UK Forex Reserve Plan could Harm Pound

Yesterday, UK Chancellor George Osborne announced that his government was ready to begin rebuilding its foreign exchange reserves. Depending on when, how, (or even if) this program is implemented, it could have serious implications for the Pound.

Forex reserve watchers (myself included) were excited by the updated US Treasury report on foreign holdings of US Treasury securities. As the Dollar is the world’s de-facto reserve currency and the US Treasury securities are the asset of choice, the report is basically a rough sketch of both the Dollar’s global popularity and the interventions of foreign Central Banks. Personally, I thought the biggest shocker was not that China’s Treasury holdings are $300 Billion greater than previously believed (with $3 Trillion in reserves, that’s really just a rounding error), but rather that the UK’s holdings declined by 50% in 2010, to a mere $260 Billion.

Given that the Bank of England (BoE) injected more than $500 Billion into the UK money supply in 2010, I suppose that shouldn’t have been much of a revelation. After all, selling US Treasury Securities and using the proceeds to buy British Gilts (sovereign debt) and other financial instruments would enable the BoE to achieve its objective without having to resort to wholesale money printing. In addition, if not for this sleight of hand, UK inflation would probably be even higher.

Still, this is little more than a mere accounting trick, and those funds will probably still need to be withdrawn from the money supply at some point anyway. Whether the BoE burns the proceeds or reinvests them back into foreign instruments is certainly worth pondering, but insofar as it won’t impact inflation, it is a matter of economic policy, and not monetary policy.

As Chancellor Osborn indicated, the UK will probably send these funds back abroad. In addition to providing support for the Dollar (as well as another reason not to be nervous about the upcoming end of the Fed’s QE2), this would seriously weaken the Pound, at a time  that it is already near a 30-year low on a trade-weighted basis. After falling off a cliff in 2009, the Pound recovered against the Dollar in 2010, largely due to the BoE’s shuffling of its foreign exchange reserves. To undo this would certainly risk sending the Pound back towards these depths.

On the one hand, the UK is certainly conscious of this and would act accordingly, perhaps even delaying any foreign exchange reserve accumulation until the Pound strengthens. On the other hand, the BoE is under pressure to fight inflation. It is reluctant to raise interest rates because of the impact it would have on the fragile economic recovery. The same can be said for unwinding its asset purchases. However, if it offset this with purchases of US Treasury securities and other foreign currency assets, it could weaken the Pound and maintain some form of economic stimulus. Especially since the UK has run a sizable trade/current account deficit for as long as anyone can remember, the BoE has both the flexibility/justification it needs to coax the exchange rate down a little bit.

Ultimately, we’ll need more information before we can determine how this will impact the Pound. Still, this is an indication that the GBP/USD might not have much more room to appreciate.

View the original article here

Forex Markets Look to Interest Rates for Guidance

There are a number of forces currently competing for control of forex markets: the ebb and flow of risk appetite, Central Bank currency intervention, comparative economic growth differentials, and numerous technical factors. Soon, traders will have to add one more item to their list of must-watch variables: interest rates.

Interest rates around the world remain at record lows. In many cases, they are locked at 0%, unable to drift any lower. With a couple of minor exceptions, none of the major Central Banks have yet raised their benchmark interest rates. The same applies to most emerging countries. Despite rising inflation and enviable GDP growth, they remain reluctant to hike rates for fear that they will invite further speculative capital inflows and consequent currency appreciation.

Emerging markets countries can only toy with inflation for so long. Over the medium-term, all of them will undoubtedly be forced to raise interest rates. The time horizon for G7 Central Banks is a little longer, due to high unemployment, tepid economic growth, and price stability. At a certain point, however, inflation will compel all of them to act. When they raise rates – and by much – may well dictate the major trends in forex markets over the next couple years.

Australia (4.75%), New Zealand (3%), and Canada (1%) are the only industrialized Central Banks to have lifted their benchmark interest rates. However, the former two must deal with high inflation, while the latter’s benchmark rate is hardly high enough for carry traders to take interest. In addition, the Reserve Bank of Australia has basically stopped tightening, and traders are betting on only one or two 25 basis point hikes in 2011. Besides, higher interest rates have probably already been priced into their respective currencies (which is why they rallied tremendously in 2010), and will have to rise much more before yield-seekers take notice.

China (~6%) and Brazil (11.25%) are leading the way in emerging markets in raising rates. However, their benchmark lending rates belie lower deposit rates and are probably negative when you account for soaring inflation in both countries. The Reserve Bank of India and Bank of Russia have also hiked rates several times over the last year, though again, not yet enough to offset rising prices.

Instead, the real battle will probably be fought primarily amongst the Pound, Euro, Dollar, and Franc. (The Japanese Yen is essentially moot in this debate, and its Central Bank has not even humored the markets about the possibility of higher interest rates down the road). The Bank of England (BoE) will probably be the first to move. “The present ultra-low rates are unsustainable. They would be unsustainable in a period of low inflation but they are especially unsustainable with inflation, however you measure it, approaching 5 per cent,” summarized one columnist. In fact, it is projected to hike rates 3 times over the next year. If/when it unwinds its quantitative easing program, long-term rates will probably follow suit.

The European Central Bank will probably act next. Its mandate is to limit inflation – rather than facilitate economic growth, which means that it probably won’t hesitate to hike rates if inflation remains above its 2% threshold. In addition, the front runner to replace Jean-Claude Trichet as head of the ECB is Axel Webber, who is notoriously hawkish when it comes to monetary policy. Meanwhile, the Swiss National Bank is currently too concerned about the rising Franc to even think about raising rates.

