Trichet and Bernanke Set To Speak Thursday Morning

Original Article from ForexTraders Forex News and Market Commentary

Two of the most powerful people in the world will speak Thursday morning concerning the global economic outlook.  The EUR/USD has moved up slightly during the London session on the heels of positive bond auctions in Spain and France; however, the market was unable to bid prices up beyond yesterday’s HI’s at 1.2855 as investors wait for European Central Bank President Jean-Claude Trichet to speak at 8:30 am and Fed Chairman Ben Bernanke at 9:00 am.

Although today is heavy with key risk events, the market may not break out of its trading range until the Non-Farm Payroll release tomorrow morning.  NFP tends to be one of the most revered key leading indicators of economic health, and the market may be hesitant to commit to large directional positions before the NFP confirms economic direction.

Trichet

As stated, the euro found strong support this morning as a result of strong bond auctions in France and Spain.  Strong bond auctions are expected in France, but the market is still watching Spain, Portugal, Greece, Italy, and Ireland very closely.  For several months now, we have been writing about the possibility of the EuroZone Debt Crisis re-emerging this fall.  One of the leading indicators that will show the EuroZone is again in serious trouble will be when and if these struggling countries face difficult bond auctions.  As of yet, there is still plenty of investor demand for these bonds, but if the fiscal concerns do become serious enough that investors are unwilling to buy Greece, Portugal, Spain, Ireland, or Italy’s bonds, then there will most likely be a huge bout of risk aversion that sweeps the market once again.

European equity markets remained subdued even in light of the positive bond auctions as investors were unwilling to bid prices up before Trichet speaks this morning.  The market will be watching and listening closely to see whether Trichet formally commits to extending liquidity to help the European banking system.  GDP blew past market expectations in the 2nd quarter.  The expected figure was 0.7%, and the actual figure came out at 1.0%, which was quite surprising considering the systemic problems the EuroZone faced during the Q2 with its Debt Crisis.  However, Germany was able to benefit enormously from a cheap euro as its exports were much more attractive to foreign buyers, and that increased exporting activity in Germany helped overall EuroZone GDP tremendously.  Now, many economists are concerned that economic growth will slow significantly in Q3 as the euro has strengthened during the last 3 months.

Trichet is also expected to cast a cautious tone concerning economic outlook, but traders will be listening closely for any new verbiage or departure from his normal mood of cautious optimism.  Trichet has also been championing fiscal austerity in developed nations, saying that countries such as the U.S. should turn to decreasing government spending.  Interestingly enough, Fed Chairman Ben Bernanke is actually about to the do the exact opposite as he and the rest of his Board Members at the Fed are currently preparing to inject another round of fiscal stimulus into the U.S. economy.

Bernanke

Today, Fed Chairman Ben Bernanke will be testifying before the Financial Crisis Enquiry Commission in Washington DC.  Bernanke’s testimony comes in 2 parts:  a written, prepared statement and an open Q&A session with the Congressional board.  The prepared statement does not generally move the market as most of his verbiage will most likely be as expected, but during the Q&A, his answers to tough questions oftentimes offer a clearer picture to investors concerning the Federal Reserve’s next steps.

The most likely scenario in the United States is that the economy will enter into a prolonged period of very sluggish growth.  Mr. Bernanke has been communicating this view consistently, but he is concerned that the very sluggish growth could pull the U.S. into a deflationary period, which can be disastrous for an economy and can lead to a decade or more of virtually no economic growth.  This fear is why Mr. Bernanke and the Federal Reserve are seriously considering yet another round of quantitative easing.  They are willing to do anything to stimulate the economy back into robust growth.

Market Price Action

Yesterday, we mentioned the euro was beginning to put pressure on resistance to the upside.  We currently have some very fascinating price action beginning to develop between the euro, pound, and dollar.  Generally, the EUR/USD and GBP/USD move in very tight correlation.  However, we have been seeing that correlation break down over the last few days.  This morning, U.K. Nationwide HPI came out below the market expectation of -0.3% at -0.9%.  This surprise to the downside led the pound to move lower in the immediate aftermath of the release and then to drift sideways and lower throughout the London session.
 
On the other hand, the euro has again moved to the upside during the London session today.  The economic outlook and Central Bank leaders in the U.S, U.K. and EuroZone are diverging.  In the EuroZone, Trichet is by far the most hawkish concerning interest rates and monetary conditions, and the EuroZone is also posting pretty good economic data relative to these other countries.  Therefore, the euro is beginning to move higher, and if economic data continues to back up Trichet’s decisions, we could see the euro move up quite a bit versus both the dollar and pound in the coming weeks.

Of course, the elephant in the room concerning the EuroZone is the possibility that any day the EuroZone Debt Crisis could begin to erupt again, but currently those fears seem to be on the backburner.  If the sovereign default concerns in the EuroZone can remain contained, then the euro could move up quite nicely in the next few months.

We have been calling for a huge drop in the euro at some point in the latter part of 2010, but the reality is that will most likely not happen as long as the Debt Crisis remains under control.  As a trader, be on the lookout for the first signs of major fiscal trouble in struggling EuroZone countries.

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Bullish U.S., China PMIs, Lead to an Equity and Commodity Market Rally

Original Article from ForexTraders Forex News and Market Commentary

Stocks in China, HK, Japan, US, SouthAmerica, Europe and elsewhere were up today, commodities also rallied, while gold suffered some losses. Most of it was due to a series of robust data recently, boosted by today’s manufacturing PMI numbers.

Latin American markets continue to inflate, Colombian stocks break a record

Colombia is not the likeliest of places to be the star of Latin America, but today’s price action has seen the stock exchange of the country break an all-time record. Chile Peso at a six-month high, Argentinian stocks enjoying a bull run, Colombia setting new records would make one think that we are in 2006-2007 when rates were rising globally, commodities, and stocks skyrocketing, inflation worries intensifying, and not in 2009-2010, when deflation is the main theme. Nonetheless, the vast amounts of money pumped into the system let us live through this illusion for a while, and while it lasts, it is not altogether without educational benefit to observe its development.

