After losing significantly during most of this Wednesday’s session as risk aversion prevailed globally, the kiwi rebounded in currency markets as retail sales advanced in the country reviving the confidence regarding the Southern Pacific economy.

The New Zealand dollar had its worse decline in two months this Wednesday as consumer prices showed negative figures, but a retail sales report published in this Thursday early morning in the country revived confidence in the currency as figures came better than forecasts suggested.

NZD/USD traded at 0.7227 as of 12:51 GMT from as low as 0.7185 hours earlier.

If you want to comment on the New Zealand dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.

The Canadian dollar ranked among the worst performers in currency markets today as risk aversion influenced commodities and equities trading, which are strongly related to the loonie’s rates as weak economic data in the country also influenced the confidence towards Canada’s currency.

Speculations that interest rates hikes would happen anytime soon in Canada faded further away as consumer prices retreated according to a report published today, which forced the loonie down in a day were demand for raw materials declined, affecting the outlook for the Canadian economy as half of the country’s exports are commodities. The U.S. dollar advanced sharply versus its Canadian counterpart ask risk aversion brought traders to purchase safer assets in the world’s wealthiest nation, pushing the loonie away from parity with the greenback this Wednesday in foreign-exchange markets.

A considerable amount of strength in the loonie’s rally since the beginning of the year was based on the fact that a fast paced recovery would improve odds of interest rate hikes by the Bank of Canada, which has not been confirmed or signaled by the Canadian financial authorities so far, decreasing attractiveness for the loonie. Today, the commodities market was also bearish, affecting demand for Canadian raw materials and causing a double impact on the loonie rates.

USD/CAD traded at 1.0472 as of 19:23 GMT from a previous rate of 1.0314 yesterday. CAD/JPY traded at 87.06 from 88.39.

If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.

The Canadian dollar declined versus its U.S. counterpart and

lower-yielding currencies as risk aversion rose impacting markets with extreme influence in the loonie rates, those of raw materials and equities, which dropped globally this Friday.

The loonie was impacted today as energetic and metallic commodities declined, specially the crude oil, as raw material exports account for more than half of the country’s international trade revenue, in a day of bearish markets in New York and Toronto. China’s new tightening lending policy declined appeal for high-yielding currencies, and despite U.S. mediocre data published in reports this Friday showing a slow down in the country’s inflation, the greenback advanced versus the loonie after touching a three-month low earlier this week.

The Canadian dollar has been fluctuated in almost perfect correlation with commodities in the beginning of 2010, despite the country’s fundamentals, which are also adding confidence for the loonie to gain in currency markets, according to analysts. As the crude oil retreated below $80 a barrel, the loonie’s rally was halted, but may continue if risk appetite returns during the next weeks.

USD/CAD traded at 1.0284 as of 16:38 GMT after touching 1.0219 yesterday. CAD/JPY declined to 88.27 from 88.85.

If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.

The Brazilian real posted the fourth straight day of decline versus the U.S. dollar as speculations suggest that the Treasury is likely to start a debt selling plan to buy dollars, declining attractiveness for the real in currency markets.

The real touched the weakest level in 2010 today as speculations suggest that overseas investors are leaving the country, and such capital outflows declined appeal for the emerging market South American currency. A Treasury plan that may be used to buy dollars also affected the real’s outlook, in another day of losses versus most of the main traded currencies this week.

USD/BRL traded at 1.7658 as of 20:03 GMT from an opening rate of 1.7405.

If you want to comment on the Brazilian real’s recent action or have any questions regarding this currency, please, feel free to reply below.

The Canadian dollar profited from a higher risk appetite session today and rebounded versus the yen and its U.S. counterpart as equities rose in North America, allowing the correlated loonie to profit from this trading scenario.

After two days losing in currency markets as concerns that the Canadian economic recovery is not as robust as analysts suggested, the loonie rebounded today, profiting from a positive performance of stocks and commodities, which have an extreme influence in the Canadian currency rates as raw materials exports are responsible for a big cut on the country’s international trade. The Canadian dollar also benefited from a less attractive U.S. dollar, which has been losing its appeal as the nation published several reports which featured data below forecasts, suggesting that interest rates will be not hiked so soon in the world’s wealthiest nation.

Demand for commodities is still playing a major role to back the loonie’s advance, as Canada’s economy, and consequently its currency, will rely on the global economic recovery in the first half of 2010 to determine whether demand for the nation’s raw materials will allow the country to recover steadily or not.

USD/CAD traded at 1.0304 as of 19:42 GMT from a previous rate of 1.0385 in the intraday. CAD/JPY rose to 88.60 from 87.52.

