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U.S. Dollar Gives Back, Euro Struggles to Hold Ground

2011-05-09T09:40:00.000-07:00

The U.S. dollar lost ground during the overnight trade as currency traders increased their appetite for yields, and the rebound in risk sentiment is likely to drive price action throughout the North American as the economic docket remains fairly light for Monday. However, the EUR/USD pared the overnight rally to 1.4441 and the single-currency may face additional headwinds over the near-term as European policy struggle to address the risk for contagion.

During the unscheduled meeting on May 6, the EU pledged to review the lending terms of the EUR 110B bailout for Greece in order to avoid the region’s first sovereign debt restructuring, but the record-high financing costs faced by the European periphery will continue to bear down on market sentiment as investors fear the a breakup of the monetary union. In turn, the small correction in the single-currency could be short-lived, and the EUR/USD may continue to push lower over the near-term as it breaks out of the upward trend from earlier this year. As the euro-dollar struggles to hold above the 78.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.4430-50, the overnight rally may taper off going into the North American trade, but speculation for higher borrowing costs may help to prop out the single-currency as the European Central Bank sticks to its one and only mandate to ensure price stability. Despite the ongoing turmoil within Europe’s financial system, market participants still see the ECB raising the benchmark interest rate by 75bp over the next 12-months according to Credit Suisse overnight index swaps, and the EUR/USD may face range-bound price action in the coming days as investors weigh the prospects for future policy.

The British Pound struggled to hold its ground as home prices in the U.K. marked the biggest decline in seven-months, and the GBP/USD may threaten the upward trend from earlier this year as we are likely to see the Bank of England maintain a dovish outlook in its quarterly inflation report, which is due out on May 11. As growth and inflation cools, BoE Governor Mervyn King should retain a neutral tone for future policy, and the central bank head may talk down speculation for higher borrowing in the U.K. as he aims to encourage a sustainable recovery. As the GBP/USD approaches the 50-Day SMA at 1.6286, we may see the near-term reversal in the exchange rate gather pace later this week, and the sterling may face additional selling pressures over the near-term as the DailyFX Speculative Sentiment Index now highlights a bearish outlook for the pair. The contrarian indicator suggests we will see additional declines in the exchange rate as retail traders are now net long against the GBP/USD, and comment from the BoE will certainly dictate future price action for the pair as investors weigh the outlook for monetary policy.

As equity futures foreshadow a higher open for the U.S. market, the rebound in risk appetite should carry into the North American trade, and the U.S. dollar may lose ground throughout the day as investors move into higher-yielding currencies. However, as Standard and Poor’s lowers Greece’s sovereign credit rating to B from BB- and warns of additional cuts on the horizon, heightening fears surrounding the European debt crisis could spur a shift in risk sentiment as investor confidence remains battered.

Rupee down ; Dollar gains

2011-05-06T10:57:00.000-07:00

The rupee was down in early morning trades on Friday tracking weak regional peers and dollar gains overseas.
* At 9:24 a.m., the partially convertible rupee was at 44.8250/8400 per dollar, after touching 44.90, a level last seen on March 28. It had closed at 44.76/77 per dollar on Thursday.

* The index of the dollar against six major currencies was down 0.15 percent at 74.079 points, but higher than 73.090 at the close of local foreign exchange market on Thursday.
* The dollar held on to chunky overnight gains on Friday and key resistance levels were in its grasp as tumbling oil prices, a dearth of indications there would be an immediate rate hike from the European Central Bank and a series of soft U.S. data prompted selling of higher-yielding currencies.

Dollar Needs another Push from Risk Aversion, GDP or Rates

2010-01-28T03:58:00.000-08:00

The Economy and the Credit Market

Investor sentiment has diminished and the US currency has subsequently climbed. The correlation between risk appetite and the dollar is hard to miss; but it isn’t the only fundamental driver for the benchmark – it is just the most influential. The other prominent factors for the greenback are the same yardsticks for value that every currency is measured against: interest rate and growth potential. For yield, the dollar is still lagging most of its counterparts. At 0.249 percent, the three-month US Libor stands at a discount to even its Japanese and Swiss counterparts (both considered funding currencies for the investing world). However, the outlook for interest rates is far more hawkish in the US than it is in Japan – sentiment that we can confirm through expectations priced into overnight index swaps. According to Credit Suisse’s data, the US is looking at 82bps of tightening over the next 12 months and Japan only 1 bp. In fact, policy officials took another step towards loosening the reins today. Though the FOMC would vote to keep the benchmark interest rate unchanged at its range between zero and 0.25 percent with the ‘extended period’ time frame; there was finally dissention from a member in the loose time frame and hard expirations dates have been placed on most of the emergency programs. As for growth, the IMF and World Bank’s forecasts for the US economy are significantly higher than the European Union and Japan. Perhaps Friday’s 4Q GDP reading will add another leg of support for the dollar.

US Dollar May Decline as Stock Index Futures Point to Recovering Risk Appetite

2010-01-28T03:57:00.000-08:00

The US Dollar may decline in European trade as US equity index futures trade 0.6% higher ahead of the opening bell, pointing to a rebound in risk appetite that could weigh on the safety-linked greenback.

Key Overnight Developments

• New Zealand Dollar Little Changed After RBNZ Rate Decision
• Japanese Retail Sales Disappoint as Consumer Confidence Flounders

Critical Levels

The Euro is little changed heading into the European session after prices retraced nearly all of the drop below 1.40 seen in early overnight trade. The British Pound has also yielded an effectively flat result, reversing lower late into Asian trading after testing as high as 1.6229 against the greenback. We remain short EURUSD at 1.4881.

Asia Session Highlights

The Reserve Bank of New Zealand kept benchmark interest rates unchanged at 2.5% as expected. RBNZ Governor Alan Bollard said annual inflation is expected to track comfortably within the target band over the medium term, reiterating that the bank expects to begin removing policy stimulus around the middle of 2010. The reaction from the currency markets was understandably muted considering the outcome offered no significant changes in policy expectations.

Japan’s Retail Trade report showed sales fell much more than economists expected in December, slipping -1.2% versus calls for a -0.2% decline. In annual terms, sales fell -0.3%, disappointing expectations forecasting the first increase 15 months. The outcome follows a report last week that showed consumer confidence fell for the second consecutive month in December amid expectations of deepening unemployment.

Dollar Surges as Speculative Sentiments Sours, Rates Slowly Rise

2010-01-21T03:33:00.000-08:00

Are the US and global economies developing a speculative bubble? Just a year ago, investors and policy makers were still reeling from the fallout of the worst financial crisis in modern history. Today, though growth projections are reserved and yield expectations are far below the levels seen through the boom years, the Dow is 60 percent above its 2009 lows. This is a side effect of the world’s governments laying down a safety net for speculators in the form of policy and encouraging risk taking through unprecedented injections of stimulus. Interest rates near recent-record lows have opened the doors to financing and leverage; and market participants are happy to recover some of the wealth lost through the preceding crisis. However, a factor that has been ignored for too long through the bullish rally is that this market cultivation is temporary. Eventually, the government has to withdrawal its support and the market will have to stand on its own weight. Considering the sharp rally in the dollar and drop in risk-sensitive markets today, this eventuality can no longer be ignored. And, while this particular spike in volatility doesn’t necessarily mark the turning point for speculation; it nonetheless speaks to the doubts that lie just beneath the surface. Should a move to fairly value capital markets develop, the dollar will be a primary benefactor as a primary source of funding behind the carry trade build up. Furthermore, when the US and Japanese 3-month Libor rate finally flip in the dollar’s favor, the greenback won’t have to depend on risk alone.

