight retreat yesterday. US data released today didn’t give any strong indication of which way the US economy is going to head towards, and in any case, inflation numbers remained higher than what the Fed would like to see. US gross domestic product gained 1%, at an annual rate in the first quarter, the Commerce Department said Thursday in its third and final estimate, up from its previous estimate of a 0.9% increase, and that was largely expected by the markets. This upward revision was aided by stronger gains in consumption and exports, and showed that the US was able to hang onto its rope in the first three months of the year.
That said, Q1 was over, long over, and we are in the last days of Q2. Looking ahead, Q3 may show slight improvement as a result of the tax stimulus checks handed out by the government, but come Q4, all may come tumbling down. So while it’s all nice to praise the US economy based on today’s “quite ok” GDP data, the economy is still “on the brink of a recession” - quoting Greenspan’s words.
Inflation And Jobless Claims
It was reported today that the price index for personal consumption expenditures excluding food and energy rose 2.3%, at an annual rate. A little uncomfortably high, but presumably not that of an urgent matter for the Fed since they said yesterday that inflation is expected to moderate later this year and in 2009.
Initial claims for jobless benefits were unchanged at 384,000, and the four-week average got pushed up to its highest since October 2005. Continuing claims lasting more than one week surged 82,000 to 3,139,000, the highest level in more than four years. This data suggests that it is more difficult for the unemployed to find work.
Forex Trading
The dollar is again down against the Euro, Swiss franc, British pound and the Japanese yen today as traders continue to pare expectations of a rate hike by the Fed anytime soon. USD/CHF fell to the lowest in nearly three weeks, reaching an intraday low of 1.0250. Downside targets are around 1.0200-10, then 1.0170. EUR/USD rose to 1.5750, and bull targets are 1.5760, 1.5800.
Economic Calendar for Friday:
- French GDP 0650 GMT
- Eurozone current account 0800 GMT
- UK GDP 0830 GMT
- Eurozone consumer confidence 0900 GMT
- US PCE deflator, personal spending, PCE core 1230 GMT
- US U of Mich confidence 1400 GMT
Published on Fri, Jun 27 2008, 13:32 GMT
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Euro Advances As Forex Traders Price In Rate Hike Next Week
Thu, Jun 26 2008, 08:25 GMT
by Grace Cheng
The US dollar fell against the Euro after the Fed held the main interest rate unchanged at 2%, ending a series of 7 consecutive cuts. What happened? Most market participants had expected the Fed to keep the rate unchanged anyway in Wednesday’s FOMC meeting. Initially the dollar traded higher but that subsided and traders began taking their profits on long dollar positions.
In the accompanying statement, the Fed said, “Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased.” They also said that “uncertainty about the inflation outlook remains high”, given the “continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations.” All except Dallas Fed’s Fisher, voted for no change. Fisher preferred an increase in the rate at this meeting.
The Fed is very unlikely to embark on a rate tightening cycle so soon after cutting rates so aggressively as the economy still looks so fragile. An August rate hike has been thrown out the window by many traders last week, but people are already betting on a September rate raise. On the other hand, the ECB is widely expected to hike rates next week to fight the threat of high inflation, and that expectation should keep the Euro on the offensive.
Forex Trading
EUR/USD rose to 12-day high of 1.5687, and the Euro rallied to an all-time high around 169.20 against the Japanese yen. EUR/USD’s topside targets are 1.5700-10, 1.5740. EUR/JPY has more potential to rise further as it is more lucrative for traders to seek yield when buying EUR/JPY since interest rates in Japan don’t seem to be going anywhere.
The dollar could be under pressure in the meantime at least till the ECB rate decision next week, but from a medium-term perspective, more hawkish rhetoric from the Fed could stem the dollar’s decline. The Fed is walking a tightrope right now: If they hike rates, that could be worse for an economy that’s on the brink of a recession. If they cut rates, they risk a weaker dollar and possibly higher oil prices.
Trichet Says
ECB chief Trichet told European Parliament on Wednesday: “I didn’t say we would envisage a series of increases. I said we could decide to move our rates by a small amount in our next meeting in order to secure the solid anchoring of price expectations.”
Economic Calendar for Thursday:
- Fed vice-chairman Kohn speaks at ECB conference 1130 GMT
- US GDP, core PCE, personal consumption 1230 GMT
- US existing home sales 1400 GMT
- NZ trade balance, GDP 2245 GMT
- Japan national CPI 2330 GMT
- Japan retail sales 2350 GMT
Published on Thu, Jun 26 2008, 08:25 GMT
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Dollar Down, But Not Out, On 16−Year Low US Consumer Sentiment
Wed, Jun 25 2008, 07:25 GMT
by Grace Cheng
Record-breaking downbeat consumer confidence and housing data released today have depressed the US dollar in the currency markets, although the USD remains within recent range against the Euro, Swiss franc, British pound and the Japanese yen. US consumer confidence fell to 50.4 this month, worse than the forecast reading of 56.4, from a revised 58.1 in May (originally reported at 57.2). June’s reading was the lowest since 47.3 in February 1992, which means that US consumers haven’t been feeling this pessimistic in 16 years. Clearly, the slump in the housing market, coupled with record oil prices and weak jobs market are taking a huge toll on the average American. Before the credit crisis unfolded last summer, consumer confidence stood at 111.90 in July, and now the index has fallen by more than 50%. Only a record low of 12.3% of those surveyed are expecting their income to rise in the next few months.