If you want to comment on the Canadian dollar’s recent action or have any questions regarding this currency, please, feel free to reply below.

Risk aversion declined significantly today after China set a new reserves requirements for banks in the country, allowing the yen to outperform all of the 16 main traded currencies in

foreign-exchange markets, as pessimism surged.

Equities markets in Asia and globally declined today, raising demand for the yen, as China set a minimum of 16 percent of reserves that large banking corporations in the country must have, in order to avoid a credit bubble as the one that caused the global slump in late 2008. The yen is considered the safest refuge in currency markets for turbulent times and benefited from today’s negative scenario, as China’s policy decreased demand for high-yielding assets, which were trading high since the beginning of the year. The Australian dollar posted the sharpest losses versus the Japanese currency as loan approvals in the real estate sector declined.

China’s strict regulations declined optimism that were fueling demand for higher-yielding since the last week, according to analysts. The yen had declined significantly after several sessions losing versus most currencies, as today’s shift in markets sentiment was a good opportunity for it to level up.

AUD/JPY fell to 84.23 as of 15:45 GMT from a previous rate of 85.53 in the intraday comparison. CAD/JPY followed the same trend at 87.72 from 89.08.

If you want to comment on the Japanese yen’s recent action or have any questions regarding this currency, please, feel free to reply below.

Sterling dipped slightly against the single currency, relinquishing gains in the afternoon as US equities slipped back, closing the day down just 0.1% at 1.0958.

• In early trading, investors picked up on comments from the ECB President who added to remarks from other eurozone officials expressing worries about the strength of the single currency.
• In response the markets took the euro slightly lower, enabling the pound to reach up over 1.10, near Monday’s 3-week high.
• In addition, the pound gained slight support after the UK public spending deficit in September fell short of market expectations, buoying investor sentiment.
• However, the euro trimmed its losses in the afternoon as global equities turned negative and investors cautioned over taking long positions ahead of a speech by Bank of England Governor Mervyn King in the evening.
• In trading today, the pound has broadly strenghtned as the MPC minutes from their latest meeting sounded a relatively positive tone. Currently the UK currency is trading one percent up on the single currency, approaching €1.11.

A lot of people like the participants of the currency markets, economists and experts of the Central bank have been trying to understand and identify, what factors exactly drive the highs and the lows of the Forex market. A lot of experts suggest that predicting the future move or trend of the Forex market is more of an art than a science. That is because even the experts at times have to split their views in relation to the direction of the Forex market.

Technically speaking there are two schools of thoughts or approaches which is primarily used to analyze the Forex market. The first one being the Fundamental Analysis and the second one is the Technical Analysis. We would be discussing each one of the approaches briefly.

Fundamental Analysis – This is based upon the prevailing economic conditions. Majorly people who are medium to long term traders in the Forex market tend to stick to this approach. As this involves an assessment of the economic growth, macroeconomic indicators which might include the GDP, prevailing interest rates, inflation in the economy unemployment in the country and the foreign exchange reserves in the country.  Along with the involved geographical risks, while evaluating the future value of a currency. These are the forces which drive the demand and the supply of money. More over at times the Central banks might also intervene in the Forex market to correct the values there.

Technical Analysis – This is based upon the recorded historical data of the prices. The data is used for the computation or rather forecasting the future price or trend of the Forex market. These days more and more people like the traders, who are generally trade for a short term tend to get drifted towards the technical analysis approach. This may be called as a gift of the implementation of the modern technologies and the computers. Unlike the Fundamental analysis the Technical analysis is based on the assumption that the result of all the in formations used for the Fundamental analysis is the prevailing Forex rate in the market, so nothing needs to be captured separately. The discounting mechanism of the Forex market may be called as another reason for the technical analysis to be so popular. The market normally does not predict anything but it just reveals the thought process of the hedge funds, the pros in the market and the other major movers and shakers of the Forex market.

In the end I would say no approach is right or wrong. As it’s not a very uncommon phenomenon that the Fundamental Approach predicts a bullish trend and the reverse shown as per the Technical approach and the approach other than the one you use appeared to be correct or vice-versa. Thus being a hardcore fundamental or technical trader would just mean being in the dark for half of the time. So I would suggest look at both and use your common sense.

Exchange rate risk is one of the four risks associated with the worldwide foreign exchange market. The market supply and demand for currencies shifts continuously and its consequences lead to the exchange rate risk on an outstanding forex position. An outstanding position is always subject to the changes in the prices of currencies thereby leading to exchange rate risk. These positions can be managed so that the losses can be cut short and profitable positions can be carried forward. The main dealers in the currency markets i.e., the Banks and traders use their analysis, skills and experiences to employ certain limits for the said purposes. These limits undertaken to minimize exchange rate risk can be classified into position limits and loss limits.

