Forex News Updates

US Dollar Marks its Sharpest Rally in Three Months but will it carry through to Friday?

2009-11-13T23:19:00.002+05:00

•    Euro Looks to Take Control of its Own Fundamental Future with 3Q GDP Numbers
•    Australian Dollar at Risk of Being Pegged Fundamentally Overbought
•    Japanese Yen’s Correlation to Risk has Waning as Recovery Develops

US Dollar Marks its Sharpest Rally in Three Months but will it carry through to Friday?
The US Dollar enjoyed its most impressive daily advance in months Thursday at the expense of investor confidence. Personifying its macro role as the ubiquitous safe haven currency; the greenback would forge its biggest advance against its primary trade partner, the euro, since August 7th. And, immediately erasing any arguments that this was a currency-borne move; we saw the S&P 500 fall over one percent, gold tumble 1.2 percent and the second tier economic data on the US docket disappoint.

While the contents of today’s calendar lacked in their precedence for market-moving potential, they nonetheless offered important status updates on the economic and fiscal health of the United States. Considering the dollar’s primary function as of late is to fill in as a funding currency for strong carry flows, there are few more imperative fundamental considerations for traders than gauging its suitability in this role. Aside from the forecast for growth and interest rates (where the US actually leads many of its liquid counterparts), the preponderance of bloated deficits and record levels of government debt helps to keep the greenback on the short-side of most yield plays. The October monthly budget statement released by the Treasury added to the policy malaise. A $176.4 billion shortfall was the largest for that particular month and was the fifth largest on for any period. Looking at the breakdown, spending declined by 2.7 percent through the year while revenues and other income plunged 17.9 percent. It is clear that though officials are already moving towards a measured exit from stimulus, the impact of the recession on tax income will maintain budget deficits at extraordinary levels for years to come.

From fiscal struggle to economic recovery, the bullish outlook for the housing sector was dealt a blow by the MBA’s weekly mortgage applications report for the period ending November 6th. Though the headline reading rose 3.2 percent, filings for home purchases dropped 11.7 percent to the lowest level since December of 2000. This leads us to question whether the vital artery of growth can sustain its recovery without government assistance. The silver lining to the day was seen in employment. Initial jobless claims for ht week through November 7th fell more than expected to its lowest level since the first week of January. Continuing claims for the previous week followed suit with sharp contraction to levels not seen since early March. While these figures on their own are not confirmation of a halt to firing and rebound in hiring; they bring the US one step closer.

Looking ahead to tomorrow, the question that every trader is asking is whether the dollar will follow through on its impressive run today. Considering the currency is now on the verge of possibly turning its dominant trend (EURUSD and the Dollar Index are just off their respective channel extremes); it will likely take a considerable shift in either the dollar’s market status or underlying risk appetite to advance such a development. The University of Michigan Consumer Sentiment gauge doesn’t necessarily hold the influence needed and it is somewhat late in Friday’s session. On the other hand, the European growth numbers could make a broader appeal to sentiment. However, considering the effort required to force a breakout; it is the more probable scenario that the greenback will either retrace its gains or settle into the weekend.

Euro Looks to Take Control of its Own Fundamental Future with 3Q GDP Numbers
As a prelude to tomorrow’s heavy event risk, the European Central Bank released its monthly Survey of Professional Forecasts bulletin with a positive revision to growth. According to the report, Euro-Zone GDP is expected to contract 3.5 percent through 2009 (from a previously projection of a 4.5 percent slump) and expand 1 percent through 2010 (compared to a previous outlook of 0.3 percent). Looking ahead to Friday’s European session, we will find validity to these more optimistic forecasts in (and a much more volatile response to) the government’s first measures of 3Q growth. The most Euro Zone measures hold the greatest fundamental weight for the macro crowd; and the official consensus calls for 0.5 percent growth through the three months to officially bring the region’s recession to a close. However, the reading alone will not likely define the entire event. For volatility, the German numbers could steal the show. Scheduled for release at 7:00 GMT (a full three hours before the regional data), Europe’s largest economy is expected to have grown 0.8 percent through the period to match its fastest pace of expansion since the final quarter of 2006. Furthermore, those looking for fundamental guidance beyond just the few hours of volatility that follows the round of data will dig deeper into the performance of other members. While Germany and France have paced the global recovery, other economies like Italy and Spain (which reported a contraction of 0.3 percent today) are still struggling.

Australian Dollar at Risk of Being Pegged Fundamentally Overbought
The Australian dollar has enjoyed its status as bullish extreme of the economic and monetary policy spectrum while risk appetite extended its impressive recovery; but what happens should sentiment cool or even retrace? Thursday’s pullback in risk appetite (though leveraging a recovery for the US dollar) left the Australian currency relatively unscathed. Speculators maintain a strong fundamental and persistently hawkish interest rate outlook that has served them well over the past eight months. However, RBA Governor Glenn Stevens has already come out saying further policy adjustments will be taken in moderation. There is reason to believe him. Consumer-based inflation was at its lowest level in a decade through the third quarter and still cooling. For growth, while the net employment change for October unexpectedly rose by 24,500 positions last night; the jobless rate still ticked up to a six-year high. With the rest of the world taking its time and fundamentals developing at a moderate pace, there is reason to believe the RBA will slow; yet the market is still pricing in an 84 percent chance of a hike on December 2nd.

Japanese Yen’s Correlation to Risk has Waning as Recovery Develops
With the dollar competing for the title of the market’s favored funding currency where does that leave the Japanese yen. While benchmarks for other asset classes (stocks, commodities, etc) have all pushed to record highs, the more risk-attuned yen crosses have actually been developing long-term, broad congestion patterns. This could be in response to island nation’s economic recovery, its ballooning deficit and debt position or simply an effect of competition; but what seems clear is that this ambiguity will not last for long. Signs of lasting deflation are rising and domestic consumption is far from healthy. When US rates start to rise later down the line, it is almost a certain that Japan’s will remain untouched.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

EUR/USD: Trading the Preliminary German GDP Report

2009-11-13T23:18:00.002+05:00

Trading the News: German Gross Domestic Product

What’s Expected

Time of release: 11/13/2009 7:00 GMT, 02:00 EST

Primary Pair Impact : EURUSD

Expected: 0.8%

Previous: 0.3%

Effect the German Gross Domestic Product report had over EURUSD for the past 2 quarters

2Q 2009 German Gross Domestic Product

The preliminary GDP reading for Germany showed the economy unexpectedly emerged from the recession as the growth rate expanded 0.3% from the first-three months of the year, while the annualized rate of growth slipped 7.1% from the previous year amid expectations for a 7.6% decline. However, as the Bundesbank forecasts the unemployment rate to reach 10.5% in the following year, the slump in the labor market is likely to weigh on economic activity going forward as policy makers see a risk for a protracted recovery. As a result, the European Central Bank is likely to hold borrowing costs at the record-low and maintain its EUR 60B in covered-bond purchases to stem the downside risks for growth and inflation, and is widely expected to maintain a dovish outlook as the central bank sees price growth slipping below the 2% target over the near-term.

1Q 2009 German Gross Domestic Product

Economic activity in Germany contracted at a record pace during the first three-months of the year, with the growth rate tumbling 3.8% from the fourth quarter of 2008, while the annualized rate plunged 6.7% from the previous year amid expectations for a 6.5% drop. The bigger-than-expected decline reinforces a dour outlook for future growth as policy makers anticipate GDP to weaken at an annual pace of 6% this year, and the government may take further steps to shore up Europe’s largest economy as the outlook for global growth remains bleak. Nevertheless, as Chancellor Angela Merkel pledges EUR 82B in public spending to jump-start the ailing economy, with the European Central Bank lowering borrowing costs to a record-low of 1.00% and commiting EUR 60B in covered-bond purchases, the extraordinary efforts taken on by the government should help to stem the downside risks for growth and inflation.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.