The US dollar is also shaken by the biggest year-over-year drop of house prices in the US. According to the latest S&P/Case-Shiller housing data, home prices fell 15.3% in April , the biggest drop ever. The “good” thing? It came out better than the 16% expected. The only “bright-spot” of the data is that the 3-month annualized rate of decline, now at 22.08%, is slowing. Although it is still a big decline, it is the slowest 3-month pace of decline since December. The US housing sector is likely to experience further price declines as foreclosures, a result of mortgage defaults, add to the burgeoning supply of homes on the market. Watch out for US new home sales from the Commerce Department on Wednesday.
Greenspan Says
Former Fed chief Greenspan said today that financial instability may continue into 2009 and that “data suggests we are on the brink” of recession. He thinks that Fed action in March had reduced the odds of recession, but an economic recovery in the US “isn’t in the immediate outlook.” He expects very sluggish growth for the next 12 months, and thinks that oil will remain volatile.
Forex Trading
The US dollar has slipped modestly today, but still traders will be reluctant to short the dollar further before the Fed’s rate announcement Wednesday at 1815 GMT. EUR/USD is hovering around 1.5600, and today’s trading range is within yesterday’s. Its nearest support is around 1.5450, and resistance is 1.5650. USD/CHF hit a high of 1.0470, and resistance is around 1.0490-1.0500, then 1.0520.
Economic Calendar for Wednesday:
- UK Nationwide house prices
- German CPI
- Italian retail sales 0800 GMT
- US durable goods 1230 GMT
- US new home sales 1400 GMT
- US FOMC rate decision 1815 GMT (rate expected to stay at 2%)
- NZ current account balance 2245 GMT
Published on Wed, Jun 25 2008, 07:25 GMT
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Stock And Forex Markets To Eye US FOMC Meeting Next Week
Mon, Jun 23 2008, 12:11 GMT
by Grace Cheng
Another week has passed, and the sentiment in the financial markets has changed again. In the forex markets, the US dollar fell against other currencies like the Euro, and in the US stock markets, the Dow and S&P 500 had another strong downward spiral Friday.
One of the events that’s got traders talking about and reacting to is next week’s US Federal Open Market Committee (FOMC) meeting. Poor US manufacturing data has led traders to scale back their expectations of a rate hike by the Fed soon, and for next week’s rate-setting meeting, investors are expecting the Fed to keep the benchmark rate at 2%, after seven reductions since September last year. There is now just an 8% chance the Fed will raise rates by 25 basis points on June 25, compared with 22% odds a week ago. The current yield is not particularly appetizing considering that the Euro’s yield is higher, and that the ECB has made its intention clear by signaling they are very likely to raise rates in July.
In forex trading, EUR/USD hit a high of 1.5650 Friday, an expected resistance level, before bouncing down to hover around 1.5600.
Did Stock Traders Freak Out On Freaky Friday?
Traders caused/experienced a mayhem in the stock markets Friday, selling stocks in almost all sectors including financials, transport and technology. The Dow plunged 220 points to close at 11842.12, and was down 4% for the week. It also just so happened that Friday was the Triple Witching day, when futures and options expire in the stock markets, so a lot of adjustment - aka noise - took place.
But then again, people are seeing many reasons to short stocks, whether large or small cap ones. There are the usual (unwelcoming) predictions of further bank writedowns, dividends being slashed etc around the corner, plus, two largest bond insurers MBIA (MBI: 5.59 0.00 0.00%) and Ambac (ABK: 2.05 0.00 0.00%) have got their credit ratings downgraded by Moody’s on Friday.
Hang on tight for the rollercoaster ride and keep your stops in place.
Published on Mon, Jun 23 2008, 12:11 GMT
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Traders Alter Rate Expectations After Record Surge In UK Retail Sales
Fri, Jun 20 2008, 08:21 GMT
by Grace Cheng
The wind direction has changed suddenly in the UK. After several disappointing UK economic data and higher than expected inflation numbers, most market players are caught by surprise by today’s release of UK retail sales which came out much better than even the most optimistic estimates. UK retail sales data surged 3.5% m/m and 8.1% y/y in May on increased food and clothing sales, eclipsing the -0.1% and 4.1% average forecasts. The 3.5% increase in UK sales was the most since the government survey began in 1986. In April, sales fell 0.3%. The year-over-year increase was the highest since 2002. These are enormous gains, and traders and economists are finding that hard to believe.
Whether May’s retail figures are a fluke or not, the bonds and currency markets are busy adjusting their outlook again. The British pound rocketed against other currencies today and two-year gilts had the biggest fall in four days after the sales report. The pound also got some support from BOE governor King’s speech made yesterday. He said, “The Monetary Policy Committee is prepared to take whatever action is needed to return inflation to the 2 percent target and to keep expectations of inflation in the medium term anchored to the target.”
Remember King had said in his letter to the Chancellor of the Exchequer Alistair Darling that the path of rates is uncertain? Well, his tone has changed a little, perhaps he realized he had been too dovish, and now wants to give the impression that he too can be an inflation fighter. Today, traders are again factoring in some chance of interest rate hikes by the BOE; even JP Morgan is now expecting an August rate increase.
Soft US Manufacturing Activity
The Federal Reserve Bank of Philadelphia reported Thursday that its June index of general business conditions, which covers factory activity within the bank’s district, fell to -17.1, from May’s -15.6 and April’s -24.9. This data came in softer than the -11 reading expected, and continues to indicate a contraction of manufacturing activity.