That leaves the Federal Reserve Bank. Traders were previously betting on 2010 rate hikes, but since these have failed to materialized, they have pushed back their expectations to 2012. In fact, there is reason to believe that it will be even longer than that. According to a Bloomberg News analysis, “After the past two U.S. recessions, the Fed didn’t start raising policy rates until joblessness had fallen about three- quarters of the way back to the full-employment level…To satisfy that requirement, the jobless rate would need to be 6.5 percent, compared with today’s 9 percent.” Another commentator argued that the Fed will similarly hold off raising rates in order to further stabilize (aka subsidize) banks and to help the federal government lower the real value of its debt, even if it means tolerating slightly higher inflation.

When you consider that US deposit rates are already negative (when you account for inflation) and that this will probably worsen further, it looks like the US Dollar will probably come out on the losing end of any interest rate battles in the currency markets.

View the original article here

Fed Paper: Power of Technical Analysis in Forex is Declining

Being a practitioner of fundamental analysis, you could say that I’m always on the lookout for hard evidence that fundamental analysis is superior to technical analysis. Thus, I was delighted to discover a working paper (“Technical Analysis in the Foreign Exchange Market“) by the St. Louis Branch of the Federal Reserve Bank, released just this month. Alas, the paper barely touched upon fundamental analysis, but its conclusions on technical analysis in the currency markets were startling. In short, the effectiveness of technical analysis in the currency markets has declined steadily since the 1970s, such that only the most sophisticated/complicated strategies are currently profitable.

Rather than conduct original research, the report’s authors – Christopher J. Neely, an assistant vice president and economist at the Federal Reserve Bank of St. Louis, and Paul A. Weller, the John F. Murray Professor of Finance at the University of Iowa – performed a meta analysis of the existing research. They cited a litany of studies, covered a variety of topics, sometimes with contradictory conclusions. In order to ensure comprehensiveness, they looked at the profitability of numerous types of technical analysis indicators, across numerous currency pairs, over time, in different types of trading environments, and adjusted for risk.

All of the earlier studies, dating back to the 1960s, established the profitability of technical analysis, even when it was simplistic. Since then, however, most studies have shown steadily declining effectiveness: “TTRs [Technical Trading Rules] ere able to earn genuine risk-adjusted excess returns in foreign exchange markets at least from the mid-1970s until about 1990…and that rule profitability has been declining since the late 1980s.” The same trend has unfolded in the last decade, as traders have relied increasingly on computerized trading strategies: “Kozhan and Salmon (2010), using high frequency data, find that trading rules derived from a genetic algorithm were profitable in 2003 but that this was no longer true in 2008.”

Given that the two authors also concede that the financial markets are undoubtedly inefficient and that currency markets in particular are filled with observable trends, how should we understand this decline in the effectiveness of technical analysis? In one word, the answer is competition. “Profit opportunities will generally exist in financial markets but…learning and competition will gradually erode ["arbitrage away"] these opportunities as they become known.” In addition, there has been a “dramatic rise in the volume of algorithmic trading,” which has given rise to a so-called financial arms race to develop ever-more sophisticated trading strategies.

Indeed, the research shows that “more complex strategies will persist longer than simple ones. And as some strategies decline as they become less profitable, there will be a tendency for other strategies to appear in response to the changing market environment.” In addition, technical analysis that is used to trade exotic (i.e. less liquid) currencies is more likely to be profitable than major currencies, especially the US Dollar.

The report opens the door to further research, by indicating that “Technical trading can be consistently profitable in certain circumstances.” As if it wasn’t already clear, though, the vast majority of technical traders (perhaps all traders for that matter) are destined to be outmaneuvered and will ultimately lose money trading forex. Another way of looking at this, however, is that the the savviest traders – those that can spot complex trends and execute trading strategies quickly – still have a chance at earning consistent profits.

View the original article here

Swiss Franc Surges to Record High(s)

In the last two weeks, the Swiss Franc rose to record highs against not one, not two, but three major currencies: the US Dollar, Euro, and British Pound. The Franc is now entrenched well above parity against the Dollar, and is closing in on the magical level of 1:1 against the Euro. With market uncertainty projected to run well into 2011, continued strength in the Franc is all but assured.

The Franc’s rise is due entirely to its being perceived as a safe haven currency. Its debt levels are comparable to other industrialized countries, its economy is in mediocre shape, and interest rates are the lowest in the entire world (the overnight lending rate is a paltry .1%). Some analysts have cited the “strong Swiss economic outlook” and “the health of Swiss public finances” as two factors buttressing its strength, but make not mistake: if not for the tide of risk aversion sweeping through the world’s financial markets, the Franc would hardly be attracting any attention.

As I have reported recently, the Dollar and the Yen have also benefited from the spike of risk aversion caused by renewed concerns over the fiscal health of the EU and the prospect of conflict in Korea. Perhaps owning to nothing more than proximity, the Franc has been the primary beneficiary from EU sovereign debt crisis. “It appears that smart money investors are pre-emptively bailing funds out of the eurozone with Switzerland providing a safe port to ride out the eurozone sovereign debt storm that appears to loom on the horizon,” summarized one analyst.

Unfortunately, it looks like the situation in the EU can only become serious. Despite a collective move towards fiscal austerity, all of the problem countries are still running budget deficits. As a result, members of the EU are set to issue no less than €500 Billion of new debt in 2011. To make matters worse, “The onslaught of credit warnings and downgrades of sovereign ratings over the past few days added to worries that borrowing costs in many euro zone nations could rise further.” This could trigger a self-fulfilling descent towards default and further buoy the Franc.