U.S. Manufacturing PMI improves

U.S. manufacturing PMI came at 56.3, way above expectations. Nonetheless, from our vantage point there is little cause for surprise since manufacturing industry is likely to outperform the rest of the economy for the remainder of this period, just as it underperformed during the bubble years.

The index was boosted by gains in prices paid, employment, inventories and production, while the new orders index actually fell, indicating the likelihood that the robust performance of this month will not be maintained. In any case, manufacturing is a small portion of the U.S. economy right now, even if its future share will be larger. As for Friday’s NFP release, we don’t see the point of speculation and guesses on the basis of PMI numbers since data will be available in a short time.

On another note, Eurozone August Final PMI came at 55.1, largely matching expectations. Among larger member nations, Italy was the only nation posting a disappointing PMI reading.

More on CNY

The PBOC set the central parity rate at 6.8126 today, at a ten-week high. In spite of satisfactory PMI reading from China(51.7 officially, 51.9 accroding to HSBC) , the central bank seems to maintain the focus on the upside, concerned about the implications of the slowdown in Europe and U.S., as well as the domestic bubble bursting issues. More significant were statements by Hu XiaoLian, the female deputy of Mr. Zhou, who repeated the PBOC’s commitment to Yuan appreciation, adding at the same time that appreciation alone would not resolve the U.S. trade deficit issue (she even said that it does not have a “key role” in rebalancing trade issues). She noted, also, that the SAFE does not determine investment allocation of the $2.5 Trillion cash pile on the basis of political concerns, almost certainly intended as a prop to the Euro. In spite of satisfactory PMI reading from China(51.7 officially, 51.9 accroding to HSBC) , the central bank seems to maintain the focus on the upside, almost certainly worried about the implications of the slowdown in Europe and U.S., as well as the domestic bubble bursting issues.

The sustained string of higher fixes must surely be unnerving a lot of people in Washington. It will be interesting to see how long U.S. politicans can manage to escape the temptation to make some gains by attacking and condemning the Chinese. As the final two years of the Obama presidency approach, we suspect that the President will find it more and more costly to oppose the populist measures advocated by some members of the Congress, the constant chatter about the need impose higher tariffs on China, and to declare the country a currency manipulator. It is clear that the earlier the Chinese act, the better it will be for them,if they have the plan to do anything serious at all.

Singapore overtakes Switzerland to become the 4^th most active FX trading center

In yet another testimony to the rapidly increasing power of Asian money in the word, the BIS reports that Singapore has become the fourth most active FX trade center after London, New York and Tokyo. There is no question that much of this dynamism is in fact a consequence of the bubbling Chinese export sector, but even then, one finds it hard to avoid being nimpressed by the great achievements of the continent over the past 2-3 decades. Swtizerland slipped from third to fifth place as Europe’s importance decreases to the advantage of East Asia.

Let’s conclude by recalling that August, which is frequenly a bullish month for stocks, saw its worst performance of nine years in 2010, according to the WSJ. Between Friday and now not much should happen, as markets will be busily waiting for the NFP, which will set the tone of the month probably.

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Euro Breaks Out Of Range on Global Risk Appetite

Original Article from ForexTraders Forex News and Market Commentary

After nearly 2 weeks of trading within a tight 150 pip range, the euro broke upside resistance at 1.2780 during the London session early Wednesday morning.  The euro actually broke through 2 key swing HI’s on the hourly chart as it broke to the upside, so we could see further euro gains in the coming days.  
 
In this chart, you can see the two clear swing HI’s in the green-shaded boxes that the euro broke above in order to post new HI’s this morning.  Then, the euro continued to push higher in early New York trading as buyers bid EUR/USD up to the 1.2850 area.  The euro will face heavy resistance in the 1.2900 area and should see sellers protect the area initially.  If the euro moves higher during the NY trading session and pressures the 2900 level, there may be very strong selling interest today.  The euro has already moved beyond its daily range at the start of the NY session, and when a currency pair is overbought as the euro is today, it oftentimes has strong difficulty breaking through key areas of support and resistance.

The push from 1.2800 to 1.2850 during early NY trading was due to the ADP Employment figure that came out at 8:15 est.  The number was a big disappointment as it posted at -10k versus the expected figure of +15k.  This means there was a loss of 10,000 jobs instead of the expected gain of 15,000.  The focus in the United States is heavily on employment figures.  The very poor labor market conditions are weighing on economic recovery and this number today is yet another confirmation that the U.S. economy is really struggling.  Economists and investors know this, but each disappointing figure just makes it worse.

The ADP Employment number can also be a leading indicator for Friday’s Non-Farm Payroll, and if it is in this case, we could see a very strong bout of risk aversion enter the market.  The question is which direction will the Dollar go?

Case for Dollar Weakness

Generally, when U.S. data comes out very poor, the Dollar tends to get strong as investors rush into the safety of the U.S. Dollar.  Then, as U.S. data comes out good, investors tend to sell the Dollar as they rush out of the low-yielding Dollar and into higher-yielding currencies.  However, during the last 3 months we have seen this correlation break down.  During the months of June and July, market participants aggressively sold the U.S. Dollar as key economic data came out negative.  Let’s break down why this has been happening.

The current global recovery is facing a major wall of resistance as the U.K., U.S., China, and the EuroZone are all facing uncertain financial conditions.  The U.S., however, seems to be facing the most difficulty at the moment.  China is still moving forward in very strong fashion, they are simply going through a period of slower than usual growth.  The same seems to be true in the U.K. and the EuroZone.  The U.S. is in a different place, though.  In the U.S., the threat is not only an economic slow-down, but an actual economic contraction.  Key economic indicators seem to be pointing to a possible double-dip recession in the United States, and some economists are beginning to predict that the Q3 GDP may read negative in the U.S.  Two consecutive quarters of negative GDP constitutes a recession.  Since the U.S. is really facing this potential threat alone, investors are beginning to raise the possibility of selling the U.S. Dollar as U.S. news continues to come out negative.

If this phenomenon continues, it could serve disastrous for the U.S. Dollar.  Investors have long been not interested in holding the Dollar during good times because of the incredibly low yield offered.  However, the market has tended to hold the Dollar during bad times since investors want the safety of their capital above everything else.  What will happen if the U.S. heads into economic contraction and other developed nations do not?  How will this affect the U.S. Dollar?