Forex Trading
The retreat of oil prices from above $138 to around $135 had given a slight boost to the US dollar, but dollar gains are capped by the soft Philly Fed manufacturing data. Consolidation is likely to take place into the weekend. EUR/USD rose to a high of 1.5585 before falling back below 1.5500. 1.5420-30 is the nearest support. USD/CHF’s nearest resistance levels are around 1.0490, 1.0520-30. GBP/USD rose to the highest in more than a week to 1.9725. Next bull targets are 1.9750, 1.9770-80, 1.9800.
Economic Calendar For Friday:
- German PPI 0600 GMT
- Swiss producer and import price 0715 GMT
- Canada retail sales 1230 GMT
Published on Fri, Jun 20 2008, 08:21 GMT
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RBS Predicts Global Market Crash: What's In It For Them?
Thu, Jun 19 2008, 09:48 GMT
by Grace Cheng
According to the UK daily newspaper Telegraph, a research team from Royal Bank of Scotland is warning investors to get ready for a “full fledged crash in global stocks and credit markets over the next three months”, noting inflation will paralyze major central banks. They forecast a 300 point drop in the S&P by September to around 1050, with contagion spreading across global stock markets, and for the iTRAXX index (high grade corporate bonds) to widen to 130/150, the “Crossover index” (low grade corporate bonds) to widen to 650/700 on renewed investor panic. Their reasoning is that the temporary momentum from America’s fiscal boost may fizzle out by July on delayed impact from the oil spike.
Bob Janjuah, credit strategist at RBS, said, “A very nasty period is soon to be upon us - be prepared.”
He said, “The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.” He also said in order for global inflation to be lower, we may need to see slower global growth.
Maybe RBS is short on S&P, and they want investors to go short as well, while screaming “The sky is falling”? That’s right, it’s a bit insane for a financial institution to make such sensational doomsday remarks. However coming from the guy who was known for his warnings last year about the credit crisis which proved to be accurate, it might be worth listening to what he’s saying.
And if RBS is warning investors about this market crash which would amount to one of the worst bear markets in the last 100 years, does it want normal retail stock investors to sell their portfolios and realize whatever losses they have sustained over the past year, thus pushing stocks even lower (if RBS is short, it would make sense!)? Given the volatile market conditions over the past few months, investors will have experienced a huge blow and cutting their losses now might be too little, too late.
Forex Trading
With no major economic releases or speeches on tap today, currencies have been moving sideways. The US dollar is up against the Euro, Swiss franc, British pound and Japanese yen. The British pound is a notable loser, falling for the second day against the dollar as minutes from the Bank of England June 5 policy meeting showed members decided an interest-rate hike wasn’t “urgently” needed to keep inflation under control. The minutes also revealed that David Blanchflower was the only policy member who wanted a rate change, voting for a cut to from 5% to 4.75%. Blanchflower might already have changed his mind about that after yesterday’s release of UK inflation data which showed inflation up 3.3%.
GBP/USD fell to a low of 1.9475 today, but traded above yesterday’s low. It has since moved back up above 1.9550. Shorting interest may crowd around 1.9600 and 1.9630. The pound is also weaker versus the Euro, trading near the lowest level in a week. If the BOE resists lifting interest rates higher to keep inflation expectations down, we could see more downside risks to the Pound.
Yesterday, BOE’s King wrote a letter to Chancellor of the Exchequer Alistair Darling, saying that the “path of bank rate that will be necessary to meet the 2 percent target is uncertain.”
Economic Calendar For Thursday:
- Swiss National Bank rate decision (rate expected to stay at 2.75%) 0730 GMT
- UK retail sales 0830 GMT
- Canada CPI 1100 GMT
- US initial jobless claims 1230 GMT
- US Philly Fed 1400 GMT
Published on Thu, Jun 19 2008, 09:48 GMT
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Intense Inflation Pressures: Fed And Bank Of England Have Their Hands Tied
Wed, Jun 18 2008, 07:38 GMT
by Grace Cheng
US industrial production fell for the second consecutive month in May, falling 0.2%, following an unrevised 0.7% decline in April. This was worse than the 0.2% gain expected as utilities posted a sharp decline in output. Overall, industrial production is down 1.1% compared to a year ago. No one can deny that industrial output is contracting, but at least it hasn’t been a rapid drop.
Meanwhile, inflation data released today showed that US producer prices in May rose at their fastest rate in six months (1.4%), although core prices excluding food and energy, gained just 0.2%. Both figures are in line with expectations. Inflation is again becoming a threat to the US economy, which recently prompted anti-inflation rhetoric from Fed officials.
US Rate Hike Pushed Back From August To September?
The decline of the US dollar yesterday and today reflects that traders are scaling back their expectations of a rate hike by the Fed as early as August, on doubts that the Fed would indeed have room for that even as the economy is still under stress.
Interestingly, former St. Louis Federal Reserve President William Poole (he retired in March) said today on TV that “we should be moving sooner rather than later” with regards to the Fed raising interest rates. He said, “I don’t think you can interpret what’s happening with energy as a temporary shock.”
His words would have carried much more weight if he hadn’t just retired, but still, they could stem the dollar’s decline as traders readjust their expectations. JPMorgan Chase and Barclays are now forecasting a rate increase in September.
Euro: Not Much Bullish Steam Either
The latest ZEW survey put out another spark from the Euro. Sentiment among German financial analysts and institutional investors plunged to its lowest level in June since December 1992 on rising oil prices and a weakening growth outlook. The data signals that economic activity in Germany -Europe’s largest economy -is slowing down after a surprisingly strong first quarter.