Position limits

Position limits can be further subdivided into daylight position limit and overnight position limit.

1. The daylight position limit establishes the maximum outstanding amount of a certain currency which a trader is allowed to carry at any single time period. This limit mirrors both the trader’s level of trading skills and the amount at which the trader reaches the apex.
2. The overnight position limit which is smaller than daylight limits indicate to any outstanding position kept overnight by the traders. In reality, the majority of foreign exchange traders do not hold overnight positions.

Loss limits

Loss limits are undertaken to avoid unsustainable losses made by traders. This is administered by the senior officials in the dealing centers. The loss limits are selected on a daily and also on a monthly basis by the higher authority.

In the present scenario these limits are executed conveniently with the help of computerized systems. This enables the treasurer and the chief trader to have continuous, instantaneous, and comprehensive access to the exact figures for all the positions and the profit and loss from such outstanding positions held. All the branches in the country and abroad are connected to the head office through network systems and these information are accessible from any of the locations.

A currency option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to trade a specific amount of currency at a certain price on or before a certain date, regardless of the market price of the currency. On the other hand it gives the seller, or writer, the obligation to deliver the currency under the contractual terms, if and when the buyer wants to exercise the option. Currency options are financial instruments used for speculation and hedging. Volatility of a currency has a direct link with the options as it may generate a profit or loss in the options market. Options are a cheaper medium for currency trading also is more secured that the spot currency trading.

Currency options constitute the fastest-growing segment of the foreign exchange market. Currency options represent 5 percent of the foreign exchange market. The biggest options trading center is the United States, followed by the United Kingdom and Japan. Options prices derive their values from the cash instruments and as such they are known as derivative instruments.

Options are available on either cash or futures in majority of the currency markets. Generally they are traded either over-the-counter (OTC) market or on the centralized currency derivatives markets of the particular country.

Any currency may be traded as an option and the traders may quote on any exotic currency including any cross currencies.

The expiry date may be determined from several hours to several weeks and years, although the majority of dates expire around the even dates i.e., one week, one month, two months and, so on. The currency cash market is always open round the clock and as such options may be traded round the clock.

The US Dollar surged higher to start the trading week as stocks sold off across Asian exchanges, boosting demand for the safety-linked currency. The British Pound bore the brunt of the greenback’s assault as risk aversion compounded last week’s dovish rhetoric from the Bank of England.

Key Overnight Developments

• Pound Tumbles Despite BOE Backtracking on King’s Comments
• Japanese Yen Surges on Safety Demand as Stocks Plunge in Asia

Critical Levels

The British Pound and the Euro both suffered sharp losses in overnight trading as stocks tumbled in Asia, driven lower by Friday’s disappointing US economic data, sending the MSCI Asia Pacific regional benchmark index down 1.2% and boosting demand for the safety-linked US Dollar.

Asia Session Highlights

The British Pound raced sharply lower in early trading as currency markets seemingly concluded that the Bank of England suspiciously “protests too much” after the UK Times Online cited unnamed sources at the central bank as saying King was trying to talk down sterling last week. The Pound began to accelerate lower last Monday after the BOE released an article titled “Interpreting Recent Movements in Sterling” as part of its quarterly bulletin which argued that the inability of drying up capital inflows to finance the current account deficit could mean a fall in the “the long-run sustainable real exchange rate”. Sterling bears were given extra fuel last Thursday when Governor Mervyn King said rebalancing the UK economy was “very necessary [and] the fall in the exchange rate that we have seen will be helpful to that process” in an interview with The Journal.

Reserve Bank of Australia Governor Glenn Stevens struck a hawkish tone at a testimony to the Senate Committee in Sydney. Stevens said that Australia’s recession has been mild and the economy has done “quite well” as government stimulus “materially” supported growth, adding 2-3% to local demand. On interest rates, Stevens said that benchmark borrowing costs are “unusually low” and will need to go back to normal levels, adding that inflation targeting will guide the timing of adjustment to “more normal levels”.