As far as I can tell, the notion that, “Despite the Swiss franc’s recent sharp gains, we still believe there is plenty of room for further upside ahead,” seems to encapsulate current market sentiment. According to the most recent Commitment of Traders Report, investors continue to increase their long positions in the Franc. According to Bloomberg News, “Options traders are more bullish on the franc for the next three months than any major currency except the yen.” Meanwhile, a sample of analysts’ forecasts suggests that the Franc could appreciate another 5% over the next six months.

At this point, the main variable the Swiss National Bank (SNB), which could resume intervention on behalf of the Franc. After spending close to €200 Billion to depress the Franc, the SNB accepted the futility of its efforts and formally renounced intervention in June. However, Swiss National Bank President Philipp Hildebrand recently referred to the Franc’s rise as a “burden,” and warned that the SNB “would take the measures necessary to ensure price stability” in the event of  “renewed financial market tensions.”

As to whether intervention is likely, analysts remain divided. “The timing [for intervention] would certainly be perfect, with liquidity very thin….pre-holiday markets are ideal for springing a surprise,” said one strategist. According to Morgan Stanley, however, the SNB is “unlikely to intervene in the near term to stem the rise in the franc. The previous intervention earlier this year has left a huge overhang of liquidity in the economy and the Swiss National Bank doesn’t want to further boost the money supply.” In addition, the SNB experienced losses of €22 Billion on its forex reserves in the first nine months of this year, and will be reluctant to incur further losses by resuming intervention.

In short, aside from this lone point of uncertainty, all factors point to continued upside.

View the original article here

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

View the original article here

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

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.

Thu Dec 02 06:28:00 GMT 2010

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Euro Open'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

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

View the original article here

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

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: US Open'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

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.

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

View the original article here

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.

---------------------------------------------------------------------------------------------------------------------------------

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.

---------------------------------------------------------------------------------------------------------------------------------

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.

View the original article here

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

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Opening Comment'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

Crude Oil Wipes Out November Rally Despite Plunge in Inventories, Gold Falls for a Fourth Day but Rebounds Overnight

Commodities – Energy

Crude Oil Wipes Out November Rally Despite Plunge in Inventories

Crude Oil (WTI) - $80.91 // $0.47 // 0.58%

Commentary: Crude oil fell for a fourth day in a row despite a steep drop in U.S. crude oil inventories. The move in crude was interesting considering that U.S. equity markets were virtually flat the entire day. Crude was down between $0.50 and $1.00 before the inventory report, proceeded to rally up to unchanged after the numbers, and then sold off for the rest of the day to end down $1.90, or 2.31%, to $80.44. Crude has virtually wiped out this month’s entire run.

We can only speculate as to why crude underperformed to such a degree on Wednesday. OPEC could be keeping a lid on prices by raising production, or the impact from the diesel-related spike in demand from China could be abating as imports make their way to the region. We have seen crude oil imports into the U.S. plunge in recent weeks, with distillate imports in particular virtually disappearing, which could be an indication that supply has simply been shifted from North America to Asia.

As we said in our latest report on petroleum inventories: “Imports remain extremely depressed and fell further last week to the lowest since 1997. Such a low level of imports is likely a function of weak demand rather than tight supply. U.S. inventories were and still remain extremely elevated—especially on the product side. Thus, we have seen refineries cut production to bring stocks to more normal levels. Imports fell as refineries demanded less crude. Furthermore, a spike in diesel demand in China has led to premium pricing in that part of the globe, which is another factor that has led to reduced volumes coming into the U.S. Indeed, we have seen U.S. distillate imports completely evaporate, but even so, stocks remain more than ample.”

Technical Outlook: Prices have continued to tumble, with the bears just a hair away from challenging the horizontal barrier at $79.49. A break below this boundary exposes a rising trend line set from May’s spike low, now at $77.04. Near-term resistance remains at $83.27.

Commodities – Metals

Gold Falls for a Fourth Day but Rebounds Overnight

Gold - $1348.20 // $12.20 // 0.91%

Commentary: It’s been awhile since gold fell four days in a row, but that was the case on Wednesday as the metal shed another $3.70, or 0.28%, to settle at $1336. It was a day of pause for the rally in the U.S. dollar as the currency fell just slightly versus most of its rivals. Tomorrow we will publish our weekly Gold – Forex Correlations report and all indications are that the numbers will show that this week was another in which gold and the dollar held true to their inverse relationship.

Now that gold prices are $90 below last week’s all-time highs, some may be anxious to dip their toes into the water. We would be extremely cautious here, however, for the potential downside remains significant. Consider that it was less than two months ago that gold first surpassed $1300. Meanwhile, gold ETF holdings have risen only slight over the last five months.

Technical Outlook: Prices have stalled above support at $1322.39, the 38.2% Fibonacci retracement for the 7/28-11/9 advance. Near-term resistance stands at a previously broken rising trend line set from late July, now at $1358.96. Alternatively, renewed selling pressure that takes prices through current support will target the 50% Fib at $1290.81.

Silver - $26.18 // $0.54 // 2.11%

Commentary: Silver again bucked the trend in gold prices to advance $0.16, or 0.62%, to settle at $25.63. From peak-to-trough silver had fallen from $29.36 to $24.99, or 15% in a little over one week. A bounce is to be expected, but given how frothy silver remains, it will likely be some time before prices make another significant run higher.

The gold/silver ratio fell to 51.5, but remains higher than levels earlier this month near 50. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance while a lower ratio indicates silver outperformance).

Technical Outlook: Prices are testing higher through resistance at 26.10, the 50% Fibonacci retracement of the 10/22-11/09 upswing. A daily close above this juncture exposes the 38.2% Fib at $26.87. Near-term support stands at $25.33, the 61.8% level, with a reversal lower through this boundary exposing the 76.4% Fib at $24.37.