How To Trade This Event Risk

Economic activity in Germany is expected to expand at a faster pace in the third quarter as economists forecast the growth rate to increase 0.8% after rising 0.3% during the three-months through June, and long-term expectations for higher interest rate in Europe could drive the exchange rate higher as the nation emerges from the worst recession since the post-war period. Business confidence in the region jumped to a 13-month high in October, with industrial outputs increasing 2.7% after rising 1.8% in August, and the data reinforces an improved outlook for future growth as trade conditions improve. A report by the Federal Statistics Office showed the trade surplus widened to 10.6B from 8.1B in August as exports jumped 3.8%, while the Federal Labor Agency said unemployment slipped 26K in October after falling 15K in the previous month, leading the jobless rate to fall back to 8.1% from 8.2% in previous month, and conditions are likely to improve going into the following year as the government forecasts economic activity to expand at an annual rate of1.2% in 2010 after contracting 0.5% this year. At the same time, retail spending unexpectedly declined 0.5% in September after tumbling 1.8% in the previous month, while the GfK consumer confidence survey slipped to 4.0 from a revised reading of 4.2 in October amid expectations for a rise to 4.5, and the ongoing weakness in the domestic economy may weigh on the outlook for growth as policy makers see a risk for a protracted recovery. Bundesbank President Axel Weber said that “the general economic trend is pointing upward” and expects the growth rate to expand 0.75% in the third quarter, but went onto say that the economy “continues to rely on support from fiscal and monetary policies” and argued that the stimulus “shouldn’t be withdrawn too quickly” as the recovery remains weak. In addition, the central bank head remained “concerned that unemployment may rise in the course of next year,” which would hamper the outlook for private spending, and Mr. Weber continued to see a risk for GDP to remain below last year’s level until 2013 as growth prospects remain subdued. Moreover, the International Monetary Fund anticipates the recovery to be “slow and fragile” as the group forecasts GDP to grow at an annual rate of 0.3% in 2010, and the European Central Bank may keep the benchmark interest rate at the record-low throughout the first-half of the following year in order to encourage a sustainable recovery throughout the euro-region. Nevertheless, as risk trends continue to drive price action in the foreign exchange market, a rise in risk appetite could support the euro higher as market participants move into higher risk/reward investments.

Trading the given event risk favors a bullish outlook for the single-currency as market participants anticipate economic activity in Germany to expand for the second consecutive quarter, and price action following the release could set the stage for a long euro trade as policy makers hold an improved outlook for future growth. Therefore, if the growth rate expands 0.8% or greater from the second quarter, we will look for a green, five-minute candle subsequent to the release to confirm a buy entry on two-lots of EUR/USD. If these conditions are met, we will place our initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will generate our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.

In contrast, the slump in household spending paired with tightened credit conditions are likely to weigh on the economy, and a dismal GDP reading is likely to stoke increased selling pressures on the single-currency as investors weigh the prospects for a sustainable recovery in the region. As a result, if GDP expands 0.4% or less, we will favor a bearish outlook for the EUR/USD, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.

Euro Vulnerable If Third-Quarter GDP Continues to Show Weak Private Sector

2009-11-13T23:15:00.004+05:00

The Euro may see selling pressure in European hours even as Euro Zone economic growth advances for the second consecutive quarter if the outcome relies heavily on government stimulus while the private sector remains weak, casting doubts on the sustainability of recovery.

Key Overnight Developments

• New Zealand House Sales Grow as Slower Pace in October
• Euro Consolidates, British Pound Pushes Higher in Overnight Trading

Critical Levels

The Euro crept higher off the low set in US hours but failed to build any significant momentum, spending much of the Asian session consolidating in a narrow 20-pip range above 1.4850. The British Pound pushed slightly higher, adding as much as 0.2% against the US Dollar.

Asia Session Highlights

With nothing of particular significance on the economic calendar, currency markets took an opportunity to consolidate in overnight trading. The Real Estate Institute of New Zealand (REINZ) reported that House Sales grew at a slower pace in October, but the figure was firmly within the range of outcomes seen after the metric peaked in May. September’s JapaneseIndustrial Production figures were revised slightly higher while Consumer Confidence figures printed within hair of expectation, with both general and household sentiment continuing to flatten out since August as the impact of fiscal stimulus begins to wane.

Euro Session: What to Expect

Gross Domestic Product figures out of the Euro Zone top the economic calendar in European hours, with the region’s top three economies (Germany, France, Italy) as well as the currency bloc as a whole expected to post the second consecutive quarter of positive growth in the three months to September. While the figures in and of themselves should not prove too market-moving, the breakdown of where growth came from will be critical. Second-quarter figures relied heavily on government spending to underpin output, but traders have become increasingly suspect of the sustainability of the rebound once the impact of fiscal stimulus peters out. Indeed, Germany’s ZEW survey of investor confidence dropped for the second consecutive month to the lowest level since July earlier this week. To that effect, the Euro will be vulnerable if third-quarter figures do not reveal meaningful evidence that the private sector is at least somewhat ready to pick up the baton after public funds are withdrawn.

Forex Market Hours

2009-11-13T23:15:00.001+05:00

Given the global nature of currency trading, the market is open for business around the clock, 24 hours a day. It is important for the trader to know the times when the major markets are active and how this can be implemented in their trading.

As a general rule, a specific currency will usually be most active when that particular market is open. For example, the GBP and its related pairs, while active and tradable 24 hours per day, tends be most active and widely traded during the hours when the London market is open. Meanwhile the JPY and its related pairs will be more widely traded during the Tokyo business day.

The market hours for the major FX markets are as follows:

London – 3 AM through 12 noon Eastern time (~35% of total FX volume)

New York – 8 AM through 5 PM Eastern time (~20% of total FX volume)

Sydney – 5 PM through 2 AM Eastern time (~4% of total FX volume)

Tokyo – 7 PM through 4 AM Eastern time (~6% of total FX volume)

The above information can be utilized in several ways. The more trades that are being executed during a given time (all things being equal), the narrower the Bid/Ask spreads will be. Greater liquidity results in a narrower spread.

Also, we see that between the hours of 8 AM and 11 AM Eastern US time, the two largest markets (London and New York) overlap one another for about 3 hours. This represents a key trading time slot for many traders. Keep in mind that each trading day will be different from every other and there are no guarantees that this time frame will generate incredible trades on a regular basis. However, with the London and New York markets open and trading simultaneously, more trading opportunities often present themselves.

While we see an overlap between the trading hours of the Tokyo and Sydney markets, it is not as significant as the London and New York overlap due to the significantly lower overall trading volume.

Weekend Trading

While the FX market technically never closes, virtually all of the major banks and trading entities do close for the weekend. The volume over the weekend is so small that it tends not to offer much trading opportunity for traders. While some activity can occur depending on fundamental news that may occur over the weekend, generally any movement in the currency pairs is negligible, and trading liquidity is extremely thin, making trade execution difficult and spreads very wide. Hence, the FXCM Trading Station closes at 4 PM Eastern time on Friday and opens again at 5 PM Eastern Time on Sunday.

Given differences among traders, some will keep positions open over the weekend while others will close all open positions before 4 PM Eastern on Friday.

AUD/CAD

2009-11-13T23:14:00.005+05:00

The trend of the AUD/CAD is up nicely on the daily chart and we see a pullback off of the high. This is a potential buying opportunity.

A move down to the 4-hour chart shows that this pullback might not be done quite yet.

I have a trendline plotted to show possible support along with the Slow Stochastics (15,5,5) to show when/if a reversal can be confirmed by this indicator. The trends of most pairs seem to be losing their steam a little although I have seen no real indication of a trend change. So I would use a more conservative approach and wait for the Slow Stochastics (or another indicator) to signal the buy entry. As usual, protective sell stops should be placed under this low after the bounce up with profit target set at twice that risk.

The Importance of the Risk:Reward Ratio

2009-11-13T23:14:00.003+05:00

Trader A has a win percentage of 75% on all trades while trader B has a win percentage of closer to 40% on all trades. Which trader is more profitable?

Of course we can’t answer that as we don’t know how much each trader makes when they are right compared to how much they lose when they are wrong. So the win percentage is not the most important factor in trading. I’m sure that we would all like to win most of our trades, but if our goal is to be profitable, then there is more to the equation. It is called the risk:reward ratio and is one of the most important aspects of money management and a key to becoming a consistently profitable trader. Let’s take a look at some examples:

If you risk 100 pips and look for 300 pips in profit, your risk:reward ratio is 1:3 meaning one pip of risk for every three pips in potential profit.

If you risk 100 pips and look for 200 pips in profit, your risk:reward ratio is 1:2 meaning one pip of risk for every two pips in potential profit.

If you risk 100 pips and look for 100 pips in profit, your risk:reward ratio is 1:1 meaning one pip of risk for every one pip in potential profit.

