Euro Follows Broader Markets as Europe Attempts to Sort Out Problems

EUR/USD

The EUR/USD failed to hold onto earlier gains generated by broader risk appetite as concerns over the European debt crisis and the U.S. economy spark a late sell off. Optimism was high overnight as the Obama administration and the GOP agreed to extend unemployment benefits and extend existing tax cuts the wealthy. Risk appetite remains a main driver of the pair’s price action despite the concern over Ireland, Spain and Portugal, evidence by the 64% correlation between it and the Dow. Meanwhile, U.S. and European yield expectations have started to grow in influence with both explaining 20% of direction. Fed QE has raised concerns over future inflation and has markets starting to price in abrupt tightening. Conversely, an increase in ECB stimulus efforts has dimmed the yield outlook for the single currency. The passing of the new Irish budget failed to help generate bullish sentiment, which will leave us to take our cues from broader trends when trading the euro/dollar.

EUR Interest Rate Expectations

USD Interest Rate Expectations

ECB Interest Rate Expectations

The European Central Bank has aggressively resumed their bond purchases as they look to restore investor confidence in European sovereign debt. Meanwhile, E.U. ministers voted to not provide aid packages for Spain and Portugal as there is confidence that the monetary authority’s actions will negate the need for help. The central bank increasing their additional measures has pushed out the horizon for a rate hike with Overnight Index Swaps now pricing in 32.4 bps in tightening over the next versus 49.6 on November 18th. Discuss this and trading ideas join the EUR/USD forum.

Credit Suisse (OIS) ECB

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

The outlook for U.S. interest rates has remained unchanged for the past month despite a dismal labor report and the ongoing issues in Europe. Talk of additional QE from Ben Bernanke also failed to dim the outlook for a rate hike, as the prospect for more pump priming has only fueled inflation fears. The upcoming economic docket is light but we could see the extension of unemployment benefits add to the prospect for future tightening. However with the FOMC rate decision looming markets may wait ti see what policy makers say before making any new bets.

Source Bloomberg – Prepared by John Rivera

Risk

Stocks ended the day flat following their late selloff after the S&P 500 hit a two year high and the Dow just missed its yearly high. The blue chip index could be settling into a short-term range if we see continued bearish momentum. 11,000 remains a major support barrier and another test of the psychological level could be ahead, which doesn’t bode well for EUR/USD bulls given their strong correlation. Discuss this and other fundamental data in the Economics Forum.

Dow (Daily)

Source Bloomberg – Prepared by John Rivera

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com

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FOREX: Euro Hopes for Lifeline as All Eyes Turn to the ECB

By Ilya Spivak, Currency Strategist Thu Dec 02 06:28:00 GMT 2010 Key Overnight Developments

NZ Dollar Outperforms as Stocks Rise on US Reports, ECB Hopes Australian Dollar Misses Risk Rally on Soft Retail Sales, Trade Data Critical Levels

The Euro continued to follow the risky asset complex higher in overnight trade, adding 0.2 percent against the US Dollar. The British Pound yielded a flat result, oscillating in a narrow range above the 1.5600 figure. We remain long the US Dollar against the Euro, Kiwi and Japanese Yen.

Asia Session Highlights

Capital Spending excl Software (3Q)

Trade Balance (Australian dollar) (OCT)

The New Zealand Dollar outperformed once again in overnight trade, adding 0.6 percent on average against its top counterparts as Asian stock exchanges followed Wall Street higher, boosting the risk-correlated currency. The MSCI Asia Pacific regional benchmark index rose 1.5 percent – the most in nearly a month – following an encouraging set of US economic data as well as amid speculation that the European Central Bank may announce new measures to snuff the sovereign debt crisis festering in the Euro Zone at the upcoming monetary policy meeting (see below).

As yesterday, the Australian Dollar failed to share in the risk-driven advance, yielding a largely flat result on the session after October’s Retail Sales report proved disappointing. Receipts fell 1.1 percent, marking the first decline in eight months and the largest since July 2009. The Trade Balance surplus widened, but the outcome failed to excite considering it came courtesy of a drop in imports rather than robust export growth. Inbound shipments fell A$558 million – or 2.5 percent – while overseas sales added A$253 million (1.1 percent).

On balance, it’s no surprise the Kiwi is overtaking its antipodean counterpart as the go-to beneficiary of risk appetite. The Reserve Bank of Australia has turned noticeably timid – with markets are betting on no further rate hikes for the next 12 months – while the RBNZ is tipped to add 58bps to benchmark borrowing costs over the same period according to a Credit Suisse gauge of traders’ priced-in expectations.

