Trading the News: ECB Rate Decision / News Conference
What is Expected
Time of release: 11/08/2007 12:45 GMT, 07:45 EST (Conference 13:30 GMT, 08:30 EST)
Primary Pair Impact : EURUSD
Expected: 4.00%
Previous: 4.00%
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How To Trade This Event Risk
The European Central Bank has sat on a 4.00 percent overnight lending rate for the past four consecutive policy meetings. And, given the official and unofficial consensus among economists and in the markets, a pass will most likely be the outcome for the November 8th meeting as well. However, the rate decision itself will not be the only opportunity for an event-driven trade. The central bank’s statement and news conference, in which the President Jean Claude Trichet will offer up the monetary policy group’s outlook on growth and inflation as well as field questions from reporters, could trigger a strong move from the high flying euro. In fact, looking over the past three announcements, there was little to no increase in volatility following the decision; yet opportunities for fundamental trades have consistently presented themselves following the release of the statement. For this coming statement release (scheduled for 13:30 GMT), there will be a few immediate notables to grasp a fundamental direction. First and foremost, the presence or absence of ‘strong vigilance’ will set the tone. This closely monitored idiom was absent last month. More likely, the market will be looking for the adjective of ‘accommodative’ in describing monetary policy. This was a staple for hawks and was dropped for the first time in nearly a year last month. From there, any adjustment to forecasts of cooling growth or inflation to hover near 2.0 percent or mention of further credit market problems in the near future will slowly impact the currency. The ECB’s policy stance will inevitably draw be measured against the Fed’s cuts and RBA’s hike.
In the past few months, the European monetary authority has grown increasingly dovish – turning from consistent hikes, to breaking the ‘strong vigilance’ chain, to easing inflation and growth forecasts. As such, any notable change to this slow degeneration could recharge rate speculators. Optimally, a surprise hike would be the order for a euro rally; but that outlier aside, the return of ‘strong vigilance’ or ‘accommodative’ could bring back the hope of further hikes. Beyond that, discretion will apply. To consider a long EURUSD, event-driven trade on this risk we will look for a clear fundamental engine and a green, five –minute candle to confirm entry. We will take two lots at market with a stop at the nearby swing low (or reasonable, fixed-distance) and automatically set the first limit equal to risk on a single lot. The target on the second lot will be based on discretion and should taken into account the level of fundamental surprise. When the first lot takes profit, we will move the second lot’s profit to breakeven to conserve profit.
Considering the evolution of policy over the past four months and the heights of EURUSD, risk clearly lies to the downside. Any unmistakable warning of an eventual rate cut turn the pair lower and may even mark a medium-term top.
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Trading the News: US Change In Nonfarm Payrolls
What is Expected
Time of release: 11/02/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 82K
Previous: 110K
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How To Trade This Event Risk
Though the fear of major revisions and negative payroll releases have faded for the non-farm payroll indicator, the heightened market moving potential for the report isn’t likely to weaken for Friday’s number. For the October print, the market is already primed for a new, major leg for the dollar. Market anxiety was built in the lead up to the Wednesday’s GDP/FOMC mix. The growth report was strong with a 3.9 percent pace of annualized expansion – a figure that beat expectations and marked a more than one year high – yet the reaction to the data was anchored due to the looming event risk in the rate decision. The Fed announcement was a relative disappointment with a mere 25 basis point rate cut and commentary that curbed the possibility of further hikes over the next few quarters. However, those market participants banking on volatility won’t call it a week until the major event risk on the US docket has been fully expunged. Looking at the official consensus for the headline employment report, forecasts are once again middle of the road at 88,000 (once again hovering around the popular 100,000 outlook). The broad expanse of complementary indicators were averaging out with a modest pickup. The US consumer confidence employment component ticked lower for the third month and the four-week average for initial claims hit its highest level since April; but the ISM manufacturing jobs sub-gauge, the ADP payrolls, Challenger Job Cut, Monster and Hudson reports all nudged higher. Given this tepid setup, the hope for a major move this week will likely vanish if the NFPs can’t surprise on the headline or revision.
Trying to trade a long dollar position on the employment data should be done conservatively considering the steady downtrend the currency. On the fundamental front we will look for consistency across the various indicators: a strong NFP number for October, an upward revision to September, perhaps a downtick in the jobless rate and sustained rebound in the annual earnings report. Of course, the headline number and revision take precedence, but the fewer points of support for the dollar, the more suspect dollar momentum will be. On a strong fundamental release and a green five-minute candle, we will look to take a short EURUSD position on two lots at the close of the 12:35 GMT bar. The initial stop will be at the nearby swing high (or reasonable distance) and a first target will equal risk. The second lot’s objective will be discretionary and its stop should be moved to break even when the first lot takes profit.
Consistency in a disappointment would be the best policy for a short-dollar trade as well. However, a negative October report (or September revision especially) could easily over shadow the rest of the data. The same strategy applies for the short, just in reverse.
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Dollar: How Low Can It Go?
“For the time being,“ we noted in our Friday commentary, “the market views US monetary policy as highly accommodative and ECB policy as neutral at worst. In short US rates will continue to decline while EZ rates will remain steady. As long as that dynamic persists, aided by supportive equity markets the EURUSD should continue its inexorable march towards 1.4500.”
This week, the markets saw further evidence of US slowdown as Exiting Homes plunged -8.0% lower, jobless claims recorded their second consecutive print of330K+ claims and Durable Goods contracted -1.7% against expectations of a 1.5% rise. Even the seemingly positive New Homes number was deceptive as prior months reading was revised downward demonstrating that the housing sector is in a full out recession.
Little wonder then, that as data hit the screens rumors started to circulate that the Fed will cut rates by 50bp rather than the expected 25bp at next Wednesday’s FOMC meeting. Should that occur the EURUSD can easily hit 1.4500 as the interest rate differential in the pair will compress to a mere 25bp lead for the greenback. Already EZ 2 year swap rates are higher than those of the US indicating that fixed income markets are betting that US rates will fall below those of the Euro-Zone.On the flip side,with anti-dollar sentiment so prevalent in the market a 25bp cut may spur a relief rally for the greenback, especially if the NFP numbers due two days later print at 100K+ or above. The Fed appears to have made a calculated decision to offset the loss in housing wealth with strong growth in exports. If that policy results in steady labor markets, their gamble may just pay off and the greenback should stabilize. For now, however, theses are the darkest of times for dollar bulls. – BS.
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Euro – Signs of a Slowdown
Euro’s climb towards 1.4500 continued this weekbut on the economic front the data started to show signs of a slowdown. On Friday, the German GFK Consumer Confidence poll missed badly to the downside printing at 4.9 versus 6.5 expected. The reading for November hit a seven month low as sentiment soured after the financial market turmoil of August made consumers more cautious. More troubling still, the propensity to buy index was strongly negative in October at -12.9 versus -2.4 in September suggesting that Retail Sales may come in weaker than expected. Meanwhile, Industrial Production rose only 0.3% vs. 0.9% expected and the flash PMI Manufacturing reading came dangerously close to the 50 boom/buts line at 51.3
The overall picture suggests that the ECB is quite unlikely to tighten further, for fear of stifling the region’s delicate economic recovery. The one of concern for European monetary officials is the continued double digit growth in money supply figures. However, even the 11.4% pace of growth in M3 has failed to translate into any meaningful price pressures asEZ core CPI data remains at 1.5%.
Next week, the European calendar is especially light with only the unemployment and PMI manufacturing data on the docket.The trade in the part will almost certainly be driven by the North American data and risk appetite/risk aversion dynamics.The EZ economic situation, as long as it remains steady is almost an afterthought to the market right now.The euro continues to trade as the anti-dollar. – BS
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Yen Rallies After G7 Remains Mum On The Japanese Currency
In the wake of the G7 meeting of Finance Ministers in Washington, the Japanese yen rallied sharply against the U.S. dollar. Finance Ministers from the world's biggest economies showed a lack of concern on the continued fall of the U.S. dollar and preferred to call for faster appreciation of the Chinese Yuan. On Sunday ET, the U.S dollar fell to as low as 113.27 yen after having traded at 114.50 on Friday, October 19. However, during the rest of the week the price action was rather choppy and the USDJPY traded off mostly in the developments in the equity markets.
This week data reinforced expectations the Bank of Japan will keep interest rates on hold over the next few months. For instance, according to a government report released on Friday, Japan's nationwide core consumer price index fell 0.1 percent in September from a year earlier. This was the eighth straight month of core CPI deflation. Even so, Tokyo’s CPI, a leading indicator of national price trends rose by 0.1 percent, the first increase we have seen in five months, and an indication that higher crude oil prices could soon be spreading across the broad economy. Other report released on Friday showed that production in the industrial sector of the Japanese economy fell 1.4 percent in September from the previous month, compared with expectations for a 1.3 percent drop. Earlier in the week, a report showed that Japan's September adjusted trade surplus hit a record high of ¥1.03 trillion, largely supported by a decline in imports.
Looking at the week ahead, we will keep our eyes on the Bank of Japan interest rate decision and our attention on Mr. Toshihiko Fukui speech, the Bank of Japan Governor,when the BoJ Policy Board meets next Wednesday. The BoJ is widely expected to keep interest rate on hold. In fact, Interest rate swaps on the overnight call rate are pricing in less than a 20 percent chance the BoJ will increased rates before the end of this year. In addition, markets will watch for any particularly large surprises out of Retail Sales, Overall Household Spending, Unemployment and Manufacturing PMI, all expected to be released between Monday and Tuesday.– AS
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Cable Consolidates Near 2.05 Amidst BOE Rate Cut Prospects
On Thursday, the Bank of England issued a gloomy outlook for the UK’s financial markets, noting that the credit, equity, and commercial property markets remain “vulnerable to further adjustments.” The BOE pointed the finger at a sharp slowdown in the US economy and rising credit defaults that “could trigger a further round of asset price falls.” While this analysis does not necessarily suggest that the central bank will be aiming to cut rates in the near-term, it does effectively eliminate much of the probabilities of a rate hike. Indeed, BOE Governor Mervyn King is a staunch hawk and extremely hesitant to enact policies that create the potential for moral hazard to come into play – though one could argue that the BOE’s bailout and guarantee of funds at Northern Rock just a few weeks ago was the epitome of just this. Nevertheless, until UK data starts to reflect a more pronounced economic slowdown and easing in price pressures, interest rates in the UK will likely hold at 5.75 percent until at least Q1 2008.
Looking ahead to the British pound's event risk this week, Cable bulls may be disappointed to see that most of the data is expected to signal a slowdown in the UK economy. Nationwide house prices are anticipated to have slowed to an annual growth rate of 8.5 percent from 9.0 percent, as the BOE's policy tightening earlier in the year takes a toll on the housing sector. In fact, we've already seen that mortgage application figures have started to fall back, and the softer demand could finally forces sellers to knock down prices a bit. Meanwhile, GfK consumer confidence may drop further to –8, as sentiment will undoubtedly remain negative amidst high oil prices and concerns about the health of the financial markets. On Thursday, PMI manufacturing could give some clues as to how exports are faring with the British pound holding consistently above the $2 mark. Overall, much of this week's news is likely to suggest that after the UK expanded rapidly in Q3, growth during Q4 will probably fall off markedly and underpins the bearish case for the GBP/USD pair. – TB
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Swiss Franc Holds the Bid
The Swissie continued tofollow anti dollar sentiment ending the week pretty much where it closed last Friday. At the start of the week SDCHF staged a huge fake-out, rallying 280 points only to give nearly all of it back by the end of the week. The franc continued to weaken against the euro as modest carry trade flows kept the pair bid, but overall it basically matched its much larger neighbor in making gains against the greenback.
One possible reason for Swissie bullishness was the continuing hawkish commentary from the SNB.The Vice Governor of the Swiss
National Bank, Mr. Philipp Hildebrand, in a speech in Switzerland Thursday said that the. Swiss economy was "robust," and noted that “should our inflation forecast show that the development of the foreign exchange rate threatens price stability in the medium term, this would be a reason for the Board to reassess the degree of restrictiveness of monetary policy.”
The SNB’s decidedly hawkish stands suggest that they may deviate from the ECB and raise rates at the December meeting, but that decision will be almost exclusively contingent on the inflation figures, which is why the Friday’s CPI report could carry so much weight with the market. If the CPI prints hotter than expected then the FX markets could reassess their EuroSwiss rate expectations and the EURCHF pair which up to now has traded almost exclusively on carry trade flows could begin to weaken as traders shift capital to the franc. – BS
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Canadian Dollar Shows Few Signs of Slowing at 33-Year Highs
The Canadian dollar showed little hesitation in pressing onto fresh 33-year highs against its US namesake, with all-time highs in crude oil prices and general US dollar weakness sinking the USDCAD to new depths. The currency pair’s early-week rally gave false hopes for a notable medium term reversal, but speculators pounced on the opportunity to continue selling the USDCAD. Loonie buying pressures likewise coincided with bullish Canadian Retail Sales results; despite a disappointing Wholesale sales report, retailers saw sales grow 0.7 percent through the month of August. Robust employment gains have driven consumption trends in the world’s eighth largest economy, and CAD bulls hope that the coming week’s Net Change in Employment report will show continuation of labor market gains. The coming week clearly promises volatile conditions for all US dollar-denominated currency pairs, and the USDCAD is certainly no exception.
We are likely to see major moves in the Canadian currency in the days ahead, as a mid-week US Federal Reserve interest rate announcement and Friday labor data are both virtually guaranteed to force volatile moves in the C$. A Wednesday Gross Domestic Product report is likewise slated to grab forex market headlines, but it is relatively unlikely that we will see notable price movements ahead of the critical US FOMC announcement. That being said, USDCAD risks remain to the downside ahead of Wednesday’s events. Speculation that the US Federal Reserve may cut rates by as much as 50 basis points has kept the US dollar on offer through recent trade, and such a move could only drive the greenback to fresh depths against its Canadian dollar. Friday’s employment numbers likewise show potential for driving further USDCAD drops; the Net Change in Employment figure has beaten consensus forecasts for 7 out of 10 months this year. Given a median analyst estimate of a relatively minor 11,000 job gain, we could easily see the result come in stronger than expected. Given such bullish economic prospects, we see relatively little scope for fading Canadian dollar strength through short term trade. – DR
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AUDUSD Swept To 23-Year High On Surprise Jump In Inflation, Gold
A volatile mix of fundamentals and commodity price action pushed AUDUSD above 0.91 last week, marking the highest level for the pair since June of 1984. The few indicators sprinkling the calendar were evenly spaced. And, while the fundamental reports were few in number, they were considerable market movers in their own right. Beginning with the least influential report, the Conference Board’s composite Leading Index of economic indicators jumped 0.6 percent for its August measurement - the largest jump in six months - through gains in the money supply, building permits and equities. Conversely, the impact this indicator had on the Australian currency paled in comparison to the fuel provided by the third quarter factory and consumer-level inflation reports. The PPI report set the Consumer index up for a relatively uneventful release. According to the Bureau of Statistics, prices at the factory gate unexpectedly accelerated 1.1 percent in the three months through September – lifting the more closely watched annual report off of its three-year lows to a 2.4 percent clip. However, the modest rebound in factor-level price pressures didn’t accurately reflect the strain at the consumer level. The CPI data was antipodal, with headline annual figure cooling to its slowest gait in 8 years at 1.9 percent while its headline counterpart accelerated to a 16-year high 3.1 percent.
During the lull in scheduled, fundamental currents last week, commodities easily took over the helm on the Aussie dollar. Energy, agricultural and metal prices rallied across the board, paced by crude and gold. While Australia is the among the top producers of multiple natural resources (coal, zinc, beef), no correlation held as tight as the one with gold. The precious metal rallied to a 28-year high above $780/ounce just as AUDUSD pushed to its own recent record. Even if all the event risk should on the docket this week fall flat, gold and the many other commodities in the Australian export universe could easily drive the currency to gains or losses on their own.