If you risk 100 pips and look for 50 pips in profit, your risk:reward ratio is 2:1 meaning two pips of risk for every one pip in potential profit.

If you risk 100 pips and look for 25 pips in profit, your risk:reward ratio is 4:1 meaning four pips of risk for every one pip in potential profit.

So trader A would not be profitable using a 4:1 risk:reward ratio while maintaining a win percentage of 75%. On the other hand, trader B using a 1:2 risk:reward ratio while maintaining a win percentage of 40% is a profitable trader. I would recommend that new traders use a 1:2 risk:reward ratio in their trading. If you open a trade with a risk of 25 pips, then try to get twice that or 50 pips in profit. I would also recommend moving your protective stop up to breakeven when the market moves halfway to your target. An example of this would be if you bought at 1.2500 and placed your protective stop at 1.2475, your risk is 25 pips. Using a 1:2 risk:reward ratio means placing your limit order to take profits at 1.2550 for a potential gain of 50 pips. When the market moves up halfway to your target which would be the 1.2525 level, you move your protective stop from 1.2475 up to your entry level of 1.2500. At this point, you can only win or break even on the trade. Then you can spend your time looking for the next trading opportunity instead of following the current trade.

Avoiding Taking Profits Prematurely

2009-11-13T23:14:00.000+05:00

Student's Question:

I chose the Head and Shoulders Pattern of the USD/JPY daily Chart which also shows interesting entry points when the Exponentional Moving Averages (EMA's) are being used.

You will find the the following EMA's on the chart: 200, 50, 20 and 10. Based on the 200 EMA-line the trend of the currency pair is a Down Trend. Therefore I will not be tempted to place trades against the trend. The chart shows 2 crossovers situations that can be qualified as higher probablility trades: The EMA 10 crosses below EMA 20 and EMA 20 crosses below EMA 50 almost on the same moments of time.

Please comment on my placed limit orders. Am I taking my profits to fast?

Thanks

Instructor's Response:

Nice job on employing Moving Averages to take this trade in the direction of the trend on this Daily chart of the USDJPY. You demonstrate a good understanding of this concept.

Since your stop is only 40 pips in each case but the limit you have set is providing many times that amount in terms of profit, the Risk Reward Ratios you have in place (1:9 and 1:7.5 respectively) are very strong. For the record, we look for at least a 1:2 RRR on every trade.

In this case, this USDJPY continued to move to the downside so I can understand why you asked about taking profits too soon. A plan that a trader can employ to take advantage of an ongoing move without having their entire position at risk is to trade multiple lots and scale out of the position.

For example, let's say that you opened 3 lots on each of these trades. As soon as the trade reached the 1:2 RRR, in this case +80 pips, one lot could be closed out and the stop could be moved to your initial point of entry...a breakeven stop.

As the pair progressed, another lot could be closed at the 1:3 RRR point...in this case that would be +120 pips. (3 x 40 pip initial stop = 120 pips) On the last lot the stop could be trailed at a respectable distance, let's say a hundred pips or so, to capitalize on any additional profit should the pair continue to move in your favor.

USD Bulls Need to Take a Stand on Friday in Order for Latest Rally to Gain Traction

2009-11-13T23:12:00.002+05:00

An as to be expected session of trade thus far with currencies mostly caught in some consolidation as the USD pulls back off of its Thursday highs. In fact, all major currencies are higher against the Greenback despite another round of comments from various officials in support of the USD. World Bank’s Zoellick has come out once again, while France’s Lagarde and New Zealand PM Key have also suggested that the USD should be higher.

MORNING SLICES

FUNDYS

An as to be expected session of trade thus far with currencies mostly caught in some consolidation as the USD pulls back off of its Thursday highs. In fact, all major currencies are higher against the Greenback despite another round of comments from various officials in support of the USD. World Bank’s Zoellick has come out once again, while France’s Lagarde and New Zealand PM Key have also suggested that the USD should be higher. PM Key makes more of a reference to Kiwi and his concerns with the relative strength of the local currency and the strain it is having on exports.

Relative Performance Versus USD on Friday (As of 9:50GMT) –

1) YEN +0.60%

2)   STERLING    +0.58%
3)   AUSSIE       +0.57%
4)   KIWI              +0.50%
5)   CAD       +0.30%
6)   SWISSIE      +0.29%
7)   EURO            +0.24%

The Yen and Sterling are the strongest currencies on the day, while the Euro and Swisse lag, despite still being firmer against the USD. On the data front, German GDP came in on the whole as expected with some upward revisions to the previous print offsetting the weaker than expected headline, while French GDP has disappointed, with the impact from the release being mitigated by earlier warnings from French Eco FinMin Lagarde. The German Wisemen did not help the Euro’s cause after painting a bleak picture for the local economy despite the consecutive quarters of positive growth. Finally,Eurozone GDP came in weaker than expected and helped to keep the lid on Euro rallies ahead of the US Open.

Elsewhere, in Switzerland, producer and import prices came in on the weaker side of expectation. In the UK, PM Brown is still pushing ahead with his unpopular Tobin Tax, while some of the relative strength in the Pound has been attributed to reports that a Korean fund is looking to purchase HSBC’s head office. In Japan consumer confidence was released and held steady at 40.5, but this hardly factored into price action, with more of the attention paid to some rumors of a Usd/Cny reval that opened a sizeable rally in the Yen into mid European trade.

Other markets have also bounced on similar themes, with US equity futures pointing to a higher open, while commodities are also moderately bid. However, it is worth noting that gold did manage to put in a very compelling bearish outside day off of its record highs on Thursday. Major US equity indices also managed to put in some bearish reversal days, which could suggest that the current bounce in currencies will only be short-lived.

Looking ahead, the North American calendar is quite busy with US trade balance (-$31.8B expected) and import prices (1.0% expected) kicking things off at 13:30GMT, along with Canada international merchandise trade (-CAD1.7B expected) and new motor vehicle sales (0.0% expected). University of Michigan confidence (71.0 expected) is the final release for the week at 15:00GMT. On the official circuit, Fed Evans and Noyer are scheduled to speak on asset price bubbles in Paris at 16:30GMT.

GRAPHIC REWIND

TECHS

EUR/USD - The story here continues to be about the 50-Day SMA (1.4765) and its ability to prop any setbacks for a majority of the up-trend in 2009. The market has simply been unable to establish a close below the medium-term moving average to keep the bullish structure firmly intact. However, some stretched medium-term technical studies do warn of a major corrective pullback over the near-term and potential shift in the structure. While it is premature to get too aggressive at current levels, we have established a short on Monday by the 78.6% fib retrace off of the 1.5060-1.4625 move, in anticipation of a topside failure ahead of 1.5060 which looks to be playing out. For now, the key level to watch below comes in by 1.4810, with a break to bring the 50-Day back into play. A close below the 50-Day SMA will then directly expose neckline support of a major double top formation at 1.4625 which if broken will force a material shift in the construct of the market and open a medium-term retreat back into the lower 1.4000’s. Only a close back above 1.5060 will delay outlook and threaten short trade.

USD/JPY – Difficult to determine whether we are undergoing some bearish consolidation within the broader underlying downtrend, or are in the process of carving out some form of a short-term base. We will stick to the latter for now with the market looking like it could be carving out an inverse head & shoulders base above 88.00. A break above 91.25 will help to reaffirm the prospects for the right shoulder, with a push back above the neckline by 92.50 ultimately required to confirm formation. Back under 89.20 however will likely negate and shift focus back on downside and towards 87.15-88.00.

GBP/USD - Despite the latest surge, the market has been well confined to a prominent range that has defined price action for the past several months. Monday’s rally has stalled out shy of the 1.7040, 2009 highs, with the market being well capped by formidable internal range resistance in the 1.6800’s. Look for the latest topside failure to now potentially set up a resumption of setbacks towards a very well supported 1.6250 area over the coming days. Any rallies should be well capped ahead of 1.6800.

USD/CHF - We continue to retain a constructive outlook for the pair despite the underlying bearish trend with medium-term studies overextended and warning of a more meaningful corrective rally. While the latest pullback has matched the recent 2009 lows by 1.0030, this does not rule out the potential for a double bottom formation to be confirmed on an eventual break back above 1.0335. Thursday’s strong bullish day strengthens double bottom prospects, with next short-term resistance now in sight by 1.0205. Ultimately, only back under 1.0030 would undermine our double bottom outlook and put pressure back on downside.