US Dollar Forecast to Lose Against British Pound,

2010-01-14T21:17:00.001-08:00

Recently-choppy US Dollar price action has made for similarly directionless shifts in forex sentiment, and we believe that the US Dollar is likely to continue range-trading against the Euro. Strong rallies in the British Pound, on the other hand, seem likely to continue given strongly one-sided crowd positioning and give us reason to believe that the GBP will continue to gain against the USD and Japanese Yen. We see similarly extreme crowd sentiment in the Canadian Dollar and accordingly call for further CAD strength against its US namesake (USDCAD losses), while forecasts likewise point to further Swiss Franc rallies against the Euro and US Dollar. Watch our twice-a-day updates on DailyFX+ for more up-to-date SSI positioning data.

Dollar Weighed by Building Risk Appetite, Tempered Rate Forecasts Read more: DailyFX - Dollar Weighed by Building Risk Appetite, Tempered Rate Fore

2010-01-14T01:35:00.000-08:00

The Economy and the Credit Market

While there is little momentum behind underlying risk appetite; the bearing on sentiment is enough to weigh on the market’s top funding currencies. Maintaining this market role for well over a year now, the US dollar is struggling to regain its footing as speculative interests retain their hold over the broader markets. Looking forward, the currency’s next prominent trend will no doubt follow the tack that investor sentiment defines. And, in this distinct correlation, the greenback is sidelined by the same dynamic that has anchored progress in equities, commodities and fixed income. Rousing a clear bearing and true conviction on sentiment (whether it be bullish or bearish) has proven a complicated task. The reflection period afforded by the year-end holiday has clearly awoken market participants to the reality that government support will eventually be rolled back and rates of return are still anemic. On the other hand, the ranks are hesitant to unwind their risky positions without a clear reason to do so. In these conditions the dollar will remain stuck. Yet, this does not mean the currency will lack volatility. In the background, the dollar can still move up and down the risk spectrum. To effectively shed its status as a funding currency, the greenback will have to find support from interest rate expectations. However, the outlook for rates over the next 12 months is a paltry 75 basis points and just today, the Fed’s Dudley suggested the “extended period” the group has upheld is likely longer than six months.

A Closer Look at Financial and Consumer Conditions

Financial conditions are improving rapidly: at least that is what recent data and indicators are suggesting. Financial market stability is coming under increased duress – and it is just a US-based problem. Small imbalances are turning into incredible fissures, and all it takes is investor sentiment to crack for the markets to fall apart. At the positive end of the spectrum, China has had to take steps to curb rampant speculation and deflate potential bubbles before they burst. On the other end of the spectrum, Moody’s has warned that the Greek and Portuguese economies are looking at a “slow death” if they are unable to rein in budget deficits. In the middle, the US is groping for stability through regulation and increased investor participation. However, the government is already rolling back emergency stimulus. Can the market stand on its own?	The US and global economy are improving – but at a measured pace. To this point, the world’s largest economy has merely put in for a recovery from its worst depression in generations. This is not the precursor to a roaring period of growth; but rather a move towards stability that precedes a tepid phase of growth as employment, consumer spending and business investment recover. However, considering the level of most speculative markets, it seems investors may be overestimating the economy’s potential. Something has to give, and it will almost certainly be sentiment. Taking an objective reading on economic health, the December NFPs finally tipped a positive payroll figure; but full employment is still a very long ways off.

The Financial and Capital Markets

Investors sentiment is living on borrowed time. Traders have pushed traditional capital markets to highs not seen in over a year as sidelined funds find their way back into the speculative arena. However, the tides have slowed as the bulk of those market participants willing and able to fuel the rally and reap the rewards of capital appreciation have already put their funds to work. In the meantime, regular income (dividends, coupons, and other sources of yield) has advanced little – leaving investors in safe assets. Will this cautious group be encouraged to buy into the rally that equities and commodities have enjoyed and subsequently revive the dominant trend. Or, will the risky markets’ high levels further discourage conservative investors from taking the plunge until a correction puts prices closer in line with fundamental values? The latter scenario is the more probable as sentiment is more reactive and less enduring dynamic. This leaves us with the million dollar question: when will risk appetite normalize?

A Closer Look at Market Conditions

Traders are trying to wring every basis point of return out of the markets as they can. Investors’ favored assets have pushing to new highs; but the conviction and fundamental support that was once driving the advance is now absent. There is no better reflection of risk appetite than the benchmark Dow Jones Industrial Average. This index has maintained its bullish trajectory; but the pace of growth is sluggish with volatility bound by a tight three-hundred point range. Commodities have shown greater levels of activity; but large swings have prevented a clear trend from developing. Should fear take over, expect a clear bearing to once again develop for the market.	Risk premiums are pushing to excessively low levels. Traditional volatility indicators (based on implied volatility calculated through options), default premiums, investment grade rate spreads and other measures of risk are all pushing to new lows. This is a natural reaction to increased investor participation (deeper liquidity); but does it mean conditions are inherently safer? Far from it. There are distinct threats to market stability (a downgrade for Greece, another round of write downs from financial institutions, the withdrawal of government stimulus, etc); but in the end, a collapse in risk appetite itself will likely end the run. An effort to book profits can easily undermine fragile sentiment.

Japanese Yen Outlook Clouded by Opposing Yield Trends

2010-01-11T04:18:00.000-08:00

The near-term trajectory of the Japanese Yen against the US Dollar is veiled in uncertainty after mixed cues from December’s US jobs report jumbled relative yield expectations between Japan and America.

Japan’s savings rate is high relative to other developed countries, reflecting the expense of living on an island with limited space and scarce home-grown resources. This translates into Japanese investors’ preference for safe, liquid assets that offer stable income over a long period of time. Typically, this means a choice between either US or domestic government debt, with the favored asset determined by the yield difference between US and Japanese bonds. These underlying capital flows are the dominant driver behind USDJPY, with the pair now nearly 84% correlated with the spread between the yields on the two countries’ 10-year Treasury notes.

The outlook for US interest rates took a hit after December’s labor market figures fell short of expectations, showing the world’s largest economy shed 85,000 jobs versus forecasts of a flat result. However, the outcome was not without a silver lining as November’s numbers were revised higher to reflect a 4,000 jobs gain versus the originally reported 11,000 loss, which amounts to the first positive outcome in two years. Still, the market’s first reaction was that of disappointment as the 10-year yield spread moved by nearly a full basis point in favor of Japanese notes while a Credit Suisse gauge tracking the market’s priced-in US interest rate outlook for the next 12 months dropped to a four-week low.

Meanwhile, short-term interest rates seem to be telling a different story. Much of the Dollar’s weakness through 2009 was attributed to the fact that the cost short-term (3-month) borrowing in Japanese Yen surpassed that of the greenback for the first time since 1995, leading to the widespread proliferation of the short-USD carry trade. As of Friday, this yield advantage has narrowed to the smallest since August, suggesting the Yen is well on its way to reclaiming the dubious honor of the most favored funding currency.