Euro Session: What to Expect

French ILO Mainland Unemployment Rate (3Q)

French Mainland Unemployment Change (3Q)

French ILO Unemployment Rate (3Q)

Gross Domestic Product (YoY) (3Q)

Gross Domestic Product (QoQ) (3Q)

Retail Sales (Real) (YoY) (OCT)

Purchasing Manager Index Construction (NOV)

Euro-Zone Gross Domestic Product s.a. (QoQ) (3Q P)

Euro-Zone Gross Domestic Product s.a. (YoY) (3Q P)

Euro-Zone Household Consumption (QoQ) (3Q P)

Euro-Zone Gross Fixed Capital (QoQ) (3Q P)

Euro-Zone Government Expenditure (QoQ) (3Q P)

Euro-Zone Producer Price Index (MoM) (OCT)

Euro-Zone Producer Price Index (YoY) (OCT)

European Central Bank Rate Decision (DEC)

The monetary policy announcement from the European Central Bank takes top billing on a busy calendar of scheduled event risk, with investors hoping for bold action to contain sovereign stress on the edges of the currency bloc after a story in the Financial Times suggested Jean-Claude Trichet and company may increase their purchases of periphery bonds, thereby lowering borrowing costs and boosting liquidity. Furthermore, if the amount of renewed purchases is sufficiently large, this would markets that the ECB is confident enough in Europe’s ability to contain the crisis to risk a sovereign default against itself, an unequivocally bold statement that would likely send the Euro as well as the entire risky asset complex higher.

On balance, such an outcome seems unlikely. The ECB has given no indication that it was prepared to commit to expanding its balance sheet and several of its members (including Axel Weber, the likely candidate to succeed Trichet as the bank’s President next year) have publicly expressed their unease with the modest bond purchases already being undertaken. Furthermore, the ECB is notoriously incremental and slow-moving in its approach to monetary policy, hinting that a smaller step, like pausing the unwinding of its emergency long-term lending facilities (LTROs) for Euro Zone banks, are likely to come first. Indeed, the ECB may opt for a still more cautious approach, whereby LTROs are kept in place for the banks of those countries still under stress while phasing out those for other Euro Zone members as scheduled.

Elsewhere on the docket, the second revision of Euro Zone Gross Domestic Product figures is expected to confirm that output added 0.4 percent in the third quarter. Separately, Swiss GDP is forecast to grow 0.5 percent in the three months to September while the UK Construction PMI report shows the home-building sector slowed for the second consecutive month in November.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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Thu Dec 02 06:28:00 GMT 2010

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FOREX: Euro Threatened as Irish Government Faces Election Loss

Key Overnight Developments

Swiss Franc Underperforms as Korea Conflict Fears Subside Australian Dollar Weaker as Prices Retrace NY Session Gains Japan’s Trade Balance Surplus Widens as Imports Soften Critical Levels

The Euro and the British Pound kept to narrow ranges in Asian trade, with sterling spiking higher only late into the session after the Bank of England’s Andrew Sentence – the standby hawk on the rate-setting MPC committee – said policymakers need to gradually raise interest rates. We remain long the US Dollar against the Euro, Japanese Yen and New Zealand Dollar.

Asia Session Highlights

Corporate Service Price (YoY) (OCT)

Merchandise Trade Balance Total (Yen) (OCT)

Adjusted Merchandise Trade Balance (Yen) (OCT)

Merchandise Trade Exports (YoY) (OCT)

Merchandise Trade Imports (YoY) (OCT)

BOJ’s Nakamura Speaks on Japanese Economy

Private Capital Expenditure (3Q)

Currency markets saw quiet trade in overnight hours, with the Swiss Franc underperforming the majors having surged earlier in the week as geopolitical fears eased amid fading concerns about an escalation of violence between the Koreas. The Australian Dollar also tipped lower, retracing some of its recent gains having followed Wall Street higher in North American trade.

Japan’s Merchandise Trade Balance surplus undershot expectations, printing at 821.9 billion yen in October. While this marks an improvement in the headline reading from the previous month, the outcome seems far from encouraging considering it comes courtesy of the weakest import growth in 10 months as opposed to robust overseas sales. Indeed, exports grew at an annual pace of just 7.8 percent, the weakest since November 2009. Given strongest Yen in over a decade, which ought to boost imports, such dismal figures seem to point to little more than the anemic state of Japanese domestic demand, reinforcing deflationary pressure and keeping the perennial low-yielder’s funding currency status firmly intact for the foreseeable future.