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

View the original article here

FOREX: Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

By John Kicklighter, Currency Strategist 18 November 2010 03:22 GMT Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress? Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence Dollar Rally Cools Post Breakout as Investors Mull Financial Cracks, US Inflation

Most experienced traders are familiar with the concept that a significant breakout is often followed by a short-term correction whereby the market makes it ultimate decision to catalyze the new-found trend or reverse the move to draw price back into a comfortable trading range. Both the dollar and risk appetite trends are currently in this transition period. Looking for the logic behind this pause during a period that many would think is a clear signal to plow into a new trend, there is both a technical and fundamental motivation. From the technical side of things, former support is often treated as new resistance (and vice versa) as the initial breakout flashes through momentum by clearing nearby entry and stop orders. As this accelerant is burnt off, the many speculators used to the old trend will attempt to jump back in on what they think is a ‘cheap’ price. Yet, as it becomes evident that the market is struggling to overtake that former floor, reality begins to set in and the eager traders capitulate. That said, a false breakout is the scenario where there is enough participation to push beyond the technical boundary and put the market back on its original path. We can see that most market benchmarks are in the process of determining which scenario will prevail. The Dollar Index, is pulling back towards the five-month trend and 50-day moving average that it just recently overtook. Reflecting on a broader theme, the S&P 500 marked a very tentative and modest bounce after posting its biggest drop in months to break a preternaturally consistent, two-month bull trend.

The fundamental aspect of this trading phenomenon is unique to our current situation. There are still very serious reasons to doubt the outlook for economic activity, financial stability and the prospect for returns; but it is difficult for market participants to throw in the towel on the impressive trend of the past few months. Since the beginning of September, considerable leverage was dedicated to taking part of the steady climb ahead of the Fed’s second stimulus program. Eventually, investors in equities, corporate debt and other risky assets will submit to the troublesome forecast; but there is currently a lull that is allowing traders to ignore reality. The most prominent threat, European financial stability, has recently found a temporary period of calm after Ireland refused stimulus at Tuesday’s EU meeting. However, this doesn’t improve the situation in the country’s banking system. In fact, it merely postpones a solution while financing costs across the region continue to balloon and the lines of support start to breakdown. Another building threat to risk appetite trends exists in China’s threats to curb inflation. This may seem a prudent economic policy; but the side effect is curbed speculation in one of the market’s favorite trading destinations.

The US is providing its own contribution to the global risk scheme. Adding credence to the Fed’s decision to add a second round of stimulus this month, the core measure of annualized CPI growth slowed to its weakest pace on record at 0.6 percent. This doesn’t really diminish the dollar any further because the expansionary policy has been largely priced in at this point; but it does remind us that there are lasting economic and market troubles related to deflation or stubborn disinflation. The data that we should pay more attention to is the housing starts data. Construction on new developments plunged 11.1 percent to its second lowest level on record owing largely to multi-home dwellings. Yet, this data should be put into context of the larger US housing sector problems. Not only is construction activity anemic; the wealth in home prices is further curbing confidence, a backlog of reposed properties is threatening to keep this sector from contributing to a recovery and ongoing issues with foreclosures threaten to trigger the financial mess tied up in real estate-based mortgages. US housing may pose a second wave crisis.

Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: AUDUSD and AUDCHF offer Short-Term Setups in Eerily Quit Markets

Euro Buys Time with Irish Bailout Rebuke but Region-Wide Troubles will Force the Issue

Have conditions improved in Europe? It would seem so with the euro slowly retracing its steps after its significant decline of the past week. However, this tentative recovery is more accurately attributed to a pause in more pervasive financial concerns. Ireland is still the most immediate threat to the future of the shared currency. Finance Minister Lenihan’s decision to snub financial support from the EU at the group’s monthly meeting late Tuesday has not improved the situation. In fact, the uncertainty increases the risk for instability for the broader region. However, as the market awaits the EU, ECB and IMF’s assessment of the country’s ability to stabilize its own banking sector, there is time for reflection.

Yet, the market may not simply wait for policymakers to give them the official assessment of the market’s health. It was reported Wednesday that LCH.Clearnet – one of the largest clearing houses for European fixed income – raised its margin on Irish government debt by 15 percent for the second time in a week. The steps to smother confidence are progressive in this way. In the meantime, Ireland isn’t our only concern. Following up on its threat to withhold its next tranche of support to bailout Greece, Austrian officials said the EU was pushing back its December payment to January. Elsewhere, Portugal struggled in its recent bond auction; and it was rumored that the ECB had to buy Portuguese and Greek bonds.

British Pound Traders Find Little Confidence in Employment Figures, What about Deficit Progress?

Even though risk appetite took a slow turn north, the British pound was still struggling to gain traction. This was particularly surprising given a surprise decline in jobless claims through October; though the noncommittal BoE minutes help offset that fundamental marker. Perhaps speculation of a future stimulus program will carry more weight as we look ahead to public borrowing figures.

Canadian Dollar Prepares for Capital Flows, Growth Forecast and BoC Quarterly Review

The Canadian dollar has merely been following risk appetite and US dollar-based trends the past few days; but perhaps the currency’s own fundamental backdrop will carry more weight over the coming 24 hours. On the docket for Thursday are the Leading Indicators index and capital flows figures. For actual market influence though, the BoC’s quarterly review will likely carry the most weight for policy and growth forecasts.