Euro Session: What to Expect

A preliminary estimate of Germany’s Consumer Price Index is set to show that prices fell -0.2% in the year to September, marking the third consecutive month that the EU-harmonized metric has printed in negative territory. A reading in line with expectations is unlikely to prove market-moving: economists have called for year-on-year CPI to shrink -0.3% through the third quarter, and averaging September’s would-be reading with those recorded in the previous two months yields just about that outcome. The coming months present an opportunity for volatility, however: consensus forecasts have inflation coming back into positive territory in the fourth quarter and averaging around 1.2% through 2010; if this proves too rosy as the economy falters anew after the boost from fiscal stimulus (both at home and abroad) and the inventory cycle fizzles out, a drop in inflation expectations stands to prolong the slump in the Euro Zone’s largest economy. Indeed, consumers and businesses have little incentive to spend and invest in the present if they reckon prices will be lower in the future, bringing economic activity to a standstill. This will mean the ECB will keep interest rates at current lows longer than nearly all of its major counterparts (with the exception of Japan and Switzerland), weighing down the Euro.

Written by Ilya Spivak, Currency Analyst
Article Source – Pound Tumbles, Dollar Surges as Risk Aversion Hits Currency Markets (Euro Open)

Currency markets will be focused on the outcome of the G20 summit of world leaders in Pittsburg to guide directional momentum. A leaked draft communiqué hinted policymakers were in no rush to withdraw fiscal stimulus, but concerns remain about what measures will be taken against risk-taking in the financial markets.

Key Overnight Developments

• NZ Annual Trade Deficit Shrinks as Imports Fall for Fifth Month
• Bank of Japan Says Recovery After Stimulus, Restocking is “Uncertain”

Critical Levels

The Euro initially sold off but prices recovered late into the overnight session, adding much as 0.2% against the US Dollar. The British Pound continued to be sold, though prices recovered most of the drop in early trading that saw GBPUSD test as low as 1.5918, trading just below 1.60 ahead of the opening bell in Europe.

Asia Session Highlights

New Zealand’s annual Trade Balance deficit contracted to the narrowest in over six years, revealing a shortfall of –NZ$2.37 billion in August following a revised –NZ$2.49 billion result in the previous month as imports fell for the fifth straight month, shrinking -21.6% from a year before. The outcome speaks ill of domestic demand in the smaller antipodean nation, especially considering that the Kiwi Dollar has become considerably stronger over recent months, which should boost New Zealanders’ purchasing power of foreign goods and encourage imports. More of the same is likely going forward as unemployment continues to push higher, trimming incomes and discouraging spending. Indeed, a survey of economists conducted by Bloomberg forecasts the trade gap will shave just -6.6% on average off GDP this and next year, the smallest since 2004. To be fair, however, exchange rate movements take a long time to be reflected in trade figures, so it is possible that the currency’s recent gains may surface to widen the shortfall in the months ahead. The deficit grew –NZ$725 million from July, more than the –NZ$329 million expected, but monthly figures tend to be volatile and looking at annualized readings offers better gauge of trade flows’ direction.

Minutes from the August policy meeting of the Bank of Japan revealed that while policymakers agreed that “overseas economic conditions have stopped worsening,” but expressed concern that the pace and sustainability of recovery after the effects of fiscal stimulus and the inventory restocking cycle run their course “remained highly uncertain.” Members concurred that exports will probably continue to improve for the time being as overseas markets stabilize, but domestic consumption will remain weak as unemployment continues notwithstanding isolated policy-induced spikes in purchases of specific items such as cars and electrical appliances. On inflation, members concluded that year-on-year consumer price figures will remain weak largely because of the correction in high oil costs seen last year. On financial conditions, policymakers said that while funding access had improved for large firms, credit for small enterprises remained limited.

Euro Session: What to Expect

With little of importance on the economic calendar, currency markets will be focused on the outcome of the ongoing Group of 20 (G20) summit of world leaders going on in Pittsburg. Traders’ concerns are two-fold: first, there are worries that policymakers will take recent signs of economic stabilization to agree on a path to withdrawing fiscal stimulus measures, nipping the recovery in the bud; second, it remains unclear what, if anything, will be agreed upon regarding regulations of risk-taking in the financial markets. On the former point, a draft G20 communiqué leaked by Reuters contained language saying leaders will maintain expansionary policies until the global recovery is secured, alleviating at least some concern. Little is known on the latter point, however, and any actions that are perceived to be too strong (which, in fact, would be any kind of broad-based agreement considering the difficulty of building consensus in the G20) are likely to send capital feeing out of risky investments and into safety-correlated assets like the US Dollar and the Japanese Yen.

Article Source – Currency Markets Look to G20 Summit Outcome to Guide Price Action (Euro Open)

The British Pound may be in for a volatile session ahead as the release of minutes from this month’s Bank of England monetary policy meeting top the economic calendar in European hours. Currency markets were active in overnight after New Zealand GDP unexpectedly expanded and the Chinese central bank deputy governor sounded off against the US Dollar.