On balance, it is unclear which one of these relationships will prove dominant in the near term. If the initial reaction seen in the 10-year bond spread sees follow-through in the week ahead, USDJPY is set to decline. Alternatively, if short-term rates take center stage that should encourage a repositioning of carry trade portfolios away from a short-USD to a short-JPY bias, leading USDJPY higher.

Euro Range against US Dollar at Risk Ahead of European Central Bank

2010-01-11T04:15:00.000-08:00

The Euro finished the week modestly higher against the US Dollar despite a fairly disappointing string of European economic data. Soft Purchasing Managers Index survey results and disappointing Retail Sales data may have normally been enough to sink the Euro against its US counterpart, but likewise disappointing US Nonfarm Payrolls results left the EURUSD higher. Euro Zone consumers spent 1.2 percent less on retail goods through the month of November—substantively worse than consensus forecasts of no change. The true fireworks may nonetheless wait until the coming week’s key European Central Bank Interest Rate Decision. Relatively aggressive market interest rate forecasts suggest that unexpectedly dovish ECB rhetoric may force substantive Euro pullbacks and it will be critical to monitor any and all commentary from the central bank.

The Euro’s relatively narrow trading range against the US Dollar suggests that markets have reached an impasse. On the one hand, fairly steady improvements in US economic data and a strong surge in US Dollar-long positions suggests that the tides may have turned in the Greenback’s favor. On the other, Euro Zone data has likewise generally improved and the longer-term trend favors continued Euro appreciation against the US currency. A key question in traders’ minds is simple: which major central bank will begin tightening monetary policy the soonest?

Overnight Index Swaps show that interest rate speculators and hedgers predict that the ECB will raise rates by a cumulative 99 basis points in the coming 12 months—noticeably more than expectations of 77bp in Fed rate moves. Relatively lofty expectations may nonetheless be put to the test by the upcoming ECB meeting. Though the bank will almost certainly leave rates unchanged, any suggestions that they may soon raise rates could easily force Euro volatility against the US Dollar and other counterparts. Considerably more dovish rhetoric would likely force the biggest moves, however; comparatively lofty Euro rate expectations leave it at clear risk of pullback on any disappointments.

The Euro Zone economic calendar is otherwise devoid of historically market-moving economic releases, and it will be far more important to watch market positioning and sentiment through various measures. As we wrote recently, CFTC Commitment of Traders data shows that large speculators remain the most net-short EUR/USD since it bottomed in late 2008. Whether or not history repeats itself may be a question of key fundamental developments out of the world’s largest economies.

Dollar Faltering as Risk Trends Hold, Interest Rate Speculation Cools Read more: DailyFX - Dollar Faltering as Risk Trends Hold, Interest Rate Spec

2010-01-07T03:34:00.000-08:00

The Economy and the Credit Market

Speculative trends have been slow to recover from the year-end lethargy that seemed to set in two months ago. Nonetheless, the US dollar has seen its ability to capitalize on the stalled drive in risk appetite diminished by that same stability and the development of a few other fundamental concerns. Today, the minutes from the Federal Open Market Committee’s (FOMC) last policy meeting squashed burgeoning speculation that interest rate hikes could be in store for the near future. Throughout 2009, the market was pacified by central bank Chairman Ben Bernanke’s suggestion that the next rate decision would not come until at least the middle of 2010. This was a loose target; but the tangible efforts to withdrawal stimulus from their emergency aid programs offered traders a clear stepping stone towards the inevitable. However, in recent commentary, the time frame for a decisive hawkish move grew increasingly vague. Today’s report revealed the debate for a hike was not progressing well. The minutes reported a deliberation over whether asset purchasing programs should increased and extended should the economic recovery soften. What’s more, some officials argued that the slack in the economy would likely contain inflation pressures. In reaction to the event, interest rate expectations tumbled for a third day, reversing the hawkish trend that had built up throughout December. Now the dollar’s best hope is for risk appetite to collapse.

A Closer Look at Financial and Consumer Conditions

Financial conditions are improving rapidly: at least that is what recent data and indicators are suggesting. Yields on mortgage securities reported their lowest spreads relative to government paper of the same maturity in 17 years; while the riskiest grade of corporate bonds rose above ‘distressed’ levels for the first time since June of 2008 after a report that the asset class marked its second biggest one-day offering on record. The markets are the ideal barometer for risk; but that does not mean they are neither rational nor stable. On the same breathe, data revealed corporate bankruptcies surged 50 percent last year; and there are many other cracks in the system. All that is needed is for one of these threats to materialize and shake sentiment.	Data released this past week has supported a gradual recovery in the US economy. However, if we were going by the pace of the capital markets, it would seem that investors believe the nation has turned a sharp corner and is now on an aggressive trajectory. Today, policy officials allowed for a slight bullish adjustment to their growth forecasts – commenting that they had “modestly increased” their projections for activity in 2010 and 2011. There has been a strong rebound in business activity and a few other corners of the market; but the true gait of recovery rests with core components of the economy like employment, credit, consumer and foreign demand. For a contrast in reality, watch Friday’s NFPs for the reaction to a modest improvement.

The Financial and Capital Markets

Risk appetite has not lost significant ground in nearly two months; but neither has it advanced very much in that period either. There are few asset classes that have climbed in recent days (mainly the physical commodities); but on the whole, investors are awaiting guidance before they plow additional funds into the market. Through most of 2009, market participants were comfortable with diversifying money that was previously held in safe-haven assets because they were drawn by the quick capital gains that could be made. However, since stalling, the opportunity to turn a quick profit after the Dow has rallied more than 60 percent and gold is pushing record highs seems unlikely. With any further appreciation likely to come at a more controlled pace, investors will be more frugal in where they place their capital. In a fastidious environment, the severe lack of yield, coupon payments and dividends offers little incentive to heavily speculate. At this point, the markets are more exposed to a correction than a steady advance.

A Closer Look at Market Conditions

Capital markets are offering a divergence in pace; but the bearing is consistent across the spectrum. Equities, commodities and fixed income are all reflecting a market that is more tolerant of risk and that is hungry for yield. However, recent activity perhaps show a greater level of ‘rationality.’ The benchmark Dow Jones Industrial Average is still rising; but it is a gradual advance that has allowed now more than 300 points of volatility for two months. Speculators looking for a quick profit have turned to the commodity market. With no regular source of income, traders have driven securities like crude on a sharp swing. Oil is now in its strongest advance in 13 years.	Traditional risk indicators are showing few signs of excess. However, should signs like a two-year low in junk bond spreads and a 170-year low in mortgage spreads be construed as a reasonable development in the course of the economic and financial recovery? This is a debatable point. Growth trends have certainly improved and the markets have stabilized; but that does not mean that conditions will continue to improve. In fact, with expansion and expected returns expected to level off, and considering the world’s governments will eventually have to withdrawal their unprecedented stimulus packages; speculators may soon be encouraged to book profit

Currencies Lacking in Direction as Whipsaw Price Action Dominates early 2010 Trade Read more: DailyFX - Currencies Lacking in Direction as Whipsaw Pr

2010-01-06T03:39:00.001-08:00

Another exciting session of trade in Europe with the Euro selling off like wildfire early on following ECB Stark comments that the EU would not save Greece. Stops below 1.4300 in Eur/Usd were tripped, with the pair trading down to 1.4285 before finally finding some solid support.