UK Inflation Worsens
The carefully crafted words in a letter prompted the sharp fall of the British pound today, and the currency’s prospects look very dim again. May UK consumer price inflation jumped 3.3% on the year (3.2% expected). This is the second time that the CPI is above 3% ever since the Bank of England gained independence in 1997 for setting interest rates. Since the increase is well above the BOE’s 2% inflation target, BOE governor King had to write a letter to Chancellor of the Exchequer Alistair Darling to explain why inflation is so high. So King wrote that inflation “is likely to remain markedly above the target until well into 2009″ and that the “path of bank rate that will be necessary to meet the 2 percent target is uncertain.”
Uncertain? Is he ruling out interest rate hikes? Given that fundamentals in the UK are deteriorating, the BOE may find it impossible to raise rates to fight the increasing inflation. The British pound has nowhere to go but down down down.
Forex Trading
The US dollar is slightly weaker against the Euro, Swiss franc and Japanese yen, but is a strong performer versus the British pound due to heavy shorting pressure on the pound.
EUR/USD bulls only managed to push up the currency pair up to 1.5555, near where expected resistance of 1.5560-70 lies, before bouncing almost 100 pips down to a low of 1.5460. USD/CHF declined to 1.0375, around where the support zone lies and then bounced back up above 1.0450. GBP/USD fell 230 pips from a high of 1.9700, and is now trading around 1.9500.
Economic Calendar For Wednesday:
- UK BOE minutes 0830 GMT
- Swiss ZEW survey 0900 GMT
- US MBA mortgage applications 1100 GMT
- Canada leading indicators 1230 GMT
Published on Wed, Jun 18 2008, 07:38 GMT
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Dollar has biggest weekly advance against Euro in three years
Mon, Jun 16 2008, 09:27 GMT
by Grace Cheng
It was Friday the 13th yesterday, but the US currency wasn’t at all spooked. While the US stock markets closed the week almost flat (Dow up 0.8%; S&P 500 down 0.05%), the US dollar had a roaring good time in the currency markets. The US dollar just clinched the biggest weekly gain against the Euro since 2005 and the biggest weekly rise against the Japanese yen since December 2004.
You could say that Bernanke’s speech on Tuesday initiated the strong turnaround in USD sentiment; he said that US economic risks have diminished and he’s paying attention to the weak dollar. Increasingly over the past few months, a weaker dollar seems to be negatively correlated with oil prices although whether a causal relationship exists between these two is another issue altogether. Many, including the US Federal Reserve, are worried that the dollar’s weakness has come to a point whereby its benefits are being outweighed by the negative ramifications in the current economic situation. Dollar weakness ain’t that sexy anymore.
For traders who are counting on a July’s rate hike from the ECB to boost the Euro in a sustained way, they may have to look elsewhere, for Trichet and other ECB members have said last week the market shouldn’t be expecting a series of increases from them. July’s hike could be a one-time event.
Canada and France For Stronger Dollar
Finance minsters from the Group of Eight nations have gathered for the G8 meeting on Saturday. France’s finance minister Christine Lagarde said, “The strengthening of the dollar seems very satisfying to me.” Canada’s finance minister Jim Flaherty is also on the side favoring a strong US dollar. He said that strong US currency “can help on the inflationary side because of the difference it makes with a low US dollar in terms of oil prices.”
Could Greenspan’s Words Inspire More Gains In USD?
Former Fed chairman Greenspan said Friday via satellite today to a conference in Mexico City that the financial markets have shown a “pronounced turnaround”‘ since March when Bear Stearns was rescued from collapse. He also said “there is a reduced possibility of a large, intense recession”, and that the Fed will have to put “increasing pressure on the money supply and reserves” to combat inflation, and “as a result you will see interest rates rising”.
Forex Trading
Last week’s pip tally for the four major currency pairs:
- EUR/USD - fall of 540 pips
- USD/CHF - gain of 400 pips
- USD/JPY - gain of 400 pips
- GBP/USD - fall of 400 pips
EUR/USD’s nearest support is around 1.5280, and if the pair breaks successfully below that area, more bearishness could ensue. USD/CHF’s upside targets are possibly around 1.0560, 1.0590-1.0600. Nothing’s for certain in the markets, so keep on top of economic releases as always, and watch the charts.
Published on Mon, Jun 16 2008, 09:27 GMT
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Dollar Looks Primed For Near−Term Rally On Rate Hike Speculation
Fri, Jun 13 2008, 11:43 GMT
by Grace Cheng
The near to medium-term outlook of the US dollar in the currency markets is one of relative strength, particularly against the Euro, Swiss franc, British pound and Japanese yen. Ever since Bernanke indicated he has his eyes fixated on the weakening dollar last week, together with US Treasury Secretary Paulson and president Bush reiterating this week their commitment to a stronger dollar, the change in dollar sentiment has been quite dramatic, although it went a little shaky after ECB’s Trichet said a small rate increase is possible in July.
US retail sales report released today is USD-supportive as it showed that retail sales increased twice as much as forecast in May, climbing 1%, following a 0.4% gain in April that was previously reported as a decrease. This overall 1% gain is the most since November 2007 as American consumers spent their tax rebates at electronics and department stores, some of which offered promotions tied in with the tax rebates (Wal-Mart including). High gasoline prices at pump stations also contributed to the increase in sales, but excluding that, purchases rose 0.8%. Retail data from the previous two months were revised upward - a good sign as those accounted for sales prior to the stimulus package.
Even though this Tax Rebate Effect is only temporary, and is expected to plump up figures for the second and third quarter, it is nonetheless helpful to the notion of a still-seemingly-”resilient” US economy that is trying its best to hang on. Consumer spending makes up about 70% of US GDP, so money that gets spent is good for the overall economy. By the time the Tax Rebate Effect runs out probably in the last quarter, consumer spending could once again be dented by the lousy job market.