Most likely the U.S. Dollar will weaken significantly because there will be no reason for investors to hold it.  This could be the beginning of the great U.S. Dollar bear run that many economists and experts have been predicting for some time.  We have seen hints of this phenomenon unfold during June and July and we have seen it again today.

Case for Dollar Strength

Unfortunately, it seems that the only case for real U.S. Dollar strength during the 2nd half of 2010 and into 2011 is if the global economy slows significantly.  Currently, investors are unsure of the economic outlook.  There are many mixed signals in the market, and the economic outlook is probably more uncertain right now than in recent history.  At the beginning of The Great Recession, at least investors knew we were in trouble.  Now, no one is sure.  Are we going to rebound and move up from here, or is there still significant downside risk?  Of course, there is downside risk, but no one knows how far we will fall, if we will fall, or when we will fall if we do.  The outlook is very uncertain.

As long as the global outlook remains uncertain, the U.S. Dollar should find strength as investors are unwilling to completely depart from the safety of U.S. Treasuries.  However, if the global economy does deteriorate during the next month to several months, and it becomes clear that other countries are in the same degree of trouble as the U.S., then the Dollar should remain in bullish mode.

Lately, we have seen poor U.S. news come out, the market sells the Dollar aggressively, and then after 15-30 minutes of Dollar selling, the market reverses course and begins buying the Dollar only to retrace all the Dollar weakness and actually move into further Dollar strength within several hours.  This is what is playing out during the NY trading session at the moment, as investors remain very uncertain of the economic outlook.

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Stocks and Risky Currencies Fall, Gold Jumps on PBOC Rumors, Moody`s Comments

Original Article from ForexTraders Forex News and Market Commentary

Yesterday’s Asian session saw a lot of activity and was generally dominated by sales, but the American market seems to have found some floor on somewhat positive confidence and home sales data. The market seems to be rowing against the currents, however, because the positive nature of the releases is only on the surface.

Among today’s news, neither the report about better than expected industrial production rates (0.3% vs. -0.4%)in Japan in August, nor data on growth of retail sales have done much to help Japanese stocks. Nikkei was down by more than 3 percent, and most Asian stock markets registered losses, even as currencies remain strong against the USD. In U.S. better than expected home sales data for June failed to make any impact since we already possess disastrous numbers for July.

Moody’s warns about Chinese banks

Apart from uncertainty caused by Japanese inaction,pessimism about Asia was boosted today on a report by Moody’s, via the Telegraph, about the unsustainability of the current lending practices in mainland China, where the government is risking future stability by supporting bank lending through debt (i.e. higher leverage).

“Moody’s said China Investment Corporation (CIC), the country’s sovereign wealth fund, borrowed $8bn last week to recapitalise three state-owned banks, using debt rather than genuine equity to boost bank capital.

The agency said that beefing up the banks by this method is “credit negative” for China as a whole: “The increases in assets and equity are artificial and without real economic substance. The increase in reported equity enables the banks to lend more and effectively leverages up the system.”

• Weird rumors about Zhou Xiao Quan defecting leads to early Asian sell-off

  Testimony to the degree of nervousness that exists in the markets about China right now, Asian session saw major a sell-off upon claims that the PBOC Head, Zhou XiaoQuan, who had not been visible for a while in the media, had defected fearing punishment for large losses of about $430 billion suffered in consequence of his team’s FX management strategies.

  China may be a strange place in many ways, but it is not North Korea. One has to look a long way back to the past, to the times of the Zhao Ziyang, for example, to find the kind of ostracism that might conceivably compel an official to leave the country. The fact that rumors like this can find credibility is nothing more than a sign of how skeptical many people have become about the multiple Chinese bubbles, but even with all the problems in the country, the head of the central bank defecting because he fears punishment is just too outlandish to be believed.

Israel says Iran may attack a Middle-East nation, Iran threatens to bomb Dimona

The problems between Iran and Israel are not new, but the intensity of rhetoric has been increasing for the past three months or so. In yet another step of escalation, an Iranian official is quoted as saying that the country will bomb Dimona Nuclear Reactor if it gets attacked, as Israeli minister Dan Meridor, in a question and answer session on Israeli radio in Farisi, expressed his fear that Iran would attack a Middle Eastern nation.

What he means is probably that the Iranians will respond to American bombing of their reactors by attacking Israel, which is, in his thinking, a third party not involved in hostilities. We suspect that this type of comment reflects the desire of Israelis to leave the military attack to the US due to their frontline status, and the greater risks they would face in the face of an Iranian counterattack. That also speaks against a unilateral, pre-emptive Israeli attack on Iranian installations.

It is of course difficult to reach conclusions on the basis of isolated statements such as these, but given the importance of the Gulf Area in maintaining global economic stability, traders must keep an eye on the region even if matters appear to progress (almost) smoothly at the moment.

CFTC withdraws reform proposals, leaving retail forex clients free to (almost) suicide at 100:1 leverage

The CFTC had made some sensible and suitable proposals for reforming the FX market a while ago, but those proposals appear to have been withdrawn in the face intense opposition from lawyers, dealers, and some speculators. The most crucial piece of contention is maximum leverage, naturally, since it is a major cause of the frequently large losses suffered by traders, and the huge profits reaped by brokers.

The CFTC had proposed a regulation capping leverage at 10:1, at just one tenth of the currently available level at 100:1 in the U.S. At the moment, in the EU and the UK even higher leverage is possible, which explains why so many brokers prefer to base their operations in European or British centers. The calculation is simple,:while returns for the trader are often disappointing, the broker makes ten times as much money from the spread at 100:1 leverage than he would at 10:1.

Among other things, according to the statement at the CFTC website, the new, diluted rules will require “the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.“

In other words, the CFTC is aiming to streamline regulation, and end the chaotic state of the retail forex market by establishing straightforward regulatory categories.

Also,

“FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries will be required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements. “

On the whole, pretty much of a disappointment, after we have seen how miserable the consequences of letting an industry regulate itself are in the subprime crisis. The CFTC is letting the NFA determine leverage limits, which means that the brokerage business will get away with whatever limit (or lack of it) serves its interests best.