Euro Session: What to Expect

French Consumer Confidence Indicator (NOV)

Italian Business Confidence (NOV)

All eyes are focused on Ireland, with the ruling Fianna Fáil party expected to do poorly in a by-election in Donegal South West. This would reduce the government’s majority in the lower house of parliament (the Dáil) from three to two seats, making the possibility that the current administration will lose support before the budget vote on December 7 more likely. While the markets have arguably priced in the loss already considering it has been well-telegraphed in recent polls, a particularly skewed outcome in favor of the opposition may stoke risk aversion and compound selling pressure on the Euro.

The data docket looks lackluster, with third-quarter Swiss Employment figures amounting to the only bit of notable event risk. Turning to sentiment, stock index futures tracking the major European bourses are ticking higher ahead of the opening bell, hinting risk-correlated currencies may find a bit of support, absent shocking news out of Ireland of course.

For real time news and analysis, please visit http://www.dailyfx.com/real_time_news

To receive future articles by email, please contact Ilya at ispivak@dailyfx.com

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Forex: Euro, British Pound To Face Headwinds As Risks For Contagion Intensify

By David Song, Currency Analyst Mon Nov 22 12:30:00 GMT 2010 Talking Points

Japanese Yen: Higher Against Most Majors British Pound: Stands Ready To Aid Ireland Euro: Risks For Contagion Gathers Pace U.S. Dollar: Chicago Fed Index on Tap The Euro fell back from a high of 1.3785 during the overnight trade as Ireland opted to seek a bailout from the EU, and the single-currency may face increased headwinds going into the North American trade as the risks for contagion intensify. In response to the bailout, Moody’s Investor Services said that Ireland is likely to face a “multi-notch” downgrade, while European policy makers argued that it’s still premature to speculate on the size of the rescue package. In an effort to stem the risks for contagion, the EU announced that Portugal’s banking system is healthy and resilient, but went onto say that the euro-area continues to face an uneven recovery as the governments operating under the fixed-exchange rate system struggle to manage their public finances.

At the same time, European Union Economic and Monetary Commissioner Olli Rehn said that the issues Portugal faces are “very different” than Ireland’s as the country “has taken very bold decisions concerning fiscal consolidation and continuing its structural reforms,” but the risks for contagion could lead the European Central Bank to support the economy going into 2011 as it aims to balance the risks for the region. As fears surrounding the debt crisis exacerbates, the ECB may put its primary mandate on the line as it aims to restore financial stability, and speculation surrounding the outlook for monetary policy could play an increased role in driving price action for the euro as the central bank talks of reestablishing its exit strategy in the coming months. As the EUR/USD continues to hold below the 20-Day SMA at 1.3810, the euro-dollar may pare the rebound from the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3490-1.3500, which could lead to a test of the August high (1.3333) in the coming days.

The British Pound pared the overnight rally to 1.6083 as the U.K. pledged to assist Ireland, and fears surrounding the European debt crisis could drag on the exchange rate as Britain struggles to manage its own public finances. U.K. Chancellor of the Exchequer George Osborne said that he stands ready to help the “friend in need” while speaking on the BBC radio, and went onto say that the U.K. has made “a commitment for a bilateral loan” in an effort to ease the turmoil in the European financial system. As the U.K. aims to curb its budget deficit and tightens fiscal policy, there could be increased pressures on the Bank of England to support the economy in 2011, but the stickiness in price growth could spur an increased split within the MPC as policy makers expect inflation to hold above target throughout the following year. As the economic outlook remains clouded with uncertainties, the GBP/USD may work its way back towards the 50-Day SMA (1.5874) to test for near-term support, but we should see the exchange rate push higher throughout the remainder of the year as it maintains the upward trend from May.

U.S. dollar price action was mixed overnight, with the USD/JPY bouncing back to reach a high of 83.56 on Monday, and we may see a clear trend develop during the North American trade as equity futures point to a lower open for the U.S. market. As the economic docket remains fairly light for Monday, risk sentiment is likely to dictate price action in the currency market, and we may see little reaction to the Chicago Fed’s National Activity index, which is expected to increase to -0.24 in October from -0.58 in the previous month, as speculation surrounding Ireland’s bailout takes center stage.

Will the EUR/USD Retrace The Advance From September As European Debt Woes Intensify? Join us in the Forum

Related Articles: Forex Weekly Trading Forecast - 11.15.10

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

FX Upcoming

Chicago Fed National Activity Index (OCT)

Euro-Zone Consumer Confidence (NOV A)

ECB President Jean-Claude Trichet Delivers Annual Report

Fed's Narayana Kocherlakota Speaks on Monetary Policy

New Zealand Net Migration s.a. (OCT)

Contracts for 23 straight months.