While there is a backup in place with commodities, the economic calendar doesn’t look like it will disappoint. The data begins early with the NAB business confidence numbers for the third quarter. The survey crossed the wires with a four-year high in its last reading; but turmoil in the financial market, higher raw material costs and rate hikes have significantly depressed the monthly figures. On the following day, a double shot of housing data will gauge lending habits through HIA new home sales and building permits. The trade deficit announced Thursday morning is expected to improve substantially, but its simultaneous release with the monthly and quarter retail sales data should dampen its potential. The consumer spending numbers are set to weaken slightly for September, but accelerate to a 1.6 percent clip through the third quarter. With inflation already checked off, consumer spending is the next hurdle for another rate hike. – JK
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RBNZ Leaves Door Open for Further NZDUSD Gains
The New Zealand dollar continued to rally against its US namesake, as rallies in global stock markets and a surprisingly hawkish central bank sent the currency to multi-week highs through Friday’s close. Previous tumbles in global risky asset classes left the Asia-Pacific currency offered through mid-October, but a recent reversal left high-yielders cautiously bid ahead of next week’s critical US FOMC interest rate announcement. The US central bank is widely expected to cut domestic short term rate targets by at least 25 basis points, with hopes of a 50bp cut fueling stock market rallies through earlier-week price action. The New Zealand central bank shows little indication that it will pursue similar moves through the medium term, however, as a surprisingly hawkish stance on inflation forced speculators to scale back forecasts for RBNZ rate cuts. Tepid third quarter Consumer Price Index figures had originally led many to believe that the bank would ease rates from record-heights, but RBNZ Governor Alan Bollard emphasized that price pressures remain a top concern for the central bank. Given expectations for a widening of the New Zealand dollar – US dollar yield spread, the NZDUSD may continue to rally through medium term trade.
Trading the News: UK Gross Domestic Product
What is Expected
Time of release: 10/19/2007 08:30 GMT, 04:30 EST
Primary Pair Impact : GBPUSD
Expected: 3.1%
Previous: 3.1%
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How To Trade This Event Risk
The British pound has been put into a holding pattern for nearly three weeks against its US counterpart as the market waits for a significant shift in fundamentals to usher the pair into the next leg of its trend. This economic turning point may very well be the UK’s third quarter GDP report. The first of the G7 to release its growth numbers, the report may very well be a guide not only to the health of the domestic economy and the Bank of England’s disposition, it may also set the standard on 3Q GDP forecasts for the entire global community. Looking at the market’s reaction following the previous three advanced readings, the price action has been relatively muted. After 60 consecutive quarters of growth, annualized expansion has stabilized around 3.0 percent; and economists have grown used to this pace. Heading into the event risk, the market consensus is calling for a modest cooling in the quarterly print from 0.8 percent in the period through June to 0.7 percent. At the same time, the year-over-year measurement is expected to hold steady at 3.1 percent. Consistency seems to be an important condition for a significant market reaction – as the response to the fourth quarter release would suggest.
The recent release of the stronger than expected September retail sales report suggests consumer spending may be a key contributor to positive growth. Should annual growth accelerate to 3.2 percent or above – and/or the quarterly measurement outpace its own consensus – economists and market participants may very well imply that expansion can survive with a currency pushing new multi-decade highs; and that the central bank can focus on alleged inflation pressures in the pipeline. With strong GDP readings from both the quarterly and annual figures, we will look for a five minute green candle to confirm entry on a long, two lot GBPUSD position. The stop for both lots will be set either at the nearby swing low or at a reasonable, fixed distance. The target on the first half of the trade will equal the distance to the stop, while the second lot’s objective should be taken on discretion. When the first lot takes profit, the stop on the second should be moved up to break even to conserve profit.
Considering a possible bearish scenario, there are more than a few sectors that could overwhelm the strength found in consumer spending. The visible trade balance set a record low, industrial production has stagnated and the financial services industry has been roiled by a July rate hike and waning confidence due to the first run on a UK bank in over a century. Should the GDP numbers cross the wires worse than expected, we will use the same criteria and strategy setup for a short as we would for the long, except in reverse.
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Talking Points
$ Dollar: Struggling To Find Bottom
Trading the News: US Advanced Retail Sales
What is Expected
Time of release: 10/12/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 0.2%
Previous: 0.3%
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How To Trade This Event Risk
Over the past three months, the US Advanced Retail Sales report has lacked in its fundamental influence over the dollar. However, as an indicator, the leading gauge for objective consumer spending still ranks among the most important reports in the US cache. In fact, considering the downward revisions in forecasts for economic expansion over the final half of the year and the Fed’s recent move to loosen its stance on monetary policy, the health of the consumer sector has grown in significance. If consumer spending falters, then the cooling employment trends may draw the whole sector down and damage a vital component of growth. Alternatively, steady spending from the largest sector could help the economy avoid a much-feared recession and balance economics long enough for the Fed to turn its attention back to inflation concerns. Of course, as a event-driven trade, the fundamental specifics will take a back seat to the immediate surprise from the data. The consensus for September retail sales is tepid, allowing for a considerable divergence to the upside or downside. However, as we have seen over the past three releases, the headline number alone may not be enough to move the market. The ‘core’ figures and component activity could also be taken into account should the leading figure not genuinely surprise.
After the Fed’s decision to cut the overnight lending rate by 50 basis points last month, the bearish cloud over the dollar has grown darker. Now, with the greenback pushing 15 year lows and the central bank expected to continue in its efforts to lower the benchmark rate, the future of the economy and the currency may rest in the consumers hands. We would optimally like to see a considerable upside surprise (0.5 percentage points or more) as a fundamental trigger for a short EURUSD trade. With a strong fundamental reading and red, five minute candle for technical confirmation, we will look to take a short position on two lots at market with an immediate stop at the swing high (or reasonable distance) with a first target equal to this distance. When the first lot takes profit, the stop on the second should be moved to break even and a discretionary target for this half may be clearer with momentum and volatility taken into consideration.
For an bearish outcome on the economic release, we would need a disappointment of equal magnitude to our bullish scenario. A mere drop in sales may not be enough to rally EURUSD considering its proximity to its all-time highs. Should the fundamentals be incontrovertible and a green, five minute candle be put into place, we will use the same entry and management rules for a long trade.
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Dollar Plunge Relentless But Gloom May Be OverdoneAfter spending a few days at the start of the week consolidating its losses around the 1.40 level, the greenback pushed lower still under the relentless threat of further rate cuts by the Fed and growing fears of a potential recession in the US economy. By the end of Friday EURUSD set yet another record high at 1.4275 and appeared destined to move higher.
The economic data was weak across the board, starting with a very ugly consumer confidence number which plunged below the key psychological level of 100 printing at 99.8 for the first time in 2 years. Durable goods was also of little help contracting another 4.9% on the month while housing continued to be a slow motion wreck with Existing Homes sales falling –8.3% against expectations of a -5.2% decline.
Nevertheless, despite the gloom and doom that has pervaded the markets the dollar bears may be overplaying their hand. As we noted on Thursday, “The low readings in consumer sentiment and the worse then expected drop in Durable Goods …all suggest that the economy is retrenching. However, the calls for an inevitablerecession may be a bit premature, especially if labor markets remain steady. “ Indeed if there is any morsel of hope for greenback longs it rests on the surprisingly strong labor dataThis weeks jobless claims showed a marked improvement dropping below 300K and if NFPs rebound as expected to 100K they will demonstrate that US economy continues to expand suggesting that the calls of an imminent recession are overblown.while the path of least resistance is down, the dollar remains grossly oversold, and a better than expected NFP print could bring some temporaryrelief to downtrodden dollar longs. -BS
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Euro - Not All is Well on the EZ Front
“Le super-euro”.That’s what the French are calling it these days. And from the look of the price action who could disagree.The currency has set record highs three weeks in a row reaching 1.4275 in Friday trade. Meanwhile the retail exchange rates have actually reached 1.55 making each dollar worth only 2/3rd of a euro to any American tourist venturing abroad.
Yet the economic data within the region hardly supports such bullish sentiment. Both GFK consumer confidence and IFO business survey printed worse than forecast at 6.8 and 104.9 respectively while Industrial Orders contracted a sharp –4.0%.The Manufacturing data was for two months back, suggesting that the Industrial sector was already feeling the pinch with EURUSD in the high 1.30’s. With the pair now trading above 1.40 manufacturing may really begin to suffer as the competitive disadvantage of the high euro will pressure the exporters.
One interesting point to note is that EZ is the dominant exporter to the Middle East, which remains a dollar block region.Despite the record high oil revenues, the rise in the EURUSD exchange rate has wreaked havoc with inflation in the Gulf region and its demand for European goods may be curtailed, hurting EZ export growth.
Next week the marquee event will be the ECB rate announcement on Thursday. The market expects rates to remain at 4.0% and given the rise in the currency that outcome appears likely.Yet one of the assumptions underlying the euro’s recent rise has been the notion that the ECB has not reached the end of its tightening cycle. While ECB President Jean Claude Trichet is well know for never giving any forward guidance, show he not mention the word “vigilance” it would suggest that the ECB will remain stationary for the rest of the year.The realization that European rates aren’t rising anytime soon, may trigger a profit taking rally in the pair especially after such a parabolic rise over the past month. – BS
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Strong Yen Data Comes With Fine Print
The yen drifted within its broad range against the benchmark dollar for yet again last week. On the data front, the newswires were actually lit up by a number of top tier indicators; but most of these market-movers came with strings attached. The heavy economic flow came on Friday with fundamental traders working with inflation, spending and industrial production numbers among others. Retail sales and household spending data was among the most dramatically changed with household consumption rising a greater than expected 1.6 percent through August. This in turn helped boost the value of receipts over the same period by 3.9 percent– the single largest monthly increase in the indicator’s series in at least seven years. However, before hailing the return of a strong consumer appetite, we have to remember that a sizable rebound was suspected after poor weather and earthquakes in July severely depressed spending. Factories activity similarly saw an abnormal rebound in activity as many were able to resume production halted by the latter natural disaster. Alternatively, the inflation data grounded the currency with more consistent readings. The annual calculation on the core National CPI report marked its eighth consecutive negative number, grounding traders in the reality that the BoJ has little support for another rate hike for some time.
Outside the realm of the tidy economic calendar, risk trends continue to loosen their grip on the Japanese currency. Since credit markets seized and global equities collapsed in the first half of August, major stock indices have quickly closed back in on record highs and the carry trade has come back into vogue among the crosses. As testament to the robustness of the renewed appetite for risk, the yen hardly flinched when Yasuo Fukuda assumed the office of the Prime Minister from a battered Shinzo Abe. Though we have yet to see the full details on his plans for the economy, trade and his standpoint on the yen, he already enjoys a sizable approval rating.
In the days ahead, the calendar will release very few market-worthy indicators and those will be issued very early in the week. The Tankan report from the Bank of Japan will offer an outlook for business sector activity and spending. Taking into account firms’ persistent habit of competing with discounts, the threat of waning demand from the US and recent credit and lending issues, economists expect the more pertinent components of the report to pull back from 16-year highs. The outlook for manufacturing and services, as well as the planned capital expenditure figure, will be the stand out numbers. Not two hours later, the labor cash earnings report for August, will turn once again to the consumer. And, unlike last week’s spending data, this figure is not expected to be influenced by anomalous circumstances. – JK
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Pound Rallies Despite Financial Woes – Retrace Seems Likely
Signs that the UK financial system may be wavering were offset by upward revisions to GDP figures, allowing the British Pound to regain traction and leaving GBPUSD to end the week 1.3 percent higher at 2.0471. On Tuesday, the UK Telegraph reported that the Bank of England had only 4.4 million pounds to cover UK bank deposits in the case of a failure compared the $49 billion held by the FDIC in the US. However, this information is somewhat distorted, as the policies in the UK and the US are very different. The FSCS, which is the UK version of the FDIC, holds no funds and only raises those funds in the event of a bank failure, while on the other hand, the US has the money readily available in case of a collapse.This signals that things in the UK are not as bad as the article suggests, however, concerns were only exacerbated by news that struggling mortgage lender Northern Rock – which faced a customer bank run less than two weeks ago – had borrowed another 5 billion pounds, bringing the company's debt to the Bank of England up to nearly 8 billion pounds since it sought emergency funding two weeks ago. No other financial institutions have come out of the woodwork quite yet to seek funding, and unless there are banks in absolute dire straits, they probably won’t as this is equivalent to shouting “we’re in big trouble” to the financial press.
Over the course of this week, event risk in the UK will be scattered with the most market-moving data coming at the end of the week. First, traders may ignore PMI manufacturing on Monday to focus on housing equity withdrawals for the second quarter, as a marked drop-off could signal a decline in consumer spending. The release ofPMI construction may go unnoticed, as the figure remains at very lofty levels and a mild decline in the figure would not be surprising. Finally, the BOE rate decision will garner the most attention, despite the fact that no rate change is expected. Given the woes of mortgage lender Northern Rock and fears that a credit crunch will disturb economic growth in the UK, speculation has risen that the BOE will cut rates this year. Nevertheless, BOE Governor Mervyn King remains an ardent inflation hawk and with housing prices, energy prices, and RPI still high, his bias is unlikely to change. Furthermore, King is notorious for being against the implementation of policies that have even the smallest chance of introducing the risk of moral hazard. As a result, we do not expect the BOE to cut rates in 2007. This may not translate into gains for GBPUSD this week, however, as the pair’s rally may be overextended. – TB
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USDCHF Could Make Up Gains Despite An Expected Rise In CPI
The Swiss Franc set fresh multi-year highs against the downtrodden US dollar, with improved interest rate differentials boosting the Swissie’s stance against the greenback. Given the Fed’s surprise decision to cut interest rates by 50 basis points on September 18th and mounting speculation that the central bank will cut again in October, traders remain focused on the dollar’s narrowing yield advantage over the CHF. The US dollar is expected to fall further through the medium term, as clear expectations for further interest rate cuts can only worsen the buck’s stance across the board. In contrast, the Swiss Franc’s yield curve shows steadily rising rate expectations through the period. Fundamental data somewhat supported the currency’s gains, as the KOF index – a composite of major economic various economic indicators used to project growth in the coming three to six months - unexpectedly hit a 13-month high of 2.14 against expectations of a second monthly contraction to 2.00. Despite the fact that consumer sentiment has fallen in recent months amidst rising energy prices and a credit market upheaval, spending continued to fuel growth last month. What's more, business sector activity and trade account figures are still well balanced in positive territory. However, a feeling of caution is still hovering over the outlook on the Swiss economy. Should credit market disruptions upset employment trends or demand from a major trade partner like the Euro-zone cool, Swiss expansion may be in jeopardy. Nevertheless, the Swiss National Bank’s projections for steady, strong growth appear to be coming to fruition and could set the stage for continued rate normalization in December.
This week, event risk will be thin for the Swiss Franc, but the indicators due to be released could be market-moving on a very short-term basis. On October 1st, SVME PMI is likely to decline after the index surprisingly surged to a reading of 65.1 the month prior. Nevertheless, focus will be on the next day’s release, as CPI is scheduled to be announced. Inflation pressures remain very tepid, but a surprise jump could be enough to lead investors to ramp up speculation of a hike by the SNB in December. However, last week’s COT report showed that speculators are the longest they have been since June 2006, when USDCHF bottomed just below 1.20. As our Technical Strategist Jamie Saettele said in the report, “If speculators return to a net short position, then it is likely that a significant low is in place,” and this overextended positioning may be enough to force a short-term retrace in the USDCHF. – TB
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New Record High For Canadian Dollar
When liquidity flushed back into the FX market last week, fundamental traders had no economic data to work with but it did have a very heavy psychological burden attached to it after testing parity just before the weekend. As the US dollar stabilized and loonie traders bided their time until Friday’s GDP report, some of the perpetual bulls looked to take a little profit out of their successful USDCAD trades - and perhaps clear a little head room for continuation. A steady rebound in USDCAD held through Wednesday morning, carrying the pair all the way back to 1.0095 before the market tides changed. The turn in price action did no not come on its own. Crude oil, which had spent three days pulling back from its all time highs (lined up exactly with the USDCAD turn), before Wednesday rolled around with a strong rally from the closely monitored commodity. In three day’s the active WTI contract sprinted more than $5 to come within a few cents of the September 20th record. The bond between the oil and the Canadian currency was so strong that It even helped overcome a spat of disappointing economic data. Though the GDP number that crossed the wires Friday morning was only a monthly number, the series has a history of stoking volatility. Indeed, a 0.2 percent print from the July report did rouse price action; but the loonie rally was not the expected outcome from a release that fell short of economists forecasts for a 0.3 percent read. Regardless of the divergence of expectations, the economy continues to steam ahead at a healthy pace.