In sum, we note gold’s powerful rally today, and, in agreement with others, anticipate the breaking of new records in the coming weeks. In other respects, we continue to expect a significant deterioration in global economic stability largely as a consequence of major upheaval in China and the rest of the Asian region. We believe that this phase of the economic downturn lasting since 2007 will reach its climax in Asia, and Europe in the next two years.

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Pound and Euro Price Action Points To Possible Further Downside Movement

Original Article from ForexTraders Forex News and Market Commentary

The EUR/USD and GBP/USD have both continued to move inside of relatively tight trading ranges over the last 2 weeks as investors try to formulate a game plan for the second half of 2010.  Economic signals are quite mixed with the United States facing a severe slow-down in the economic recovery, but the EuroZone appearing to move forward at a steady pace.  You have Fed Chairman Ben Bernanke saying he will pump more stimulus into the U.S. economy, but you have European Central Bank President Jean-Claude Trichet saying that Central Banks should inject no further stimulus and instead focus on trimming huge budget deficits.  These mixed signals in the global economy regarding the current global economic recovery are causing investors to be a bit unsure of which direction the market should go.

EUR/USD

 
The euro has been in a very tight 150 pip range of consolidation since August 20th.  All of last week and this week, investors have been unwilling to break the HI’s and LO’s of this trading range.  Many economists and large fund managers have been calling for the euro to weaken significantly versus the dollar before year’s end.  The primary reason is because the sovereign debt crisis in the EuroZone is expected to resurface at some point this fall as the austerity measures in Greece, Portugal, Spain, Italy, and Ireland begin to weigh heavily on economic growth and drag the EuroZone back into a period of very slow growth or even recession.

However, the drop in the euro was not quite expected to be this soon.  But as we have dropped from the 1.3300 level, the current price action on the euro over the last 2 weeks is definitely pointing to lower levels.
 
You can see on this chart that as price fell from the HI’s of 1.3300, it fell very sharply.  When you have that degree of vertical selling followed by a flat correction at the bottom of the move, it most often means that price is going to make another leg to the downside.  As you can see, price is definitely consolidating at the low of the move, which is a classic signal that lower levels will be seen in the near term.  Of course, the euro has major support at 1.2600, but once it can break the 600 level, the next area of strong support is not until 1.2430, which is the 62% retracement of the entire move up during June and July from the LO of 1.1875 to the HI of 1.3330.  This area should offer strong buying interest if the euro does come down there this week or next week.  However, as the euro has fallen from its HI’s of 1.3300, you can see that both corrections have been very flat, with very little buying interest.  At the moment, things are not looking very good for the euro technically.

GBP/USD

 
Pound price action has been very similar to that of the euro.  Price has dropped quite significantly in August, and now since August 20th, the pound has moved in a relatively tight 200 pip zone of consolidation.  The pound has diverged from the euro quite heavily in London trading today, though.  As the euro has moved back up toward the top side of the range, the pound has moved down on the day to retest support at 1.5375.  The pound looked very bearish in early NY trading as it touched a low of 1.5362 before finding support and moving back up toward 1.5400.
 
As the pound continues to put pressure on the 1.5375 area, we need to see a convincing close on at least the 1 Hour chart to confirm further downside movement.  However, once that downside movement is confirmed, the pound has plenty of room to fall.  The first area of minor support is at 1.5325, which is the 38% retracement of the entire move up during June and July on the Daily Chart, but the strong support that has been formed at 1.5370 may nullify the strength of that line if we begin moving to the downside.  The next area of strong support will be should be at 1.5120, which is the 50% fib and a strong area of support/resistance.  Current price action on the pound is looking quite bearish as there has really been no buying interest in the pound as we have fallen from the HI’s of 1.6000 during the month of August.

U.S. Consumer Confidence

Consumer Confidence came out quite better than expected today at 53.5.  The expected figure was 50.7.  This number is a good sign for the U.S. economy.  Lately, most key economic data has been coming out very negative, and consumer confidence is a huge determining factor of economic strength.  When consumers do not have faith in the economy, the economy tends to get even weaker as consumer demand drops and causes economic growth to falter.  This number today should help to restore a bit of confidence in financial markets.  At this point the fear and general lack of direction in financial markets is not going to be cured by 1 positive economic report, but it definitely will not hurt.  In the FX Market, risk currencies such as the pound and euro immediately strengthened versus the Dollar, but those gains were quickly given up and the market began to move sideways.  More positive reports will needed throughout the remainder of the week to truly abate the current fear that is present in financial markets.

FOMC Report

FOMC Minutes will be released at 2:15 pm this afternoon, and the report is expected to reinforce the general dovish tone that has been coming out of the Federal Reserve for the last month.  When the FOMC report follows directly on the heels of a public speech by Fed Chairman Ben Bernanke, as this one does, it tends to have less of a market impact, so we may not see too much movement this afternoon as a result of the Minutes.  However, if there is any surprise concerning monetary policy decisions for future rate hikes, then we could see some volatility enter the market, but the probability is quite low.

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BoJ Intervention Talk Leads Nowhere, Stock Markets Fall on Weak Income Data

Original Article from ForexTraders Forex News and Market Commentary

Gold and the dollar were, up while currencies like the Euro depreciated against others on concern that the Fed’s actions will not be enough to support growth. Income and spending numbers released early in the day showed that U.S. consumers are spending from their savings which doesn’t bode well for the recovery. On the whole, today was not heavy on data which helped traders focus on interpreting and analyzing last week’s developments.

Most Asian currencies were higher against the USD today in response to the disappointing “emergency” action of the BoJ. Stock markets were mixed, as the Nikkei fell, while the Hang Seng was up.