Convenience Store Sales (YoY) (OCT)

Falls for first time in three-months.

Slowest rate of growth since April.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Mon Nov 22 12:30:00 GMT 2010

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Kiwi Stands Out in Early Monday Trade; Euro Bid on EU/IMF Bailout

An interesting and exciting start to the week, with currencies trading all over the place and in different directions on the back of varying market drivers. The Euro has jumped out to some early gains on Monday with the weekend news of an EU and IMF bailout for Ireland of some Eur80-90B helping to bolster sentiment in the region. However, there are those who feel that the need for the bailout should be viewed as more of a net negative, with fears now spreading to other beleaguered economies within the Eurozone. Much of the attention from those with such views has no shifted over to Portugal, and it will be interesting to see how things play out and if indeed the Euro can sustain the positive momentum from the bailout news.

We continue to find it quite amusing that we now live in a world where news that recognizes major setbacks within the global economy is recognized with a positive sentiment reaction. Whether it is the latest bailout of Ireland, or the announcement from the Fed of more quantitative easing, the markets continue to translate these distressing actions as risk positive which continues to leave us highly concerned and distraught.

Another big story on the day has come out of New Zealand, with Kiwi getting slammed across the board following the news that S&P has revised its foreign currency sovereign debt outlook from “stable” to “negative.” The rating agency cited New Zealand’s “vulnerability to external shocks, arising from its open and relatively undiversified economy” as the main source for its concern. Interestingly enough, we have gone ahead and initiated a position in the Kiwi, but our position is long Kiwi against the Australian Dollar.

The Aud/Nzd cross has jumped well over 200 points on the day to more than double its average daily true range, leaving the hourly RSI above 80. This suggests that at a minimum we should see some form of a corrective move following the parabolic price action, and as such, the short trade makes sense. Fundamentally, New Zealand’s banking sector is largely owned by Australian banks and we contend that any fallout in New Zealand from the rating agencies could very well be a red flag for the Australian economy. Recent tightening actions in China should also not be ignored, and Australia is far more exposed to the fallout from such actions which ultimately will curb growth and force a material slowdown in the overdone Australian economy. This further supports our current Aud/Nzd short position.

Looking ahead, the European session is very quiet on the economic release front, with the only noteworthy data series coming in the form of some Swiss money supply due at 8:00GMT. Eurozone consumer confidence (-10 expected) is due out in North American trade at 15:00GMT, but not before the release of the only US data in the form of the Chicago national Fed activity index at 13:30GMT. On the official circuit, ECB President Trichet delivers his annual report at 15:00GMT, while Fed Kocherlakota speaks in South Dakota at 18:30GMT. US equity futures and commodities prices are fairly well bid on the day.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@fxcm.com and you will be added to the distribution list.

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Gold - FOREX Correlations Strengthen as Ireland Fuels Risk Aversion

Gold has been receiving an increasing amount of attention recently as the metal soars to new record levels. But you don’t have to trade gold to benefit from the metal’s recent volatility. In fact, many of the popular currency pairs have been moving in tandem with gold, offering forex traders an opportunity to piggyback on the uptrend or bet against it, with the added benefit of trading within the world’s deepest and most liquid market.

The following table includes the correlation between gold and the most popular currency pairs over various timeframes. A value close to +1 indicates a strong positive relationship between gold and the pair, while a value close to -1 indicates a strong negative relationship.

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Weekly Commentary: Gold – Forex correlations strengthened across the board this week, with intraday correlations in particular making a huge comeback. News flow was dominated by developments in the Irish debt crisis, which led to risk aversion across all financial markets.

Some readers may recall that the situation in Ireland began to impact markets as far back as last week, but at that time the damage was limited to the Euro. The U.S. dollar continued to fall against other currencies, while gold hit a new record high. Thus, we saw the correlation between gold and EUR/USD weakened significantly, while that between gold and the other pairs held firm.

But that was last week. This week EUR/USD continued to fall, but this time other dollar-rivals joined in the declines. Gold fell sharply as well. That has allowed the correlation between EUR/USD and gold to rebound notably. At the same time, gold’s correlation between other pairs strengthened even further.