So will the crude correlation continue to drive the Canadian currency unimpeded next week? It may very well, but it will certainly have competition. The economic calendar is dotted with a number of top tier market movers. Coming late in the week Thursday starts the fundamental run with a building permits and Ivey PMI report. Building permits will act as leading indicator for the health of the housing market. So far, the residential market has shown little consequence of the recent credit freeze that has roiled markets around the world. However, it is too early to fully assess whether Canadians have successfully avoided this disruption or not. A little later that same day, the Ivey report for September will reveal whether heightened demand for commodities will counteract the taxing exchange rate. The market is looking for a higher number; and even if we do see one, this delicate balance cannot last for ever. Finally, Friday’s employment report will offer the greatest chance for a loonie-side reactions.
While the Canadian calendar may have its hand in moving the currency, a number of outside factors should be monitored as they could shock the market into motion. While Canadian credit market issues and political jawboning may drift in the background; US data could have a very real impact on USDCAD. NFPs, which reported its first contraction in three years last month, will be the loaded release. - JK
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Australian Dollar Surges on Gold Prices, but Can RBA Deliver on Rates?
The Australian dollar finished the week at fresh 18-year highs, boosted by a tumble in its US namesake and a surge in demand for high-yielding currencies. Marginally better-than-expected economic data kept the currency’s medium term rally intact, with similarly high-flying gold prices improving demand for the Aussie. The precious commodity rose on extended US dollar weakness and otherwise robust international demand—leaving little scope for a significant retracement of its recent advances. The correlation between the Australian dollar and Gold has reached its highest levels since mid-2006 and tells us that the AUD will continue to mirror moves in the precious metal.
Economic data on the week painted an optimistic view of future AUD price action, with the TD Securities Inflation indicator improving the odds for higher Australian interest rates through 2007. The private survey showed that the headline consumer prices rate matched previous multi-month highs of 3.0 percent through August. If the more closely-followed official CPI figure follows suit, then the inflation-targeting Reserve Bank of Australia will have little choice but to raise interest rates through subsequent meetings. An upcoming RBA meeting is sure to force volatility across AUD pairs, but markets doubt that the bank will raise rates on its October 3 meeting.
The RBA Cash Target announcement will clearly dominate event risk on the Australian dollar calendar, but later Retail Sales and Trade Balance figures likewise threaten extended moves in the domestic currency. A recent Bloomberg News survey shows that 27 of 27 economists expect the Reserve Bank to leave rates at 6.50 percent due to uncertainty in global credit markets. Yet an impressive AUD rally suggests that some expect RBA Governor Glenn Stevens to act on strong consumption data and send rates higher. Inaction by the bank would likely lead to a short-term Australian Dollar decline, but subsequent Retail Sales and Trade figures will undoubtedly force further volatility in AUD pairs.Retail consumption is expected to have decelerated in August, but a robust trend nonetheless shows warning signs of extended consumer spending. A simultaneous Trade Balance report is likewise expected to show a deterioration through August, but strong domestic commodity prices could nonetheless bolster Australian exports. - DR
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New Zealand Dollar Rallies on Strong Carry Trade Rebound
The New Zealand dollar surged to fresh monthly highs against its US namesake, bolstered by greenback weakness and robust demand for high-yielding currencies. The Kiwi’s 8.00 percent yield proved too difficult to resist, as speculators continued to pile onto NZDUSD longs. The previously beleaguered currency has shown clear signs of strength, with recent CFTC speculative positioning figures showing strong potential for a continuation in the NZD uptrend. Net non-commercial long positions grew by 1,600 contracts to 12,722 in the trade session ending September 25. The number showed clear improvement yet remains significantly below previous extremes—suggesting that further growth can only continue the Kiwi rally.
The week’s economic data likewise supported NZD bulls, with the key Gross Domestic Product figure showing above-consensus growth through the second quarter. Though the number comes on a significant 3-month lag, it shows that the economy remains more robust than previously imagined—diminishing the likelihood of Reserve Bank of New Zealand interest rate cuts through 2007. Consumer and Business confidence data likewise improved optimism on the state of the domestic economy. Indeed, the larger-than-expected Trade Balance deficit represented the only notable disappointment on the week of key economic data.
The coming days of event risk will be considerably more tame, with a second-tier ANZ Commodity Prices report the only notable on the ledger. Markets expect that strong Dairy and Food prices will boost the prices release,as robust global demand for soft agricultural goods continues to boost the Kiwi economy. Whether or not such a result will have an impact on the domestic currency is entirely another question. Indeed, the currency is likely to trade off of global risk sentiment and events in the neighboring Australian economy.– DR
[ 本帖最后由 hefeiddd 于 2008-5-21 13:07 编辑 ]
Trading the News: Canadian Gross Domestic Product
What is Expected
Time of release: 09/28/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : USDCAD
Expected: 0.3%
Previous: 0.2%
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How To Trade This Event Risk
Though the monthly Canadian GDP releases have historically been rather reliable in their ability to drive fundamental currents in the loonie, last month’s report has cast some doubt on the indicators effectiveness. The otherwise perfect storm of an upside surprise in both the June and second quarter figures would theoretically give USDCAD considerable downside momentum. As it happens, this was not the case last month. However, the market’s interest in growth numbers has been revived recently as the Canadian dollar has continued its push higher and reached the parity milestone. When the 1.00 was broken, politicians, union leaders and economists turned their audible grumbles to loud cries of disbelief and support. Finance Minister Jim Flaherty addressed the public by stating the USDCAD’s exchange rate was less a reflection of Canadian fundamentals and more a product of the struggling greenback. Should economic growth miss expectations, it may be taken as a sign that fading growth in the US is starting to cross the border and encourage long-term loonie bulls to start unwinding their positions. Alternatively, an unflappable trend of expansion may suggest the Canadian economy is immune to the US’s cold; and parity is more than justified.
An upside surprise in the July GDP number may offer perennial USDCAD bears reason to stick with their trades and look for a permanent stay down below parity. However, we wouldn’t look to take such a strong bias in such an event. A strong GDP figure and a five minute red bar (with some evidence of increased volatility for a possible guide to momentum) would trigger a short trade on two lots with an initial stop set at the nearby swing high (if this is too far away, a reasonable fixed distance should be substituted). The first half of the trade should have a target equal to risk while the second should be based on discretion. When projecting the second objective, take into consideration momentum and the proximity of the 32-year low. When the first lot makes profit, move stop on the second to break even.
The same entry criteria and trade maintenance laid out for the short strategy would apply to a potential long USDCAD trade. One considerable difference though is the consideration for the discretionary profit potential. Considering the fundamental importance of a strong Canadian economy and the overextended loonie, a rally could prove strong.
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Fed Throws Dollar to the Dogs – 1.45 Next?After weeks of consolidation during which the EURUSD churned between 1.33-1.38 dollar bears finally had their day as the pair broke through the key psychologically important 1.40 level aided in no small part by Fed’s decision to cut rates by 50bp rather than the market consensus 25bp.ClearlyFOMC members took a calculated risk to err on the side of higher inflation rather than lower economic growth. With credit markets still fragile and housing markets continuing to contract, the Fed decided that simulative action was necessary even ifit further weakened the greenback.
Despite record highs in oil and gold, the core CPI rate remained relatively low at 0.2% month over month gain and for the time being the Fed’s action looked wise as the yield curve steepenned and equity markets rallied to within striking distance of all time highs. After all a weaker dollar helps US exports which should contribute positively to GDP growth in Q3. However, the Fed’s strategy carries one great danger.If low interest ratesmarkedly decrease the flowcapital to US, the dollar becomes vulnerable to a panic sell off.With near 1 Trillion Current Account deficit US is highly dependedon foreign capital flows to finance its consumption and growth. Last week’s shocking decline in TICS data may have been the first sign that foreigners are losing appetite for US debt. While one month does not make a trend, the TICS could become much more important in the upcoming months if the dollar remains under assault.
Next week, markets will focus on the latest housing data as well as consumer sentiment, but perhaps the most important event risk will take place on Wednesday as traders await he Durable Goods report.If Durables surprise to the upside the dollar may catch a break as the bleakest of forecasts regardingUS economic demand will prove premature. However, should the data show yet another disappointing result the dollar may weaken further as traders will begin pricing in yet another rate cut before year end. -BS
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Euro Barrels Higher But Can it Sustain the Gains?
The Euro barreled through the 1.40 level last week as significant weakness in the US Dollar pushed the EURUSD pair to record highs of 1.4120. Economic data did very little to underpin gains for the pair, as the results proved to be weaker than expected. First, the seasonally adjusted Euro-zone trade balance surprisingly fell into a deficit during the month of July as the appreciation of the Euro hinders purchases of European exports. Furthermore, import growth accelerated quite a bit with the help of higher oil prices and strong domestic demand. There are emerging signs that consumption in the Euro-zone could slow, however, as the ZEW survey of economic sentiment unexpectedly plummeted to a reading of -20.3. The surge in pessimism was somewhat warranted, as investors were faced with volatility in the financial markets and continued hawkish commentary by European Central Bank members signaling another potential rate hike. However, with Euro-zone CPI now well below the ECB’s 2.0 percent ceiling and the downside risks to growth slowly increasing, it may be entirely unnecessary for the central bank to tighten monetary policy, if not completely counterproductive. As a result, EURUSD could be in for some widespread selling as traders start to speculate that the ECB’s tightening cycle is complete.
Looking ahead to this week, the economic data on hand isn’t likely to make much of an impact on EURUSD trade, as US Dollar flows will likely remain the driver of the pair. The Euro may be plagued by more disappointing sentiment reports, as both the IFO Business Climate and the GfK Consumer Confidence surveys are scheduled to be released. There is little hope for improvements in either figure, as investors and consumers alike will be increasingly concerned about the prospects for growth in the Euro-zone. Indeed, it appears that the European economy could be teetering on the brink of deterioration, and if we start to see European Central Bank members ease up on some of their hawkish rhetoric, EURUSD bulls may start to pay heed and take the pair back below 1.40. – TB
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Yen Drawn Between The Carry Crowd And Dollar Void
Clearly the FOMC’s decision to cut its benchmark lending rate 50 bp rippled across the currency markets last week. And, for the USDJPY major, this policy shift had a duel effect. On the one hand, the sharp drop in the dollar created a vacuum for yen bidding to fill. However, USDJPY certainly did not see the same massive anti-dollar move that the other majors reported. This was because the yen pair has traded as a proxy for overall risk – with a particularly close correlation to the health of equities. Consequently there was clear tug of war in the pair as the masses were confused over whether the cut was a major blow to its considerable rate differential or if it would stabilize market volatility enough to revive risk appetite and the carry trade. Ultimately, this battle would not be resolved by the end of the day. Interestingly enough, the Bank of Japan delivered its own rate decision just a short time after Fed Chairman Ben Bernanke surprised the market. As many had speculated, BoJ Governor Toshihiko Fukui said the downside risks to the US economy and unstable global financial markets would be a hindrance to any further rate hikes out of Japan. And, though it went unsaid, the Fed’s cut may signal an end to global hawkishness.
Aside from the central bank activity this week, there were a number of upper crust indicators attracting fundamental traders back to the economic calendar. Sizing up next week’s retail trade report, the nationwide and Tokyo department sales figures put up a strong showing. Elsewhere, the All Industry Activity Index for July fell 0.4 percent in line with expectations primarily due to industrial productivity disrupted by earthquakes and unruly weather impacting the retailing and tertiary sectors. These numbers aside, the top data point for the week was the Ministry of Finance’s BSI sentiment index for the third quarter. A sharp rebound in optimism among large manufacturers was based on confidence that the economy would find traction; yet this clearly did not encourage business leaders enough to increase planned spending.
Looking to the scheduled economic activity ahead, fundamentals will definitely guide price action should the volatility and risk aversion/acceptance trends continue to moderate. The front half of the week is relatively light. Supermarket sales, the merchandise trade balance and small business confidence reports will garner little interest. The real action begins Friday morning in Tokyo with the usual consumer/inflation indicator pack. The National and Tokyo CPI figures for August and September respectively are expected to hold firmly in negative territory, which would further depress any lingering hope of a nearby rate hike. The retail sales, household spending and employment numbers will be the true question mark for the period though. They will be the first test of optimistic growth projections. – JK
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Pound Recovers Though 6.00% Seems Out Of Reach
Bank of England Governor Mervyn King, like his US counterpart Federal Reserve Chairman Ben Bernanke, was grilled by government officials last week over his handling of the ongoing credit crunch. More specifically, the Commons Treasury Select Committee’s quizzing was focused on how the Northern Rock situation had gotten so out of hand. King was not unprepared though. He defended the BoE’s actions saying legislation ultimately tied his hands on his ability to handle the situation. The Governor said he would have preferred to be a ‘covert’ lender of last resort (LOLR) or usher a quiet sale, but that take over laws and other rules had prevented such solutions. He went on to reiterate his strong stance against the ‘moral hazard’ of bailing banks out their own, poor investment and lending decisions. King made similar assertions in a letter to Select Committee chairman John McFall a week before in which he said he was reluctant to inject the market with liquidity. However, doubts over the entire British banking system moved policy makers to promise to provide tens of billions of pound in three-month loans. This was in addition to the BoE’s and Government’s pledge to guarantee all Northern Rock clients’ savings; though neither party made it explicitly clear whether the same level of protection would be extended to the customers of any other bank or financial firm that fell on hard times. These accommodative steps towards the simmering problem in the financial market, along with cautious minutes from the September 5th and 6th meeting, raise a real concern that the MPC has reached the end of its rate increases and may even entertain the probability of a cut should market conditions worsen.
Looking at the list of indicators scheduled for release over the coming days, it seems as if there will be little fundamental head wind to carry the pound through 2.0 the dollar mount a defense. The first noteworthy indicator to hit the wires is the final reading on second quarter GDP. Economists expect the annual and preliminary readings to hold fast with a 0.8 percent rise for the quarter and 3.0 percent through the year. The current account balance for the same period, on the other hand, will be an unknown for event traders to worth with. The deficit is expected to contract for the second consecutive quarter after hitting a record in the final months of 2006. On the following day, the Nationwide Building Societies housing prices report for September will give another weigh in on the health of the residential housing market.This follows a 2.6 percent drop in the Rightmove indicator, the steepest since 2002. Considering the Bank of England is just coming off of five rate hikes, the credit market is still fragile and consumer sentiment has been unsettled by the Northern Rock run, the UK housing market may follow the US residential sector on a deep pull back. Finally, Friday will bring the September GfK Consumer Confidence survey. The official consensus is already calling for a step down in optimism, though given the growing fears of a stability of the banking and lending system, it would not be surprising to see something worse than expected. – JK
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Swiss Franc Sets Multi-year Highs on Interest Rate Outlook
The Swiss Franc set fresh multi-year highs against the downtrodden US dollar, with improved interest rate differentials boosting the Swissie’s stance against the greenback. Given the Fed’s surprise decision to cut interest rates by 50 basis points, traders’ focus immediately turned to the dollar’s narrowing yield advantage over the CHF. The US dollar is expected to fall further through the medium term, as clear expectations for further interest rate cuts can only worsen the buck’s stance across the board. In contrast, the Swiss Franc’s yield curve shows steadily rising rate expectations through the period. This alone may be enough to keep the Swissie bid, but we nonetheless feel that overextended positioning may be enough to force a short-term retrace in the USDCHF. According to our technical analyst Jamie Saettele, the pair may correct before a fresh wave to new lows (See here for full report: here ).