Japan intervention talk comes to nothing; “bold” action restricted to stimulus

Precisely as anticipated on this page and elsewhere last week, the decisive and bold action threatened by Japanese officials has been discovered to be nothing but an empty bluff. In a move that borders on the ridiculous, the BoJ has decided, after what was touted as an “emergency” meeting, to announce a secondary 6-month $10 trillion yen fixed-rate liquidity facility in addition to the existing three-month 0.1 percent loans introduced in December. One can imagine the discussion between officials as they discussed their options. It is obvious that the PM was reminded in no uncertain terms of the futility of trying to intervene in the FX market without support from other central banks, how unlikely this support was to materialize in the face of well-understood U.S. opposition, and how limited Japan’s options were in combating the USDJPY trend otherwise. In his turn, we suspect that the PM was unwilling to leave the meeting without annoucing something tangible, and the compromise was this feeble loan program that has not managed to raise a single feather in the FX market so far. Indeed, the Yen rose a short time after the announcement of “bold” action.Further, data on positioning of large speculators shows that Yen longs were continuing to be built up last week in an indication of how incredulous the market already is against the daily threats of intervention (on the other hand, the longs are high by historical standards, so a natural reversal may come in soon, helping the Japanese relax a little). The threats seem to generate the opposite of the intended effect, creating an image of a government that is so powerless that the only thing that it can spend is its prestige and credibility.

The shady Mr. Ozawa’s challenge may at some point for the PM to take the futile, and unconstructive path of a unilateral intervention. Even this appears to be unlikely, but it can’t be ruled out because of survival issues faced by the PM. The yen story will no doubt continue, and we’ll update you as soon as events progress into the autumn.

CNY continues its series higher-than-anticipated USDCNY fixes

The PBOC fixed the CNY at 6.8025 vs. 6.8001 on Friday, futher extending the uptrend. The latest high maintains the currency at its mid-June levels, and we can talk of the reintroduction of the peg during that period.

Upon news that the USDCNY peg was broken, we had commented on these pages about the absurdity of the notion that any regime change had taken place, noting that in the context of controlled appreciation, the PBOC would be more than ready and willing to revert to the peg without even making a statement. The Chinese manage their currency and their economy in a highly pragmatic manner, and are not beholden to slogans or mottos. The declaration and the qualifications that were announced by the PBOC on June 21^st were not an indication of anything more than a temporary readjustment to the exchange rate policy, which had been maintained as a fix up until then. And as we now observe, the bank did not hesitate to delay its appreciation plan as soon as it became clear that the economic situation was more fluid than they desired.

There is no question that the Chinese are aware of the necessity of revaluing the Yuan, but to undertake drastic action they will have to be shown the consequences of inaction clearly. Certain tariffs recently imposed in the U.S. goes some way towards this purpose, but stronger action is necessary if the Chinese are made to revalue on a cost/benefit assessment. As far as we are concerned, the Yuan issue is one of the two main features of this phase of the economic downturn along with the future of the Euro, and we’ll continue to focus on developments here.

Finally, the decision by the PBOC to allow exporters to deposit some of their foreign currency income overseas, without converting it to the Renminbi, is of note. It shows once again the tricks enjoyed by the PBOC directed at resolving sterilization issues in the domestic market while refusing to support sustained and meaningful appreciation. The small amounts channelled out of the country are too small to ease domestic problems, but big enough, probably, to create bubbles and imbalances in other smaller nations if export cash is redirected there (which will happen anyway through indirect channels even if the proceeds are invested in U.S. Treasuries).

Eurozone August economic sentiment better than expected

As with most other recent releases from Europe, confidence numbers were robust, coming at 101. 8 vs. 101.3 in the previous month. Business sentiment was weaker, while inflation expectations were unchanged. The first half of this year has not been a bad period for Europe, so we are not surprised to see some improvement in confidence. On the other hand, various indicators of growth and confidence appear to be plateauing out, and with background issues promising to make the second half of the year a different experience for the continent, we suspect that European bullishness will not be long-lasting.

Many are still digesting the food-for-thought supplied by the Fed chairman at Jackson Hole, but we don’t think that the Fed has a lot of relevance as it has already done just about anything that it can do. The Japanese experience shows that the more-of-the-same approach of supplying ever increasing amounts of cheap money is exponentially less effective with the passage of time, and there is no reason to think that the experience here will be very different. The basis of the chairman’s optimism about being able to revive economic activity was the idea that effective stimulus, delivered early, would prevent the kind of deterioration suffered during the Great Depression. In other words, it either works early, or it doesn’t inspire much hope of working at all. It is true that the Fed has prevented a general meltdown, but there is barely any signal that it has managed to prevent the shift in psychology that is the root of all long-lasting economic downturns. That is why we remain highly skeptical about its relevancy for the foreseeable future.

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Japanese Yen Hits Another 15 Year High Against the Greenback

Original Article from ForexTraders Forex News and Market Commentary

Amid a buzz of speculation over whether the Bank of Japan would intervene, the Japanese Yen hit yet another 15 year high against the U.S. Dollar last Tuesday.

Before USDJPY made its new low of 83.57, the Japanese Trade Balance had been released showing a surplus of 0.61T that was somewhat higher than the expected 0.47T.

Official Phone Discussion Gives Impression BOJ Will Stand Aside

Prior to the new low, Prime Minister Naoto Kan and BOJ Governor Shirakawa had a phone discussion about recent forex market developments and “economic conditions at home and abroad”. This gave forex traders the impression that the BOJ would hold off on intervening against the Yen, and so they basically began selling USDJPY.

Nevertheless, the U.S. Dollar quickly recovered from its lows by trading back up above the 84.00 level. USDJPY eventually reached a high of 85.18 before closing the Tuesday session at 84.89.

On Wednesday, Yoshihiko Noda, the Japanese Finance Minister, held a meeting with Prime Minister Kan and commented that Japanese authorities would, “have to take appropriate action when necessary” to counteract the stronger Yen levels.

Furthermore, in additional comments made later that day to reporters in Tokyo, Finance Minister Noda stated, “We have to take appropriate action when necessary, though I plan to continue to watch currency movements very closely with great interest.” He went on to say that, “My basic understanding is that movements have been one-sided.”

A History of Japanese Central Bank Intervention

The last time the Bank of Japan intervened in the currency markets was on March 16^th, 2004, when the Japanese Yen was trading at 109.00 to the U.S. Dollar. The Bank sold a total of 14.8 trillion Yen in the first quarter of 2004 after having sold a total of 20.4 trillion Yen in 2003. Despite the intervention, the Yen ended 2004 lower at 102.63 to the Dollar.