Key Overnight Developments

• Currency Surges as New Zealand GDP Unexpectedly Grows in Second Quarter
• USD Drops After PBOC’s Hu Says Dollar-Reserve System Must Change

Critical Levels

The Euro trended higher against the US Dollar in overnight trading, testing as high as 1.4842. The British Pound also advanced, adding as much as 0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Gross Domestic Product unexpectedly added 0.1% in the three months to June, snapping five consecutive quarters of losses. Economists were forecasting a -0.2% result ahead of the release. The economy shrank -2.1% from a year before, less than the expected -2.6% decline. The Reserve Bank of New Zealand was among those calling for a contraction when Governor Alan Bollard said the bank expected to “keep [interest rates] at or below the current level…until the latter part of 2010” at the monetary policy announcement earlier this month, and traders seemingly took today’s release to mean the time table will now accelerate. Indeed, a Credit Suisse gauge of priced-in rate hike expectations for the coming year jumped 13 basis points to a record high and the New Zealand Dollar surged to a fresh 2009 high against a trade-weighted basket of top currencies.

The US Dollar Index (an average of the greenback’s value against six major counterparts) spiked to a fresh yearly low after the Chinese central bank’s deputy governor Hu Xiaolian wrote in a paper posted on the G20 website ahead of the group’s summit in Pittsburg this week that the current crisis was due in part to the Dollar’s role as global reserve currency. Hu, who is also the former director of China’s foreign-exchange authority, went on to say that the world stands at risk of an asset bubble and potentially another crisis akin to the current one if the global monetary system is not changed.

Euro Session: What to Expect

The release of minutes from this month’s Bank of England monetary policy meeting headline the economic calendar in European hours. The announcement itself produced no surprises with interest rates left at 0.5% and the magnitude of quantitative easing unchanged at 175 billion pounds. Just five days later, however, BOE chief Mervyn King gave resoundingly dovish testimony to House of Commons Treasury Committee, saying poor credit growth remains a direct drag on demand and revealing that policymakers are considering cutting the interest rate they pay on bank deposits to encourage idle reserves to be channeled into lending. The latter comment in particular sent the British Pound tumbling, with traders clearly caught off guard as the BOE was seemingly preparing for more, not less, monetary easing despite the recent uptick in leading economic indicators. This creates strong potential for sterling volatility as the markets dissect tonight’s release for any clues on how serious King and company are about the deposit rate idea and when (if ever) such an outcome may be expected. For our part, we speculated ahead of the September 10 rate announcement that the bank was preparing the markets for a change in policy after the asset-buying scheme largely failed to affect lending to the real economy. Indeed, although Mervyn King has said that the BOE was “beginning to see its impact on the supply of broad money,” the M4 measure of money stock grew at an annual pace of just 12.6% in August, the slowest in a year, while central bank’s own data showed net lending shrank for the first time in at least 16 years in July.

Separately, the British Bankers Association’s measure of Loans for House Purchase is set to show that mortgage approvals rose by 40,500 in August, the most since February 2008, hinting at stabilization in the property market. Earlier this week, a report from Rightmove Plc showed that UK house prices fell the least in a year in September, saying “confidence is up, stock is down and the number of people searching is high.” However, as we noted earlier, the rebound may have a hard time retaining traction with consumer sentiment apparently tracking equities and therefore is vulnerable to a (long overdue) correction in risky assets while unemployment continues to rise, with a survey of economists polled by Bloomberg calling for the jobless rate to top 9% next year.

Turning to the continent, a handful of Purchasing Manager Index releases are expected to come in broadly positive. In Germany, the manufacturing sector is expected to expand for the first time in 14 months while the pace of expansion in the service industry picks up to the fastest since April 2008. Manufacturing will likely continue to shrink in the Euro Zone as a whole but the rate of decline is set to moderate to the slowest since the sector first began to contract in May last year. The improvement can likely be attributed to the continued rebuilding of inventories after firms cut production and exhausted their stocks of goods last year and through the first quarter of 2009 amid the global economic downturn. Still, Industrial New Orders are expected to shrink -25.9% in the year to July, suggesting the pace of demand contraction will remain within the range noted since November of last year.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound Volatility Threat High as Currency Markets Focus on BOE Minutes (Euro Open)

Currency markets are likely to continue looking to risk sentiment to drive price action with another thin economic calendar on tap in European trading hours. Switzerland’s Trade Balance report and the SECO economic forecast update are set for release.