US import prices also released today rose in May for the third month in a row, again proving that inflationary pressures are rising in the US. Import prices jumped 2.3% (2.5% expected) in May after rising 2.4% in April. Year-over-year, prices are up a record 17.8%.
G8 Meeting
Don’t forget the G8 meeting is coming up this weekend in Osaka, Japan. Traders are likely to pare their USD short positions ahead of that as G8 finance ministers are likely to discuss recent currency moves although forex may not appear in the final statement.
ECB Says
Trichet and another ECB member Stark have said that the financial markets should not be expecting a series of increases as the ECB is not precommitted to that. ECB’s Lorenzo Bini Smaghi said today that policy makers “only sent indications for July, not beyond”.
Forex Trading
The US dollar gained strength today. EUR/USD fell 180 pips to a low of 1.5380, and bear targets lie around 1.5360, 1.5310, 1.5280. If EUR/USD breaks past support after support, it could move towards 1.5000 in the medium-term. USD/CHF went to a high of 1.0490, with upside targets around 1.0530, 1.0560, 1.0590-1.0600. GBP/USD fell 200 pips today to a one-month low of 1.9435, and Pound bears are likely to sell rallies into 1.9500.
The Australian dollar has had a sharp fall versus the US dollar today after the Aussie government reported that employers unexpectedly cut jobs last month. AUD/USD hit an intraday low of 0.9330, and 0.9290-09300 is nearest support, followed by 0.9270.
Friday:
- Reserve Bank of Australia Governor Stevens speaks 0310 GMT
- Bank of Japan monthly report 0600 GMT
- German CPI 0600 GMT
- US CPI 1230 GMT
- US U of Mich consumer confidence 1400 GMT
- Greenspan speaks in Mexico City 1600 GMT
Published on Fri, Jun 13 2008, 11:43 GMT
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Wednesday's Trading: Currency Markets Take Cue From Sliding US Stocks
Thu, Jun 12 2008, 07:26 GMT
by Grace Cheng
The currency market is taking its cue today from the performance of US stock markets in the absence of major US economic releases. The US dollar initially rose against the Euro, Swiss franc, British pound and Japanese yen but is now trading lower versus these currencies. European Central Bank’s Juergen Stark said Wednesday that markets understood the central bank’s signal to raise interest rates next month, but he poured water over the speculation of a series of interest rate increases. ECB’s Noyer is also sounding a little hawkish today, saying that while a July rate increase is possible, it is still not guaranteed, and also repeated what ECB president Trichet said last week, that the ECB is in a state of heightened alert.
Euro strength has waned off, and it’s possible the US dollar could consolidate ahead of this weekend’s Group of Eight meeting in Osaka, Japan, where G-8 finance ministers may or may not talk about currencies. USD bulls are not too keen to jump into the market today, seeing how US stocks are off to a weak start, falling under shorting pressure, and oil prices are still at elevated levels.
WaMu and Lehman Stocks Sliding Again
Stock investors aren’t welcoming the idea that Fed officials are sounding increasingly worried about inflation in the US as that would mean possible rate hikes which would put a dent into the already tough business environment. The Dow was down more than 150 points; Nasdaq and S&P 500 are also in the red.
Seattle-based Washington Mutual (WM: 6.06 -0.62 -9.28%), the largest US savings and loan company, is one of the biggest losers within the banking sector, falling a more than 13% at one point today. There are also rumors of a huge unexpected writedown by investment bank Goldman Sachs (GS: 162.40 -4.81 -2.88%) when it announces quarterly results next week, causing the S&P 500 financial sector to dip to a five-year low today.
Lehman Brothers (LEH: 23.75 -3.75 -13.64%) fell more than 5% today after the bank said it would lose $2.8 million in the second quarter and is raising $6 billion in capital. So far, Lehman has declined more than 23% in the last four sessions. Right now, shorting financial stocks just seems to be a better bet.
Thursday:
- Australia unemployment rate 0130 GMT
- Bank of Japan rate decision (rate expected to stay at 0.5%)
- US retail sales, import price index, initial jobless claims 1230 GMT
- US business inventories 1400 GMT
- New Zealand retail sales 2245 GMT
Published on Thu, Jun 12 2008, 07:26 GMT
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Will The US Intervene In The Currency Markets?
Wed, Jun 11 2008, 09:03 GMT
by Grace Cheng
Yesterday I posted an article saying to watch out for Bernanke’s speech as that was likely to support the US dollar. Indeed, the dollar surged strongly against major currencies such as the Euro and Swiss franc after Bernanke unexpectedly revealed some optimism in his speech. He said the economic outlook has improved from a month ago and pledged that central bankers will fight any increase in inflation expectations. “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” he said.
Frankly, no one really expected him to say that about the current state of the US economy as he has always emphasized that there are great downside risks to the economy (he still does). The US dollar also has gotten a second round of renewed support from US Treasury Secretary Paulson who said yesterday and repeated today that he does not rule out currency intervention, saying that “I never like to say never”.
For so long, the financial markets haven’t been reminded about the topic of currency market intervention because nothing much about it was said by high-ranking policymakers. And now, Paulson’s assertions of “I never like to say never” are bringing more power to Bernanke and Bush’s words that they would like to see a strong dollar. Paulson also said that economic fundamentals are sound and “those long-term fundamentals are going to be reflected in our currency value”.
While I don’t see the Treasury intervening to buy up dollars, the collective intentions of Paulson, Bernanke and Bush are very clear: They would like to see a stronger dollar. There is now an increased likelihood of currency traders closing their short USD positions, and for the USD to appreciate higher in the near to medium-term.