Before the 2003 to 2004 period, the Bank of Japan actively intervened in the currency markets from September 17^th of 2001 to June 28^th of 2002, along with the New York Federal Reserve Bank who stepped in to intervene to weaken the Yen on September 27^th 2001. The USDJPY level at the time of these interventions was near 123.00 and intervention continued through the end of June of 2002.

In addition, from January of 1999 through April of 2000, the Bank of Japan intervened 18 times in the forex market, as well as once through the Federal Reserve and once through the European Central Bank. Nevertheless, despite this intervention, the Yen continued strengthening, eventually reaching the 102 level by April of 2000.

The Japanese Yen had made its previous high point on April 1^st of 1995 – no joke intended – when the Yen reached a postwar high of 79.75 to the Dollar after repeated interventions by the Bank of Japan and the U.S. Federal Reserve.

Fed and ECB Support for BOJ Intervention Seen as Unlikely

Because of the current global economic situation, a concerted intervention effort to weaken the Yen by the Bank of Japan acting along with the U.S. Federal Reserve and/or the European Central Bank is currently seen as rather unlikely by forex market observers.

Furthermore, due to soft economic situations in both Europe and the United States, neither region would seem to be very willing to see their currencies get much stronger.

Basically, a stronger currency may mean consumers pay cheaper prices for foreign imports but it also means less local money would be received for a country’s exports. Both of these factors can be a deterrent to a country’s economic growth.

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Weekly Recap and Outlook for USDJPY – 8/30/2010

Original Article from ForexTraders Forex News and Market Commentary

USDJPY saw volatile trading last week, initially starting the week off on a firm note by making its weekly high of 85.69 on Monday. The pair then began trading lower after Prime Minister Naoto Kan and BOJ Governor Shirakawa had a phone discussion about recent forex market developments and “economic conditions at home and abroad”. This prompted the nervous market to think that the BOJ may not be taking immediate market action to reverse or slow the recent strength in the Japanese Yen.

Tuesday saw the rate trade to its weekly low of 83.57 that represents a fresh 15-year low for the rate after the Japanese Trade Balance came out showing a surplus of 0.61T that was considerably better than the expected 0.47T. Also, the previous number saw a slight upward revision from 0.46T to 0.51T. Yoshihiko Noda, the Japanese Finance Minister, also held a meeting with Prime Minister Kan and commented that Japanese authorities would, “have to take appropriate action when necessary” to counteract the stronger Yen levels.

This finally did the trick, so USDJPY then politely reversed and began trading higher on Wednesday in spite of the release of weak U.S. housing market data and despite a lack of economic data from Japan. The pair then consolidated on Thursday as the Kansas City Fed’s Jackson Hole Symposium began that had BOJ Governor Shirakawa and other high level Japanese finance officials attending.

Also on Thursday, Japanese Household Spending showed an increase of only 1.1% for the year against an expected rise of 1.5%. Also, Tokyo Core CPI fell by -1.1% for the year, a number that was just slightly above the market consensus of a -1.2% drop. In addition, Japanese National Core CPI dropped by 1.1% for the year, in line with the market’s expectations. Thursday also saw the release of the Japanese Unemployment Rate that contracted to 5.2% and came out a bit better than the 5.3% that had been expected.

Friday saw the Greenback rebound strongly versus the Yen after a slightly better than expected U.S. GDP number came out. Also weakening the Yen were comments from Prime Minister Kan that, “volatile movements in the currency market have a negative impact on economic and financial stability.” USD/JPY then proceeded to close the week at 85.33, showing just a modest drop of 0.3% for the week.

Fundamental Outlook for USDJPY

The primary market-moving economic data releases and policymaker speeches scheduled for this coming week in Japan and the United States are as follows:

Japan:

The upcoming economic data calendar in Japan is similar to last week in terms of activity, and offers some important numbers for the forex market to ponder. Data releases scheduled feature the important Japanese Retail Sales data due out on Tuesday.

Monday is quiet, so Tuesday starts the week off with the release of the highlighted Japanese Retail Sales (3.1% y/y).

Also out on Tuesday are Manufacturing PMI (last 52.8), Preliminary Industrial Production (-0.3% m/m), Average Cash Earnings (0.9% y/y) and Housing Starts (2.5% y/y).

Wednesday has nothing of note scheduled for release, but Thursday has the Japanese Monetary Base (6.3% y/y).

Friday ends the week with Capital Spending (-6.6% q/y).

United States:

The upcoming week of economic data releases out in the United States heats up substantially and once again offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features key employment data that includes Non Farm Payrolls and the U.S. Unemployment Rate that are both due out on Friday.

Monday starts the active week off with the release of Core PCE Price Index (0.1% m/m), Personal Spending (0.4% m/m) and Personal Income (0.3% m/m). In addition, a speech by FOMC Member Bullard is scheduled in St. Louis.

Tuesday has the S&P/CS Composite-20 HPI (3.7% y/y), the Chicago PMI (57.5), the CB Consumer Confidence survey (50.9), as well as the important FOMC Meeting Minutes.

Wednesday offers Challenger Job Cuts (last -57.2% y/y) and the important ADP Non-Farm Employment Change (20K) that might provide a clue to Friday’s major numbers. In addition, Wednesday has scheduled ISM Manufacturing PMI (53.3), ISM Manufacturing Prices (55.8), Construction Spending (-0.4% m/m) and Total Vehicle Sales (11.6M).

Thursday features has the important weekly Initial Jobless Claims (477K), as well as Revised Nonfarm Productivity (-1.9% q/q), Revised Unit Labor Costs (1.4% q/q), Pending Home Sales (-1.5% m/m) and Factory Orders (0.5% m/m).

Friday will provide the weekly highlight since it features the key Non Farm Payrolls data (-101K) and the U.S. Unemployment Rate (9.6%). Also due out on Friday are ISM Non-Manufacturing PMI (53.6) and Average Hourly Earnings (0.1% m/m).

The Technical Picture for USDJPY

On the technical front, USDJPY saw a sharp sell off last Tuesday that sent the rate to a new fifteen year low at the 83.57 level. After that blowout, USDJPY then traded correctively higher throughout the rest of the week, and eventually peaked at 85.43 on Friday before closing down slightly at 85.33, falling an overall 0.3% on the week.