Fundamental data proved a mixed bag through the past week of trade, as disappointments in business sentiment offset positive results in inflation data and domestic production. The Swiss ZEW survey fell significantly below consensus forecasts for the month of September, reflecting a pessimistic outlook on the future of economic conditions. The net implications of such a result are bearish for expansion, but robust second quarter Industrial Production data nonetheless shows that the economy remains on solid footing. A slightly higher than expected Producer and Import Price inflation figure subsequently boosted outlook for domestic interest rates. Given a relatively hawkish Swiss National Bank, any signs of increased price pressures can only increase speculation for rising interest rates for the CHF.
Upcoming event risk will include the typically market-moving KOF Leading Indicator and UBS Consumption report. Both are forecast to show a moderate slowdown in growth, with recent financial market troubles spreading to other sectors of the economy. Yet positive surprises in said figures could easily prove that Switzerland remains isolated from the global credit crunch. Outlook on the Swiss Franc subsequently will depend on the results from the KOF data, with risks arguably remaining to the upside ahead of the release. - DR
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Canadian Dollar Hits Parity, Can This Record Run Continue?
Not only did the Canadian dollar hit a new 31-year high against the benchmark greenback, it has had done the unthinkable and reached parity. Extending the break below 1.0475 on September 11th, USDCAD dropped slid another 360 points last week to find a low of 0.9935. Of course, such a milestone could not pass without a policy maker weighing in. Finance Minister Jim Flaherty made a rare comment about the Canadian currency stressing its strength was primarily due to the severe slump in the US dollar and not a reflection of strong developments in the economy. He was so concerned in fact that he made a call to Bank of Canada Governor David Dodge, though he would not divulge the contents of their conversation. However, other politicians have not been shy in their demands to Dodge. The Canadian Labour Congress urged the central banker to follow the Fed’s lead and cut the benchmark lending rate 50 basis points to prevent layoffs in the manufacturing sector that are likely to evolve as exporters suffer from the stifling exchange rate with the nation’s largest trading partner.
While Dodge and his fellow policy makers mull over their options, it is worthwhile to take a look at last week’s economic indicators. The Fin Min.’s comments that the currency is not running on Canadian economic fuel seemed to be fully encompassed in two top tier releases: the consumer inflation index and retail sales report. The CPI’s climb to highs set only a few months ago was certainly the final component for encouraging the BoC to hike the overnight lending rate a quarter percent back in July to 4.50 percent. However, since hitting its highs inflation pressures have fallen back considerably. The headline CPI gauge cooled to a 1.7 percent annual pace, the weakest in eight months and well below the policy group’s 2.0 percent target. While the core figure didn’t allow for the same volatility, even with the exclusion of the considerable drop in gasoline prices, it still cooled unexpectedly to a 2.2 percent gait. Further adding to the turn in economic fortunes, consumer spending was obviously delivered a blow by expensive gas prices and higher interest rates. A 0.8 percent drop in retail sales threatens the engine of the Canadian economy: domestic spending.
Over the coming week, there is only one economic landmine to disrupt the market’s natural flow; but it a doozy. The July gross domestic product figure could lend further credibility to the comments Fin Min Flaherty’s made last week about steady growth that does not warrant a the loonie’s recent highs. As it stands, projections are aiming high looking for a 0.4 percent jump in growth that would double June’s improvement. However, should this indicator miss its mark, the policy makers words will likely ring loud in traders’ ears and take some of the air out of the Canadian currency. Indeed, with USDCAD as such incredible lows, sentiment will become a balancing act. Every piece of scheduled data, official comment or commodity fluctuation could potentially drive the next leg of the loonie’s run – up or down. - JK
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Australian Dollar Shows Few Signs of Slowing Advance
The Australian dollar retraced significant ground against its downtrodden US namesake, as improved interest rate differentials boosted demand for the carry trade-linked currency. A surge in gold prices likewise helped drive the Aussie higher, with a bullish outlook for the precious commodity translating to currency gains. We remain bullish the currency through the medium term, but our own technical analyst Jamie Saettele believes that the pair may experience a correction to the 0.8492 mark before resuming its advance. (Read here for full report: here) From a more fundamental perspective, recent economic data may likewise represent a hurdle to further runs higher.
A sharp drop in August HIA New Home Sales reflects that recent credit market troubles may significantly dent recent Aussie real estate gains—casting a similarly dark shadow over the future of domestic consumer spending. A simultaneous New Motor Vehicle Sales report supports this argument, as the headline number fell a whopping 1.9 percent through the same period. Automobile sales remain robust at a 8.0 percent year-over-year pace, but the recent report certainly suggests that the trend may turn lower on a jump in market interest rates.
The coming week of economic data may shed further light on the future of consumer spending, with a Private Sector Credit report to headline event risk for the Aussie dollar. Analysts predict that the net amount of private sector debt grew by 1.0 percent through the period—hardly indicative of slowing demand. Yet a disappointment in the number could confirm concerns and heighten pessimism on domestic lending markets. Other important economic data includes a Job Vacancies report due at 00:30 GMT on September 27. Though the second-tier report does not typically force major moves across Aussie pairs, the leading indicator for employment growth could nonetheless give insight on the future of labor trends.- DR
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Can the New Zealand Dollar Hold Recently Gained Ground?
The New Zealand dollar regained significant ground against its US namesake, as a greenback rout pushed the NZDUSD to monthly highs. Kiwi advances likewise dragged the AUDNZD substantially off of its September peak, and the NZDJPY rallied an impressive 370 points off of Sunday’s open. New Zealand’s impressive 8.00 percent yield proved to hard to resist as yield-hungry investors kept the currency bid. Yet such overwhelming demand for domestic interest rates leaves the currency highly susceptible to swift declines on a recurrence of a carry trade liquidation. Rallies across risky global asset classes have kept the carry trade afloat through recent trade, but we remain unconvinced that this marks the turn in the popular trading strategy’s performance.
The past week of economic reports showed surprisingly bullish signs in both Credit Card Spending and Current Account balance—improving the Kiwi’s status among major foreign counterparts. The former showed that spending remained robust in the small island economy, with seasonally-adjusted growth advancing to 8.4 percent through July. The latter demonstrated a better-than-expected external balance of payments for the broader economy. The highly-publicized New Zealand Current Account deficit certainly remains a detriment to the sustainability of New Zealand dollar gains, but it appears markets remain relatively unconcerned with the below-forecast second quarter result.
The upcoming week of event risk will likely cause modest volatility across all NZD pairs, with Q2 Gross Domestic Product results due at on September 27 at 22:45 GMT. Given the extensive delay in time of reporting, the number may not prove quite as significant as one might expect. Clearly, however, any large surprises could easily spark volatile moves in the domestic currency. Earlier Trade Balance and Building Permits results may likewise spark pronounced moves in the Kiwi, as markets remain sensitive to both domestic housing and international trade figures. Outlook for the New Zealand dollar subsequently depends on upcoming economic event risk, with the trio of GDP, Trade, and Housing numbers to influence sentiment on the overall economy. – DR
Trading the News: US Non-Farm Payrolls
What is Expected
Time of release: 09/07/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 100K
Previous: 92K
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How To Trade This Event Risk
The fundamental consequence of the monthly non-farm payroll report has grown considerably since the August 3rd print of the July employment statistics. Since the last employment survey crossed the wires, bearish sentiment has washed over the dollar. Though the greenback has been propped up by a renewed interest in safe haven assets, the US economy itself has not escaped the heavy-handed effects of a credit-market crunch that has sent ripples across asset classes and national boarders. So far, only the most immediate effects of the disruption (wider credit spreads, a surge in volatility and big losses in equities and bond yields) have been accounted for. Now economists and traders are waiting for the pinch in the more-or-less objective fundamental indicators to guide forecasts of growth and interest rate policy. The Bureau of Labor Statistics’ employment survey will be one of the first reports to offer reliable a reliable measure of the recent turbulence on a major economic player: the consumer. Expectations are still net positive with a 100,000 consensus; however, complementary data would suggest this outlook is very optimistic. Aside from the expected drop in finance and construction jobs related to the credit problems, the ISM services employment component dropped to its lowest level since December 2002 while the ADP figure marked a new four-year low 38,000 addition to private payrolls.
Trading a better than expected employment report has its advantages and its disadvantages. Supporting a strong reaction, much of the recent economic data may be setting unofficial expectations below the market consensus. On the other hand, an increase in NFPs would likely have to be substantial to overwhelm the growing fear in holding dollars with talking heads threatening recessions and the Fed appearing as if it is on the verge of cutting interest rates. Should payrolls print well above expectations and EURUSD produce a good red, five-minute candle, a short on two lots should be taken with a stop at the nearby swing high (be generous as this is a volatile release). The first target should equal risk, the second is discretionary. Raise the stop on the second half to break even when the first takes profit.
A weaker than expected BLS report may be downplayed given the bearish shadow over the US economy. To garner a genuine trade from the release, an NFP print below 50,000 (a contraction would be most effective) may be needed. To increase the chances for a successful trade, a jump in the unemployment rate or drop in average hourly earnings could help with follow through.
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Trading the News: Canadian Annualized GDP
What is Expected
Time of release: 08/31/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : USD/CAD
Expected: 2.8%
Previous: 3.7%
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How To Trade This Event Risk
The Canadian growth report has considerable market moving potential, especially when it may have a hand in guiding a somewhat undecided policy board at the Bank of Canada into either the dovish or hawkish camp. Expectations for the second quarter GDP report are low, with the official consensus calling of a 2.8 percent pace of expansion that stands clearly in contrast to the previous period’s strong number. The reduced pace will likely take its cue from the 0.3 percent pick up in growth over May and the unchanged reading in April. However, the outcome can be altered dramatically be the June growth report. Forecasts for the quarterly number generally close to actual prints since the majority of the data is already booked; but the monthly number has proven to be somewhat more volatile. The economy is expected to have passed the month unchanged, which would certainly unsettle the longer performance. At the same time, the precarious 0.0 percent read sets up a strong possibility for a sentimental reaction if the June figure tips higher on the back of business activity and trade or lower on domestic consumption and housing activity. Regardless of the outcome, any fundamental trade should take into consideration that price action could cool going into the weekend or a shudder in risk approval in capital markets could take charge.
Determining the fundamental significance of a strong growth report should take into consideration both the quarterly and monthly figures. Optimally, both would print above expectations to give a USDCAD short signal. As always, the same entry criteria and trade structure should be observed in executing a trade. A weak fundamental report and a red five minute candle would give the signal to short; but volatility should be monitored after the trade is placed to see if price action is truly responding to the data. Entry should be made at the market on two lots, both with stops above the nearby swing high. The target on the first lot should equal its own risk, while the second should be determined on discretion (keeping in mind that price action will cool into the weekend). When the first lot makes profit move the stop on the second to break even.
A disappointing monthly GDP figure could easily depress the quarterly report below the market’s official consensus. Such an outcome would certainly exacerbate fears that the Canadian economy will be vulnerable to a heavy hit from global credit problems and the Bank of Canada’s previous rate hike would not be repeated in the foreseeable future.
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Return of Risk Dooms the Dollar By the end of the week the markets finally saw some calm as news about the sub-prime fiasco began to recede from the front pages.As we noted on Friday, “The announcement that Bank of China carried nearly 10 Billion dollars of exposure to asset-backed bonds on its books had little impact on trade, partly because the Chinese bank is well capitalized and partly because the marked is becoming somewhat inured to stories of MBS risk. Traders attention is now shifting to handicapping what effect the past two weeks of volatility in capitalmarkets may produce on the real economy.”
To that end the US economic news was actually surprisingly good, though backward looking. Durable goods expanded by the biggest percentage amount since 2004 largely on the back of aircraft orders, while New Homes sales increased for the first time since April despite the much publicized problems in the housing sector. The New Homes Sales number was a bit deceptive as only the West saw a steep pick up in sales. Nevertheless,the latest economic data suggests that US economy continues to function and perform well even in the face of mounting problems in residential real estate.
Ironically enough, positive news for the US economy and US stock markets spelled doom for thegreenback as risk appetite returned to the currency market and the buck followedits familiar path of strength against the yen and weakness against all other majors. Next week event risk remains relatively tame with only GDP revisions and Personal Income and Personal Spending number of note. Given that this is the last week of August with Labor Day coming up perhaps the markets will get a much needed rest from volatility -BS
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Euro – Hike or No Hike?
The ECB sent out conflicting messages to the market this week first signaling on Wednesday that the September hike was on schedule only to send out a clarifying statement on Friday that the hike may be on hold if market conditions did not improve.Despite the confusion the euro was hardly dented as it made steady progress higher all week long. The main driver was the renewed appetitive for risk as carry trades came back in vogue and both EURJPY and EURCHF soared taking the euro along with them for the ride.
On the economic front the news from the Eurozone was generally quite good as New Industrial orders beat forecasts and Composite PMI for August remained well above the 50 boom/bust line. As we noted on Friday, “Clearly, the higher euro and the decline in US consumer demand is having some negative impact on EZ growth but overall the economic performance in the 13 member region continues to follow an expansionary path which should maintain a hawkish bias in ECB monetary policy for the time being.”
Next week the IFO survey will be the marquee event of the week with market participants anticipating a sharp contraction in the wake of recent market turbulence. Yet the industrial sector is far less affected by the volatility of the capital markets and therefore an upside surprise is not out of the realm of possibility. With most European traders spending their final days of summer on the beach, dealing desks next week may be at half staff which could create some whipsaw action in the pair.– BS
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Yen Loses Momentum as Carry Comes Back
On Thursday night carry came back with a vengeance as calming news from the sub-prime market and reluctance of BOJ to raise rates beyond the current 0.50% level revived demand for high yielding currencies across the board. We stated in our report that, “Yesterday’s announcement after the close of US equity trading that BoA purchased a 2 Billion dollar stake in Countrywide Mortgage alleviated trader’s fears that the country’s biggest mortgageoriginator was in danger of bankruptcy.Only a few days ago CFC was reduced to tapping it bank credit lines as the liquidity crisis reached its peak. The Countrywide news served as a criticalcatalyst in turninginvestor sentiment from risk avoidance to risk assumption.In the currency market this dynamic translated into strong gains for the carry tradewhich was further aided by the BOJ decision tonight to keep rates steady at 0.5% preserving the interest rate differential againstG10 high yielding currencies.”
Yet although the BOJ decision was clearly affected by the recent market volatility Governor Fukui warned that “Distortions and the misallocation of resources could occur if interest rates are kept at levels inconsistent with the economy.'' His pointed rhetoric suggested that the Japanese central bank will be ready to resume tightening monetary policy next month if global financial markets remain calm.
Despite Governor Fukui’s assurances Japanese economic growth remains problematic. Yen traders willfocus on Retail Trade and Household spending numbers for any discernable signs of rebound in consumer demand.Some evidence if a pick up would go a long way in boosting the chances of a hike. In the interim yen will continue to dominated by carry trade flows, although like in all other pairs trading next week may slow to an appreciable crawl – BS
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British Pound Recoups Losses As Growth, Rate Outlook Improves
The British pound was relatively unencumbered by the economic calendar and volatile market conditions last week, allowing the currency to win back some of the losses it had incurred through the wave of global risk aversion that overcame the markets over the first half of August. Looking at the economic docket from this past period, there was little threatening to unnerve traders who were still focused on yen crosses and equity activity for guidance on their own risk tolerance. However, there were a few indicators that crossed most fundamental traders’ radars. Over the first few days, lending and inflation took center stage. Housing price pressures through August, measured by the leading Rightmove report, accelerated modestly to 12.8 percent. Less objective in its report on inflation was the M4 money supply and lending figures for July. The rate hike last month obviously had a direct impact on public sector borrowing which dropped 6.5 billion pounds, yet the money supply actually accelerated slightly to a 13 percent rate. The more glossy market moving fodder came on line Friday morning in the second measurement of growth. The headline figures were untouched, a 0.8 percent rate of expansion for the quarter and 3.0 percent for the year. The data was not totally unscathed though; the breakdown reported a few surprising results. A pick up in consumer and government spending to the tune of 0.8 percent was strong enough to offset a surprise 1.1 percent drop in capital investment and a 1.0 percent drop in exports. Looking back over the path of the sterling last week, it would be imprudent to ignore the impact that general risk flows had on price action. Sharp drawdowns in all pairs considered in any way, shape or form overbought or otherwise related to the carry trade were on the rebound in a global effort by central banks to inject liquidity into financial hubs. The turn was made official when the Fed announced it had cut its discount rate.