More USD-Supportive Comments
Dallas Fed’s Fisher said inflation must be controlled, and he would rather risk weaker growth for some time if that helps keep inflation expectations under control. He said the Fed drew the rate cut line at 2% but he would have done it at a much higher level. He expects the US economy to be sluggish for a period. Retiring Fed’s Mishkin also talked about inflation risks, saying that inflation expectations are important for policy.
US Trade Gap Widens
The US trade deficit widened in April by 7.8% to $60.9 billion, more than the $60 billion gap predicted, making it the widest gap since March 2007. Imports rose to a record $216.4 billion as prices of imported petroleum surged ($96.81 a barrel) and the total amount of fuel bought rose to another record too. Exports also rose the most since February 2004, to a record $155.5 billion, due to demand for commercial aircraft, autos and agricultural machinery.
We could expect to see a further widening of the deficit in the coming months as oil prices rise even though exports continue to do very well. The weaker dollar is no longer as important a trump card for the US as its benefits are beginning to be outweighed by the inversely correlated rise in oil prices. No wonder Bernanke & Co are beginning to show signs of concern for the currency.
Forex Trading
EUR/USD fell nearly 200 pips to a low of 1.5460. Potential bear targets are 1.5430, 1.5400, 1.5360-70. USD/CHF’s nearest resistance is 1.0420-30 and Swiss bulls may target 1.0500 in the near-term. The British pound fell sharply against the US dollar today as the RICS report showed that house sales in the UK fell to a 30-year low in May. GBP/USD fell more than 200 pips to an intraday low of 1.9530, close to erasing the gains made from the past three days.
Wednesday:
- UK trade balance, claimant count 0830 GMT
- US MBA mortgage applications 1100 GMT
- Canada new house price index 1230 GMT
- Fed’s Kohn speaks on inflation 1530 GMT
- US Fed’s Beige Book 1800 GMT
Published on Wed, Jun 11 2008, 09:03 GMT
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Dollar Recovers After US Pending Home Sales Hit 6−Month High
Tue, Jun 10 2008, 10:23 GMT
by Grace Cheng
The US dollar was initially weaker against the Euro and the Swiss franc Monday but by New York open, it erased much of its earlier declines on the stabilizing US stock markets (Dow went up by more than 100 pips intraday)and after the release of a better-than-expected report on US pending home sales in April. The National Association of Realtors’ index for pending sales of previously owned homes rose 6.3% to 88.2 from March, and this is the highest level in six months.
The surge in buying activity is mainly concentrated in zones which saw double-digit price declines. So whether people are buying homes for themselves or for investment, they are attracted to the lowered property prices and had already signed the contracts to purchase even though the transactions weren’t closed yet (hence pending). If mortgage rates continue to fall as they have recently, that might lead to more people qualifying for home loans and thus more buyers to absorb the pool of housing inventories.
Strong Dollar Mantra
US president Bush repeated Monday that the US commitment to a strong dollar. He said, “A strong dollar is in our nation’s interests. It is in the interests of the global economy. The long-term health and strong foundation of our economy will shine through and be reflected in currency values.”
These remarks were made before he left for Europe to attend the US-European Union summit in Slovenia. What’s interesting is that Bush usually issues statements regarding currencies when prompted, but in today’s case, he wasn’t prompted by the media. The US dollar is likely to be propped up prior to Fed chairman Bernanke’s speech on Tuesday at 0015 GMT where he could again reiterate that the dollar is on his mind.
Forex Trading
EUR/USD rose to a six-week high around 1.5845, but then retreated towards 1.5700. 1.5660 and 1.5630 are support levels for the currency pair. The improved USD sentiment in the US session also lifted USD/CHF from its intraday low of 1.0145 to 1.0280, and its nearest support is around 1.0120-30.
However the US dollar has not been able to rise against the British pound after a big rise in UK producer prices was reported earlier today, reigniting hopes that the Bank of England may have to raise rates in the coming months to fight inflation. GBP/USD rose from 1.9670 to a high of 1.9800.
Tuesday:
- Fed’s Bernanke speaks on inflation 0015 GMT
- UK industrial production 0830 GMT
- Italy GDP 0900 GMT
- Fed’s Fisher speaks on monetary policy 1200 GMT
- US trade balance 1230 GMT
- Bank of Canada rate decision 1300 GMT (rate expected to be cut from 3% to 2.75%)
- UK NIESR GDP estimate 2301 GMT
- Japan GDP 2350 GMT
Published on Tue, Jun 10 2008, 10:23 GMT
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Prospects Look Dim For Canadian Dollar And British Pound
Thu, Jun 5 2008, 08:07 GMT
by Grace Cheng
The US dollar is stronger today against currencies like the Canadian dollar, British pound and Japanese yen, but remains more or less unchanged versus the Euro, Swiss franc. Broadly speaking, sentiment is still supportive of a USD rebound. The ADP employment report released today showed that private sector jobs rose by 40,000 in the US in May, better than the 30,000 drop expected by most economists. In April, 13,000 jobs were added by the private sector, which was revised up from the previously reported 10,000. Although the ADP data isn’t very telling, it gives a glimpse of how the government’s monthly jobs report could turn out. With the US non-farmpayrolls to be released this Friday, you’d better mark that on your calendar as it is one of the most anticipated events every month. The median forecast is for non-farm payrolls to fall by 60,000 in May.