FLOWS

CTAs selling Usd/Jpy on rumors of China reval. Exporter and system funds on the bid in Aussie. US prime name bidding Cablewhile Russian names on the offer. Solid sovereign bids on dips in Eur/Usd. French bank and UK clearer offers in Eur/Gbp.

TRADE OF THE DAY

No Trade: We are currently exposed to the USD through our short Euro and Aussie positions and will stay sidelined until these positions play out.

PORTFOLIO OVERVIEW

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the"distribution" list.

Dollar Index Technical Forecast

2009-11-13T23:11:00.006+05:00

The US Dollar Index may have registered a significant Intermediate Trend Reversal at 74.94 and a sustained rally above wedge resistance will signal a recovery toward 81.47 over coming weeks.

US Dollar Index (USDI), last at 75.98

October 27th, 2009

Since peaking at 89.62 in early March this year, the USDI has been declining in a 5-wave sequence. Waves 2/ and 4/ display Alternation, with Wave 2/ being a Double-Three and Wave 4/ being a simple Zigzag. Together, Waves 2/ and 4/ approximate 100%. Since the early June peak of 81.47 (interpreted as completing Wave 4/) the Dollar has been declining in what appears to be an elongated 5th-Wave Diagonal Triangle structure; wherein each leg of the Diagonal pattern truncates (coinciding with Bullish price/momentum divergence) and the final leg is almost exactly 61.8% of the first.

A sustained break of the USDI’s Descending Wedge pattern would confirm a trend Reversal and herald a probable corrective recovery over coming weeks back toward the 81.47 level but with potential as high as 84.01; being a 61.8% retracement of the entire 89.62 – 74.94 decline.

The Bottom Line: The US Dollar Index may have registered a significant Intermediate Trend Reversal at 74.94 and a sustained rally above wedge resistance will signal a recovery toward 81.47 over coming weeks.

Forex Options Point to a Slowdown in US Dollar Gains

2009-11-13T23:11:00.003+05:00

Forex options and Futures markets continue to show that US Dollar sentiment is at bearish extremes, and a further unwind of said positioning is likely to produce material US Dollar rallies. Indeed, we have been calling for a major Dollar turnaround for quite some time now. It is never good to be early on calls for a trend reversal, but we feel that dynamics are such that Dollar strength is likely to continue. Elevated forex options market volatility expectations virtually guarantee eventful price action in the week ahead.

Read a how-to guide on understanding our Forex Options Weekly Forecast report.

Volatility expectations have surged across the board on the recent US Dollar turnaround. Typically we see major market turns on especially fast-moving price action, and this likewise hints at further dollar gains. Of course, sky-high FX options implied volatility levels likewise guarantee that price will not move in a straight line. We advise caution in setting maximum risk levels for trading on what looks to be one of the most eventful weeks of price action for the better part of a year.

Euro/US Dollar Options Analysis

Futures positioning on the Euro/US dollar has unsurprisingly moderated as of late, as traders begin to close their extremely net-long positioning on EURUSD tumbles. FX options risk reversals likewise show that many are hedging against further Euro weakness, and the sharp shift actually suggests we are growing near a short-term bearish sentiment extreme. We remain bearish the EUR/USD on the prospect of further position covering, but risk of bounce is high.

British Pound/US Dollar Options Analysis

FX Options and Futures sentiment continues to suggest the British Pound may outperform the Euro on comparatively neutral positioning. Non-commercial traders actually remain fairly heavily net-short GBPUSD—as they have been since it last traded above 2.0. FX Options risk reversals are decidedly neutral the currency pair, and our short-term outlook is somewhat mixed. Suffice it to say, however, a further unwind of FX Futures positioning would produce GBP strength.

US Dollar/Japanese Yen Options Analysis

Forex options markets show that traders are the most bullish the USDJPY (Bearish the Japanese Yen) in the past 90 trading days, while the longer-term trend in price shows we are in a fairly clear downtrend. The FX options market sentiment extremes suggest that we may have hit a USDJPY top and it is likely to continue its longer-term correction. A sharp correction in Non-Commercial futures positioning leaves scope for further USDJPY weakness.

US Dollar/Canadian Dollar Options Analysis

We have persistently called for Canadian Dollar weakness against the US Dollar (USDCAD strength), but a sharp shift in sentiment suggest the pace of gains may slow. Non-Commercial futures positioning had reached the most USDCAD-bearish (Canadian Dollar bullish) extremes since the pair traded near parity. We have seen futures positioning pull back somewhat, but the bigger story is FX options risk reversals. The sharp shift signals that USDCAD gains may slow.

US Dollar/Swiss Franc Options Analysis

Non-Commercial futures positioning on the US Dollar/Swiss Franc pair remains the most bearish in nearly 5 years—pointing to clear sentiment extremes. Yet FX Options actually show that risk reversals are at bullish extremes and give a decidedly mixed view on the Swiss Franc. All else remaining equal, we expect that an unwind of USDCHF shorts (Swiss Franc longs) will produce rallies. Yet the sharp shift in Risk Reversals suggests that the pace of gains will slow.

Australian Dollar/US Dollar Options Analysis

We continue to call for a sustained Australian dollar pullback, as sentiment has remained extreme for quite some time now. Non-commercial futures traders remain near the most net-long the AUDUSD since the pair traded above 0.90. As with other US Dollar pairs, however, FX options show a substantive shift in market sentiment. The impressive drop in risk reversals suggest that the pace of AUDUSD losses may slow, but we remain bearish on a medium-term basis.

New Zealand Dollar/US Dollar Options Analysis

The New Zealand dollar/US Dollar pair is quite similar to the AUDUSD, with significant sentiment extremes leaving the door open for near-term declines. As of several weeks ago, Net Non-Commercial positioning on NZDUSD futures remained the most net-long since the pair set noteworthy tops in July, 2007.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com, drodriguez@dailyfx.com

Scandi Daily 11.13

2009-11-13T23:09:00.002+05:00

OVERVIEW – We had mentioned in Thursday’s commentary that there was a risk for a pullback in the regional currencies in light of the early warning signs of a shift in broader global macro sentiment as reflected through global equities and overinflated gold prices. Indeed, the markets did manage to intensify their reduction in risk appetite throughout the day, which in turn acted as a strain on both the NOK and SEK. On Friday, though it is still early in the day, there has been a reversal of fortunes for the regionals with both currencies outperforming across the board. It is no surprise to see the Australian Dollar and Norwegian Krone in the top slots on Friday, with any push back into risk likely to favor the two economies that have already reversed their respective monetary easing cycles. However, at this point, today’s rebound in currencies against the USD is merely classed as corrective and we project that the currency selling and reduction in risk appetite will once again emerge into the latter half of Friday’s session. Technical studies confirm our bias with all of the nordic crosses showing the Scandis in the process of carving out some significant tops against the major currencies. Gold has put in a very strong bearish outside day on the daily chart off of its record highs, and this should act as a catalyst for some material setbacks in the commodity which should weigh on oil, thereby also weighing on the highly correlated krone. US equities have also put in a bearish reversal day on Thursday, which should ultimately weight on the risk correlated krona.

Eur/Sek pullbacks should be well propped ahead of 10.15 with the market in the process of carving a meaningful base on the daily chart. Look for Thursday’s bullish close to now open the next push back towards the recent range highs by 10.53. A break above will confirm constructive outlook and accelerate. Initial resistance at 10.27.

Eur/Nok despite the latest setbacks, we still view he overall price action as constructive since the market broke back above 8.41 in mid-October. Look for the price to be well supported ahead of 8.35 which now offers itself as previous resistance turned support, in favor of a bullish resumption back above key short-term resistance at 8.56 over the coming days. Wednesday’s bullish outside day reaffirms.

Usd/Sek our view is still constructive at current levels despite the latest setbacks and favors USD appreciation over the coming weeks. We contend the market is attempting to carve out a major base rather than in the process of some bearish consolidation. The recent break back above 7.10 confirms bias and exposes 7.40-50 further up. Any setbacks are expected to be well supported ahead of 6.75, while back above 7.20 accelerates. Initial resistance by 6.85 has now been cleared and this should get things going in our favor.

GBPCHF Range Fortified by Technicals, Resistant to Fundamentals

2009-11-13T23:07:00.002+05:00

One of the most important factors for range trading in today’s markets (beyond finding an attractive technical setup) is finding a pair that is not directly correlated to the rest of the market. For the vast majority of the viable, liquid exchange rates; risk appetite is the primary source for trend and volatility.