MORNING SLICES

FUNDYS

Another exciting session of trade in Europe with the Euro selling off like wildfire early on following ECB Stark comments that the EU would not save Greece. Stops below 1.4300 in Eur/Usd were tripped, with the pair trading down to 1.4285 before finally finding some solid support. The move appeared to be more than an overreaction with some swift buying reversing market direction and taking the pair back to fresh session highs towards 1.4400. Comments from the Greek FinMin that all would be fine also helped to reinfuse appetite for the Euro.

Relative Performance Versus USD on Wednesday (As of 10:45GMT) –

1) AUSSIE +0.20%
2) CAD +0.13%
3) SWISSIE +0.06%
4) STERLING +0.03%
5) EURO -0.01%
6) KIWI -0.22%
7) YEN -0.80%

Although the Pound had been bid on the day, there were many looking to sell the single currency after Pimco came out for the second time in two days to warn of the high risk of Britain losing its coveted triple A rating. Also on the ratings front, Fitch was seen demoting Iceland’s ratings which did not help to bolster investor risk appetite. More broad comments on the USD on Wedensday with the UAE coming out and reaffirming that it would maintain its peg to the Greenback. The PBOC was out with monetary policy report and there were no shockers after the Chinese central bank said that it would maintain an appropriately loose monetary policy to support the ongoing recovery.

On the data front, releases were on the whole disappointing with German and Eurozone services PMI coming in weaker, while Eurozone PPI was softer and Eurozone industrial new orders were well below expectation. UK services PMI was also released and managed to be the standout after coming in right on consensus.

Looking ahead, mortgage applications are due at 12:00GMT, followed by Challenger job cuts at 12:30GMT and ADP employment (-75k expected) at 13:15GMT. ISM non-manufacturing (50.5 expected) caps things off at 15:00GMT. US equity futures point to a softer open, while oil is flat and gold is slightly bid.

TECHS

EUR/USD: While longer-term and medium-term technicals now warn of a major shift in the structure, which favors additional USD gains, shorter-term technicals are stretched, with the daily RSI in the process of recovering from below 30. Remarkably, the daily RSI in the major had not been below 30 since October of 2008. While this development reaffirms the trend shift into the USDs favor, the shorter-term horizon now warns that we could see more of a bounce over the coming days to allow for some inter-day oversold technical readings to unwind. The risks from here are potentially for a bounce back towards the 1.4625 area before considering a fresh downside extension below the 200-Day SMA.

USD/JPY: Despite the latest bounce, the pair still remains confined to a very strong downtrend and any rallies are seen limited, in favor of a bearish resumption. Look for a lower top to now carve out by 93.20 ahead of the next drop back below key short-term support by 91.00 over the coming sessions. It is however worth noting that the market has broken back above the daily Ichimoku to potentially warn of a shift in the structure. But moves above the Ichimoku in recent attempts have proved fleeting. A break back above 93.20 will now be required to force a shift in our bias.

GBP/USD: The market has now easily cleared support by the 200-Day SMA and psychological barriers by 1.6000 to open the next downside extension towards key medium-term support at 1.5700. Daily studies are however in the process of unwinding from oversold levels, and we would recommend looking to sell into rallies rather than selling on breaks. Look for any rallies to now be well capped ahead of 1.6300, where a lower top is sought out ahead of the retest on 1.5700.

USD/CHF: The break back above 1.0340 in recent weeks has been a critical development which now greatly increases the likelihood of a material shift in the structure in favor of additional medium-term USD gains. The market has also now broken back above the 100-Day SMA for the first time since May 2009, while the daily RSI has recently reached its highest levels in over a year, which further strengthens our core bullish outlook. From here, look for any setbacks to now be very well supported ahead of 1.0200, with the market now seen eyeing a test of next resistance by 1.0700 over the coming days.

FLOWS

Local accounts on the offer in Usd/Cad. French bank and US prime name demand for Eur/Gbp. Central bank and semi-official bids in Eur/Usd.

TRADE OF THE DAY

Eur/Aud: The market has been very well supported over the past decade on dips into the 1.5500 area, and given the pace of the latest declines, we like the idea of once again looking to buy into the current dip below 1.6000. Daily and weekly studies are looking quite stretched with the daily RSI already dipping below 30, and any additional declines on Wednesday into the mid-1.5600’s are sure to result in some very exhausted and overextended hourly studies. This should set up a highly compelling short-term entry for what could ultimately develop into a formidable longer-term trade. STRATEGY: BUY @1.5650 FOR AN OPEN OBJECTIVE; STOP 1.5450. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY. 3X LEVERAGED.

PORTFOLIO OVERVIEW

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British Pound Falls to Lowest in a Week as UK Consumer Confidence Disappoints Read more: DailyFX - British Pound Falls to Lowest in a Week as UK Cons

2010-01-06T03:36:00.000-08:00

The British Pound fell to the lowest level in a week against the US Dollar after UK consumer confidence posted the largest decline in over a year in December as stimulus measures fade and the government reverses a value-added tax reduction.

Key Overnight Developments

• UK Consumer Confidence Fell Most in Over a Year, Shop Prices Surged
• Australian Building Approvals Topped Expectations on Public Spending

Critical Levels

The Euro consolidated NY-session losses in overnight trading, oscillating in a choppy range above 1.4340. The British Pound dropped to the weakest level in a week, testing as low as 1.5945 against the greenback on a drop in consumer confidence (see below). We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights

UK Consumer Confidence fell more than expected in December with an index from the Nationwide Building Society slipping to 69 from a revised reading at 74 in the previous month, the largest decline in over a year. Economists were forecasting a print at 72 ahead of the release. A sub-index tracking consumers’ expectations about the economy 6 months into the future dropped to the lowest level since August 2009. Nationwide Chief Economist Martin Gahbauer said the outlook for consumer spending may turn out to be “sluggish” in 2010 as stimulus measures are withdrawn while the government returns the value-added tax (VAT) to 17.5% from 15% where it had been for past year to help deal with the burgeoning fiscal deficit.

The VAT was also a key factor behind a jump in retail inflation as the British Retail Consortium’s Shop Price Index gained 2.2% in the year to December. Indeed, the VAT was first lowered in December 2008, exactly one year before the period covered in today’s release. BRC Director General Stephen Robertson also identified “increases in the costs of oil, food commodities such as wheat and sugar and the continued weakness of the Pound” as contributing factors to higher prices.

In Australia, Building Approvals outperformed expectations to rise 5.9% from the previous month and 33.3% from a year before in November. However, the outcome is not as encouraging as the headline figure would suggest considering most of the upswing was accounted for by a huge 28.8% increase in approvals for government-funded buildings, an increase more than six times larger than the rise in permits for private construction projects. The data likely reflects a boost from the infrastructure projects approved as part of last year’s fiscal stimulus plans, meaning it says relatively little about the likelihood of a robust self-sustaining recovery in the property market even as mortgage rates begin to reflect higher benchmark borrowing costs while the government reduces its grant for first-time home buyers to A$7,000 from A$21,000.

Euro Session: What to Expect

The final revision of the composite Euro Zone Purchasing Manager Index is expected to confirm that the metric rose to 54.2 in December from 53.7 in the previous month, revealing that the currency bloc’s manufacturing and services sectors expanded at the fastest pace since October 2007. The metric has steadily pushed higher since bottoming in February of last year, upward momentum may be slowing as firms look ahead to the withdrawal of stimulus measures amid uncertainty about the pace of a self-sustaining recovery as record-high unemployment and shrinking private-sector lending continue to weigh on spending and investment. Indeed, December’s outcome will mark the smallest increase in the PMI gauge in 10 months.