Interestingly enough, though the Fed, ECB and BoJ continued to shore up liquidity last week, the Bank of England held out as the only central bank not to flood its domestic markets with cash. The only activity on the board was a loan to Barclays Plc on the 21st of 314 million pounds at the emergency 6.75 percent – the first in a month after the subprime rout began in earnest – which seemed suspicious, though officials assured it was related to a delayed loan from HSBC and nothing else. So what does the MPC’s resolute stance convey? Perhaps this is a sign that they still want to hike or they are confident that as the world’s financial center they could weather the globe’s problems. However, both seem dangerous propositions given the UK’s housing market is at dangerous heights in its own right – a problem made worse by record consumer debt. The docket next week is yet another light one. The GfK confidence survey will be the pinnacle of the week. – JK
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Swiss Franc Falls Back On Data As Carry Traders Lose Interest
Though it is the number two funding currency in the carry trader’s toolbox, the Swiss franc has struggled to win back lost ground at the same clip that the Japanese yen has. Perhaps the franc’s title as a reserve currency was muddling the rebound in risk appetite. In financial markets around the world, equity benchmarks were turning higher, government bond yields were reversing course after touching multi-month lows, credit spreads on the corporate and money market level were once again contracting to normal levels and premiere carry trade pairs (like the yen crosses) were retracing portions of their massive losses from the opening weeks of August. And, all the while, USDCHF spent most of the period in a 100 point range. One handicap for the Swiss currency was that it received funds not only as a carry unwind but also as investors sought safe havens for their capital. As traders started to move their money back into so-called ‘risky positions,’ both the dollar and franc were on the chopping block. Another explanation for the unit’s inability to capitalize on risk trends was the activity on the economic calendar. Reports on import and producer inflation, international trade and investor confidence all fell through the week. The saving grace for the docket was the quarterly employment data, which coincidently provided the most impressive surprise on the period’s top indicator. Employment over the three months grew 2.4 percent (the most in seven years) to 3.737 million (the highest level on records going back to 1991). This fills in the gap for areas of disappointment for the week as strong domestic consumption will make up for the trade imbalance and encourage firms to pass on costs for more expensive raw materials even as imported inflation eases.
This coming week will be another one that is laden with economic data. The fundamental action opens early with UBS’s proprietary consumption indicator. The spending report precedes the retail sales report, and gives a broader look into spending habits beyond the confines of just the retail sector; so its economic influence is high even if its impact on price action isn’t. On the following day, the KOF leading economic indicators index will give the monthly update on growth forecasts. Economists are calling for a marginal improvement for April; though once again traders may reserve their growth trades until the following week when the government reports second quarter GDP. Finally, the consumer inflation report will wrap things up in a decidedly anti-climactic close. Though the SNB frequently quotes possible future price pressures when it gathers for its quarterly rate hike, front-line price pressures have held well below the central bank’s target level. The market has long picked up on this dichotomy; so a reaction from USDCHF will likely be limited. Finally, outside of the tidy calendar, an eye should be kept on risk developments at all times. Though the franc has not responded in the recent wave of risk capital flows, that does not bar a carry move from overwhelming safe haven considerations and driving the Swiss into a steep pitch. – JK
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Canadian Dollar Could Gain Despite GDP Slowdown
The Canadian dollar ended the week higher against the greenback, as the US currency’s weakness gave USDCAD bears hope for a return to the recent 30-year lows. Economic data from the country was broadly mixed, as retail sales were worse than expected, showing a sharp drop of 0.9 percent - the sharpest decline since September 2006 - as auto sales plummeted 2.7 percent while receipts at gasoline stations fell 2.5 percent. Excluding autos, retail sales fared a little better, but still slowed significantly from May's breakneck pace at a rate of -0.3 percent. Nevertheless, May's gain helped retailers record their best quarter in almost six years, as sales rose 3 percent during the second quarter - the best reading since the fourth quarter of 2001. Meanwhile, CPI for the month of July was released exactly in line with expectations, and for the Bank of Canada's monetary policy group, this marks the fifth consecutive month that consumer inflation has grown faster than the established 2.0 percent target as the annualized measure holds at 2.3 percent. Nevertheless, with the local (and global) economy threatened by growing credit problems, a rate hike on these numbers seems doubtful.
Looking ahead, Canadian economic data may not bode well for the national currency, as Q2 GDP is anticipated to slow sharply to 2.8 percent from the year prior. Given the rapid appreciation of the Canadian dollar throughout the quarter, demand for products from the country likely took a hit. In fact, exports slid 1 percent to C$39.3 billion in June on lower sales of machinery and equipment such as aircraft. On the other hand, as we mentioned above, retail sales proved to be net positive during the second quarter, signaling that consumption should make a positive contribution to GDP report. While this economic data is certainly important to keep in mind for the Loonie, the currency has not been trading based off of fundamentals lately. In fact, technical levels and a monthly trading anomaly favor a move to the downside (for more on why, click here for David Rodriguez’s special report). As a result, traders may find USDCAD down near the 1.0400 by the end of this week, even if economic data prove to be disappointing. – TB
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Will Australian Data Help Further AUD/USD Gains?
The Australian dollar rocketed higher throughout last week, racking up nearly 300 points to test the 0.8274 level, and while economic data worked in favor of the currency, it was the resurgence of carry trades that really gave AUDUSD a lift. Liquidity crunch jitters started to calm in the equity markets, and the effects were felt throughout the forex markets as traders felt more confident taking on leveraged bets. Looking at the fundamental data on hand, the Westpac leading index jumped 1.0 percent during the month of June as dwelling approvals advanced 7.5 percent and real money supply expanded 2.2 percent from May. Furthermore, with the jobless rate at a 33-year low of 4.3 percent and rising wages prompting consumers to spend more, and growing sales of commodities to China driving export earnings and business investment, economic expansion in Australia looks likely to continue. Finally, given the slower tightening pace that the Reserve Bank of Australia has taken over the past year versus central banks like the Reserve Bank of New Zealand, there are far fewer roadblocks for growth.
This week there is a significant amount of data due to be released, but the most important market-movers come at the latter end, as retail sales and the trade balance will both hit the tape. Retail sales growth is anticipated to slow to 0.6 percent in July, down from 1.4 percent during the month prior. While this may not be incredibly bullish for the Australian dollar in the near-term, consumption still remains strong and should be a driver of GDP growth during the third quarter. Meanwhile, the trade deficit is predicted to narrow in July, as export demand remains hot. Looking at technical levels for AUDUSD, 0.8274 may hold up as solid resistance, but a continuance of the bullish momentum and a break higher could take on 0.8414. On the other hand, a return to risk aversion throughout the markets would take the pair back down to 0.8120. – TB
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Carry Trade Rebound Jumpstarts Kiwi, Can it Continue?
The New Zealand dollar has shown an impressive rebound from last week’s dismal performance, as a slow return to risk appetite has led the high-yielder higher against major counterparts. Carry trade interest was clearly the main source of NZD bids, as the Japanese Yen shed a similarly significant portion of its recent gains. Indeed, the Kiwi rallied despite headwinds from largely disappointing economic data. The domestic economy showed a much larger than expected trade deficit through the month of July at a -791 million gap between Imports and Exports. External demand for New Zealand production continued to drop on the exceedingly high NZ$ exchange rate, while domestic demand for foreign goods was boosted by the relative drop in prices for imports. Yet markets tempered their reaction on the disappointment; given a substantial decline in the New Zealand dollar, such negative effects on overall trade will likely improve over the long term. Speculators likewise ignored disappointments in Credit Card Spending and Services PMI. The trend remains towards slowing domestic economic growth, but some analysts nonetheless feel that the central bank may continue to raise interest rates on the inflationary tumbles in the NZ$.
Upcoming economic data will be relatively limited, with the seldom market-moving Money Supply figures and NBNZ Confidence number due towards the end of the week. The wild card remains the announcement date for Producer Price numbers, which are scheduled for release anytime between the 26th and 30th of the month. Though these are the producer price inflation numbers for the second quarter, they will nonetheless influence expectations for the Reserve Bank of New Zealand’s policy setting meeting on September 12. Analysts unanimously expect the bank to leave rates unchanged, but markets will listen very closely to attached statements by RBNZ Governor Alan Bollard. Despite slowing signs of economic expansion, some feel that the bank remains on the offensive on weakness in the exchange rate. Given that the RBNZ has a fixed inflation target, Bollard may have little choice but to raise rates in the face of highly inflationary import prices. Time will tell if the central bank continues tightening monetary policy. Higher rates may not necessarily be bullish for the Kiwi if risk aversion returns, however, leaving the performance of risky financial asset classes critical to the outlook on the Asia Pacific currency. – DR
Trading the News: U.S. Durable Goods Orders
What is Expected
Time of release: 08/24/2007 12:30 GMT, 08:30 EST
Primary Pair Impact : EUR/USD
Expected: 1.0%
Previous: 1.3%
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How To Trade This Event Risk
The Durable Goods Orders report has been a spotty performing over the past three months. In the past there has been a notable lack of price action on the headline number alone, or else a reaction was isolated to a short move with little to no follow through. To properly prepare for this report, a few conditions should be set out ahead of time to avoid a fundamental trade that sputters. First of all, a trade should be based on both the headline and ex. transport measurements of the indicator. As with the case in April, a surprise in one facet of the report could lead to a quick move out of the gates; but a conflicting signal could quickly erode the economic potency of the overall report and force a retracement. Therefore, look for at least numbers in a consistent direction - though equal measures of surprise between both would likely improve the success of the trade. Another factor to keep in mind is the new home sales report due at 14:00 GMT which could change the current in the market. Finally, with the approach of the weekend, a lacking fundamental surprise could lead traders to ignore the data in favor of going back into risk trades and squaring their books for the weekend.
Trading a positive surprise would go against the prevailing trend in EURUSD up until Thursday morning, and that should be taken into account when placing stops and targets. Depending on the extent of the surprise (and considering consistency between the measurements), a stop should be placed with a mind towards overnight volatility and nearby swing highs. In the April and May announcements this meant a 25 point stop loss. At the same time, when a short trade is initiated it should be done in two lots with equal stop limits, as usual. The first lot’s target should equal the amount of risk taken and the stop on the second half of the trade should be moved up to break even when the first half books profit. A second objective should be discretionary; though in the past, follow through was lacking heading into the weekend and a distant target was usual not obtainable before the position actually closed at break even.
A disappointing report from Friday’s orders report would follow the market’s current path. The reaction to the report can obviously come in varying degrees; however, a drop in both measurements of the demand report would work the best for a fundamental trade. The same rules apply to the long trade that have been laid out for the short-side trade.
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Trading the News: U. of Michigan Confidence
What is Expected
Time of release: 10:00 EST, 14:00 GMT 8/17/2007
Primary Pair Impact : EUR/USD
Expected: 88.0
Previous: 90.4
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How To Trade This Event Risk
With the market in its current state (global equities falling, yields doing the same, investors struggling for liquidity and everyone seeking a safe haven for their capital), is there any room for fundamentals? It is impossible to say, but being prepared for a possible event-driven trade would be wise regardless. Heading into the Friday release of the University of Michigan’s preliminary survey of consumer sentiment, the official forecast is calling for a print of 88.0. This would be a modest pull back from the five-month high set in July; but it wouldn’t set any records itself. However, an upset could certainly take advantage of high volatility in the markets. In recent days, all the aforementioned exogenous factors have stoked a heated debate over what the Fed’s next move will be. Certainly, consumer optimism and spending habits will be central to this argument and could add to the dovish turn or encourage confidence that the central bank will continue to hold out for inflation alone. Trying to discount this report is difficult as gasoline prices are lower and employment is still strong, though this could easily be offset by the state of the stock market. Furthermore, the action in global equity markets the day of the release should be accounted for if a trade is triggered.
An upside surprise would add fundamental fuel to an already strong dollar rally. However, the impact could be limited since the dollar has already rallied so heavily in the past two weeks. As such, an upside surprise should be significant. A print that beats the July figure would be good, but one that comes in above January’s multi-year high 96.9 would be optimal (though it is highly unlikely). If there is the fundamental impetus and price action confirms a short, the trade should be structured around the technical and the extent of the surprise. A considerable surprise can support a more distant objective, while a small one should not look for much in terms of a decline.
With the dollar having already gained significantly, a weak sentiment report could fuel a rebound in EURUSD. As with the dollar-positive scenario, the bigger the divergence from the forecast, the greater the expected reaction from the dollar. With the fundamental kindling and a five-minute green bar as the spark, a long position should be taken, both with stops set at the nearby swing low (if this is too far away, a decent fixed-distance could substitute). The objective for the first lot should be equivalent to the risk taken, which will in effect fund the second half of the trade. When the first half takes profit, move up the stop on the second to break even. Discretion should be used in determining its target. For example, it may be shifted lower if equities are moving adversely.
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What a difference a week makes. Summer doldrums quickly disappeared as capital markets scrambled wildly to cope with the liquidity crisis unleashed by the BNP Paribas announcement that its was suspending redemptions in its asset backed funds.This was the third such move by a major financial player over the past few weeks, and while in the short term it may have been a prudent course of actionfor preservation of assets in the fund – the long term implications for capital markets of such arbitrary changes in policy could be disastrous. As one market participant noted in mid-week, “There is huge pressure on money rates due to an apparent sense of mistrust. Following BNP Paribas' statement, very few institutions appear willing to lend. If you kill off the inter-bank market and the asset- backed commercial paper market has effectively collapsed, then we look to be heading for a serious liquidity crunch.'” Indeed if investors lose confidence in their ability to redeem their capital, they will simply refuse to provide it and that could have a chilling effect on all risk taking operations.
As we noted on Thursday, “Ironically enough, this doomsday scenario would likely benefit the US dollar – the epicenter of the sub-prime mess - as the greenback would become bid on safe haven flows. Tonight’s price action is a good example of this dynamic at work, as the buck strengthened across the board following the BNP news.” The safe haven theme may persist next week, especially if the markets continue to experience volatility, but eventually real economic issues will begin to weigh on the greenback.Unlike this week, next week’s calendar is chuck full of data and most estimates look for declines in everything from housing to consumer confidence. One possible boost for dollar bulls could come from the Retail Sales number on Monday. With expectations of a consumer slowdown so prevalent in the markets, any upside surprises in the July data would suggest that the US consumer remains relatively healthy despite the collapse in housing. If that remains the case, talk of a soft landing rather than a hard crash could improve market expectations of US growth going forward.-BS
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Euro – Could ECB Hold Off on the Hike?
No done deal yet. While last week the markets priced in with near certainty the possibility of a rate hike to 4.25% from the ECB after Jean Claude Trichet used the keyword “vigilance”, this week such certitude no longer exists.After the BNP turmoil on Thursday, the ECB was forced to inject more than 130 Billion dollars into the system as European credit markets came to a grinding halt. Therefore, it is not unreasonable to speculate that the central bank may decide to hold off tightening monetary conditions given the very precarious nature of money markets in the 13 member region.
Such a move however could have severe repercussions on the euro.The ECB prides itself on transparency and consistency, so a change of policy after essentially telegraphing a commitment to a hike could send the euro reeling not only on interest rate differential reasons, but also because it would suggest far deeper financial problems in the Euro-zone and undermine the case for euro as a viable alternative to the dollar. That is why we believe the possibility of a rate hike delay while real is remote for the time being.