How stable is the GBPCHF Range?
• Levels to Watch:
-Range Top: 1.6950 (Fib, Pivot)
-Range Bottom: 1.6675 (Fib, Pivot)
• Comparing the price action between equities and GBPCHF we see little direct correlation. This is a good sign as is suggests one of the most unpredictable and influential drives for the broader markets poses less of a threat to this specific pair’s range. Nonetheless, fundamentals do factor in. The British pound backs the worst performing economy (made worse by a credit rating warning from Fitch). Scheduled event risk threatens mild waves.
• Congestion developed over the past three week’s maintains strong levels of both support and resistance. The ceiling on pattern is founded on a 61.8% Fib and a pivot developed through the past year at 1.6950; while the floor is the 38.2% level of the same wave and notable pivot near 1.6675. The real concern is determining the medium-term trend.
Suggested Strategy
• Short: Setting entry at 1.6925 is aggressive given recent highs but is well within the range.
• Stop: For an initial stop of 1.7005, we easily cover the past month’s tails at resistance. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• Target: The first objective is one-and-a-half times risk (120) at 1.6805. The second is 1.6725.

Trading Tip – One of the most important factors for range trading in today’s markets (beyond finding an attractive technical setup) is finding a pair that is not directly correlated to the rest of the market. For the vast majority of the viable, liquid exchange rates; risk appetite is the primary source for trend and volatility. Therefore, finding range setups day in and day out becomes a game of speculating on the health of sentiment. What’s more, if we are not careful, our efforts at finding different pairs is render useless as we could leverage our exposure to an underlying driver. For those floating more than one range position (or various positions founded through any means of analysis), it is important to take stock of your exposure to those factors that go beyond merely leveraging up on a single currency. As for GBPCHF, the correlation to risk trends is very low. Where the Swiss franc is often considered one a good funding currency candidate, the pound is not an attractive carry currency. An extended recession, ballooned quantitative easing program and the impending threat of government spending cuts means this currency can supply neither a reasonable yield nor the promise of rising rates in the immediate future. Technically speaking, the boundaries to this range are both well founded. Our strategy looks to play a reversal from resistance; but there is a question as to the medium-term trend (long-term is clearly bearish). For this reason, either side of the congestion pattern is fair game. However, regardless of direction, this should take only a few days to setup and play out or we will cancel all open orders to reevaluate.

Event Risk for the UK and Switzerland

UK – The British pound is a fundamental oddity. The benchmark market yield for the currency makes it a reasonable carry; but the disastrous fundamental outlook for the United Kingdom quickly thwarts all hope of appreciation through yield expectations. With an ongoing recession, extremely loose monetary policy stance and ballooning fiscal deficits; it is difficult to gauge when the currency will be able to reenter the normal stream of speculation. Until then, there will always be the possibility of sharp and unexpected swings in price action that follow vague changes in sentiment. For the economic calendar’s part, next week’s BoE minutes holds the greatest potential for volatility. The Quarterly Monetary Policy report offered an outlook for inflation and insight into their reasons for expanding the bond purchasing program; but they could further clarify the issue with this release (perhaps with the MPC vote and sentiments).

Switzerland – While the US dollar may hold the title of top funding currency in name, the Swiss franc actually holds the lower benchmark market rate (3 month Libor). This may not impart the franc with the same troubles that the greenback suffers day in and day out; but its influence is clearly measured in for those Swiss crosses that hold a significant yield differential. For this reason, the top fundamental concern for this currency is, without question, investor sentiment. However, short-term volatility could still be roused by notable, event risk. The retail sales, trade balance and ZEW survey numbers all account for notable areas of the economy.

Written by: John Kicklighter, Currency Strategist for DailyFX.com

Questions? Comments? Send them to John at jkicklighter@dailyfx.com.

DailyFX Analyst’s Maintain A Bearish Euro Bias, But Will They Be Rewarded?

2009-11-13T23:06:00.002+05:00

DailyFX analysts continue to maintain a bearish bias against the Euro as they look to take advantage of the single currency’s correlation with equity markets. Stock values continue to rise despite the lack of supporting fundamentals increasing the chances of a reversal.

Signs that the global economy is emerging from its recession sent stocks to their highest level in over a year with the Dow breaking back above 10,000 at the end of October. However, the blue chip index’s inability to hold above the psychological level would fuel our analyst’s bearish Euro bias. Rising unemployment (10.2% in the U.S.) and the prospect of government stimulus programs coming to an end would weighed on risk appetite. Short Euro positions would initially be rewarded with the EUR/USD failing to stay above its own prodigious level of 1.5000. However, a pledge from the G-20 to keep interest rates low and maintain government programs (U.S. extension of $8,000 home buyer tax credit) reignited demand for higher yields pushing equities and the single currency back above their psychological barriers.

Where Are We Headed?

This week we saw 60% of our analysts choose to reinitiate their short Euro positions and were rewarded by today’s bearish descent. Stock markets have pulled back after running into staunch resistance levels with the Dow facing the 50% Fibo retracement of the decline from its all-time high, a barrier that traders may be unwilling to conquer without improving fundamentals. A merger from Hewlet Packard and 3com along with a drop in initial jobless claims to its lowest level since January failed to excite markets today. Therefore, we could be seeing the beginning of a bearish trend for stocks which will most likely bring the Euro in tow, as the two have been in lock step since September. Euro-zone GDP figures due out tomorrow are expected to show the regions recession came to an end in the third quarter which could provide support for the single currency. However, the backward looking growth gauge may do little to overcome concerns that the global economy is on a hard path to recovery.

British Pound Holding Support Line

2009-11-13T23:04:00.002+05:00

he US dollar has slipped following its Thursday advance. Of note is the GBPUSD, which continues to hold above a support line extended from October and November lows.

The GBPUSD has been in a consolidation mode since late May. Price has traded in a wide 1300 pip range since then in what could be corrective (continuation of strength) or distributive (reversal of strength). A support line drawn off of the 10/13 and 11/3 lows has held. 1.6710 is short term resistance. At this point, I do not see a clear trade although it should be noted that shorting does not look wise as long as the support line is intact.

Euro Halts Three-Day Decline as Economy Emerges From Recession, British Pound Rally Supported by 20-Day SMA

2009-11-13T23:03:00.000+05:00

The euro advanced to a high of 1.4903 during the overnight trade, but failed to hold ground and slipped back to the 20-Day SMA (1.4885) as economic activity in the region expanded less-than-expected in the third quarter.

Talking Points
•    Japanese Yen: Finance Minister Fujii Says Economy Remains ‘Very Unstable’
•    Pound: Rally Remains Supported By 20-Day SMA
•    Euro: 3Q GDP Expands Less-Than-Expected
•    US Dollar: Trade Balance, U. of Michigan Confidence on Tap

Euro Halts Three-Day Decline as Economy Emerges From Recession, British Pound Rally Supported by 20-Day SMA

The euro advanced to a high of 1.4903 during the overnight trade, but failed to hold ground and slipped back to the 20-Day SMA (1.4885) as economic activity in the region expanded less-than-expected in the third quarter. The advanced GDP reading for the Euro-Zone showed the growth rate increased 0.4% from the second quarter amid projections for a 0.5% rise, with the annualized rate tumbling 4.1% from the previous year versus forecasts for a 3.9% drop.

At the same time, Germany’s third quarter GDP expanded 0.7% after rising 0.4% during the three-months through June, while the annualized rate slipped 4.8% from the previous year, which was largely in-line with market expectations. As the Euro-Zone emerges from the worst recession since the post-war period, expectations for higher interest rates in the region may continue to support the rally in the EUR/USD however, economic advisors to the Germany government expects the European Central Bank to scale back its emergency programs before the Governing Council begins to raise borrowing costs throughout the economy. Moreover, the group said that the economic recovery in Germany remains fragile as the expansion in monetary and fiscal policy continues to support economic activity in the region, and went onto say that “abrupt” changes in foreign exchange rates could hamper the prospects for the recovery as global trade conditions remain weak.