Key Overnight Developments

• NZ Current Account Surprises With Surplus in Q2 as Imports Fall
• US Dollar Sold in Overnight Trading as Stocks Gain on Asian Exchanges

Critical Levels

The Euro added 0.3% against the US Dollar to retake the 1.47 level in overnight trading. The British Pound followed suit, testing as high as 1.6258. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Current Account Balance unexpectedly showed a surplus of NZ$124 million in the second quarter, marking the first quarterly surplus since the first three months of 2003. Economists were forecasting a –NZ$1.98 billion result ahead of the release. In annual terms, the deficit narrowed to –NZ$10.6 billion or 5.9% of GDP, the smallest share of total output in nearly 5 years. Details behind the headline figure look far from encouraging however: imports fell -19.6% from a year earlier, outpacing a -3.5% decline in exports and painting a picture of stagnant consumer demand in the island nation. The deficit is likely to continue to narrow in the months ahead as rising unemployment weighs on spending. Indeed, the central bank expects the external gap will narrow to 5.5% of GDP while a survey of economists polled by Bloomberg predicts the jobless rate will rise to a decade high of 6.8% by the end of this year. Traders welcomed the announcement, sending the New Zealand Dollar 90 pips higher against its US counterpart in the hour following the data release as traders expressed relief that the central bank may not be pushed to lower interest rates to cheapen the currency and thereby offer exporters a boost to help narrow the current account shortfall, which has been on the forefront of policymakers’ concerns since it led to a downgrade of the New Zealand’s credit outlook by the Fitch ratings agency. An index of traders’ one-year RBNZ rate hike expectations compiled by Credit Suisse jumped 8 basis points to a record high after the figures crossed the wires.

Euro Session: What to Expect

Swiss economic data dominates a thin economic calendar in European hours. While Augusts’ Trade Balance report is likely to show that exports fell considering last week’s dismal industrial production data, the appetite for imported goods is proving difficult to gauge from leading indicators. Domestic demand may have recovered a bit considering the recent upward correction in retail sales figures, but the trend in receipts is undeniably pointing lower while unemployment rises and consumer confidence continues to set record lows. Separately, the release of updated economic forecasts from the government’s State Secretariat for Economic Affairs (SECO) will be notable in terms of how it compares to last week’s upward revisions to the growth and inflation outlook from the SNB.

On balance, risk sentiment is likely to remain the key driver for currency markets going into the US session. Stocks rose for the first in three days across Asian exchanges after Citigroup raised its price estimate for Samsung Electronics (the world’s largest computer memory chip manufacturer), Morgan Stanley upgraded their outlook for Samsung SDI Co. and LG Chem Ltd on expectations of higher car battery demand, and China Mobile Ltd (the largest global cellular provider) said it’s customer base grew 15.6% from the previous month in August. Risky assets look set to retain momentum with US equity index futures trading higher and hinting that Wall St will open 0.2% higher on Tuesday, adding to selling pressure on the safety-linked US Dollar.

Written by Ilya Spivak, Currency Analyst
Article Source – Currency Markets to Trade with Risk Sentiment on Thin Economic Calendar (Euro Open)

The US Dollar may rise as stocks retreat and US equity index futures point to a lower open on Wall St with currency markets focused on trends in risk sentiment to drive price action, looking past a virtually empty economic calendar.

Key Overnight Developments

• NZ Service Sector Expands For Second Month on Inventories; Sales Decline
• UK House Prices Fell Least in a Year in September, Says Rightmove
• Euro, British Pound Sold Against US Dollar as Most Stocks Fall in Asia

Critical Levels

The Euro trended lower to start the trading week, testing as low as 1.4678 to the US Dollar in overnight trading. The British Pound followed suit, dropping as much as -0.4% against the greenback. We continue to hold a short GBPUSD position, initially targeting 1.6112.

Asia Session Highlights

New Zealand’s Performance of Services Index rose to 51.3 in August, showing the sector expanded for the second consecutive month. The details of the report are not nearly as encouraging as the headline figure would suggest, however. Inventory growth led the metric higher, adding 5.9% from the previous month, while Sales fell -1.2% to register the first decline in four months. On balance, this looks to be a reflection of the same dynamic we have seen throughout the apparent economic recovery of recent months: companies are restocking, all the while cutting costs and shedding jobs, which boosts relative output readings but says very little about the sustainability of the rebound once government stimulus is withdrawn and private demand (increasingly ravaged by unemployment as it is) has to step in and pick up the slack. Separately, Credit Card Spending fell -1.9% in the year to August, in line with the average noted over the past four months.