Next week the economic calendaroffers little support to euro bulls. German GDP is expected to print lower dropping to 2.8% from 3.1% in Q1. This by the way will be the first time since the summer of 2006 that US GDP growth will exceed that of EZ biggest economic actor and while the overwhelming majority of analysts believe this to be a one off event, it bears watching. If against all market expectations EZ growth dips below US growth in H2 of 2007 the primary source of euro’s strength may be gone.– BS
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Japanese Yen Still Ruled By Risk Aversion Trends
Risk aversion trends have kept the Japanese yen relatively strong against the majors, with USD/JPY continuing to follow the movements of US equity markets in lockstep. For example, last Thursday’s plunge in European equities, which was followed by massive losses in US and Asian equities coincided with a 200+ point tumble in USD/JPY down to a low of 117.20. Economic data was generally unsupportive of gains for low-yielding yen, as sentiment amongst households remained weak. In fact, both the Eco Watchers and the Cabinet Office consumer confidence reports showing mounting pessimism, which did not get much help from political conditions, as the Democratic Party of Japan took the majority of the Diet’s Upper House elections from the Liberal Democratic Party. This has created tension as both parties debate whether Prime Minister Shinzo Abe, leader of the LDP, should step down from office. Abe has said that he will do the “responsible thing” and stay on despite DPJ plans to push for dissolution of the Lower House and a new general election that would test the LDP mandate. Nevertheless, as we said last week, “As it stands, there are really only two fundamental events that could perpetuate a strong move by the Japanese yen: a rate hike by the Bank of Japan or a jump in inflation. Until then, the pair will remain at the whim of carry trade flows, so traders should remain alert to the risk aversion trends that have recently contributed to USD/JPY weakness.” This remains the case looking forward, as traders remain spooked by liquidity and credit crunch fears.
Nevertheless, traders should be aware of the Japanese economic data on tap this week, as the results could have an impact on future policy decisions by the BOJ. The Leading Economic Index is anticipated to rebound in the month of June, but the figure tends to be revised frequently, minimizing the impact of this particular indicator. Machine orders are estimated to show a drop in demand, signaling that business investment continues to slow. This was made evident in recent GDP reports, though the slack in capital expenditures was made upby consumption, which isn’t entirely surprising given the tight conditions of the labor market. Regardless, this pick up in spending has yet to filter into price growth, leaving prospects for further rate normalization very low. However, with the recent political turmoil created by the DPJ’s win for the majority of the Upper House possibly distracting the LDP from the central bank’s policy actions, there is the potential for a hike by the BOJ in September. – TB
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British Pound Sets Sights On 2.00 As BOE Hawks Fade
The British pound ended the week lower despite consistently hawkish commentary by the Bank of England. Last Wednesday, the central bank issued their Quarterly Inflation Report and said that the inflation rate will likely stay above the 2 percent target until 2009, assuming that the bank hiked rates by 25 basis points to 6.00 percent by the first quarter of 2007. The statement effectively assured the markets that the benchmark rate would be lifted in the near-term, and while the news did lend GBP/USD a temporary boost of nearly 60 points to test the 2.0400 level, a bout of US dollar strength kept Cable gains in check. Meanwhile, the UK's physical trade deficit narrowed to the best level since April of 2006 thanks to record fuel exports. Most other raw material groups either held steady or increased the burden on the country's balance sheet, but shipments of finished goods to Europe and Asia more than made up for this as economic growth in those regions continues to pick up the slack of a slowdown in demand from the US.
Looking ahead to next week, the British pound faces heavy event risk with inflation data, labor market reports, retail sales, and the minutes of the most recent BOE meeting are all due to be released. CPI will be the first major hurdle, and with price growth expected to have eased during the month of July, the news could prove to be highly bearish for the British pound. However, if the figure is released at a higher-than-expected rate – even if it still reflects a slowdown – Cable could surge. Next up, the BOE minutes and jobless claims report will hit the news wires at the same time, and the spotlight will likely turn to the central bank. If the minutes reflect any votes for hike, markets may consider the possibility of a rate increase next month, especially in light of the BOE’s Quarterly Inflation Report. Nevertheless, given the bank’s aggressive policy tightening over the past year, the MPC will likely want to wait until later in the year to allow more time for their past actions to take effect. As a result, risks are tilted to the downside for GBP/USD this week. – TB
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Can Swissie Garner Strength Despite Slowing Spending?
Two weeks ago we said, “In the scheme of things, the franc is the FX traders’ second favorite funding currency (behind the Japanese yen). This gives the unit a unique sensitivity to big swings in risk aversion and appetite that cross asset boarders.” While we didn’t see USD/CHF follow USD/JPY in lockstep, the Swiss franc did lose steam like the Japanese yen, but proved to be less sensitive to carry trade swings as risk aversion prevailed over the markets. Economic data out of Switzerland did not help the case of the Swiss franc either, as the SECO consumer climate index surprisingly plunged to a reading of 15 against estimates of an improvement to 22 from 20. The drop is someone disconcerting, as resilient consumption growth has led to “goldilocks” economic conditions in Switzerland. A breakdown of the data shows that the biggest decline was seen in the 12 month outlook for the economic climate, which declined to 22 in June from 31 in June, while the consumer’s ability to save declined to 35 from 44 for the same periods. It appears that consumers are starting to feel somewhat jittery as concerns build that a slowdown in the US will spread into other regions. Nevertheless, with the unemployment rate at a nearly five-year low, Switzerland is unlikely to see a sharp decline in domestic spending in the near-term.
Economic data out of Switzerland tends to be thin, and this week is no exception. First, despite a drop in the SECO consumer climate index, the Swiss consumer will likely remain resilient, which should be reflected in the retail sales report on August 15th. However, given the volatility of this particular indicator, traders don’t usually take swings higher or lower very seriously. As a result, risk aversion trends will likely remain the main driver of Swiss franc price action, creating downside risks for USD/CHF this week. – TB
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Can The Canadian Dollar Hold Its Highs Though Market Tumult?
While the FX market has been jolted this past week by the unwinding of the overextended carry trade and a general flight from risk, it seems that USDCAD has sustained only minor damage through the first wave. Though the 1.05 to 1.06 range that was so neatly tracked out in the first half of the week was breached, the moves outside these boundaries measured up to little more than false breaks. More important to price action seemed to be the housing and employment data coming off the economic calendar and the direction of key commodities. In the past week, gold and crude oil prices have fallen well off their highs as both alternative assets were caught up in the wave of risk aversion. However, whereas the commodity market was once again having a general effect on the currency market, the influence of the data was much easier to follow. The economic calendar withheld its impact on the market until late in the week. Thursday’s housing data clearly had the greater sway over the traders, though the numbers turned few heads as they did not set any records. Printing first, July housing starts fell 4.3 percent to 215,600 units on an annual basis. While this number was short of the 223,500 consensus and a four-month low itself, it holds few implications for growth projections or speculation surrounding the timing of the next shift in interest rates. Similarly, the New Housing Price Index for June gave little to go on. A 0.7 percent rise in home prices for the month was a modest miss of the market consensus and certainly a deceleration from the nine-month high 1.1 percent figure from May. Regardless of the seeming minor implications these indicators held, USDCAD nonetheless rallied 100 points before fully retracing the move. In comparison, the following day’s employment data proved to be an utter non event. Free from the cross effects of the US NFPs, a disappointing employment change and drop to a new 33-year low in the jobless rate promised action. Alas, USDCAD volatility held steady and no direction was found.
Though USDCAD has weathered the credit storm thus far, traders should not stop looking for its effects in the exchange rate. Though the US and Canadian economies are closely tied and their interest rate spread is relatively tight, it can still come under the umbrella of risk aversion. With many of the other pairs at multi-decade highs selling off, it doesn’t take too much of a stretch of the imagination to see a bigger rebound for the oversold USDCAD coming to pass. However, while the masses decide whether or not to liquidate their long loonie positions, the calendar should keep event-risk traders busy. First up will be the trade balance report for June. The market’s official consensus is calling for a modest dip in the surplus to C$5.5 billion. The actual outcome will likely depend on the trade off of week US demand and strong commodity prices through the period. The rest of the event risk on deck is second tier. Manufacturing shipments may have already been tipped off by the Ivey PMI report. International securities transactions will not likely generate much interest even in this time of risk aversion. Finally, wholesales sales will be primarily useful in setting up the following week’s retail report. - JK
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Australian Dollar Roiled By Credit Fears, Waits For RBA To Speak
As expected, the Australian dollar was in for choppy seas last week; though the fundamental basis for these moves was not what we expected they would be going into the period. Going back in time, the economic calendar read like a mine field for event-driven trading. The data run kicked off in earnest with Wednesday morning’s RBA rate decision. The central bank delivered what hawks had wanted: a quarter point hike that brought the overnight cash rate to an 11-year high 6.50 percent. However, the reaction to the announcement was certainly not what would be expected of rates at such levels. AUDUSD began a gradual advance that would extend hold for a little over a full day; a sharp rally would never come to pass. The dampened reaction to the announcement was likely due to a combination of factors. For one, PM John Howard quickly came out after the hike to say that further tightening would hurt home owners. When Howard won the top office back in 1996, he promised that mortgage rates would never be as high as they were when Labor was in control while he was at the helm. They are there now. RBA Governor Stevens will undoubtedly feel the pressure from the PM’s office to hold off on any more hikes until after the general election that must be held at latest by the end of January. What’s more, the statement that accompanied the decision was conspicuously tailored to those trends leading into this hike with no outlook for inflation or growth in the months ahead.
Looking at the docket for the week ahead, the RBA’s rate hike may get a second wind. The policy group was almost certainly mum on their forecasts for growth and inflation so that they could deliver it properly in their quarterly Monetary Policy Statement due Monday morning in Sydney. Market participants will scour the text looking for any key words that could signal if there is another 25 basis point boost is in the pipeline and when it may come. However, given current market conditions, it is likely that the central bankers are making some last minute revisions. The Australian dollar was swept up last week in a global credit crunch that sent equity benchmarks, government bond yields and carry trades diving. The fire sale of everything overbought, overleveraged and related in the most tangential way to US subprime mortgages sent AUDUSD into a 250-plus point nose dive that came in one 24-hour burst. Seeing as how this broad market downturn was triggered by only one bank’s freeze on withdrawals from its hedge fund, it isn’t hard to imagine that another round could be set off by another non-US bank citing problems tied to the credit market (or worse, the collapse of a major firm). While traders walk on eggshells waiting for the next bout of credit-driven volatility, they should remain relatively entertained by the few indicators scheduled for release. Sentiment will be well covered with a NAB Business survey for July and Westpac Consumer gauge for August. Though it is the wage cost index for the second quarter which has greater implications for spending and inflation latter and perhaps a rate hike.– JK
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Can Data Save The Kiwi, Or Is The Carry Current Too Strong?
Like the Australian dollar, the New Zealand currency actually started last week out on a strong footing. For the first few days, there was little data coming off the economic docket - allowing the kiwi to hold a steady range against its benchmark counterpart, the US dollar. The only indicator to create waves initially was Monday’s Labor Cost Index for the second quarter. The official consensus was already forecasting a rebound in the private wages report; and yet the pick up proved larger than the market had for allowed. However, the 0.8 percent increase in wages and compensation was little surprise given the related data recorded over the quarter. For the market, the indicator’s support of holding up a modest hawkish bias for the RBNZ was worth a turn out of a quick sell off that was triggered a few hours before the data crossed the wires. After this report, it looked as if traders were happy to spend the remainder of the week range trading between 0.77 and 0.7550 - though with savvy traders obviously keeping their eyes on the employment data for a possible fundamentally-triggered move. When the second quarter unemployment gauge reported a new record low 3.6 percent with spot just below resistance, it seemed a formality to wait for the breakout. This move never came to pass though as grumblings of a large European bank having trouble with its hedge funds sparked a quick increase in corporate credit spreads that led to a sell off in equities, both government and corporate debt yields and eventually carry trade pairs.
The kiwi’s future is murky at best for the coming week. There are a number of market-moving indicators scheduled for release over the coming days; but if traders in every market are concentrating on keeping liquid, the influence of the fundamental reports may be negligible. Presumably, it will not be very hard to keep track of fear in the credit market. Recently, yields, equities and carry trades have held a very high correlation to concerns over risk and the access to liquidity. This will likely only intensify over the coming week. If investors deem the sell off overblown, then the kiwi can find a bid on the cheap. On the other hand, if the credit scare has upset something far more pervasive in terms of fear, the kiwi could a further retracement that carves out another few hundred points. On the other hand, should the risk correlation weaken, the New Zealand calendar may have its chance to guide the currency. Tuesday’s retail sales figures represent the fundamental trader’s best chance at a trade. Since the data covers June, there will be a quarterly number that will only intensify the action. Expectations are running low for both, but it is the consensus for no change over the quarter that should really capture the market’s interest. Later in the week, the ANZ Business PMI reading for July will give an indication of what conditions were like for the corporate sector before the credit crunch took hold. Also from the business side will be the quarterly producer prices figure numbers, though a measure of inflation in the pipeline may be too little to late given the RBNZ’s comments recently and the efforts to inject liquidity into the market- JK
Trading the News: Canadian Net Change in Employment
What is Expected
Time of release: 07:00 EST, 11:00 GMT 8/10/2007
Primary Pair Impact: USD/CAD
Expected: 20.0K
Previous: 34.8K
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How To Trade This Event Risk
History shows that the Canadian employment report is a consistent market mover. Looking ahead, this trend should remain firmly intact especially as USDCAD struggles to find direction near its multi-decade lows and traders attempt to speculate on the future of Canadian monetary policy. Last month, the June release hit the wires just a few days before the Bank of Canada was expected to announce a hike to the overnight lending rate - this made for a very sensitive FX crowd.This months employment numbers have their own unique set of circumstances that will play into the USDCAD’s reaction. For one, the market is still on rate watch. After the central bank hiked rates last month, the follow up statement maintained that there may still be a ‘modest’ need for further tightening. However, the more important setup for this indicator is the absence of a competing US NFP report. Usually the proximity of the American labor report dampens a USDCAD reaction or otherwise turns a move abruptly before it can play out on the Canadian numbers. This is not the case this time around. As usual, a long or short trade in reaction to the data would need to meet the obvious requirements. A surprise divergence from the forecast is necessary for the initial move; though follow through may very well rely on the details (like the number of permanent to temporary jobs).
A trade in response to a better than expected jobs report would have some running room. The initial reaction (read the first 5 to 20 minutes) will likely be driven by the headline numbers ability to impress. Should the fundamentals line up and a five-minute confirmation bar (red) form, a two-lot short position would be taken. The target on the first is set to equal the risk (the nearby swing high), so it is self-calculating. However, the discretionary nature of the second lot can be molded by the details of the employment report. Whether the jobless rate holds stead (or contracts), or there is a big jump in full-time positions, or there is a big simultaneous jump in the labor force all significant points that can determine the extent of the USDCAD’s follow through.
Given the relative position of the USDCAD, a disappointing payroll number could be a very market-moving event. There has been considerable debate over whether the pair is oversold near its multi-decade lows. So far, fundamentals like a rebound in growth, a BoC rate hike and consistent spending numbers have kept the Canadian currency up. However, a threat to the strong labor trend could have dire implications for the entire economy and undo the good will these other events have won. Should the indicator miss its mark it could rouse USDCAD buying, but a drop in the net with a contraction in permanent positions and increase in the jobless rate would make for an optimal long in event-risk terms.
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Dollar Drops as Labor Slumps
For the first time since February, Non-Farm payrolls printed below 100K raising the specter of a serious slowdown in the US economy that may force the Fed to consider lowering rates before the end of the year.Certainly on the surface the news appears to be rather bleak asthe unemployment rate picked up as well and the month’s prior numbers was revised downward. The only bright spot in the report came from manufacturing which contracted only -2K jobs versus forecasts of -18K. It appears as through manufacturing is the sole beneficiary of the lower dollar, yet even in that sector the ISM survey printed worse than expected coming in at 53.8 versus 55.0 projected.
Overall US data was decidedly dollar bearish with Consumer Confidence the only unambiguous positive report for the week. Yet the readings were taken before news of further turmoil in the housing sector and the dour jobs data, so it remains to be seen if the US consumer will hold up. Given the preponderance of evidence so far, itseems unlikely at best. Next week the only event of note is the FOMC meeting. While few analysts expect the Fed to cut rates- indeed a cut next Tuesday would border almost on desperation likely sending markets into turmoil – any change in the language by Dr. Bernanke and company that acknowledges the growing problem in the credit markets be viewed asprecursor to a rate cut and could cause further dollar selling.