Elsewhere on the calendar, Euro Zone Industrial New Orders are set to decline 1% in October, the first drop since March, likely reflecting fading support from close to $2 trillion in global fiscal stimulus that has underpinned both domestic and foreign demand over recent months. The Producer Price Index is expected to have declined -4.5% in the year to November, the smallest decline in 9 months, as rebounding commodity prices put upward pressure on wholesale inflation. However, the outcome is unlikely to prove particularly market-moving with the underlying themes behind the headline figure likely to have been priced in after yesterday’s preliminary CPI release.

Japanese Yen Leads Major Currencies Higher Against US Dollar on Repatriation Read more: DailyFX - Japanese Yen Leads Major Currencies Higher Agains

2010-01-05T04:15:00.000-08:00

The Yen surged against the US Dollar late into Asian trading amid rumors of large-scale repatriation by Japanese exporters, setting off a wave of selling that weighed on the greenback against most of its major counterparts. German unemployment and Euro Zone inflation figures are on tap ahead.

Key Overnight Developments

• Yen Leads Majors Higher Against Dollar on Repatriation Rumor
• Australian New Home Sales Rise But Obstacles Remain, Says HIA

Critical Levels

The Euro and the British Pound rose gently higher in Asian trading, adding 0.3% apiece against the US Dollar. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights

Currency markets saw quiet trading for much of the overnight session until rumors of large-scale repatriation by Japanese exporters pushed the Yen higher against the US Dollar, reverberating across the majors and weighing on the greenback against most of its top counterparts. The Japanese unit gained as much as 0.9%, leading USDJPY back below the 92.00 level. The broader Dollar Index, a gauge of the buck’s average value against six of the world’s most-traded currencies, declined 0.4% to trade at the lost level in over two weeks.

Australia’s Housing Industry Association (HIA) reported that New Home Sales grew 0.3% from the previous month in November. However, the property still market faces “a considerable number of obstacles” according to HIA chief economist Harley Dale. Indeed, mortgage rates have outpaced the gains in benchmark interest rates as the Reserve Bank of Australia started to tighten monetary policy in October while the government has reduced grants to first-time home buyers to A$7,000 from A$21,000.

Euro Session: What to Expect

German Unemployment figures are set to show that the Euro Zone’s largest economy shed 5,000 jobs in the December, marking the first increase since June. The unemployment rate is expected to remain unchanged from the previous month at 8.1%. However, analysts have steadily missed the mark on forecasting the outcome over the past five months, calling for joblessness to increase only to see it move in the opposite direction. The headline unemployment change figure has shown a strong inverse correlation with the forward-looking Expectations index of the IFO business confidence survey, which rose to an 11-month high in December to hint that a better-than-expected outcome is a very real possibility again. Perversely, persistently beating estimates may have desensitized traders, limiting the market-moving potential of an upside surprise.

A preliminary estimate of the Euro Zone Consumer Price Index is set to show that the annual pace of inflation accelerated to 0.9% in December, the fastest since February. An increase in German CPI on the back of rising energy prices over the same period is supportive of a higher outcome. A return to positive (if modest) price growth is welcome news for the European Central Bank, suggesting the currency bloc may be able to avoid a debilitating period of deflation without implementing additional monetary stimulus measures. That said, this should not prove to speed up the march towards raising benchmark interest rates as Jean-Claude Trichet and company struggle to reconcile competing needs of relatively better-off economies in Germany and France with far more damaged ones like those of Spain and Greece. Indeed, tightening monetary conditions now as several Euro Zone countries aim to sharply cut back government spending to rein in their deficits would severely widen the rift between rich and poor member states within the currency bloc, likely producing a harsh political response that could conceivably endanger the structural integrity of the single currency.

New Zealand Dollar Benefits From Risk Appetite, Japanese Yen Loses Ground

2009-12-28T22:15:00.000-08:00

The New Zealand dollar pushed to a high of 0.7095 on Monday as investors raised their appetite for risk, while the Japanese Yen failed to hold ground against the greenback and halted its three-day rally, with the exchange rate rising to a high of 91.77.

The New Zealand dollar pushed to a high of 0.7095 on Monday as investors raised their appetite for risk, and the high-yielding currency may continue to retrace the sell-off from earlier this month as market participants speculate the Reserve Bank of New Zealand to normalize policy during the middle of 2010. The NZD/USD remains higher from the open after moving 46% of its ATR, and appears to be finding intraday resistance around the 10-Day SMA at 0.7095 as the RSI falls back from overbought territory. As a result, we may see the pair fall back from the high and fill-in the gap from the 100-SMA at 0.7068, and the pair is likely to hold a narrow range throughout the week as investors remain off-line ahead of the New Year.

The Japanese Yen failed to hold ground against the greenback and halted its three-day rally, with the exchange rate rising to a high of 91.77, and the exchange rate is likely to trend sideways over the week as market liquidity remains thin ahead of the New Year. The USD/JPY is slight higher from the open after moving only 32% of its average true range, and the pair may continue to retrace the decline from October as price action holds above the 100-Day SMA at 90.80. Nevertheless, the dollar-yen is likely to hold steady going into the Asian trade as the economic docket lacks market-moving potential, and we may see the pair move along the 100-SMA at 91.46 as risk trends continue to dictate price action across the currency market.

US Dollar, Japanese Yen Down as US Holiday Spending Adds to Signs of Global Growth Read more: DailyFX - US Dollar, Japanese Yen Down as US Holiday Sp

2009-12-28T22:13:00.000-08:00

The US dollar and Japanese yen dipped lower across the majors on Monday as optimism on global growth helped to spur demand for riskier assets, such as equities and the commodity dollars. According to MasterCard Advisors’ SpendingPulse, US retail sales rose an estimated 3.6 percent between November 1 and December 24 as consumers ramped up their purchases the week before Christmas and online. Additionally, the Dallas Fed manufacturing outlook survey showed improving sentiment during December, as the index rose to two-year high of 3.8 from 0.3. A breakdown of the report shows that new orders and prices are on the rise, but the production component eased back, suggesting producers are trying to limit inventory buildup.

Looking ahead to Tuesday, the Conference Board's measure of consumer confidence is expected to rise for a third straight month in December to 53.0 from 49.5. Other indicators of consumer sentiment, such as the University of Michigan's index, bode well for this upcoming release as the report showed an improvement to 72.5 in December from 67.4. All told, further increases would add to evidence that spending rose through the end of December as consumers shopped ahead of the holidays. Additionally, the S&P/Case-Shiller home price index is expected to rise for a sixth straight month in October to a nine-month high of 147.00 from 146.51, suggesting that the government's efforts to stabilize the housing market through tax incentives for buyers has been working. Indeed, last week's release of NAR existing home sales has indicated a steady increase demand, though sales of new homes have remained volatile.

Overall, it’s important to keep in mind that volumes will remain low through the rest of the week, which is likely to translate into range-bound price action until traders return next week. When it comes to the JPY crosses, though, last week’s break higher in the S&P 500 signals increased bullish potential.