New Zealand Dollar Boosted by Accelerated Inflation and Improved Consumer Confidence

It certainly helps that risk appetite trends were bullish; but the New Zealand dollar found an extra push through its own fundamental docket early Thursday morning. For interest rate hawks, the 1.2 percent reading on the 3Q producer price index output doesn’t necessarily promise future hikes; but it sets up the CPI numbers for the occasion. Also, consumer confidence would show relief in a bounce from a year low.

Tell us what you think of this article!

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

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

ECONOMIC DATA

Next 24 Hours

Average Weekly Wages (QoQ) (AUG)

Average weekly wages rose in May by the smallest amount since 2006.

Average Weekly Wages (YoY) (AUG)

ANZ Consumer Confidence Index (NOV)

Sits at lowest reading since 2009.

Trade Balance (Swiss franc) (OCT)

Swiss exports declined in September, as European slowdown and strong franc hurt exports.

Euro-Zone Current Account s.a. (euros) (SEP)

Euro-Zone posted a current account deficit in the last 8 months.

Euro-Zone Current Account n.s.a. (euros) (SEP)

Retail Sales ex Auto Fuel (MoM) (OCT)

U.K. retail sales unexpectedly fell in September for a second month as consumers braced for the deepest budget squeeze since World War II.

Retail Sales ex Auto Fuel (YoY) (OCT)

Retail Sales inc Auto Fuel (MoM) (OCT)

Retail Sales inc Auto Fuel (YoY) (OCT)

Public Finances (PSNCR) (Pounds) (OCT)

U.K. posted the largest budget deficit for any September since modern records began in 1993.

Public Sector Net Borrowing (Pounds) (OCT)

Public Sector Net Borrowing ex Interv. (OCT)

Fell to six-month low in October.

Leading Indicators (MoM) (OCT)

Fell in Sept. for first time since '09.

International Securities Transactions (C$) (SEP)

Increased in the last two months.

Sales beat expectations in August.

Initial Jobless Claims (NOV 13)

Jobless claims fell last week to the lowest level in four months.

Increased in the last three months.

Likely rose for a third month in Nov.

RPX Composite 28 Day (YoY) (SEP)

RPX composite declined annually in August for a second straight month.

RPX Composite 28 Day Index (SEP)

ECB's Yves Mersch Speaks at Euro Finance Week

ECB's Trichet, Gonzalez-Paramo, Bini Smaghi Speak on Policy

BoE's Adam Posen Speaks on Monetary Policy

Bank of Canada Publishes Quarterly Review

Fed's Kevin Warsh Speaks on Financial Markets

Fed's Narayana Kocherlakota Speaks on Monetary, Fiscal Policy

Fed's Charles Plosser Speaks on Monetary Policy

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE - 18:00 GMT

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

INTRA-DAY PIVOT POINTS 18:00 GMT

INTRA-DAY PROBABILITY BANDS 18:00 GMT

v

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

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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.

18 November 2010 03:22 GMT Nov, 17 02:36 GMT FOREX: Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk AppetiteNov, 16 02:36 GMT FOREX: Dollar Index Scores a Meaningful Bullish Breakout but European Issues, Risk Trends Still BlurredNov, 13 04:27 GMT FOREX: Dollar Ready to Rally as Europe Devolves into Crisis, G20 Sanctions Speculative Capital CurbsNov, 12 02:36 GMT FOREX: Dollar Finds Traction but Momentum Requires Risk Trends, G20 Surprises or Euro WeaknessNov, 11 02:36 GMT FOREX: Dollar Climb Winded as Reserve Diversification Calls Grow ahead of G20, Fed Reminds of QE2

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Daily Fundamentals'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

Crude Extends its Tumble as Growth Cools, Gold Stalls on Euro Troubles

By John Kicklighter, Currency Strategist Thu Nov 18 00:16:00 GMT 2010 North American Commodity Update

Commodities - Energy

Where Risk Trends Pull out of its Dive, Crude Maintains its Tumble

Crude Oil (LS Nymex) - $80.44 // -$1.90 // -2.31%

Though broader risk appetite trends were able to level off through US trading hours Wednesday, US oil maintained its tumble. This decline marked the fourth consecutive decline (fifth if Thursday’s unchanged performance is counted) and is thereby matches the worst performance the commodity has suffered since the series of declines through August 24th. The extension of this bearish phase is a combination of both fundamental and sentiment-based factors; but technical traders have no doubt taken note of the session’s low. Looking back at historical price action, the $80 figure besides representing an easily identifiable, even level is also a well-worn support/technical level and represents the mid-point of the September to December advance. So, while the technical trend channel of this period has indeed been breached, there is still meaningful support and the market has already retraced half of the previous two months’ advance.

For fundamental guidance on the day, we saw a shift away from risk appetite trends to the more tangible macroeconomic drivers. Looking at investor sentiment in fact, we see that the S&P 500 (a good, basic barometer for the level of optimism) was little moved through Wednesday’s session just a day after marking a critical shift in trend. This change in the backdrop reflect a market that is reluctant to unwind otherwise profitable positions and are therefore waiting to see the level of contagion financial problems in the US, China and especially Europe will have. In the meantime, the demand/supply balance behind oil’s fundamental value was tipped by a few big ticket developments. In Asia, China’s Premier followed up on his vow to fight inflation with a more refined effort to put temporary price controls on “important daily necessities.” This is a more elegant solution than simply vowing to put in inflation measures; but the effect on growth will likely be the same. What’s more, energy commodities can be grouped under necessities. Another indicator to note from China was the quarterly consumer confidence survey which dropped for the first time in six quarters. Moving forward to the US session, the lowest reading on core inflation on record warns of a slowing economy though does support stimulus efforts. Something to take note of for future concerns, October housing starts plunged 11.7 percent to its second lowest levelon record. Depressed activity, growing foreclosures and overleveraged real-estate derivatives could prove a new crisis.