The one bullish argument for the dollar comes in the form of a back handed compliment. Some analysts argue that the credit crunch and the unwind of positions will create a bid for the dollar as all capital becomes parked in short term Treasuries. Thus, contrary to the popular view that growth differentials will hurt the greenback this thesis basically says the buck rises on safe haven flows.
While the safe haven idea is plausible it likely to have only have only temporary effect on trade. If US economy truly slows and rates start to fall the dollar will weaken irrespective of the safe haven bid. -BS
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Euro Back to the Anti Dollar
The news from the Eurozone provided little excitement last week as the regions data printed broadly in line. The wear and tear of the appreciating currency was seen in the PMI Manufacturing figures which slippedbelow - 55 their lowest reading in more than a year. Furthermore the EZ consumer demand continued to lag with both German and EZ Retail Sales data missing targets. However, despite the generally softer tone of the releases, euro received a boost from the ECB late in the week when the President Jean Claude Trichet stated that“strong vigilance” was essential to guard against excessive inflation. This language has signaled a 25bp rate rise the following month ever since the bank started tightening in late 2005. There was some speculation that ECB would hold off on a rate hike until possibly October, thus Mr. Trichet’s assurance of a September tightening served to assure the euro bulls that a hike is in place.
However, with 4.25% rates widely expected and priced in, the news from the Euro-zone is unlikely to have any strong impact on trade. Next week’s EZ calendar only carries Industrial Production and Trade Balance data neither of which will have material impact on price. The EURUSD is much more likely to trade off the developments on the USside of the Atlantic as the euro resumes its familiar position as the anti-dollar. The economic calendar clearly indicates that we are in the dog days of summer and after several weeks of volatility perhaps some respite is due. – BS
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Japanese Yen Gains Remain Dependent Upon Risk Aversion
Risk aversion trends have kept the Japanese yen relatively strong against the majors, with USD/JPY continuing to follow the movements of US equity markets quite nicely. For example, last Tuesday’s 146 point plunge in the Dow and 18 point drop in the S&P 500 coincided with a 100 point tumble in USD/JPY from resistance at 119.35. True, economic data out of Japan was consistent with a bid tone for the oft-beleaguered low-yielder, but price reaction was minimal upon the actual release of the figures. When industrial production surprisingly surged and when the jobless rate unexpectedly fell to a nine-year low of 3.7 percent, USD/JPY barely budged. As it stands, there are really only two fundamental events that could perpetuate a strong move by the Japanese yen: a rate hike by the Bank of Japan or a jump in inflation. Until then, the pair will remain at the whim of carry trade flows, so traders should remain alert to the risk aversion trends that have recently contributed to USD/JPY weakness.
Nevertheless, traders should be aware of the Japanese economic data on tap this week, as the results could have an impact on future policy decisions by the BOJ. The Leading Economic Index is anticipated to rebound in the month of June, but the figure tends to be revised frequently, minimizing the impact of this particular indicator. Machine orders are estimated to show a drop in demand, signaling that business investment continues to slow. This was made evident in recent GDP reports, though the slack in capital expenditures was made up by consumption, which isn’t entirely surprising given the tight conditions of the labor market. Regardless, this pick up in spending has yet to filter into price growth, leaving prospects for further rate normalization very low. However, with the recent political turmoil created by the DPJ’s win for the majority of the Upper House possibly distracting the LDP from the central bank’s policy actions, there is the potential for a hike by the BOJ in September. – TB http://www.dailyfx.com/export/sites/dailyfx/story-images/2007/08/strategy_pieces/TradeOrFade/tof-4.gif
British Pound Gains Steam, But Are Declines In Store This Week?
The British pound was a consistent gainer over the course of the last week, as GBP/USD ended the week by testing the 2.0400 level. The move came on the back of dour US data, which was not entirely surprising since Cable price action was generally determined by the greenback for the entire week. The Bank of England’s rate decision resulted in little price action, as the Monetary Policy Committee left the benchmark steady at 5.75 percent, as expected, after enacting a 25 basis point hike last month. While the BOE’s 2007 tightening cycle has started to become more restrictive as it takes its toll on inflation, the housing sector, and consumer sentiment, the fact that CPI is still above the bank’s 2.0 percent target has left the markets pricing in one more hike to 6.00 percent this year.
However, this week’s Quarterly Inflation Report could determine the direction of Cable, as BOE Governor Mervyn King’s delivery of the report will make the bank’s inflation stance far clearer. If King continues to highlight the upside risks to price stability, as European Central Bank President Jean-Claude Trichet did last week, traders will ramp up speculation of a September hike to 6.00 percent. The release of the minutes from the August policy meeting on August 15th will be the other important gauge for the bank’s next move, as just a few votes for a hike will assert that hawks remain on the MPC. On the other hand, a more neutral tone in the Quarterly Inflation Report along with a unanimous vote in the meeting minutes will defer hike expectations until later in the year. In the typical “buy-the-rumor sell-the-news” price action we see so often in forex markets, the most likely scenario for GBP/USD may result in a determined bid tone ahead of Wednesday’s Inflation Report, but end with a subsequent sell-off. According to our Technical Strategist, Jamie Saettele, traders may want to “Look for a terminal thrust from this triangle into 2.0400/73 before a reversal… against 2.0654, targeting a drop under 2.0181.” For Jamie’s entire report (including charts) please click here. -- TB
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Swissie’s Sensitivity To Risk Produces Big Gains
In the scheme of things, the franc is the FX traders’ second favorite funding currency (behind the Japanese yen). This gives the unit a unique sensitivity to big swings in risk aversion and appetite that cross asset boarders. Recently, this has made the currency valuable in the carry trade unwind. However, just as volatility rose along side the pick up in risk aversion; the franc’s momentum has once again subsided as fears dissolve. This past week, the mood towards risk has clearly changed across the globe markets. The slide in government bond yields has been stemmed, most equity benchmarks in the major financial hubs have halted declines in favor of consolidation, and the Japanese yen’s rally is clearly stalling. As the winds of risk died down though the heat from the economic calendar was ready to fill in for fundamental, swissie traders. Three top market-moving indicators crossed the wires last week – a heavy week for Switzerland. The action began on Tuesday with a modest rebound in the UBS Consumption Indicator. The proprietary indicator was thrown off its trend in May when it fell of its recent historical high. A June recovery held bulls attention though as the flappable labor market encouraged purchases of large objects like autos. Not two days later, an SVME PMI report for July kept the ball rolling for the manufacturing group. The 63.0 print, a five-month high, was founded on a pick up in production and orders that suggests the group will contribute to growth through the third quarter. And, whereas both of the aforementioned indicators likely added to SNB rate speculation; the CPI numbers likely had very little impact. Inflation contracted for the first time in six months in July, though the annual figure accelerated to a 10-month high 0.7 percent. However, this adds up to very little as the central bank has maintained its aggressive policy stance through its cycle with price pressures well below its 2.0 percent target.
Looking ahead at this week’s listings, the calendar could hold the reigns on the swissie. The data begins with Wednesday’s labor report. The official consensus gives little to go on as economists are expecting the jobless rate to hold at its five year low. Realistically though, even if the report puts in for a new low, traders would likely shrug the data off since they have come to expect the strength. On the other hand, an unexpected rebound in the jobless rate could place a disproportionate weight on the franc for the same reasons it would not rally on an improvement. The second indicator to cross the wires is the quarterly SECO consumer confidence number. Optimism hit a six-year high in the quarter through April and forecasts are projecting this period’s number to only improve upon the trend as employment, spending and growth brighten the consumer’s outlook. While the scheduled fundamentals will take their place over the coming days, a leery should always be kept on the health of risk appetite. If the carry comes back into vogue, francs may flood the market. - JK
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Canadian Dollar Shows Fleeting Signs of Strength
The Canadian dollar finished slightly stronger for the first week in four, as sharp declines in its US namesake left the USDCAD at its worst since July 26. Loonie bulls took charge despite mixed economic data; a below-forecast Gross Domestic Product result and soft Industrial Product Prices hurt interest rate expectations for the world’s eighth-largest economy. The former showed that the Canadian economy rebounded from April's deceleration in growth, printing a 0.3 percent month-over-month expansion rate in May. This was largely due to services sector expansion, including retail sales which grew at their fastest pace since November of 2001 and Wholesale Sales at an impressive 1.4 percent. Manufacturing was comparatively tame but still respectable, gaining at a 0.3 percent rate. The change in Industrial Production was perhaps the only disappointment in the mix, as the sector dropped 0.2 percent on May. This likewise fed into a softer Industrial Product Prices report and moderated outlook on inflationary pressures across Canada. The net effect of the mixed economic data was to limit interest rate expectations through the end of the year. Futures traders subsequently sent implied rates for December to a meager 4.85 percent—showing a very low probability of more than 25 basis points in rate increases through year-end. Given that this was a key pillar of support for the Canadian dollar, the Loonie stands to lose further ground against major counterparts absent a reversal in interest rate trends.
Whether or not the Canadian dollar changes course will largely depend on upcoming housing and labor figures, making it a make-or-break week for Loonie bulls. Friday’s Net Change in Employment report will be the clear highlight on the week, and consensus forecasts show that analysts expect that the economy slowed jobs growth in July. Median estimates at 22,000 newly employed nonetheless remain above longer-term trends, but a disappointment could clearly drive further Loonie tumbles. The previous day’s Housing Starts data may likewise have an effect on the USDCAD’s overall trend. Forecasts call for weakness in both new construction and a deceleration in price growth, but a resilient real estate market threatens to beat the street’s estimates. Otherwise, the Canadian dollar will trade off of developments in its southern neighbor; Tuesday’s US Federal Open Market Committee is highly likely to have a strong impact across all USD pairs. Dollar weakness could once again trump the Loonie’s pullbacks—making it critical to listen to the statement following the FOMC meeting. - DR
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Australian Dollar Readies For Rate Hike, But Uncertainty Looms
Though the Aussie dollar didn’t cover much ground this past week, the currency’s fundamental cup was overflowing. A healthy mix of indicators, with prints that stoked bullish and bearish fervor, helped to stabilize the currency following a period of selling that was swept up in a wave of risk aversion. Looking back over the packed calendar, there were top-tier indicators for nearly every major vein of data. The business sector was well covered by second quarter confidence and outlook figures. According to the NAB, executives were the most optimistic about business conditions and profitability in nearly four years. The forecast was even brighter as the Condition’s Outlook report touched its highest level in the indicator’s 18 year history. Alternatively, a June trade deficit of A$1.75 billion foreshadows business leaders’ rosy outlook may be for naught. The biggest shortfall in over a year was facilitated by a sharp drop in exports caused by cooling growth abroad, a high exchange rate and disruptive storms through the month. More important to the market though was data measuring the consumer’s health. A sign that Australians are coping with higher interest rates, both building approvals and new home sales improved over June from a readings a month ago. However, most highly anticipated data for the week, that of retail sales, was left impotent by conflicting numbers. The bullish sentiment garnered from a 1.4 percent increase in receipts through the month of a June (the biggest in over two years) was swiftly stifled by the first quarterly decline in two and a half years and the biggest drop since 2000.
Considering last week’s numbers, the case for Tuesday evening’s (early Wednesday for Australia) RBA rate decision is certainly not open and shut. As it stands, 20 of 25 economists surveyed by Bloomberg are expecting a quarter point hike to 6.50 percent. This would be the first shift in the benchmark rate since November. On the one hand, hawks would say healthy business conditions, a big 1.2 percent increase in second quarter CPI, an unemployment rate at a 33-year low and the pick up in consumer spending in June are confirmation that monetary policy is too accommodative. Alternatively, doves can counter with equally valid arguments. To refute the spending case, the pick up in retail sales was in June alone, while the quarterly number actually dropped, suggesting an overall degrading trend. Another counterpoint is that inflation is actually rather stable with an annual 2.1 percent pace of growth that is almost exactly dead center of the central bank’s 2 to 3 percent target band. Whatever the outcome, there is likely enough uncertainty in the market that the event will produce interesting price action. And, looking at the docket, the action won’t end with the central bank. A quarterly housing inflation number is penciled in shortly after the rate decision. Perhaps more provocative though will be the July employment data. Following a disappointing 2,500 person increase in payrolls, a 25,000 pick up is expected to put the indicator back on track. Still, the jobless rate is forecasted to increase. – JK
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Kiwi Loses as Carry Trade Unwinds Further
The New Zealand dollar fell for the second consecutive week of trade, suffering from a continued carry trade unwind and setting fresh monthly lows against its US namesake. Economic data was limited to a second-tier NBNZ Business Confidence report, which unsurprisingly showed that optimism dipped on record-high domestic interest rates. The big story on the week was of course continued tumbles in global equity markets. The US Dow Jones Industrial Average finished the week at a whopping 5.2 percent off of recent record-highs, leaving continued risk aversion at the forefront of traders’ psyches. High-yielding currencies such as the New Zealand dollar suffered as a result, and the carry trade set fresh drawdown lows through Friday’s close. Outlook for the New Zealand dollar is clearly linked to the overall performance of risky assets, with a coming week of strong event risk to likewise force volatility in Kiwi pairs.
Failing interest rate expectations could potentially reverse course on upcoming economic data, with Wednesday night’s Employment Change data to potentially change the Reserve Bank of New Zealand’s stance on the future of inflation. As we highlighted in last week’s report, RBNZ Governor Alan Bollard effectively told markets that four consecutive rate increases may be enough to limit consumption and inflationary pressures. Yet stronger-than-forecast economic growth and wage inflation could easily deter the central bank from taking a more neutral stance on price pressures. If we see the kind of positive surprise markets have grown slowly accustomed to from the New Zealand economy, the Kiwi could easily benefit from higher interest rate differentials against major trading counterparts. Of course, this may all come to little if the global carry trade does not rebound. Given a dismal performance in risky assets on the week, we feel as though the carry trade drawdown may reach further lows before recovering through the medium term. Our recent special report highlights the fact that the carry trade unwind remains small by historical standards and leaves ample room for declines.
For the full report, please click here.
It will subsequently take a rebound in equities and strong employment to reverse the Kiwi’s course, leaving NZD bulls with little foreseeable support through short term trade. - DR
Trading the News: US Change in Non-Farm Payrolls
What is Expected
Time of release: 8:30 EST, 12:30 GMT 8/3/2007
Primary Pair Impact :EUR/USD
Expected: 127K
Previous: 132K
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How To Trade This?
In the past, the US’s non-farm payroll report was the undisputed event-risk trade in the currency market. Recently however, the reaction to the employment report has been muted and often has countered what fundamentals would suggest. Looking back at the last three reports, it is clear that the indicator is becoming harder to trade under our specific trading criteria. In both April and May, modest surprises stoked volatility, though they each lacked a strong direction. April’s disappointment led to an eventual 40 point rise in EURUSD, while May’s improvement gave a 60 point move in the dollar’s favor; though neither initially moved the market in the fundamentally ‘right’ direction. The opposite was true of the June release. EURUSD dipped on a modest surprise, but rallied against the dollar after the initial five minute bare cleared. There are a few things we can learn from these reactions. First, a surprise to the upside or downside is not as important as the extent of the divergence. Considering past releases, a miss of 25,000 to 50,000 is likely the minimum for a first reaction with follow through. This may be the case if the ADP holds any correlation to this month’s NFPs. Next, a big revision to the previous number could contribute to the move, though it is clearly a secondary or complementary effect. Regardless, targets should be conservative.
A long dollar trade (short EURUSD) has a few requirements. First of all, the indicator has to print much better than the market is expecting. Should it be only modestly better, there may be no follow through and a trade triggered on a red five minute candle could be quickly stopped out. Also, an eye should be kept on the revision. A big downward revision could impede a dollar follow through ruin an otherwise good fundamental trade. For cautious traders, should there be any question about how bullish the report is, waiting for a close on a second red candle could help confirm follow through.