UK House Prices fell -1.5% in the year to September, registering the smallest decline in over a year according to Righmove Plc, an online listing of for-sale properties. Righmove commercial director Miles Shipside said, “Confidence is up, stock is down and the number of people searching is high.” The rebound says little about the health of the economy, however, with low supply being the dominant force behind higher home values according to a report from the Royal Institution of Chartered Surveyors (RICS) released last week. Consumer confidence has tracked the rebound in the FTSE 100 benchmark UK equity index with a correlation of over 90% since March, making this part of the equation highly vulnerable to any reversal of the recent rally in risky assets. For our part, we have long argued that the markets have done too much, too fast over the past six months, with global equities trading at levels unseen since 2003 relative to earnings. The world economy grew nearly 3% in real terms that year, whereas virtually every credible forecast calls for the first post-WWII contraction in real growth in 2009, pointing to lackluster revenues and overextended asset prices. Further, trading volumes have steadily declined for the bulk of the equity rally (the past 5 out of 6 months). While some of this may be chalked up to a seasonal slowdown that is typical for the summer, it may also be hinting at waning conviction behind the up move and a forthcoming reversal as traders return from holiday and volumes pick up into the Fall.

Euro Session: What to Expect

With next to nothing on the economic calendar, risk sentiment is likely to be the primary catalyst driving currency markets in European hours. Risk appetite retreated at the start of the trading week: most Asian markets sold off, led by finance and mining companies, and US equity index futures suggested Wall St will open as much as -0.5% lower on Monday. This points to continued gains for the safety-correlated US Dollar after the greenback rose against the spectrum of major currencies in overnight trading.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar May Gain as Currency Markets Follow Risk Trends in European Hours (Euro Open)

The US Dollar gained as stocks sold off in Asian trading on news that Japan’s third-largest consumer lender will suspend debt payments to its creditors, boosting demand for the safety-linked currency. German PPI, Euro Zone Current Account, and UK Public Borrowing figures are on tap ahead.

Key Overnight Developments

• Japan’s Third-Largest Consumer Lender to Suspend Debt Payments
• Hong Kong Monetary Authority Deputy Chief Says Mortgage Rates Too Low
• Euro, British Pound Decline as Stock Losses Boost the US Dollar

Critical Levels

The Euro lost as much as -0.4% against the US Dollar, testing below the 1.47 level in overnight trading. The British Pound was weaker still, slipping as much as -0.6% against the greenback.

Asia Session Highlights

Currency markets took their cues from stock exchanges in overnight trading, with the safety-linked US Dollar rising by as much as 0.3% on average against its major counterparts as stock exchanges in overnight trading. US equity index futures are trading firmly in negative territory ahead of the opening bell in Europe, suggesting risk-taking is likely to remain subdued and hinting at further gains for the greenback.

Asian exchanges declined on reports that Aiful Corp, Japan’s third-largest consumer lender, was going to suspend debt payments to its creditors citing fund-raising problems. Most worryingly, this may be a part of a larger problem: Japan’s government has capped the interest rates that consumer lenders can charge borrowers and mandated reimbursements of overcharged interest, meaning other major firms may follow Aiful’s lead.

Separately, Hong Kong Monetary Authority Deputy Chief Executive Y.K. Choi said that the city’s banks have lowered mortgage rates “to such an extent that they might not have given due regard to the reputation risk, interest rate risk and liquidity risk potentially associated with their pricing,” stoking fears that policymakers will push for higher borrowing costs and take the steam out of the rebound in asset prices.

Euro Session: What to Expect

German Producer Prices are set to show that the pace of contraction in wholesale prices slowed for the first time in 13 months in August, rising to -7.2% from a record-low -7.8% recorded in the previous month. The uptick likely reflects the recent rebound in energy prices – an index tracking energy costs from Bloomberg and UBS has rebounded over 54% since bottoming in February. While this foreshadows some moderation in deflationary pressure on consumer prices (the benchmark gauge of the price level) in the months ahead, the strength and durability of any rebound remains uncertain. Although economic growth has started to stabilize on the back of broad-based fiscal stimulus, low interest rates, and the inventory restocking cycle, unemployment rates have continued to press higher and will surely lead to anemic private demand once expansionary policy runs its course. Indeed, the International Energy Agency has forecast that global oil demand will remain firmly below its 2004-2008 average through the end of next year, working against sustainable gains in PPI growth.