The greenback is also supported for the time being by what Fed chief Bernanke said yesterday. He said the Federal Reserve is aware of the inflationary impacts of the weaker US dollar - an unusual reference to the US currency when speaking of the economy and monetary policy - and also hinted the end of the rate cut cycle.
Woes in Britain
Cracks are showing in the UK. Nationwide, Britain’s fourth-biggest mortgage lender, said consumer confidence dropped in May to the lowest level in four years. And a private survey by CIPS showed growth in services contracted for the first time since March 2003, falling to a falling of 49.8, versus a forecast reading of 50.5. The British pound will be pressured on the downside from weakening economic data as well as from rising inflation, two big areas of concern for the Bank of England as it begins its two-day meeting to set borrowing costs.
Upcoming Interest Rate Announcements
Interest rate decisions will be announced by the Bank of England and the European Central Bank Thursday, and both are expected to keep rates on hold at 5% and 4% respectively. Britain’s 5% main lending rate is the highest among the Group of Seven nations. For instant data releases and news announcements, check out the live news feed at GraceCheng.com.
Forex Trading
EUR/USD has been trading in a tight range after hitting a session low of 1.5410 yesterday, and is now hovering around 1.5450. It is likely to stay in this range till the ECB rate decision Thursday. Possible downside targets are 1.5390, 1.5360. USD/CHF also traded sideways and is now around 1.0400. Topside targets are 1.0530, 1.0590-1.0610. GBP/USD fell slightly over 100 pips today, and if the USD continues to show strength, Cable may next test 1.9500-10.
The US dollar rose for the fifth day in a row against the Canadian dollar today as traders speculate that the Bank of Canada may be forced to cut interest rates next week as the Canadian economy posted an unexpected first-quarter contraction. USD/CAD is now trading above 1.0100.
Thursday:
- Australia trade balance 0130 GMT
- New Zealand rate decision (rate expected to stay at 8.25%)
- German factory orders 1000 GMT
- Bank of England rate decision (rate expected to stay at 5%) 1100 GMT
- European Central Bank rate decision (rate expected to stay at 4%) 1145 GMT
- US initial jobless claims 1230 GMT
- Fed’s Plosser speaks on financial stability 1600 GMT
Published on Thu, Jun 5 2008, 08:07 GMT
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Is Bernanke Hinting At A Stronger Dollar Trend To Cool Oil Prices?
Wed, Jun 4 2008, 13:28 GMT
by Grace Cheng
Fed chief Bernanke’s words today are likely to support the US dollar in the short to medium-term. Speaking via satellite at an International Monetary Conference in Spain, Bernanke said that the Fed is “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations”, since the dollar has lost much of its value against other major currencies like the Euro. It is very rare for Bernanke to talk specifically about the dollar, so his voicing out of the US currency has definitely got everyone’s attention. He acknowledged that the weakening dollar has had an effect on oil prices, and that much of the dollar’s fall is erasing its pre-2002 strength. The US dollar shot up sharply versus the Euro and Swiss franc, and is looking poised to attract bidding interest along the way.
Bernanke also mentioned that downside risks to the US economy will remain until there is clearer signs stabilization of house prices. He also said what many of us already know, which is the reluctance of Americans to spend, saying that consumers continue to face “significant headwinds” although consumer spending has thus far held up a bit better than expected. So if you want to help the economy, spend, but not overspend.
Another boost to the US dollar comes from Bernanke’s suggestion that the Fed will keep interest rates unchanged. He said, “For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.” He said the Fed will pay “close attention” to commodity prices that are driving up inflation.
Australia Leaves Rate Unchanged
The Australian dollar went higher against the US dollar to above 0.9600 but then gave up its gains after the Reserve Bank of Australia left interest rates unchanged today. Data released today showed the current account deficit for the March quarter rose to a record A$19.5 billion as bad weather in Queensland dampened the nation’s exports. One positive thing is that home-building approvals unexpectedly rose 7.8% in April for the first time in five months.
Forex Trading
EUR/USD has broken below the trendline established since February this year, and has hit an intraday low around 1.5435. Next bear target is possibly 1.5390-1.5400. USD/CHF has found support on its up trendline, and rallied to a session high of 1.0490. Topside targets are 1.0530, 1.0590-1.0610.
Wednesday:
- Australia GDP 0130 GMT
- ECB’s Trichet speaks 0730 GMT
- Eurozone PMI services 0800 GMT
- UK PMI services 0830 GMT
- Eurozone retail sales 0900 GMT
- US MBA mortgage applications 1100 GMT
- US ADP employment change 1215 GMT
- US ISM non-manufacturing 1400 GMT
- Fed’s Bernanke speak on economic challenges 1845 GMT
Published on Wed, Jun 4 2008, 13:28 GMT
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Panic In The Markets Drive Up The Japanese Yen Sharply
Tue, Jun 3 2008, 08:45 GMT
by Grace Cheng
The risk aversion theme is back in the financial markets. Both the US dollar and the Euro are down against the Japanese yen as carry traders buy back yen to close their carry positions. What’s causing the run-to-safety switch in sentiment are renewed fears that the world hasn’t seen the end of the credit market turmoil, making investors nervous about holding positions whereby they had sold the yen to buy high-yielding currencies like the Euro. UK’s largest lender of buy-to-let mortgages, Bradford & Bingley, today announced a significant profit warning and also warned that the UK housing market is deteriorating. Over in the US, another CEO was kicked off from his position today. Wachovia, fourth-largest US bank, ousted CEO Kennedy Thompson after the board found him responsible for the losses that made up more than half its market value in the past year. The bank’s losses are linked to the subprime mortgage fallout in the US. Washington Mutual, one of the largest US subprime mortgage companies, also made investors jittery today when it announced that CEO Kerry Killinger will step down as chairman, following pressures from angry shareholders.