From macro concerns to energy market-specific issues, we see that there was a big miss on the Department of Energy crude figures. Instead of the no change expected by economists, the API figures (which showed the biggest plunge since September 2008) were more reasonable forecasters with a 2 percent drop in inventories equivalent to 7.286 million barrels. On the futures market, the December contract is soon to expire; and we have seen activity roll out to the January contract – which reported a 52 percent jump in volume to its own record 341,921 contracts.

Crude Futures Chart (Daily)

Chart generated using FXCM Strategy Trader

Commodities - Metals

Gold Little Moved After Critical Break as Investors Wait for the Next Shoe to Drop

Spot Gold - $1,336.00 // -$3.70 // -0.28%

Though it would put in for a fourth consecutive loss, gold was still looking at a far more reserved decline through Wednesday’s close. This tempered pace fits both a fundamental pause from the speculative ranks and a meaningful technical backdrop. For guidance on the supply and demand course, the ‘alternative asset’ value for the metal was little changed as other gauges for sentiment trends were similarly little changed for the day. From price action, the break of the three-and-a-half month rising trend channel yesterday doesn’t mean the market is in free fall. The past month, the metal has developed a frequented level of support around 1,320 and there is still a range of short-term term rising trendlines to fall back on.

Yet, despite the technical levels that exist, fundamental and sentiment concerns can easily drive this market to resume its plunge or otherwise completely reverse the losses of the past week. There are many general financial and economic concerns that quickly puts the metal’s safe haven appeal and alternative asset value back to work. European developments are still at the forefront. However, with Ireland’s decision to not ask for financial aid at the monthly EU meeting, the region is floating in limbo. Nevertheless, EU, IMF and ECB members are scheduled to travel to Ireland and comb the nation’s finances to see if its banking system can stand up by itself. A passing or failing grade will be delivered soon. In the meantime, clearing housings for investors that are trading Ireland’s debt are boosting margin and there is concern that support for Greece’s bailout program is disintegrating. State-side, the US saw inflation trends cool to the lowest level on records going back half a century. This curbs the appeal of gold as an inflation hedge on the one hand but confirms the devaluing effects of Fed stimulus on the other hand. And, in Asia, investors are waiting to see what measures China will take towards cooling rampant inflation. This could curb speculative turnover globally and lower the risk of financial crisis from this particular region.

In addition to the big, intangible themes, we can see there is still a supply and demand influence on price. The World Gold Council released its 3Q market outlook with projections for demand growing through jewelry use, institutions, central banks and industrial. At the same time, the supply trend is also seen rising in the months ahead. One highlight for demand however shows India’s imports have through the first three quarters already overtook the total consumption of 2009 at 624 tons. Meanwhile, total ETF demand was little changed for the day.

Spot Silver - $26.17 // $0.53 // 2.07%

Wednesday’s performance for silver was essentially a mirror of the previous day. There was little progress made as volume on the active December contract dropped to its lowest level since November 2nd. Momentum has slowed on this metal’s decline for a number of days; yet it is still early to say whether this is simply a reduction in speculative interests after the increase in margin by the CME or a shift back towards optimism.

Spot Gold Chart (Daily)

Chart generated using FXCM Strategy Trader

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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.

Thu Nov 18 00:16:00 GMT 2010

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Commodities'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

FOREX: Euro and Pound Brace for EU Summit, Bank of England Minutes

By Ilya Spivak, Currency Strategist Wed Nov 17 06:47:00 GMT 2010 Key Overnight Developments

Australian, New Zealand Dollars Follow Stocks Lower on China Rate Hike Fears Euro, Pound Consolidate Ahead of EU FinMin Summit, Bank of England Minutes Fed’s Lockhart Says QE Not Intended to Monetize US Debt, Debase the Dollar Critical Levels

The Euro and the British Pound were essentially unchanged in overnight trade, with prices consolidating NY-session losses in narrow ranges ahead of a hefty dollop of fundamental event risk on tap in European hours (see below). We remain short EURUSD and long USDJPY.

Asia Session Highlights

Westpac Leading Index (MoM) (SEP)

DEWR Skilled Vacancies (MoM) (NOV)

Fed's Dennis Lockhart Speaks on Economy

The Australian and New Zealand Dollars underperformed in otherwise quiet overnight trade, sinking 0.2 percent apiece against the US Dollar as stocks declined amid lingering concerns about forthcoming Chinese efforts to cool growth in the East Asian giant after inflation hit a 2-year high, spurring fears of overheating. The MSCI Asia Pacific regional benchmark stock index sank 0.6 percent as traders reacted to yesterday’s comments from China’s Premier Wen Jiabao, who said the cabinet is drafting measures to stem price growth. Both currencies show a strong correlation with overall risk sentiment as their relatively high yields make them attractive carry trades.

The Federal Reserve’s Dennis Lockhart took to the wires defending this month’s reboot of quantitative easing (QE), saying the policy will help the economy avoid the “danger zone” and reiterating that the central bank’s aim is not to monetize US debt or debase the Dollar. Lockhart added that the Fed is likely to complete the full $600 billion in asset purchases outlined earlier this month.