British Pound Consolidates at Two-Month Low Ahead of Bank of England Minutes Read more: DailyFX - British Pound Consolidates at Two-Month Low Ahead o

2009-12-27T23:30:00.000-08:00

The British Pound consolidated losses below 1.60 to the US Dollar, the lowest level in over two months, as the Bank of England prepared to release the minutes from December’s monetary policy meeting.

Key Overnight Developments

• New Zealand Gross Domestic Product Disappoints in Third Quarter
• Euro, British Pound Consolidate in Narrow Ranges Through Asian Trade

Critical Levels

The Euro and the British Pound consolidated in narrow ranges through Asian trading hours as Japanese markets closed for the Emperor’s Birthday holiday and overall liquidity thinned out ahead of the Christmas holiday that will shut down most major exchanges later in the week. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights

New Zealand Gross Domestic Product figures disappointed, revealing the economy grew 0.2% in the third quarter. Economists had predicted a 0.4% expansion ahead of the release. Looking at the report’s details, consumption growth accelerated to add 0.7% after gaining 0.4% in the second quarter, but the pace of contraction in business investment accelerated to -0.9% versus -0.4% in the three months to June. The external sector also yielded lackluster results as exports failed to grow for the first time this year. The New Zealand Dollar declined to test a low of 0.6973 against its US counterpart after the data crossed the wires, but any significant follow-through seems unlikely considering the market’s yield expectations look virtually unchanged in the aftermath of the announcement. Indeed, a Credit Suisse gauge of the priced-in interest rate outlook has called for borrowing costs to rise 203 basis points over the next 12 months since last Friday.

Euro Session: What to Expect

The publication of minutes from December’s Bank of England policy meeting may prove of little interest with traders widely expecting the central bank to remain in wait-and-see mode until it completes and assess the impact of November’s 25 billion pound expansion of its quantitative easing (QE) program in February. Recent inflation figures have supported projections of a near-term upswing made in the latest quarterly inflation report, so there seems little reason to change gears for the time being. Still, traders will keep an eye out for any discussions about cutting the interest rate it pays on bank deposits as an additional avenue to boost lending, a proposal that surfaced in November’s minutes. An article from the Daily Mail crediting "authoritative sources" as saying that the BOE’s rate-setting committee is leaning towards expanding QE by another 25 billion at some point in 2010 may also contribute to volatility surrounding the release.

Currencies to Remain Quiet in European Trade, Looking Ahead to US Durable Goods Read more: DailyFX - Currencies to Remain Quiet in European Trade, Lo

2009-12-27T23:28:00.000-08:00

The currency market is likely to remain quiet as the economic calendar clears out in European trading hours but thin liquidity conditions may prove to amplify volatility to produce significant momentum as November’s US Durable Goods Orders figures cross the wires late into the session.

Key Overnight Developments

• BOJ Meeting Minutes Show Policy to Remain “Extremely Accommodative”
• Euro, British Pound Keep to Narrow Ranges in Thin Holiday Trading

Critical Levels

The Euro consolidated below the New York session high at 1.4366 while the British Pound continued to oscillate in a choppy range below 1.60. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights

Minutes from November’s Bank of Japan monetary policy meeting offered little by way of new insight. Policymakers said the economy is picking up but still needs close monitoring. The bank reiterated that is would stand ready to respond promptly to market movements and promised to keep monetary policy “extremely accommodative”. A representative from the Ministry of Finance that sat in on the meeting urged the BOJ to recognize the risk of deflation, which seems to have come through in the central bank’s latest interest rate decision as well as December’s monthly report.

Euro Session: What to Expect

The economic calendar is empty in European hours, with a quiet session likely ahead as traders turn their attention away from price action for the Christmas holiday. That said, thin liquidity conditions may prove to amplify volatility to produce significant momentum as November’s US Durable Goods Orders figures cross the wires. Expectations call for an increase of 0.5% versus a -0.6% decline in the previous month, which may help underpin traders’ Federal Reserve rate hike expectations after a Credit Suisse gauge of the priced-in yield forecast for the coming year dropped 5.4% and led the US Dollar lower in New York trading following disappointing New Home Sales figures.

Currencies May Turn Volatile as Markets Search for Drivers in Thin Holiday Trade Read more: DailyFX - Currencies May Turn Volatile as Markets Search

2009-12-27T23:26:00.000-08:00

Currency markets are exposed to knee-jerk volatility in thin holiday-week liquidity conditions with a close to empty European and US economic calendar leaving traders without a tangible near-term catalyst for price action.

Key Overnight Developments

• Japan’s Industrial Production Rises on Car Exports, Domestic Demand Weak
• UK House Prices Rose For Fifth Month on Falling Supply, Says Hometrack

Critical Levels

The Euro consolidated in a narrow 40-pip range below 1.44 while the British Pound yielded an effectively flat result after recovering from an initial -0.2% drop at the start of Asian trading just ahead of the opening bell in Europe. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights

Preliminary estimates showed that Japan’s Industrial Production grew 2.6% from the previous month in November, a reading slightly higher than economists expected and the largest increase since May. Output declined -3.9% from a year before, the smallest drop in 14 months. Transport equipment led the metric higher, up 1.1% from the previous month with a 0.78% gain in passenger car, bus and truck production at the forefront. Autos are Japan’s primary export and today’s outcome likely owes to a rebound in overseas demand driven by ample global fiscal and monetary stimulus efforts. Indeed, exports gained 4.9% from the previous month in November, the most in over 13 years, with metrics tracking vehicle shipments to Asia and the US turning positive for the first time in at least six months.

Meanwhile, Japanese domestic demand remained lackluster as Labor Cash Earnings fell -2.8% from the previous year in November, the third consecutive month of deteriorating wages and the biggest drop since June, weighing on spending. Retail Trade shrank at an annual pace of -1.0%, marking the first time that the metric has not improved since February, while a gauge of large retailers’ sales dropped -9.6% to register the largest decline in nearly 12 years. It remains to be seen whether a sustainable rebound in overseas sales will encourage firms to re-hire workers and boost incomes, but for the time being Japanese companies seem content to do more with less. Indeed, labor market data released last week showed that the number of employed people declined at the fastest annual rate in four months in November.

In the UK, the Hometrack Housing Survey showed that property prices will probably decline at the slowest pace in 19 months in December, falling -1.9%. On a monthly basis, prices probably rise 0.1%, marking the fifth consecutive period of growth. The details of the report were far less encouraging then the headline figure, however, hinting that shallow supply rather than recovering demand were behind the rebound in home values. Indeed, the number of newly listed properties declined -0.8% while the number of new buyers fell -2.2%.

Euro Session: What to Expect

The European economic calendar is empty and only minimal event risk is scheduled for release as US markets open late into the session with December’s edition of the Dallas Fed’s gauge of manufacturing activity set to cross the wires. This leaves the currency markets wanting of a tangible catalyst for price action, opening the door for plenty of knee-jerk volatility in thin holiday-week liquidity conditions. We will continue to hold our long-term positions but would certainly lean against taking on any new exposure in this environment.

Swiss Franc Outlook Remains Bearish as Exchange Rates Break Range Read more: DailyFX - Swiss Franc Outlook Remains Bearish as Exchange Rates Break

2009-12-14T00:36:00.000-08:00

The Swiss franc strengthened earlier this week as the Swiss National Bank announced it will conclude its corporate-bond purchase plan ahead of the following year, but ended the week lower against the U.S. dollar and the euro, with the exchange rates rising to a fresh monthly high of 1.0364 and 1.51440, respectively. The shift in the market trend suggests that the greenback, which has been the primary funding currency in 2009, is being substituted by the traditional low-yielding currencies like the Japanese Yen and Swiss franc as the outlook for global growth improves.