The British pound strengthened against the greenback for the second-day to reach a high of 1.6699, and the currency may continue to trend higher throughout the month as the rally remains well supported by the 20-Day SMA (1.6518). Nevertheless, the Financial Times said that Chancellor of the Exchequer Alistair Darling was surprised when Bank of England Governor Mervyn King projected economic activity to expand 4.0% in 2011 during the central bank’s quarter inflation report, and sees a risk that Mr. Darling may hold a lower outlook for future growth than the BoE in the Pre-Budget report due out in the following month. Meanwhile, Financial Services Authority Managing Director of Supervision Jon Pain held a cautious outlook for the U.K. mortgage market and said that credit lending should not be influenced by a handful of large financial institutions, and said that “new entrants into the mortgage market should be encouraged if they have a sustainable business model.”

The greenback weakened across the board following the rise in risk appetite, and the reserve currency may face increased selling pressures going into the North American session as equity futures foreshadow a higher open for the U.S. market. Nevertheless, the economic docket is expected to reinforce an improved outlook for private spending as economists forecast the U. of Michigan confidence survey to increase to 71.0 in November from 70.6 in the previous month. At the same time, import price are forecasted to rise 1.0% in October, with the annualized rate projected to fall 5.5% from the previous year, while the trade deficit is anticipated to widen to $31.8B from $30.7B in August.

Will The EUR/USD Maintain Its Rally?

Related Articles:

Currency Markets Inch Towards a Stronger US Dollar

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

Should You Bet against the Dollar?

2009-10-22T13:10:00.001+06:00

The declining value of the U.S. dollar has been making financial headlines lately. After hitting an all-time low in April 2008, the dollar rallied strongly in last fall's financial crisis as investors sought safe havens, but it has once again fallen as the world economy has recovered. As of Oct. 19, 2009, the IntercontinentalExchange Dollar Index has fallen about 15% from the high it reached in early March.

Symbol	Price	Change
BNZ	26.30	0.00

BZF	26.65	0.00

CEW	22.13	0.00

CYB	25.35	0.00

DXDBX	25.94	-0.28

The causes behind the weak dollar are many and complex, but essentially this means that investors around the world have become less confident in the future stability of the dollar and more confident in other currencies. The effects of the weakening dollar can also be complicated, but the upshot is that it's cheaper for people in other countries to buy American-made goods and services and more expensive for Americans to buy things sold in other currencies.

The Explosion of Currency Funds
Another effect has been the creation of a slew of new mutual funds and exchange-traded funds that allow people to bet on the rise or fall of various currencies, especially the dollar. Just five years ago, there was only one such fund, Franklin Templeton Hard Currency (NASDAQ:ICPHX - News). It invests in money market bonds denominated in various foreign currencies that the managers believe are undervalued relative to the dollar, so that it benefits when those currencies rise and the dollar falls. Since the beginning of 2005, several more such funds have sprung up. There's ProFunds Rising U.S. Dollar (NASDAQ:RDPIX - News), which tracks the New York Board of Trade's U.S. Dollar Index (USDX), and ProFunds Falling U.S. Dollar (NASDAQ:FDPIX - News), which shorts the same index and thus benefits when the dollar falls. There are also leveraged dollar funds that provide twice the returns of the USDX or its inverse--Rydex Strengthening Dollar 2x Strategy (NASDAQ:RYSDX - News), Rydex Weakening Dollar 2x Strategy (NASDAQ:RYWDX - News), and Direxion Monthly Dollar Bull 2x (NASDAQ:DXDBX - News) and Monthly Dollar Bear 2x (NASDAQ:DXDDX - News).

In the trend-chasing ETF world, Rydex has also come out with CurrencyShares, a series of exchange-traded funds that track nine different overseas currencies versus the dollar. They are CurrencyShares Australian Dollar Trust (NYSEArca:FXA.TO - News), British Pound Sterling Trust (NYSEArca:FXB - News), Canadian Dollar Trust (NYSEArca:FXC - News), Euro Trust (NYSEArca:FXE - News), Japanese Yen Trust (NYSEArca:FXY - News), Mexican Peso Trust (NYSEArca:FXM - News), Russian Ruble Trust (NYSEArca:XRU - News), Swedish Krona Trust (NYSEArca:FXS - News), and Swiss Franc Trust (NYSEArca:FXF - News). WisdomTree has a similar line of ETFs that track the Brazilian real (NYSEArca:BZF - News), the Chinese yuan (NYSEArca:CYB.TO - News), the euro (NYSEArca:EU - News), the Indian rupee (NYSEArca:ICN - News), the Japanese yen (NYSEArca:JYF - News), the New Zealand dollar (NYSEArca:BNZ - News), the South African rand (NYSEArca:SZR - News), and a basket of emerging currencies (NYSEArca:CEW.TO - News). There's also a closed-end fund, Global Income & Currency (NYSE:GCF - News), which consists of a portfolio of currencies in which the manager can either have long positions (where the fund benefits if the currency strengthens) or short positions (where the fund benefits if the currency weakens).

Given the dollar's recent weakness, it's not surprising that some of these funds have posted solid returns lately. The leveraged funds betting on a dollar decline have done especially well; Direxion Monthly Dollar Bear 2x has gained 16% so far in 2009 (as of Oct. 19), and Rydex Weakening Dollar 2x Strategy has gained 15%. Among the currency-specific funds, CurrencyShares Australian Dollar Trust has gained 33%, Canadian Dollar Trust has gained 17%, and British Pound Sterling Trust and Swedish Krona Trust have both gained around 12%. Most funds betting on the decline of the dollar have also shown double-digit gains.

Are Currency Funds Worth Owning?
You might look at such returns and be tempted to think that these funds would make good investments. But that kind of thinking is potentially dangerous, because it assumes that recent results will continue indefinitely. (They never do.) Chasing performance is usually a bad idea in any case, but currency movements are especially volatile and highly unpredictable, often defying macroeconomic factors and the predictions of experts. It's possible that you could get good short-term returns if you bought a falling-dollar fund right now, but you could easily get burned.

Just look at what happened to the ProFunds dollar funds when they first came out in early 2005. ProFunds Falling U.S. Dollar gathered considerably more assets than Rising U.S. Dollar right out of the gate, because the dollar had fallen precipitously in 2004 and most people expected it to remain weak. (See this article about currency effects from the end of 2004.) But the dollar rallied strongly in 2005, so that Falling U.S. Dollar lost nearly 10% by the end of the year, and Rising U.S. Dollar gained 12%. Since then, both funds have been on a roller-coaster ride: the dollar fell in 2006 and 2007, rose again in 2008, and has fallen again this year, and the funds have fluctuated accordingly.

It's not a good idea for individual investors to make big bets on the direction of the dollar, as that's really a form of speculation. But that's not to say foreign currency exposure is a bad idea. Indeed, it can be a good way to diversify a portfolio and hedge against the possibility of a further fall in the dollar. However, currency funds aren't necessarily the best way to get such exposure. For one thing, many of them are expensive. The CurrencyShares ETFs only cost 0.40%, and Franklin Templeton Hard Currency isn't too bad, at 1.09% for A shares and 0.78% for Advisor shares. But the ProFunds, Rydex, and Direxion funds are all pretty pricey, as such funds tend to be; ProFunds Rising U.S. Dollar is the cheapest of the bunch, with a 1.58% expense ratio for Investor shares.

Other Options for Currency Exposure
For the great majority of investors, there are better ways to get foreign-currency exposure, such as through foreign-stock funds, as long as they're unhedged. Managers of unhedged funds don't try to offset the effect of fluctuations in the dollar, so when the dollar falls, these funds benefit, and vice versa. Even some domestic-stock funds can benefit from dollar weakness if they hold a lot of multinational firms that get a large chunk of their revenues abroad, such as Coca-Cola (NYSE:KO - News) or McDonald's (NYSE:MCD - News). True, these funds offer a less-direct route to foreign-currency exposure, but if you have substantial exposure to international stocks--especially small caps, which tend to be more dependent on movements in local currencies--it's probably enough. (As Morningstar's Gregg Wolper recently noted, some funds have recently stopped hedging their currency exposure into the dollar, but others have started doing so.)

You can rev up your portfolio even further with an unhedged foreign bond fund. Currency price fluctuations account for a larger share of these funds' returns, and because the dollar has been in the doldrums, they've been among the best-performing fixed-income funds. But keep in mind that foreign bond funds can be very volatile; emerging-markets bond funds got creamed in 2008 before rallying strongly this year. Investors should tread cautiously, if at all, before delving into such funds. (Morningstar.com Premium Members can find a list of our favorite world-bond funds here and our favorite emerging-markets bond funds here.)