When there is crisis erupting, you are also certain to see a rally in the Japanese yen and the Swiss franc in the forex markets.
Weak Manufacturing In US, Eurozone
The US ISM reported today that its May manufacturing activity index came in at 49.6 versus April’s 48.6. The May reading is slightly better than the forcast of a reading of 48.5. This is the fourth straight month of contraction in manufacturing activity in the US.
Eurozone’s manufacturing sector isn’t doing so well either: its manufacturing sector purchasing managers index tumbled to the lowest level since August 2005. Despite calls by the International Monetary Fund (in a report Monday about the ECB) for the ECB to cut interest rates further ahead, ECB honcho Trichet reiterated today that the central bank will continue to focus on combating inflation in Europe. (By the way, the ECB just celebrated its 10th birthday today)
Forex Trading
Safe-haven flows are driving the forex markets today, with the Yen and Swiss franc being the biggest gainers across the board. EUR/JPY fell at least 200 pips to an intraday low around 162.20; USD/JPY fell slightly more than 100 pips to around 104.50 as of the time of writing. Other high-yield currencies like the Australian dollar, New Zealand dollar and the Canadian dollar, all fell versus the yen sharply today. Needless to say, the British pound is also a good candidate to short today because of the Bradford & Bingley news. GBP/USD fell 180 pips to around 1.9600; GBP/JPY plunged more than 300 pips to around 205.10 today. USD/CHF is holding steady, with nearest support around 1.0380.
Tuesday:
- Australia rate decision (rate expected to stay at 7.25%) 0430 GMT
- Swiss CPI 0545 GMT
- UK PMI construction 0830 GMT
- Eurozone GDP, PPI 0900 GMT
- ECB’s Trichet, Fed’s Bernanke, BOJ’s Shirakawa speak in Spain 1300 GMT
- US factory orders 1400 GMT
- UK Nationwide consumer confidence 2301 GMT
Published on Tue, Jun 3 2008, 08:45 GMT
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Fed's Tough Talk On Inflation Boosts Dollar In Thursday's Trading
Fri, May 30 2008, 10:06 GMT
by Grace Cheng
This week has so far been a good one for the US dollar - the US currency rallied higher against other currencies like the Euro, Swiss franc, British pound and Japanese yen after the positive US GDP data that met expectations, following Wednesday’s better-than-expected durable goods orders. The government said today that US gross domestic product, a measure of goods and services produced, rose at a seasonally adjusted 0.9% annual rate in the first quarter, which was slightly higher than the first estimate of 0.6% growth in the first quarter. It’s a little irrelevant to still debate whether the US was “really” in a recession from January to March even though the GDP number shows borderline growth as we are already more than half into the second quarter. The biggest drag on the US economy is the fall in consumer spending, which makes up about 70% of GDP. A huge chunk of the overall GDP - about 1.17 percentage points - was cut by the 25.2% drop in residential fixed investment.
Higher Rates In US Soon?
The US dollar also got a boost from Dallas Fed’s Richard Fisher who hinted that the Fed might raise interest rates “sooner rather than later”. He said that if inflation and inflation expectations keep getting worse, that he would “expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario”.
Fisher, a voting member of the FOMC, is the only member to dissent three times from decisions to cut the Fed funds rate, prefering no change. Yesterday Minneapolis Fed’s Gary Stern said that inflation is too high and the Fed will need to consider the timing and magnitude of any reversal in interest rate cuts.
UK Home Prices Fall Again
Nationwide reported that UK house prices fell 2.5% month-on-month in May, worse than the 0.5% decline expected, and that is the largest monthly decline ever, since record-keeping began in January 1991. May’s drop in home prices was the 7th straight month of declines, which was the longest consecutive period of monthly falls since 1992.
Forex Trading
EUR/USD broke out below 1.5600 to reach an intraday low around 1.5520. Downside targets are possibly 1.5480-90, then 1.5430. USD/CHF rallied for the third day in a row and hit a high around 1.0480 and next topside targets are around 1.0530, 1.0570-90. GBP/USD fell further today to to 1.9670 on weak housing data from the UK.
Friday:
- German retail sales 0600 GMT
- Italy CPI, Eurozone CPI, Eurozone unemployment rate 0900 GMT
- Canada GDP 1230 GMT
- US PCE core, personal spending 1230 GMT
- US Chicago PMI 1345 GMT
- US U of Mich confidence 1400 GMT
- Greenspan speaks on economy, markets 1545 GMT
- Boston Fed’s speaks on economic outlook 1630 GMT
Published on Fri, May 30 2008, 10:06 GMT
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Surprisingly Strong US Durable Goods Orders Thanks To Weak Dollar
Thu, May 29 2008, 13:21 GMT
by Grace Cheng
The US dollar is stronger against major currencies Wednesday after a government report showed that US durable goods orders slipped by just 0.5%, less than the 1% drop expected by most economists. This small drop is pretty impressive actually, considering that if you exclude transportation goods from the equation, you get a 2.5% rise in durable goods (-0.5% expected), and that is the biggest increase since 3.7% in July last year. So while demand for civilian aircraft fell, there was a decent gain in business investment. This is a good sign for an economy that is on the brink of an official recession or may already be in one as it shows resilience amid weak economic conditions. And the US economy may have to thank the falling dollar. Why? Because a weaker dollar results in stronger overseas demand for capital goods manufactured in the US, and the more goods get exported, the better it is for the manufacturing sector.
Topside momentum in the US dollar in