Switzerland’s central bank held the benchmark interest rate at 0.25% in December and no longer saw a need to “intervene and buy more bonds” as “the spread in the Swiss franc bond market” narrows, and pledged to respond to “any excessive” moves in the exchange rate in order to encourage a sustainable recovery. SNB President Jean-Pierre Roth said that monetary policy “has been effective” after purchasing CHF 3.0B ($2.9B) in corporate bonds since March to counter the financial crisis, and expects economic activity to expand 0.5%-1.0% in 2010 after contracting at an annual pace of 1.5% this year. At the same time, the Mr. Roth held a dovish outlook for price growth and said that the outlook for inflation remains “associated with downside risks,” and the board is likely to maintain its current policy over the following year as Vice-President Philipp Hildebrand is scheduled to take helm of the central bank in 2010. Meanwhile, Mr. Hildebrand argued that normalizing policy in the following year will be the “biggest challenge” as the global financial system remains fragile, but saw little risk for a credit crunch within the region as the economy emerges from the recession.

As the SNB withdraws its emergency program and softens its rhetoric to intervene in the foreign exchange market, the low-yielding currency may continue to lose ground as the USD/CHF and EUR/CHF breaks out of its recent range however, we may see the Swiss franc bounce back over the following week as the economic docket is expected to reinforce an improved outlook for the region. Swiss producer and import prices are forecasted to grow 0.1% in November after falling 0.4% in the previous month, while the annualized rate is expected to contract 3.1% from the previous year after tumbling 4.7% in October. Moreover, industrial outputs are projected to weaken 0.1% in the third quarter after surging 2.7% during the three-months through June, and the slew of data could spark increased volatility in the exchange rate as investors weigh the outlook for future growth

British Pound Looks Forward to Week of Considerable Volatility Read more: DailyFX - British Pound Looks Forward to Week of Considerable Volatility

2009-12-14T00:34:00.000-08:00

An uneventful week of British economic event risk left the domestic currency modestly lower against the resurgent US Dollar through Friday’s close. A hotly-anticipated Bank of England interest rate announcement failed to elicit major reactions from FX markets. Instead, the week’s major British Pound volatility came on news that Moody’s Investor Services expressed doubts on the future of the UK’s sovereign debt rating. Such unexpectedly sharp volatility on unpredictable news underlines FX market unease, and it remains clear that currencies can post substantial moves at a moment’s notice. The week ahead promises considerable economic event risk out of both the UK and US economies, and we expect similarly large moves in the GBPUSD through the week ahead.

Recent doubts on outlook for UK debt ratings are likely to continue through the medium to long term, as large budget deficits and a fast-growing national debt have forced rating agencies to question whether major world governments’ debt truly deserves “risk-free” status. Any further suggestions that the UK’s AAA rating is at risk could easily force substantive pullbacks in the domestic currency. But foreseeable event risk can likewise cause major moves—starting with highly-anticipated UK Consumer Price Index data due Tuesday morning.

Analyst forecasts call for a robust 1.8 percent year-over-year Consumer Price Index inflation rate through November—a 0.3 percentage point jump from the 1.5 percent seen in October. Such an outcome would leave the headline inflation rate at a mere 0.2 percentage points below the Bank of England’s 2.0 percent inflation rate, and the noteworthy month-to-month change may become a cause of concern for the inflation-targeting central bank. Said result would likely raise pressure on the Bank of England to state its “exit plans” for removing its historic monetary policy stimulus and raise interest rates to combat inflation. Officials have already committed to ending the bank’s Asset Purchase Programme in two months, but they have otherwise provided few clues as to plans for ending their historic monetary policy stimulus. Suffice it to say, markets will remain on alert for surprising results from upcoming CPI inflation numbers and their implications for the future of interest rates and Quantitative Easing.

Not to be outdone, the following day’s UK Jobless Claims data will likely provide considerable short-term volatility for the British currency. Markets predict that jobless claims rose by a relatively modest 12,500 through November—the smallest job loss since April, 2008. Given similarly bullish jobs data out of the US economy, markets are riding high on prospects for broader global economic recovery. Such optimistic expectations leave considerable margin for disappointment, and it will be important to watch whether UK Jobless Claims data can match lofty expectations.

Japanese Yen Forecast Dims Ahead of Critical Event Risk Read more: DailyFX - Japanese Yen Forecast Dims Ahead of Critical Event Risk

2009-12-14T00:33:00.000-08:00

The Japanese Yen was the top-performing G10 currency to round out the week’s trade, breaking its long-standing correlation to major risky asset classes and finishing higher despite relative outperformance in the US S&P 500. The Japanese Nikkei 225 index likewise ended the week’s trade up a respectable 0.9 percent above its open—making Yen strength an admittedly unexpected outcome. Key questions remain on the sustainability of the Japanese Yen’s advance, however, as recent IMM data points to extremely one-sided speculative positioning on the US Dollar/Japanese Yen pair. Indeed, our recent forex options and futures sentiment data showed large speculators had been the most net-long Japanese Yen since it set a noteworthy bottom in March, 2008. Speculative sentiment has since moderated considerably, but such COT data supports further JPY pullbacks and not continued appreciation.

The break in the Yen’s typically rock-solid correlation to risky asset classes makes predicting near-term price action far more difficult, and it seems increasingly likely that the USDJPY will primarily trade on developments in the US economy. The US Dollar itself likewise broke its correlation to the US S&P 500 and other risky asset classes—rallying despite stock market strength. A string of positive US economic releases may partly explain the break, and we may do well to watch a string of key US event risk in the days ahead. Hotly-anticipated US Consumer Price Index data and the US Federal Open Market Committee rate decision will likely dominate US Dollar price action, while the Japanese Yen could move on any surprises out of the upcoming Bank of Japan rate announcement.

Markets overwhelmingly predict that the Bank of Japan will leave interest rates unchanged at their upcoming meeting, but it may be important to watch for any and all references to the Japanese Yen. FX markets had recently forced the JPY to its highest levels in over a decade, but very quickly reversed course on vague threats of FX market intervention from the Ministry of Finance and Bank of Japan. Given deflationary headwinds for the Japanese economy, the central bank is staunchly against further Yen appreciation. Whether or not they comment on the fact may force substantive currency volatility in the week ahead.

Despite the breakdown in correlation between the Japanese Yen and global risky asset classes, we suspect that any major moves in global markets will force commensurate shifts in FX markets. The week ahead promises several top-tier pieces of US and Japanese economic event risk, and we expect big short-term moves from the USDJPY. Suffice it to say, traders should be on alert for substantive surprises out of a key number of highly-anticipated events.

Euro Struggles Against Dollar's Strength, Looks to Heavy Data Read more: DailyFX - Euro Struggles Against Dollar's Strength, Looks to Heavy Data ht

2009-12-14T00:32:00.000-08:00

The euro’s biggest fundamental driver is the health of the US dollar. This past week, the greenback forged ahead and the euro suffered for it across the board. As the primary alternative to the US currency, there has been a frenzied demand for the euro as the need for return and stability sent capital into the large market. However, when the tides turn and the expectations for return in the United States improves and the irrational fear that the benchmark currency will not just loose prominence but completely fall off; speculative capital will reverse course. At the same time, there are also factors for a fundamental weakening of the Euro Zone itself. The economic and interest rate outlook are cooling, especially when compared to the region’s industrialized counterparts. And then there is also the instability that member default and/or possible withdrawal from the union may bring.