Euro Session: What to Expect

Average Weekly Earnings (3M/YoY) (SEP)

Weekly Earnings Excluding Bonus (3M/YoY) (SEP)

ILO Unemployment Rate (3M) (SEP)

Euro-Zone Construction Output s.a. (MoM) (SEP)

Euro-Zone Construction Output w.d.a. (YoY) (SEP)

Italian Current Account (euros) (SEP)

A meeting of Euro Zone finance ministers in Brussels takes the spotlight as jittery markets continue to monitor renewed sovereign risk turmoil on the currency bloc’s periphery. The most pressing issue on the table is that of Ireland. The country has argued vigorously that it doesn’t need a bail-out, saying all of its obligations are fully funded through mid-2011. However, the government is also on the hook for losses sustained by the ailing banking sector. This could prove dangerous very quickly considering Irish lenders are already tapping one fifth of all ECB lending to the region’s banks and have already 40 billion euros in fiscal assistance.

Spain, Greece and Portugal – the other faces of the Euro Zone sovereign debt fiasco – are eager for Ireland to accept EU assistance and will put pressure on it to so, fearing that allowing the situation to fester longer will spur contagion fears and boost borrowing costs for their own funding efforts. Meanwhile, Germany continues to push for the creation of uniform sovereign bankruptcy procedures, thereby telegraphing that Euroland’s richest nation is less than thrilled to foot the bill for its spendthrift comrades and is willing to let them fail, albeit in an organized fashion.

On balance, the most workable proposal seems to be to tap the European Financial Stability Facility (EFSF) for funds marked for a “restructuring” of the Irish banking sector that bolsters these institutions enough to be sold off to foreign buyers. Ideally, this would be done using just the 60 billion euros contributed to EFSF by the European Commission and the 250 billion provided by the IMF. This promises to deal with the issue while simultaneously allowing Ireland to save face by avoiding an outright “bailout” while side-stepping the politically tricky issue of having one EU member bail out another.

Minutes from November’s Bank of England monetary policy meeting promise to further dissipate expectations that the central will follow the US Fed down the road of renewed quantitative easing. The release may not garner significant attention however considering traders have had ample opportunity to price in the current monetary policy landscape after policymakers unveiled an unexpectedly hawkish quarterly inflation report last week while the inflation rate ticked higher in October.

On the other hand, UK Jobless Claims are expected to have added 6,000 in October, marking the third consecutive increase and the largest since January. While the Claimant Count – a proxy for the jobless rate – is expected to hold steady at 4.5 percent, a 15-month low set in June, signs of a deteriorating labor market may certainly raise questions about the need for monetary stimulus as the onset of the government’s ambitious debt-cutting program looms ever closer.

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

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.

Wed Nov 17 06:47:00 GMT 2010

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Euro Open'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

Will The British Pound Hold Above 1.60 Ahead of the U.K. Jobless Claims and BoE Minutes?

U.K. Jobless Claims Change

Survey: 6.0K

Prior: 5.3K

Fundamental Outlook

Jobless claims in the U.K. are expected to rise 6.0K in October after climbing 5.3K the in September. At the same time, the unemployment rate is forecasted to remain unchanged at 4.5 percent, while the ILO unemployment rate during the three months through September is expected to show no change from the month prior. As public sector jobs and private employment likely scaled back during the month of October, market participants should not rule out a rise in the unemployment component.

It is worth noting that the jobs report may be overlooked as the Bank of England minutes will be released alongside the labor force change. The minutes are expected to display another three way split amongst committee members. Andrew Sentance will likely call for a twenty five basis point rate hike in interest rates, while Adam Posen will push for an extra 50 billion pounds in asset purchases as the U.K. economy will face increased major hurdles in the upcoming months amid tough austerity measures. With the split among committee members likely to widen in the upcoming months, the British pound may witness increased volatility, and additional calls for a rate hike will provide GBP support. Join me to cover both events live!

Technical Outlook

GBPUSD Daily Chart

Charts Created Using Intellicharts – Prepared by Michael Wright

GBPUSD: The pair has extended its two day decline during the overnight trade, but downside risks remain capped by the key 1.60 barrier. Meanwhile, technical indicators continue to point to further upside potential. The parabolic SAR signaled for gains on November 1st, and has yet to reverse course, while the MACD continues to point to further advancement in the pair. Indeed, our speculative sentiment index stands at 1.54 and signals for additional losses; however, I do not rule out a change sentiment in the near term as many traders as of late bet on a U.S. dollar rally.

For More Technical Analysis Visit the DailyFX Technical Page.

Written by Michael Wright, Currency Analyst

To Receive Future Articles by Email, please contact me at mwright@fxcm.com

Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast

View the original article here

Greenback Off to Solid Start in Early Week; Yen Extends Declines

By Joel Kruger, Technical Strategist Mon Nov 15 06:05:00 GMT 2010 Price action in the early week has been USD positive thus far, with most of the major currencies marginally extending declines against the Greenback on the back of weaker risk appetite, and ongoing concerns over Eurozone sovereign debt issues. The latest headlines have Germany pushing Ireland to accept a bail-out package and help avoid contagion to Portugal and Spain, and this will be a critical theme over the coming sessions.

Elsewhere, it seems that economic data releases have failed to materially factor into price action, with a much better than expected New Zealand retail sales and solid Japanese GDP, taking a backseat to broader currency flows. Also out in Asia have been weaker UK Rightmove house prices and deterioration in Aussie new motor vehicle sales data.

The US Dollar has been well bid over the past several days, with the single currency finding a renewed bid tone following the latest decision by the Fed to implement another round of QE. Market participants seem to be taking a less dovish outlook on the Fed, with the sense that the Fed is becoming very sensitive to the longer-term risks of ultra-accommodative policy and will be far less inclined to take additional easing measures from here on. Fed Lacker was out on the wires early Monday, and has contributed further to the buck’s bid tone after saying that he thought that the risks to QE2 outweighed the benefits.