That being said, now is probably not the time to jump into EUR/USD for proxy gold exposure. The long-term relationship between the Euro and gold is highly unstable, and the fundamentals do not support a strong positive correlation. Gold is garnering support from the view that it is a safe haven against the debauchment of fiat, or “paper,” currencies. Like in the United States, monetary policy in the Eurozone is extremely loose, which leads to a weaker currency all else equal.

Instead, traders should continue to look to the commodity currencies which are benefitting from much tighter monetary conditions. AUD/USD in particular looks compelling as it is bolstered by the highest overnight interest rates of all the majors, as well as the prospect of further tightening of monetary conditions in the future. The pair saw its daily correlation with gold strengthen to 0.79 from 0.77 last week, while the 60-minute intraday correlation rose to 0.84 from 0.66.

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Gold ETF holdings fell for the fourth time in five weeks, while gold tumbled almost $95 peak-to-trough from last week’s record level of $1424.60. Although prices have rebounded from the recent lows under $1330, we can’t help but wonder if the advance is getting long in the tooth. ETF holdings are near levels they were at back in July, but gold prices are $100 higher than they were at that time. Over the last several years we have observed an extremely strong relationship between these two variables, thus caution is warranted. Nevertheless, there is always the possibility that demand is coming from other segments of the gold market such as the physical investment side, which we cannot measure in real-time.

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Greenback to Take A Hit on Friday As Investors Digest Latest Fed Speech

By Joel Kruger, Technical Strategist Fri Nov 19 06:36:00 GMT 2010 Fed Chair Bernanke has been under some intense scrutiny over the past several days, with pressure and criticisms on the latest injection of liquidity into the system coming both domestically and internationally. Most recently, a letter from the Republicans calling into question the current ultra-accommodative policy has been getting a lot of attention, and the Fed has been forced to step up and defend its actions. The Fed has released the prepared text of a speech the Fed Chair is set to deliver at the European Central Bank conference in Frankfurt today, and the message is clear. The central bank will continue with the current policy as it is the only way to help the economy recovery from the latest crisis. There are two key takeaways from the speech. The first is that the central bank will continue to lower long-term rates, and the second is that foreign central banks are interfering with the Fed’s current policy through intervention efforts to weaken their own currencies.

The net takeaway from the speech is very USD bearish, and we would expect the buck to come under some more pressure on Friday once market participants take time to fully digest the text of the Fed speech. We have written in recent commentary of the likelihood for some broad based USD selling following the latest rally in the buck, and this should help to put more pressure on the Greenback into the weekend. However, we have still not given up on the buck, and feel that the USD will once again find bids into the early stages of next week.

On the surface, the tone of the speech is certainly very USD bearish, but the speech is also more likely than not in reaction to criticisms of current policy decisions that would only provoke a necessary defense from the Fed of such policy. It therefore stands to reason that the Fed would not come out and make a statement that calls into question their current efforts as that would only serve to undermine their decision making. But we do believe that there is another side to the Fed that is very much concerned with the longer-term threats of current monetary policy actions, and is looking for signs to start to reverse policy and rein in QE. Unfortunately, the Fed believes that current market conditions still do not warrant a reversal in policy, with the recovery still too fragile, and the priority still needing to be on the shorter-term threats to the economy. But irrespective of this latest speech, we have seen signs of a more balanced and reserved central bank in recent weeks. After all, the Fed only pumped in what they felt was necessary despite pressures from the markets to pump in more, and they also made it clear that they could rein in these measures at any time.

In the end, the latest speech is very USD bearish on the surface and we believe should open more USD selling on Friday. At the same time, we believe that the speech should be taken into the proper context as its intention is to highlight and defend current policy efforts. There clearly is another side to the Fed (not included in this speech) that is also very aware of the threat of current policy and looking to see more signs of recovery in the US economy so that it can begin to reverse policy. Economic data over the coming weeks in the US will be critical and this ultimately will determine what direction that Fed takes going forward. We believe that data will continue to show signs of improvement and this will allow the Fed to begin the long, slow and steady path of reversing policy, which should ultimately narrow yield differentials back in favor of the Greenback.

Elsewhere, it is worth noting that the Australian and New Zealand Dollars have been relatively underperforming in early Friday trade on the back of growing speculation and fear that China will once again look to tighten policy. Looking ahead, the economic calendar on Friday is basically non-existent, and the key focus will be the many central bankers that are slated to speak throughout the day, with many coming from the ECB conference in Frankfurt. US equity futures are trading flat into the European open, while commodities are mixed.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@fxcm.com and you will be added to the distribution list.

If you wish to discuss this or any other topic feel free to visit our Forum Page.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Fri Nov 19 06:36:00 GMT 2010

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