This article by Arijit Dutta discusses in more detail how investors can broaden their currency exposure, and this one by Gregg Wolper discusses the various currency-hedging strategies that funds use. None of this means that you absolutely need to avoid currency funds at all costs--but if you do consider investing in one, make sure you know how to use it, and keep your expectations reasonable.

David Kathman, CFA does not own shares in any of the securities mentioned above.

Australian Dollar Remains Supported By Interest Rate Expectations

2009-09-22T18:17:00.002+06:00

Australian Dollar Remains Supported By Interest Rate Expectations

Fundamental Outlook for Australian Dollar: Bullish

- Second quarter dwelling starts unexpectedly fall by 3.7%.

- RBA Minutes Temper Tightening Expectations

- The Westpac Leading Index rose by 1.1%, to its highest level in seven months

The Australian dollar set a fresh yearly high of 0.8778 against the greenback during the past week before the release of the RBA minutes tempered interest rate expectations. Policy makers stated that “members were conscious of the need to balance the task of controlling inflation over the medium term with that of supporting economic recovery.” The central bank is widely expected to be the first of the major economies to begin tightening making the already high yielder more attractive in the current environment of risk appetite. Indeed, the Australian economy emerged from the recent downturn with the least amount of scars and is poised to take advantage of global growth and the ensuing demand for raw materials. The Westpac leading index which is a gauge that attempts to forecast the economy’s performance over the next three to nine months rose by 1.1% to its highest level in seven months. Looking at the breakdown we see the bullish outlook is derived from expected positive contributions from real money supply and dwelling approvals which would suffer if the central bank started to cut rates. Furthermore, the second quarter dwelling starts report showed an unexpected decline of 3.7% against economists forecast of a 2.0% gain. It would mark the fourth straight quarterly decline and a clear signal that higher interest rates could start to increase downside risks.

Nevertheless, the central bank stated that the Australian financial system remains strong and that the country is benefitting from exposure to China and the global economy on a sustained growth path. However, Governor Stevens recognized that there are still some warnings signs such as weak business credit conditions. Therefore, we may see policy makers reluctant to take any actions that may deter lending following the recent credit crisis until inflation risks become obvious. Markets are still pricing in 174 bps of rate hikes over the next twelve months which should keep the Aussie well supported. Yet, we have seen it slip from a high of 199 bps on September 7th, which may signal some near-term weakness for the currency. The DEWR skilled vacancies report is due for release and softness in the labor market could give traders an excuse to take profits, but another sign of growth could add to bullish momentum. The RBA financial stability review and quarterly wage agreements are also on the horizon and could potentially impact price action. However, traders should take their cues from commodity markets and risk trends as they continue to be the dominant drivers of price action for the pair. The next level of resistance may be found at 0.8816-the 8/22/08 high where we could see the current rally stall. Conversely, we could see the pair retrace back to the 20-Day SMA at 0.8513 before another push higher. -

Canadian Dollar Risks Decline on Crude Oil Price Pullback

2009-09-22T18:16:00.002+06:00

Fundamental Forecast for Canadian Dollar: Bearish

- Canadian Dollar continues driven by Oil Prices

- Loonie rallies for 3 consecutive days

- Yet late-week tumble shows CAD unable to hold gains

The Canadian Dollar finished the week modestly higher against its US namesake, but the currency’s inability to close near year-to-date highs leaves short-term momentum to the downside leading into the coming weeks’ trade. The USDCAD currency pair dropped for three consecutive trading days and briefly breached the psychologically significant C$1.0600 mark. Yet it serves to note that oil prices likewise failed to hold near fresh highs, and there is clear risk for near-term pullback. Domestic economic data proved largely better than expected but had relatively little influence on price. Instead, the USDCAD continues to track Crude Oil prices and broader risk market sentiment. Continued strength in financial market risk barometers would bode well for the Canadian Dollar, but the threat of near-term reversal looms large for the recently high-flying currency.

The Canadian Dollar has ridden the wave of renewed optimism across financial markets, rising in tandem with similarly buoyant Crude Oil prices. Yet Crude Oil itself remains stuck in a consolidative range, and its inability to break higher on several successive attempts leaves clear risk of near-term pullback. A relatively quiet week of Canadian economic event risk suggests that the domestic currency will trade almost-solely on developments in other markets. Potential exceptions include early-week International Securities Transactions and Canadian Retail Sales reports. The former is expected to show that foreigners invested a net C$9.5 Billion into Canadian Securities in July. Said number would represent a modest pullback from impressive May and June results, but an at-consensus print would nonetheless underline solid foreign demand for Canadian securities. The subsequent Retail Sales release is likewise expected to show robust consumer demand, but a recently impressive Wholesale Sales result means that only the most surprising of outcomes will elicit strong reactions out of the USDCAD.

Canadian Dollar traders should keep a close eye on developments in global financial markets—especially commodity prices and Crude Oil futures. If any of these key asset classes break their recent price ranges, the Canadian Dollar may follow suit.

Dubai builds, but they don’t come

2009-09-22T18:12:00.002+06:00

There is something surreal about the financial crisis that has engulfed Dubai. A small desert emirate, without significant hydrocarbon reserves, Dubai finds itself geared to the eyebrows in the midst of a global downturn. Deutsche Bank estimates its external debts at about $74.3 billion. That, for the record, is 107 percent of the emirate’s expected 2009 GDP, or more than 14 times its government revenues for 2006 (the latest year for which data is available). But it isn’t just the extreme leverage that is surreal. Dubai has long borrowed heavily to invest. The real twist comes from the wacky way that Dubai has chosen to invest its borrowed cash. True, not all of Dubai’s money-making schemes were foolish. The development of DP World, a ports services business, made eminent sense, given the emirate’s status as a trade hub. And this has proved reasonably successful.

But some of its “get rich quick” ideas were about as sound as something out of Gulliver’s Travels — the attempts of the state of Lagado to extract sunbeams from cucumbers, for instance. Into this category one might put the attempt to conjure a financial centre out of the desert, or to build luxury housing on sandbanks in the Arabian Gulf. Or, indeed, the attempt to create a sovereign wealth fund, Istithmar, without having any surpluses to inject into it in the first place. Outsiders have long marvelled at this “build it and they will come” approach. Now its shortcomings are becoming clear. Much of Dubai is half-built and they probably won’t come. Istithmar, for instance, used leverage to pursue an investment strategy built around luxury goods, retail and financial services. It is not hard to see why this has hit the rocks. Istithmar’s parent, Dubai World, is in the process of restructuring some $12 billion of the debt it has taken on.

Predictably, it has been forced into the expedient of trying to sell good assets to fund losses on the toxic ones. However its attempts to hawk part of its $6.6 billion stake in listed DP World to a local private equity firm have thus far proved fruitless as the two sides failed to agree on price. How the crisis pans out depends on Dubai’s willingness to stand behind the various state-controlled enterprises it has spawned. Thus far it has been willing to do so. But the calls on the emirate’s meagre finances (its government revenues were little more $5 billion in 2006) seem relentless. In December it must repay or refinance a $3.5 billion bond taken out by Nakheel, Dubai World’s property unit. And the losses from other failed ventures, such as Istithmar’s investment in high end U.S. retailer Barneys, are also mounting up.

Deutsche Bank reckons it will have to refinance an average of $12.5 billion in external debt between 2010 and 2013. To continue to backstop ventures that have lost significant value or may take longer than expected to generate free cashflow, Dubai may be forced to turn for assistance to its cash rich neighbour Abu Dhabi, which has already lent it $10 billion and has provisionally undertaken to provide a further $10 billion of assistance. Were this to be sought it might stabilise Dubai’s finances, but at a cost. Dubai’s ambition to be a financial hub, tourist destination and haven for the world’s super rich depended to some extent on its relatively liberal social attitudes. The more dependent the emirate becomes on its conservative neighbour for money, the harder it may be to retain that liberal tinge.

Source: Reuters

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

2009-09-22T18:06:00.002+06:00

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

Fundamental Outlook for US Dollar: Neutral

- Speculation for rate hikes deferred as fundamentals temper exuberant risk appetite

- The steady charge in risk appetite keeps the dollar on the short side of carry interests

- Sentiment can often run askew of fundamentals; but what do technicals say about the dollar?