While most of the setbacks in the major currencies have been marginal at this point, the Yen stands out, with the currency continuing to extend declines to fresh multi-day lows against the buck. Last week, the break back above 82.00 officially took the short-term pressure off of the downside with the trigger of a double bottom that projects additional gains towards 84.00 over the coming sessions, before considering the possibility for a bearish resumption.

Looking ahead, Swiss producer and import prices are due out at 7:15GMT, followed by the Eurozone government debt/GDP ratio, and trade balance at 10:00GMT. On the official circuit, there a re a number of ECB officials slated to speak, including; Contancio and Nowotny at 7:45GMT, Tumpel-Gugerell at 8:05GMT, and Costa at 9:00GMT. US equity futures and commodities prices trade flat and will be looking to make more of a noise in European trade.

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.

Mon Nov 15 06:05:00 GMT 2010

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Opening Comment'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here

USD Graphic Rewind: Dollar Index Starts the Week Brightly As Ireland Remains Under the Cosh

The dollar index had a choppy day of trade Friday as fears of further Chinese tightening weighed heavily on the Shanghai Composite and dragged global equities lower. The dollar however, was not as broadly bid as one may have expected in such risk averse times as some investors took the change to book profit on recent euro short positions off recent highs. Despite the choppy trade the index managed to eke out a positive close capping its best week since early August.

Over night the dollar has found itself happily bid as the yen weakens after Japan’s third-quarter GDP beat expectations lifting risk appetite. The euro also remains under mild pressure despite the fact that Ireland continues to refuse offers from the EU and IMF for financial aid. Concerns over EMU sovereign debt and fears surrounding potential Chinese tightening are likely to be the dominant themes early this week, both of which should be bullish for the dollar.

Turning to technical’s for a moment, the fact that the index failed to close above 78.30 on Friday has us a little concerned that we may stall out around this level if dollar gains don’t get moving again. We remind readers we were looking for a close and break above 78.30 as a signal that a short-term double-bottom is in place and the index can/will accelerate gains, failure to do so would negate, or at least seriously question this outlook and further significant dollar gains.

Written by Jonathan Granby, DailyFX Research Team

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.

View the original article here

Gold - FOREX Correlations Reveal a Startling Divergence

By Sumit Roy, Fri Nov 12 02:36:00 GMT 2010 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.

---------------------------------------------------------------------------------------------------------------------------------

Weekly Commentary: We saw some interesting developments in Gold – Forex correlation this past week. On the surface it looks like there was a significant breakdown in the strong inverse correlation between gold and the U.S. Dollar. In fact, we saw the dollar index rise in every one of the last five sessions, while gold rose in four of the last five sessions. But if we take a closer look at the numbers, we see that the breakdown really occurred between EUR/USD and gold. Because the Euro makes up such a substantial portion of the dollar index at 58%, fluctuations in the index are dominated by movements in the EUR/USD exchange rate.

The daily correlation between gold and EUR/USD over the past month plunged from 0.73 last week to -0.17, indicating that there was largely no statistical relationship between the two in the latest week. On the other hand, the correlation between gold and every other major pair with the exception of USD/CHF, strengthened. This is quite remarkable and underscores that traders are buying gold not necessarily as a hedge against a falling U.S. Dollar, but a hedge against the debauchment of fiat, or “paper,” currencies in general. The United States and the Eurozone economies are two of the biggest culprits in this regard, having established extremely loose monetary conditions, even going so far as to purchase government debt on a large scale (aka quantitative easing). The Japanese economy is yet another with an extremely loose monetary policy, but conditions there are somewhat different given that deflation has been well-established for some time now.

It is not surprising to see the commodity currencies maintaining their strong correlations with gold. Much stronger economic conditions and rising interest rates have led to relatively tight monetary conditions in the likes of Australia, New Zealand, and Canada. But while the strengthening of gold’s correlation with USD/CAD, AUD/USD, and NZD/USD may have been expected, that is not the case with gold’s correlation with GBP/USD. Indeed, one could have reasonably anticipated that the Pound’s correlation would weaken in step with that of the Euro, but a surprising change of tone from the Bank of England in its Quarterly Inflation Report boosted the currency.

Going forward, the fate of the commodity currencies and gold will remain closely related, both dependent on the outlook for monetary policy in the United States and the Eurozone. Were the Fed or ECB to signal interest rate hikes, both gold and commodity currencies would likely tumble. A strengthening of economic data in the U.S. and in Europe may be seen as a precursor to rate hikes.

Finally, it is worth pointing out that while daily correlations between gold and most of the currency pairs slightly strengthened, intraday correlations completely fell apart across the board. Not a single pair displayed a meaningful 60-minute correlation with gold over the past week. We can attribute this breakdown to unusually volatile gold price action, and do not see it as a leading indication of a breakdown in daily correlations.

---------------------------------------------------------------------------------------------------------------------------------

Gold ETF holdings rose for the first time in four weeks, but just barely. Prices continued their ascent, surpassing $1400 for the first time ever as momentum established after last week’s Fed policy meeting continued to boost prices. In the short-term, it looks as if the correlation between gold ETF holdings and gold prices has completely broken down, but we would remind readers that over the longer-term, there is an extremely strong relationship between holdings and prices; caution is thus warranted.

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 12 02:36:00 GMT 2010

// SET PAGE PROPERTIESvar sProperties = new Object();sProperties.server = '2.6';sProperties.channel = 'Fundamental: Commodities'; // Pass page properties to Omnitureif (typeof sProperties != 'undefined') {for (var sProperty in sProperties) {s[sProperty] = sProperties[sProperty];}}var s_code=s.t(); if(s_code) document.write(s_code);

View the original article here