The Euro Zone Current Account may post a surplus in six months in July following yesterday’s better-than-expected Trade Balance result for the same period as exports surged by 4.1%. The capital side of the equation also looks supportive: Euro area stock markets gained 9.8% while the currency advanced 0.1% on average against its major counterparts. Most interestingly, any improvement over June’s -0.3 billion euro outcome will amount to a break out of the downward trajectory that has guided the metric lower since the peak in June 2007. While it is early to be certain at the moment, this could be hinting at the formation of long-term fundamental support for a stronger Euro if it marks a sustained trend change in the regional bloc’s external position.

In the UK, the Public Sector Net Borrowing report is expected to show that the government deficit expanded by a whopping 17.6 billion pounds in August, the most since May. Public debt has swelled by a whopping 73.1 billion points so far this year and is expected to average 13% of the economy’s total output, the most among the G10 nations. To that effect, the data’s release may prove to weigh on the British Pound, stoking fears that Europe’s third-largest economy could face a cut of its sovereign credit rating.

Written by Ilya Spivak, Currency Analyst
Article Source – US Dollar Rises on Safety Demand as Stocks Retreat in Asian Trading (Euro Open)

The British Pound is in European trading hours as currency markets turn their attention to the interest rate decision from the Bank of England. An actual change in borrowing costs is unlikely, with traders paying keen interest to anything that hints at the future course of the bank’s quantitative easing program.

Key Overnight Developments

• Japanese Corporate Goods Prices Disappoint, Signal Continued Deflation
• Australian Jobs Report Disappoints, Weighs on RBA Rate Hike Expectations

Critical Levels

The Euro moved slightly higher in overnight trading, adding 0.1% against the US Dollar. The British Pound followed suit, testing as high as 1.6563 against the greenback.

Asia Session Highlights

Japan’s Domestic Corporate Goods Price Index printed flat in August, showing producer prices continued to shrink at a record annualized rate of -8.5%. Economists had expected prices to grow 0.2% from the previous month to bring the year-on-year figure up to -8.4%. Prices of imported goods led the way lower, down -34.6% from a year before, with raw materials (particularly petroleum and coal) registering the largest losses at -0.8% on the month and -44.1% in annual terms. The outcome foreshadows continued downward pressure on consumer prices, which shrank for the sixth consecutive month in July, hinting that deflation is set to become entrenched once again in the world’s second-largest economy. This is a dire prospect: if consumers and businesses expect prices to be lower in the future, they will perpetually delay spending and investment waiting for the best possible bargain, bringing economic growth to a virtual standstill. At this point, a rebound in exports seems like the only saving grace for the economy, which looks like a distant prospect for the moment considering recent Current Account data but may be helped if the policies of the incoming DPJ government result in a weaker Japanese Yen.

Australia’s labor market data proved disappointing: although the Unemployment Rate remained unchanged at 5.8%, the economy shed 27,100 jobs in August, much more than economists expected. Worse still, the drop was driven by a -30.8k decline in full-time positions, marking the fourth consecutive month of large double-digit losses. More of the same is likely going forward: a survey of economists conducted by Bloomberg forecasts the jobless rate will rise to average 6.25% this year and 7.9% in 2010. Job losses will weigh on incomes and trim consumption, threatening Australia’s nascent economic rebound. Data released just yesterday revealed that retail sales unexpectedly fell in July as the impact of the government’s A$20 in cash handouts began to fade while higher borrowing costs undermined lending. Indeed, the past two days have amounted to a profound wake-up call for financial markets: traders that had been pricing in a 45% chance that the RBA will raise interest rates by 25 basis points in October just three days ago now see just a 16% chance of such an outcome.

Euro Session: What to Expect

Currency markets will be focused on the interest rate decision from the Bank of England in European trading hours, with Mervyn King and company all but sure to keep benchmark borrowing costs unchanged at 0.5%. The release’s market-moving potential hinges entirely on the statement accompanying the announcement, with traders paying keen interest to anything that hints at the future course of the bank’s quantitative easing program. Last month’s release proved pivotal as the BOE took an unexpected turn into dovish territory, expanding their asset-buying scheme by 50 billion pounds: indexes measuring traders’ 1-year BOE rate hike expectations and the average value of the British Pound against a trade-weighted basket of top currencies both topped out on the very same day. On balance, it seems unlikely that policymakers would make significant changes now, preferring to first see what happens after last month’s actions have been allowed to work through the economy. However, it is important to note that the BOE had largely failed to affect lending to the real economy having spent 125 billion on quantitative easing prior to the most recent expansion. It seems unlikely that pouring another 50 billion into the program will make much of a difference, leading us to speculate that perhaps the bank’s actions had been intended to establish expectations of a dovish bias, cushioning the impact of a more dramatic change to current policy.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound Takes Center Stage as Bank of England Announces Interest Rates (Euro Open)