If the current corrective rally continues, USDJPY should meet resistance at a falling trend line that can now be drawn at 86.90. Furthermore, the recent breakout of a presumed triangle pattern has now met its measured move objective of 83.81 in the recent decline to the 83.57 level. Now that the 84.80 support has given way, the prevailing down trend could well send the rate much lower, with 79.75 being the next major support level showing on the chart for USDJPY.

The rate also continues to trade well below its 200-day Moving Average that has now started to slope gradually downwards again after having pretty much flattened out. This key indicator now comes in at the 90.03 level and provides an increasingly bearish medium term outlook for the rate.

Furthermore, the recent low in USDJPY at 83.57 was accompanied by a fresh low in the 14-day RSI that almost penetrated into oversold territory. After the subsequent corrective rally that took the indicator right up to its upper declining trend line, the key indicator currently comes in the lower part of neutral territory at 41. This level should not impede further downside action much in the coming week, if at all.

After closing at 85.33 on Friday, resistance for USDJPY shows up in the 85.43/90 region, at 86.35, and in the 86.96/87.01 region. Initial strong support is seen in the 84.71/88 region, and below that at 84.25, at 83.57, and at the major 79.75 support level.

Overall, this technical scenario for USDJPY argues for continuing to trade the rate on the short side – both from a medium term and short term basis – although, since the rate is currently at historically low levels, traders doing so should watch out for possible sharp upward moves. Furthermore, medium term traders holding shorts could now start looking for dips to cover on near current levels, especially if additional regular RSI/Price divergence is seen on any new lows.

Figure 1: Daily candlestick chart of USDJPY showing its 200-day MA in red, Bollinger Bands in green, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.

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Weekly Recap and Outlook for USDCAD – 8/30/2010

Original Article from ForexTraders Forex News and Market Commentary

USDCAD saw choppy trading in the forex market last week, initially trading higher off of its low for the week of 1.0484 that was seen Monday. The rate continued rising sharply on Tuesday after Canadian Core Retail Sales came out at disappointing levels by showing a fall of -0.5% versus the expected rise of 0.1%. Also, the previous number saw a downward revision from -0.1% to -0.3%. Furthermore, Retail Sales were up by just 0.1% for the month, versus the consensus of a +0.4% rise. The previous Retail Sales number was revised down from -0.2% to -0.4%.

USDCAD then traded to its weekly high point on Wednesday after Canadian Corporate Profits fell by a disappointing -1.8% for the quarter, versus a former reading of a +4.8% rise. The pair then reversed and started trading softer on the back of a strong rally in gold prices and softer U.S. housing market numbers that began depreciating the Greenback.

The pair continued trading softer on Thursday, in spite of a favorable U.S. Initial Jobless Claims release. Friday saw USDCAD continued to trade lower – despite a better than expected result for U.S. GDP data. The rate eventually ended the week at 1.0520, showing a modest gain of 0.3% for the week overall.

Fundamental Outlook for USDCAD

The primary market-moving economic data releases and policymaker speeches scheduled for this week in Canada and the United States are as follows:

Canada:

This coming week of Canadian economic data releases is about as calm as last week, but it will still offer some interesting numbers for the forex market to digest. They feature the important Canadian GDP data due out on Tuesday.

Monday starts the week out with the release of the Canadian Current Account (-10.2B), RMPI (0.3% m/m) and IPPI (0.5% m/m).

Tuesday then has the highlighted Canadian GDP number (0.2% m/m) to close out the week since nothing else of note is scheduled for release.

United States:

The economic data release calendar for the United States this week heats up again this coming week and offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features key employment data that includes Non Farm Payrolls and the U.S. Unemployment Rate that are both due out on Friday.

Monday starts the active week off with the release of Core PCE Price Index (0.1% m/m), Personal Spending (0.4% m/m) and Personal Income (0.3% m/m). In addition, a speech by FOMC Member Bullard is scheduled in St. Louis.

Tuesday has the S&P/CS Composite-20 HPI (3.7% y/y), the Chicago PMI (57.5), the CB Consumer Confidence survey (50.9), as well as the important FOMC Meeting Minutes.

Wednesday offers Challenger Job Cuts (last -57.2% y/y) and the important ADP Non-Farm Employment Change (20K) that might provide a clue to Friday’s major numbers. In addition, Wednesday has scheduled ISM Manufacturing PMI (53.3), ISM Manufacturing Prices (55.8), Construction Spending (-0.4% m/m) and Total Vehicle Sales (11.6M).

Thursday features has the important weekly Initial Jobless Claims (477K), as well as Revised Nonfarm Productivity (-1.9% q/q), Revised Unit Labor Costs (1.4% q/q), Pending Home Sales (-1.5% m/m) and Factory Orders (0.5% m/m).

Friday will provide the weekly highlight since it features the key Non Farm Payrolls data (-101K) and the U.S. Unemployment Rate (9.6%). Also due out on Friday are ISM Non-Manufacturing PMI (53.6) and Average Hourly Earnings (0.1% m/m).

Technical Outlook for USDCAD

On the technical front, USDCAD sustained its break last week of the falling upper trend line that can now be drawn at 1.0454 of the rate’s former consolidation within what seems to have been a descending triangle pattern. The rate went up as high as 1.0665 on Wednesday before trading lower to close the week at 1.0520 on Friday. This close left the rate up 0.3% overall on the week.

Furthermore, the rate now seems to be moving down towards the level of the aforementioned declining trend line now at 1.0454. If the rate manages to break below that line then it will return into its consolidation pattern and the lower trend line of this pattern can be drawn at 1.0107 with a more or less flat slope. Otherwise, if that upper line holds in a sustained breakout, then further upside would be suggested toward the triangle pattern’s measured move objective which is ~744 pips. This would yield a potential target of 1.1216 from the original 1.0472 breakout point.

In addition, last week’s price action has placed USDCAD’s 14-day RSI in the upper central part of neutral territory at 56. This comes in right around the level of the declining trend line drawn on that indicator, although recent rising price action seems to have now sent the key RSI indicator above its former prevailing down channel.

Also, the medium term outlook for the pair has reverted to neutral since USDCAD continues to trade above the level of its 200-day Moving Average that now comes in at 1.0386, and which has now more or less flattened out.