Over the past few weeks, fear has gained traction among the speculative crowd. With the markets bound to general congestion for the better part of two months, traders are naturally going to grow weary of potential reversal threats. Initially, panic was sparked by Dubai World’s default/debt restructuring. Now, the focus is turned to mainland Europe. In quick succession, we have saw Greece’s sovereign credit rating downgraded and the outlook for Spain reduced to ‘negative.’ This speaks to the economic troubles that exist outside of Germany and France and the lack of flexibility that policy makers have in stabilizing individual economies and markets. Finance Ministers cannot take on more debt than the Union allows, devalue their currency or adjust interest rates to help their economies along. This leaves restrictive parameters on nations that perhaps cannot recover naturally and must either seek bailouts (which will take many years to work off) or consider withdrawal from the regional collective. Either outcome could severely undermine the stability of the euro.

Another gradual shift against the euro is its perceived fundamental strength. Six to nine months ago, speculators expected the Euro Zone would be the first of the major economies to recovery from the global recession and its policy authority would usher in the revival of yields. However, as the months passed; it became more and more clear that the European economy was seen falling further and further back in the pack for growth and the ECB maintained a solid front against raising interest rates until a recovery was certain. Today, growth for the region is expected to trail that of the US and Japan; and there isn’t even a clear outlook for a return to hawkish policy by the middle of the year (which is the time frame the Fed is working with). So, gradually, the fundamental advantages are slipping away from the euro; and fresh data is now gauged for its ability further throw the breaks or perhaps increase competitiveness. On this front, we have plenty of key indicators to work with over the coming week. For growth, the December PMI indicators for Germany and the Euro Zone will offer key benchmarks for 4Q activity. For the ECB, regional inflation indicators will tell officials whether they should start responding with measured rate hikes to compliment other efforts to rein in policy. Altogether, expect these indicators to offer short-term volatility and fine-tune adjustment to larger fundamental bearings; but meaningful trends will fall to the dollar and potential crisis.

US Dollar Making Progress on a True, Bullish Reversal

2009-12-14T00:28:00.000-08:00

There is a trend developing. The US dollar has produced notable rallies at the end of each of the past four weeks. The past two advances are the most notable. Both have come on the back of exceedingly strong economic data – the drive on the 5th was the product of strong NFPs and a drop in the unemployment rate; while the rally on the 12th would come through the merits of a strengthening consumer on sentiment and spending. This would seem a straightforward reaction to data, right? Actually, this would contradict the normal pace that the market has carved for the greenback for the past nine months where strong economic data has bolstered risk appetite and directly weighed on the dollar as a safe haven currency. So, what does this mean? Is the dollar’s role in the risk appetite backdrop changing? Is sentiment actually weaker than just the US data would suggest? Both are likely true. With the dollar looking for strength through various market conditions, the currency may be developing a meaningful bullish trend. However, playing on the well-established, fundamental roles that have been in control for over a year; a collapse in broad investor sentiment is still the most accessible catalyst for a true dollar bull trend.

As has been the case for the full year, the primary fundamental concern for the US dollar going forward is the general bearing and force of risk appetite. From this, there are two concerns. As always, identifying and measuring the influence of potential catalysts is of primary importance; but now, we also have to gauge the currency’s relationship to risk appetite itself. In the past few weeks, while the dollar’s advance has been somewhat choppy and more prominent in certain pairs (EURUSD being the most remarkable example); it has come on strong local data and developed despite stability in other key risk-sensitive markets. This is a natural development considering markets held to congestion for nearly two months now at the top of an unprecedented rally; and the dollar has carried the brunt of the burden in funding this drive. Beyond just a general dissolution of correlations, though; there are fundamental reasons for the dollar to move up the yield spectrum. The United State’s economic recovery is among the strongest in the industrialized world, the Federal Reserve is actively reducing its stimulus and the financial stability in the US markets is comparable (if not more established) to its global counterparts. All that being said, a collapse in risk appetite that balances speculative interests through profit taking is still the most capable driver for the dollar. Not only would capital return to the safety of US Treasuries and money market funds; but it would be drawn out of emerging markets and other risky areas and put into the more liquid but yield-bearing instruments in the US.

For the more definable sense of risk in this coming week’s economic docket; there is plenty of data to feed the more established fundamentals trends. For interest rate forecasts, the market is targeting the Fed’s first hike around the middle of the year – in line with Governor Bernanke’s time frame. However, such projections are not set in stone by policy makers and traders know this. The FOMC rate decision on Wednesday will offer an update on how close a hike may be. Also, interesting in this event will be any mention of more measured changes to policy like the slow withdrawal of stimulus. Realistically, stimulus and interest rates can be adjusted separately. If financial aid is maintained and rates raised, it could support the economy, help dampen any inflation that may pop up and revive the dollar. Other noteworthy indicators on deck included the CPI stats, industrial production, housing starts and the vote to lift the deficit limit.

Buy Reliance Capital, target of Rs. 870: IndiaInfoline

2009-12-01T05:17:00.001-08:00

Mumbai: IndiaInfoline (IIFL) is bullish on Reliance Capital and has recommended a buy rating on the stock with a target of Rs. 870. According to IIFL, despite extreme volatility in the broader market, Reliance Capital managed to close above its 20 daily moving average (DMA) on Friday. The brokerage says that on the upper side, the stock could face stiff resistance around the levels of Rs. 865-870.

Reliance Capital is a financial services company that has interests in asset management and mutual funds, life and general insurance, private equity investments, stock broking and depository services, consumer finance, asset reconstruction, institutional broking and distribution of financial products. The company operates in five segments: finance and investment, asset management, general insurance, consumer finance and others. Reliance Capital is a part of the Reliance Anil Dhirubhai Ambani Group.

According to IIFL, any sort of short-covering above the levels of Rs. 870, could take the stock up to the levels of Rs. 900 in the medium term. Based on the above analysis, we recommend traders to buy the stock between the levels of Rs. 828-836 for an initial target of Rs. 870, says IIFL. With the recommended target price, if the stock is bought at Monday's closing price of Rs. 832.60, the percentage of gain would be 4.49 percent.

UTI offers 30 funds for transaction on NSE

2009-12-01T05:16:00.001-08:00

Mumbai: India's UTI Asset Management on Monday offered 30 of its mutual funds for transaction through the National Stock Exchange (NSE), becoming the first fund house to take advantage of the vast distribution network of the exchange.

The Securities and Exchange Board of India (SEBI) had earlier this month permitted stock exchanges to offer their infrastructure for fund transactions, giving them access to more than 200,000 terminals in over 1,500 towns and cities countrywide, reports Reuters.

"The industry gets six percent of household savings. The move will help us get more share of household savings," said U.K. Sinha, Chairman of UTI. UTI is India's oldest and fourth-biggest mutual fund firm. It had average assets of Rs. 768.5 billion in October, more than 10 million client folios and a presence in 460 districts, offering one of the biggest distribution networks in India.