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

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

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

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

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

2009-09-22T18:05:00.000+06:00

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

Fundamental Forecast for Euro: Neutral

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

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

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

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

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

Japanese Yen Forecast Bullish on Lack of Intervention Threat

2009-09-22T18:03:00.002+06:00

Fundamental Forecast for Japanese Yen: Bullish

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

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

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

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

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

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

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

2009-09-22T18:02:00.001+06:00

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

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

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

Fundamental Forecast for British Pound: Bearish

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

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

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

Swiss Franc Trading Hinges on Yield Outlook, Risk Sentiment

2009-09-22T18:01:00.000+06:00

Swiss Franc Trading Hinges on Yield Outlook, Risk Sentiment

Fundamental Forecast for Swiss Franc: Neutral

- Swiss Producer Prices Rebound From Record Low in August
- Industrial Production Set Fresh Record Low in Second Quarter
- Annual Retail Sales Outperform Expectations, Grow 1% in July
- SNB Keeps Rates Unchanged, Upgrades Inflation Forecast

The standby counter-question to anyone seeking to forecast the direction of the Swiss Franc in recent months has been “against what?” In trade-weighted terms, the currency has been confined to a narrow range since March, when the Swiss National Bank intervened into the markets to drive down the exchange rate and pledged to keep a lid on further appreciation as a bulwark against deflation (a stronger currency boosts purchasing power, effectively reducing prices). Markets in the Euro Zone account for close to 60% of Swiss export demand, so in practical terms, reining in the Franc in trade-weighted terms has essentially meant controlling the EURCHF rate (which the SNB has openly discussed). Elsewhere, the Swissie has slipped against the commodity currencies and the Pound but has managed to advance against the US Dollar and the Yen. This is a reflection of the interest rate environment. The Australian and New Zealand Dollars, where 3-month Libor rates have stayed steadily above those of the Franc, have outperformed. The Pound and the Canadian Dollar have seen fewer gains because, while still in their favor, the yield gap has narrowed considerably since the beginning of the year. Finally, the Yen sold off as a rapidly shrinking rate spread erased any advantage the otherwise markedly cheaper Japanese unit had over the Franc, while the US Dollar fared worst of all as its 3-month Libor tumbled to sink below that which is paid on the Swiss currency.

What does this mean for the week ahead? If carry flows are the primary catalyst behind recent price action, currency traders ought to have their eye on the trajectory of risk sentiment, meaning global stock and commodity prices. We have long argued that the markets have done too, much too fast since risky assets began to rally in March with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall. While timing this reversal has proven elusive, we can say that when it does occur, the accompanying liquidation in carry trade positions will likely push the Franc higher against the Antipodeans and (to a lesser extent) the Pound and the Canadian Dollar. Meanwhile, a surge in demand for safety will likely boost the US Dollar as well as the Japanese Yen, eroding the Franc’s recent gains against those currencies.

Turning to the economic calendar, the August trade balance report will be of interest: exports look set to decline considering last week’s dismal industrial production data, but the appetite for imported goods is proving difficult to gauge. Indeed, domestic demand may have recovered a bit considering the recent moderation in retail sales figures, but the trend in receipts is undeniably pointing lower while unemployment rises and consumer confidence continues to set record lows. The release of updated economic forecasts from the government’s State Secretariat for Economic Affairs (SECO) will be notable in terms of how it compares to last week’s upward revisions to the growth and inflation outlook of the SNB

Daily Report: Dollar Weakness Continues, BoJ on Hold, SNB Next

2009-09-22T17:56:00.002+06:00

Daily Report: Dollar Weakness Continues, BoJ on Hold, SNB Next

Dollar's fall continues today as trends in the overall financial markets extend. Following 1.12% rally in DOW, Asian stocks are broadly higher. Nikkei drew further support from medium term trend line and rebounds 1.68% today. Gold's rally is still in progress and reaches as high as 1025.8 so far while crude oil extends the rebound to 72.70. Dollar index is now pressing 76 level. Among the major currencies, Aussie, Canadian and Euro are the strongest against the greenback and the up trend in theses currencies are still in favor to continue in near term. On the other hand, Sterling remains generally the weakest major currency.

BoJ left overnight lending rate at 0.1% on unanimous vote as widely expected. The asset-buying program and emergency lending program to banks and corporations are also kept unchanged. In the accompanying statement, BoJ upgraded assessment of the economy from "stopped worsening" to "showing signs of recovery" and called for growth to begin in second half of 2009 fiscal year. The bank cited a rebound in exports and public spending as underpinning a recovery, but pointed to weak consumer spending and surging unemployment as risks.

Swiss National Bank announcement is the main focus today. SNB is is expected to leave the three-month Libor target unchanged at 0.25% at today's quarterly meeting. Rates are indeed expected to be held steady for the rest of the year as well as most part of 2010 to help sustain recovery as the Swiss government exit from its fiscal stimulus. The main focus is needed on any change in the currency policy. The bank has been buying currency on an ad hoc basis to weaken the Swiss Franc and ease threat of imported deflation. The bank is keen to prevent a protracted period of deflation and will likely remain on guard to intervene in the currency market if the franc starts to strengthen.

On the data front, UK retail sales is expected rise modestly by 0.1% mom in August. Eurozone trade surplus is expected to widen slightly to EUR 1.2B in July. Canadian CPI is expected to show 0.2% mom rise, -0.6% yoy fall in August. US housing s starts and building permits are expected to improve mildly in August. Philly Fed index is expected to rise further to 7.8 in September.

Dollar index's decline continues and extends further to as low as 76.03 so far. Intraday bias remains on the downside and further decline should be seen to 75.89 key support. We're still anticipating strong support from this level to conclude recent down trend. But a break of 76.57 resistance is needed to be first sign of stabilization. Otherwise, further decline is still in favor.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.8655; (P) 0.8702; (R1) 0.8780; More

AUD/USD's rally is still in progress and reaches as high as 0.8768 so far today. Intraday bias remains on the upside and further rise should be seen to 61.8% projection of 0.6284 to 0.8262 from 0.7702 at 0.8924 next. On the downside, though, below 0.8679 minor support will turn intraday outlook neutral and bring consolidation. But downside should be contained by 0.8543 support and bring rally resumption.

In the bigger picture, AUD/USD is trading above medium term rising trend line (0.6284, 0.7702) and thus, rise from 0.6282, and that from 0.6008, is still in progress. The strength of the rise from 0.6008 and the firm break of 0.8519 resistance argue that AUD/USD is developing into another up trend. In other words, long term correction from 0.9849 has possibly completed at 0.6008 already, after being support slightly above 76.4% retracement of 0.4773 (01 low) to 0.9849 (08 high). Having said that, the current rally from 0.6008 might extend further to retest 0.9849 high next.

On the downside, below 0.8239 support will have the medium term rising trend line firmly broken and thus argue that a medium term top is formed. Some deep pull back and lengthy consolidation might then be seen, with prospect of fall to 0.7267/7702 support zone. But a break of 0.7267 resistance turned support is needed to indicate that whole rise from 0.6008 has completed. Otherwise, we'll continue to favor the longer term bullish case even in case of deep correction.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	BSI Manufacturing index Q/Q Q3	15.5	-11.4	-13.2
23:50	JPY	Tertiary Industry Index M/M Jul	0.60%	0.60%	0.10%	0.20%
3:30	JPY	BoJ Interest Rate Decision	0.10%	0.10%	0.10%
8:30	GBP	Retail Sales M/M Aug		0.10%	0.40%
8:30	GBP	Retail Sales Y/Y Aug		2.70%	3.30%
9:00	EUR	Eurozone Trade Balance (EUR) Jul		1.2B	1.0B
10:00	GBP	U.K. CBI Industrial Orders Sep		-49	-54
11:00	CAD	CPI M/M Aug		0.20%	-0.30%
11:00	CAD	CPI Y/Y Aug		-0.60%	-0.90%
11:00	CAD	BoC CPI Core M/M Aug		0.10%	0.00%
11:00	CAD	BoC CPI Core Y/Y Aug		1.60%	1.80%
12:00	CHF	SNB Interest Rate Decision		0.25%	0.25%
12:30	CAD	Leading Indicators M/M Aug		--	0.40%
12:30	USD	Housing Starts Aug		595K	581K
12:30	USD	Building Permits Aug		580K	560K
12:30	USD	Initial Jobless Claims (SEP 12)		558K	550K
14:00	USD	Philadelphia Fed. Survey Sep		7.8	4.2

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