The same conditions should apply to a bearish outcome for the employment report. A shortfall that runs 50,000 or lower would likely trigger a strong trade. What’s more, after a number of disappointing, secondary employment reports were released earlier this week, the market may be prepared for a modest drop in payrolls. This only increases the need for a big miss. With confirmation of a considerable disappointment and a five minute green bar (or two five minute bars for conservatives), a position of two long EURUSD lots should be established. The stop would be the recent swing low with a first target that matches the risk. A second target should be discretionary.
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Dollar Rebounds As Risk Liquidated Across the Board
It didn’t matter that Existing Homes Sales in US plunged another –3.8%or Durable Good came up short of expectations at 1.4% or that New Homes fared even worse than the existing stock of housing. The theme last week for speculators the world over was liquefy, liquefy, liquefy.As equity markets plunged and commodities corrected, capital came flocking back into the greenback. As we explained on Friday, “The greenback rally appears to be driven by technical factors as many speculative trades from equities to commodities to the carry trade are unwound and those assets are parked in dollars for the time being.”
The fears over the sub-prime problem have finally been realized after last week commentary by County WideFinance chief executive Angelo Mozilo. Henoted that he doesn't expect the U.S. housing market to rebound this year or next. With massive resets of Adjustable Rate mortgages stillfacing the market and a very pronounced tightening of credit conditions over the past several months, the housing recessionis likely to persist and weigh on the overall economy. Therefore while the dollar may continue to benefit fromthe technical unwind its rally may be short lived if the economy falters further. Fed fund rates have already plunged handicapping a rate cut by December to 5% from the current 5.25%. Should US rates be lower, the dollar could resume its decline as capital will resume its search for higher returns.
The question of whether the Fed will cut or not will depends largely on the state of the growth in the economy. That’s why next weeks data is likely to be scrutinized even more closely than usualas traders look for any clues of a significant slowdown.After two consecutive months of negative spreads between consumer income and spending the market is looking for an improvement. However, should the number print negativeagain it could put further pressure on the buck, indicating further deterioration of consumer balance sheets. Nevertheless, the true test of the strength of the US economy will come later in the week as all eyeswill focus on ISM and NFP data.If that news prints in line showing slow but steady expansion it may pacify the markets for the time being-BS
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Euro Feeling the Weight of Its Gains
On Tuesday the flash PMI reading for the Euro-zone surprised to the downside and we noted, “EZ advance PMI readings fell to 54.8 - materially weaker than the 55.5 forecast.While EZ manufacturing remains well above the 50 boom/bust line, today’s flash estimate registered its lowest value in nearly a year and half slipping below the 55.0 level for the first time since February of 2006. Although, like the consumer readings,the manufacturing data was somewhat ameliorated by the fact that New Industrial Orders rebounded to 1.7% from -0.6% drop the month prior, today’s report nevertheless suggests that EZ manufacturing recovery has peaked under the pressure of high exchange rates.” That data was further reinforced by the decline in the IFO survey leading us to conclude that, “The producers in the EZ have been surprisingly effective in coping with the competitive pressures of a strong currencyhowever such efficiency cannot last forever and the effect of a strongeuro is likely todampen demand sooner rather than later. “
Indeed, while the dominant theme in the markets last week was risk aversion which triggered a technical rebound in the dollar, the sub-story was the possible peaking of export dependent Euro-zone growth due to the appreciation in the EURUSD. With both manufacturing and tourism likely affected the question facing euro bulls is whether internal demand canpick up the slack and maintain growth momentum. Next week’s employment numbers and Retails sales figures should provide some possible answers as to the depth and the strength of the EZ recovery .– BS
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Yen Rises as Risk Appetite Falls
On Friday we wrote, “Yen has been the key beneficiary of the this move to risk aversion gainingmore than 200 points since yesterday. However, the unit lost some momentum in late Asia trade as USDJPY once again traded above 119.00 figure.Despite the power of the carry trade unwind, the yen is unable to gather even a modicum of support from the fundamentals. Overnight Japanese data was horrid with Retail Trade slipping to -0.4% and CPI continuing to contract. Japanese retail traders have been one of the staunchest sellers of their own currency and they stepped in to buy the dips in USDJPY tonight helping to stabilize the fall.”
Next week the tug of war should persist as the forces of risk aversion will continue to cover their yen shorts and the still potent demand of carry traders who see nothing on the economic horizon to expedite the BOJ glacial pace of monetary tightening will try to buy every dip in the yen crosses . Indeed after last weeks lackluster datachances of an August rate hike have decreased. The market will now focus on the Overall Household spending figures which will be critical to determining the health of the consumer.Expectations are for 0.7% rise. If the number prints in line, the yen may get a boost ob speculation that an August rate may yet take place,but a miss would almost certainly take that scenario off the table. None of this however will assure further yen weakness if the turmoil in global equity markets continues. In a battle between carry trades and risk aversion, the latter has the upper hand.– BS
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British Pound Punished on Risk Aversion, Potential for Bounce?
The British Pound saw an extraordinarily volatile week of trade, setting fresh 26-year highs before matching its worst single-week decline since September of 2006. A remarkable carry trade unwind forced traders to liquidate overextended GBP longs across the board, sparking especially noteworthy moves against the oversold Japanese Yen. Economic data was relatively sparse on the week, but fears of global credit tightening led a flight to safety in virtually all global asset classes. Such a dynamic has undoubtedly hurt outlook for the British currency, but it remains to be seen that this unwind will continue through the short term. According to our Technical Currency Analyst Jamie Saettele, the Sterling is due for further decline against the Swiss Franc through coming trade. (Read full report here: http://www.dailyfx.com/story/topheadline/GBPCHF___The_Beginning_of_1185559641119.html) Outlook for Cable’s performance against the US dollar is similarly pessimistic; the GBPUSD may not see significant support until a test of a year-long trendline near the psychologically significant 2.0000 mark. From a more fundamental standpoint, the British currency will see little boost from economic data through the coming week. A pending Bank of England interest rate decision is highly unlikely to show a rate increase, and the central bank does not release commentary on unchanged policy.
The early going will see little foreseeable event risk on the second-tier GfK and Nationwide Consumer Confidence surveys, but continued volatility across financial markets may nonetheless make for choppy trading. This will almost entirely depend on the performance of risky assets across the world, with Sunday night’s Asian market open to prove especially important for the outlook on the week ahead. Given that the carry trade is inextricably linked to Japan and other regional markets, speculators will likely show their true colors and outlook for high-yielding currencies as soon as they hit their desks at the open. Late tumbles in North American equity markets suggest that the Japanese Nikkei index may open trade substantively lower, but this does not rule out a later rebound on improved appetite for risk. Pending such a turnaround, we could see the British Pound catch some relief against the Japanese Yen and other lower-yielding currencies.– DR
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Swissie Looks to Slide on Diminished Rate Expectations
The Swiss Franc lost ground against the US dollar, as softened interest rate expectations hurt outlook for the European currency. All was not lost for the Swissie, however, with an overall theme of carry trade unwinds sending the CHF significantly higher against the high-flying British Pound and Euro. Speculators scaled back overextended positioning in the popular GBPCHF and EURCHF pairs, but it remains to be seen if such moves will be sustained through the short term.Swiss interest rate futures have been steadily on the rise, leaving implied rate expectations lower through the end of the year. Once a key source of Swiss Franc support, the falling future yields threaten to derail what was a promising rebound in the downtrodden currency. Limited economic data stepped in to boost the currency’s cause, however, with the KOF Institute Leading Index rising well-above consensus forecasts at 10-month highs of 2.13 in July. The gain from June levels represents the sixth consecutive increase in the index, which certainly bodes well for outlook on domestic growth. Yet such data may do push the CHF higher if higher price pressures do not follow. More specifically, we will need to see the upcoming week’s Consumer Price Index data impress for the Swissie to outperform is European and North American counterparts.
Event risk will pick up in the coming days, with market-moving SVME Purchasing Managers Index and CPI numbers to drive foreseeable volatility in CHF pairs. The former is likely to show that industrial growth remains healthy in the small European economy, yet a positive result will come to little of the later CPI data disappoints. A soft Producer and Import Price Index reading suggests that the Consumer-linked measure may be similarly subdued, keeping pressure off of the Swiss National Bank to tighten monetary policy through the end of the year. Futures currently show that markets expect at least 50 basis points of rate increases through December. Whether or not this comes to bear will hinge on upcoming inflation data, and surprises in either direction will likely drive strong moves in the CHF. - DR
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Canadian Dollar Makes Big Technical Turn, Data Comes On Line
Though it was a relatively quiet week for Canadian fundamentals last week, the loonie was on the move. The mood surrounding USDCAD changed dramatically from through this relatively short period. In the first half of the week, the pair was certainly moving in favor of the Canadian currency as traders bid it to a new record high (at least 30 years at least) against its US counter part. The last gasp of the loonie’s long-held rally came on Tuesday when a surprise jump in retail sales drove the single unit one percent higher. According to Statistics Canada’s report, Canadian consumers spent 2.8 percent more at retailers shops in May, the biggest one-month increase in nearly a decade. This report led some market participants to label this indicator as proof positive that the central bank would pursue another hike at its next meeting on September 5th. However, after this release and the sharp move, the high loonie quickly came under the spot light with no other market-worthy indicators due for the rest of the week. With no technicals in sight and fundamental traders having to weigh the possibility of further BoC rate hikes against the extreme exchange rate, it seemed only a matter of time before the market sought relief. The reprieve came relatively quickly on Wednesday when whispers of risk aversion started to earn headlines. Global equity markets marked the start of a violent turn while yields on corporate and government bonds started to back off. When FX traders looked to cut their own risky trades, long Canadian dollars seemed to top that list.
For the week ahead, the Canadian dollar will likely come back under the umbrella of risk aversion. Should any of the major ‘high-risk’ trades (i.e. equities, carry trades, etc.) continue to decline, it could easily sweep the up Canadian dollar with. Since the unit is still within arms reach of record highs against the US dollar – which happens to be the most liquid and attached to the world’s largest economy -it is still deep in overbought territory. However, should these large equity corrections prove to be temporary like the shake up in late February and the term risk aversion fade into the background, fundamental loonie traders will still have a number of releases from the economic docket on which to base their trades off of. The data push will begin early with Tuesday’s GDP report for may. After growth stagnated in the previous month, the expected 0.4 percent increase is looking pretty good. Following up on the heels of this top-tier indicator, the Ivey PMI and building permits releases will put in for price action. Both are expected to cross the wires with disappointing results. - JK
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Australian Dollar Sustains Heavy Damage, Can An RBA Hike Help?
The Australian dollar was looking at heavy losses across the board last week. Indeed, the only place the Aussie looked like it was able to hold any kind of bid was against the New Zealand currency, which was consequently embroiled in a tumble of its own. Looking back over the events for the week, there were two clearly conflicting forces playing on the Aussie dollar. Arguably the overwhelming component of this specific move was a global bout of risk aversion and subsequent carry trade unwinding. While the seeds for such a move have been incubating for some time, it seems the trigger for a wave of risk aversion came from further grumblings in the US housing market. From there, the damage spread as global equity markets pitched into sharp declines marked by major technical breaks in the some of the leading benchmark indices. No matter where investors had their capital: international stocks, government yields, corporate credit spreads or currencies; the impact was felt everywhere. For the FX market, the impact was clearly read in the majors and the crosses. From both sides of the lucrative carry (the Japanese yen and Swiss Franc to the Australian and New Zealand dollars), the shift was dramatic. Now, the question remains, is this the true turn in risk aversion or is this another round of pressure relief that draws speculators back to high yielding/high risk trades.
The other major issue controlling price action for the Aussie dollar last week was speculation surrounding the likelihood of a rate hike from the RBA. There were only two noteworthy indicators crossing the economic calendar over the period - PPI and CPI - and neither sealed the deal for the central bank. The factory-level inflation number decelerated to a three-year low 2.3 percent in is annual figure. At the same time, the favored consumer report slowed to 2.1 percent - nearly inline with the RBA’s target. On the other hand, core inflation gauges are just below the 3.0 percent tolerance limit. Looking at the calendar for the week ahead, the rate debate will only heat up. There are a number of growth and inflation reports scheduled for release that will add to the outlook. Key among this list of market-worthy reports are the NAB’s quarterly business sentiment gauge, retail sales for the second quarter and TD Securities’ leading inflation figures for July. If the RBA doesn’t have the ingredients for a hike come August 7th, a move may be deferred from some time as the national election closes in.– JK
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Kiwi Loses Support on Carry Trade Unwind, Dovish Rate Outlook
The New Zealand Dollar saw its worst weekly performance since March, as a sharp carry trade unwind and a dovish central bank doomed the currency to a pronounced sell-off. A mid-week Reserve Bank of New Zealand interest rate hike actually led to a subsequent Kiwi drop. The largely expected rate increase came on increasingly dovish commentary from RBNZ Governor Alan Bollard. In the attached communiqué, Bollard claimed “New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation." Subject to the mentioned caveats, he essentially told markets that the RBNZ may be done in its recent tightening cycle—removing a key pillar of support from NZD pairs. The Kiwi still maintains one of the highest yields of any major world currency pair, but an outlook for unchanged rates certainly stands to push it lower against currencies with rate increases on the horizon. The upcoming week may see a relatively quiet period of trade, as event risk will be limited to a second-tier NBNZ Business Confidence Survey.
The New Zealand dollar is likely to trade off of new developments in the global carry trade phenomenon, with the recent rout leaving pairs susceptible to a retrace of extended declines. Though markets are likely to put popular high-yielding pairs through their paces on an unwind of overextended Japanese Yen shorts, looking at the past tells us that the carry trade may nonetheless see a grind higher through the medium term. One only has to look back to the late February/early March carry shakeout to see that pairs like the NZDJPY and AUDJPY rebounded in trading that followed. The Kiwi-Yen pair is currently in the midst of its worst drawdown of the year, but this arguably allows for better entry on longer-term focused carry trade longs. Whether or not such a retrace occurs will largely depend on the performance of global equity markets, but a stabilization in worldwide stock indices may pave the way for a continuation of Japanese Yen declines. The losing yield advantage of the New Zealand dollar perhaps leaves it susceptible to further drawdowns against the Australian dollar, however, as the Aussie
Latest CFTC Release Dated July 24, 2007:
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US Dollar Index: Implied net positioning is its lowest since June 2006.The dollar bottomed then and rallied, albeit correctively.We mentioned last week that “our commercial interest index is at 100, which is extremely bullish.We are expecting the dollar to begin at least a multi week rally in the next few weeks.”It appears that the dollar rally has started.A significant bottom may be in place.
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EUR: Upside potential remains for the euro as the recent decline occurred without a sentiment extreme (which we define as JPercentile at or close to 100).However, since the euro consists of nearly 60% of the USD index (which shows bullish readings), we do not wish to remain bullish the EURUSD.The euro appears more attractive on the crosses, especially the EURGBP (since the sentiment extreme in the Pound suggests that the GBP will underperform).
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GBP: Speculative longs remain close to record levels and the sentiment extreme remains in place, indicating a high probability that the GBPUSD will continue to decline.At the least, we expect the decline to continue until the market is no longer one-sided.
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CHF: The trend remains towards CHF buying following the sentiment extreme registered in June.This signals that the CHF should strengthen for an extended period.Sentiment is improving and the outlook for the CHF remains bullish, especially on the crosses.
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JPY:We wrote last week that “the psychological backdrop is ripe for a reversal again so be on the lookout for a top in the JPY crosses, especially the GBPJPY and CADJPY.”The USDJPY fell hard and the crosses fell harder.There is no reason to alter out outlook.We continue to favor JPY strength.
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CAD:The CAD is in the same position as the GBP and the CAD.That is, it too is making a major turn.The percentile indicator has been at 100 for weeks and speculative longs remain at record levels.The CAD is most likely in the early stages of a significant reversal.
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AUD:Net positioning in the Aussie is little changed.We have not been looking for a top in the Aussie because sentiment was not extreme (similar to the euro).With sentiment not extreme, we have to follow the trend of positioning, which has been towards Aussie selling since longs were at a record in December 2006.Given the oulook for a stronger dollar, the reversal should be respected.