With the rate having closed at 1.0520 last Friday, the chart for USDCAD now shows resistance at 1.0584, in the 1.0665/76 region and above that at 1.0742. Support for the rate shows up in the 1.0490/1.0516, 1.0347/90, 1.0201/1.0244 and 1.0104/79 regions ahead of key psychological support seen at the 1.0000 parity level.

From a short term perspective, this technical scenario suggests the strategy of looking to trade the possible breakout of the descending triangular consolidation by buying near current levels in USDCAD for the possible 1.1216 measured move target. Nevertheless, traders should watch for signs of the rate making a sustained breaking back down below the triangle’s upper downward slanting trend line that would instead indicate a close and reverse strategy.

The suggested medium term trading strategy would involve remaining neutral before seeking to establish directional positions upon the triangular consolidation pattern’s sustained break that now seems as though it may have just come to the upside.

Figure 1: Daily candlestick chart of USDCAD showing its 200-day MA in red, Bollinger Bands in green, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.

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Weekly Recap and Outlook for the U.S. Financial Markets and Dollar – 8/30/2010

Original Article from ForexTraders Forex News and Market Commentary

The Greenback turned in a mixed performance last week, rising just a hair against the Euro, Canadian Dollar and Sterling and down against the Yen, New Zealand and Australian Dollar. The price action – which went both ways – began early in the week with news out on Tuesday that S&P had downgraded Ireland’s credit rating from AA+ to AA-.

The U.S. Dollar was up +0.2% against the Euro, +0.1% against Sterling and 0.3% against the Canadian Dollar, while it declined 0.3% against the Yen and 0.7% against both the Australian and New Zealand Dollars.

U.S. stocks lost ground overall with the Dow Jones Industrial Average declining by -62.97 or 0.62% to 10,150.65, while the S&P 500 lost 7.38 or 0.46% to 1,595.07. The broad based Nasdaq composite lost -26.13 or 1.20% to close at 2,153.63 and the Russell 1,000 dropped -3.78 or -0.64% to close at 586.14.

Commodities were mostly higher with Crude Oil gaining $1.71 or 2.33% to $75.17 per barrel while gold gained $11.50 per ounce to close the week at $1,235.00 per ounce. In addition, the grain market continued climbing, with Wheat now showing an impressive gain of 110.10% for the year.

Yields on U.S. Treasuries were mostly unchanged to slightly lower from the previous week, showing no significant change with the 3 month T-bill yielding 0.15%, the 30 year T-bond yielding 3.69% versus 3.67% the previous week.

Overall, the U.S. Dollar had an uneventful week with most economic releases continuing to show a deteriorating economy, with the exception of a few minor exceptions.

Last Week’s U.S. Data Review

Economic releases in the United States were sparse last week, beginning on Tuesday in the absence of any major economic releases on Monday.

Tuesday saw Existing Home Sales come out at 3.83M, considerably lower than the expected 4.68M with the previous number revised downward from 5.37M to 5.26M. Also on Tuesday, the Richmond Manufacturing Index printed at 11 versus an expected 14 print and considerably lower than the previous release of 16.

Wednesday saw Durable Goods Orders increase by just 0.3% month on month, significantly lower than the consensus of a 2.9% increase, nevertheless the previous number was revised upward from a decline of -0.1% to an increase of +0.1%. Core Durable Goods were even more disappointing, declining by -3.8% month on month, versus an expected rise of +2.9%, however the previous number was revised upward from -.06% to an increase of +0.2%. Also out on Wednesday were New Home Sales at 276K versus 333K expected with the previous number revised down from 330K to 315K and HPI, which declined by -0.3% month on month, versus an expected increase of +0.1%.

Thursday was the first day of the Kansas City Federal Reserve Bank’s Economic Symposium in Jackson Hole, Wyoming. In a speech to participants, Ben Bernanke, Fed Chair reiterated the Fed’s willingness to apply further stimulus measures to the economy if future data warrants action.

Also on Thursday, Initial Jobless Claims showed improvement for the first time in weeks, dropping to 473K from a revised 504K (from 500K), versus an expected 488K, while Mortgage Delinquencies declined to 9.85% versus a previous reading of 10.06%.

The highlight of the week came on Friday as Preliminary GDP rose by 1.6% in the second quarter, down from a previous reading of 2.4%, nevertheless, the number edged the consensus of a 1.5% increase. Also out on Friday was the Preliminary GDP Price Index which showed an increase of 1.9% versus 1.8% expected, and the Revised University of Michigan Consumer Sentiment indicator printing at 68.9, versus an expected 69.8, and just slightly below the previous reading of 69.6.

Fundamental Data Outlook for the United States

The coming week of economic data releases for the United States heats up considerably and once again offers some interesting data for forex traders on the U.S. economy. The U.S. economic calendar features key employment data that includes Non Farm Payrolls and the U.S. Unemployment Rate that are both due out on Friday.

Monday starts the active week off with the release of Core PCE Price Index (0.1% m/m), Personal Spending (0.4% m/m) and Personal Income (0.3% m/m). In addition, a speech by FOMC Member Bullard is scheduled in St. Louis.

Tuesday has the S&P/CS Composite-20 HPI (3.7% y/y), the Chicago PMI (57.5), the CB Consumer Confidence survey (50.9), as well as the important FOMC Meeting Minutes.

Wednesday offers Challenger Job Cuts (last -57.2% y/y) and the important ADP Non-Farm Employment Change (20K) that might provide a clue to Friday’s major numbers. In addition, Wednesday has scheduled ISM Manufacturing PMI (53.3), ISM Manufacturing Prices (55.8), Construction Spending (-0.4% m/m) and Total Vehicle Sales (11.6M).

Thursday features has the important weekly Initial Jobless Claims (477K), as well as Revised Nonfarm Productivity (-1.9% q/q), Revised Unit Labor Costs (1.4% q/q), Pending Home Sales (-1.5% m/m) and Factory Orders (0.5% m/m).

Friday will provide the weekly highlight since it features the key Non Farm Payrolls data (-101K) and the U.S. Unemployment Rate (9.6%). Also due out on Friday are ISM Non-Manufacturing PMI (53.6) and Average Hourly Earnings (0.1% m/m).

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