Thursday, April 17, 2008

Trader Buy Euros and Steps Closer to 1.60

EUR/USD Steps Closer to 1.60

The US dollar slid against all its major counterparts Wednesday as data bolstered market participants’ confidence in a 25bp rate cut by the Fed on April 30. And, in the fray, the greenback would end up setting a record low against the euro at 1.5978 – thanks in part to strong inflationary pressures in Europe, which further highlighted the dollar’s shaky rate prospects. The British pound also advanced against the benchmark with steady employment data of its own. The Canadian and Australian dollar took the biggest bite out of the weakened dollar though as oil futures touched a new intraday record above $115. Finally the low yielding Swiss franc and yen picked up minor gains, however, with risk aversion cooling its heels.

Stronger UK Employment Numbers Fail to Help the British Pound

Stronger UK Employment Numbers Fail to Help the British Pound

The British pound strengthened against the US dollar, but that is more a function of dollar weakness than pound strength because the currency has fallen to new record lows against the Buy Euro.

UK employment numbers were slightly stronger than expected with average earnings increasing. Despite the steady employment numbers and the rise in producer prices, analysts strongly believe that the Bank of England will deliver another interest rate cut in the very near future given the sharp deterioration in housing market data. Although we do believe that the BoE is more apt to cut rates than the ECB, even though CPI has not increased that significantly, the rise in PPI is nonetheless worrisome for the central bank.

Wednesday, April 16, 2008

Double Dose of Bad News Sends British Pound to a New Record Low

Double Dose of Bad News Sends British Pound to a New Record Low

Stronger producer prices drove the British pound higher yesterday, but the lack of meaningful follow through into consumer prices and continual drop in house prices drove the pound to a one month low against the US dollar and to a new record low against the Euro.

The CPI numbers today indicate that producers are finding it difficult to pass on higher costs to consumers which mean that they are taking a hit to profits. This trend cannot last forever before corporate profitability starts to seriously suffer or producers begin to raise prices. The UK economy is still in trouble, especially after house prices as measured by the Royal Institute of Chartered Surveyors (RICS) fell by the fastest pace in 30 years. At this rate, it is very likely that the UK could be following in the US’ footsteps. In the meantime, employment numbers could help the GBP tomorrow. The improvement in the employment components of the manufacturing and service sector PMI reports suggest that there may have actually been job growth last month.

US Dollar Strengthens Across the Board as Producer Prices Jump

US Dollar Strengthens Across the Board as Producer Prices Jump

The US dollar rose across all the major currencies as rising inflationary concerns spurred speculation that the Fed may hold back on additional rate cuts. As a result, the strengthened dollar picked up the most against the British Pound as disappointing UK data weighted on the currency, and was followed by the New Zealand dollar as the pair plunged to 0.785. The US dollar appreciated against the Swiss franc as the pair traded in parity, and was followed by the low yielding Yen as the pair reached 101.81. The Canadian and Australian dollar also weakened against the US dollar amid oil prices hitting a new record high of $113.99 a barrel.

Tuesday, April 8, 2008

Euro starts the day on a strong footing

The euro Tuesday is higher against the dollar after former Fed Chairman Alan Greenspan reportedly said that the credit crisis may be the most wrenching for 50 years or more. But he said home prices in the U.S. may stabilize well before early 2009.

On Monday, the dollar led the euro as currency traders waited in the wings before the European Central Bank and Group of Seven leading industrial nations meetings this week.

Analysts said that the ECB is almost certain to keep rates steady and the G7 is to refrain from addressing the strong euro in its final communique. But the risk of the unexpected - such as a more-bearish comment from ECB President Jean-Claude Trichet - will challenge any euro advance against the dollar in the days ahead.

UK house prices see largest drop since 1992

U.K. house prices experienced their largest monthly decline in almost 16 years during March, increasing the likelihood that the Bank of England will cut its key interest rate Thursday.

Friday, April 4, 2008

Non-Farm Payrolls: Dollar Outlook Hinges Upon the Degree of Job Losses

Now more than ever, the change in non-farm payrolls for the month of March will determine the outlook for the US dollar and US monetary policy. All but one of our leading indicators for non-farm payrolls point to another month of job losses, which means that a negative print alone will not be enough to drive the US dollar lower. The dollar has been rebounding in the days leading up to the non-farm payrolls report and interest rate expectations for the FOMC meeting at the end of this month are strongly skewed in favor of a 25bp versus 50bp cut. We have seen these expectations change on a dime in reaction to incoming economic data and given the fact that the non-farm payrolls report is the most market moving indicator for the US Dollar is no question that a weak release could alter market expectations significantly.

British Pound: Unfazed By Weaker Economic Data

Activity in the UK service sector slowed to the weakest level in 4 months, which led to some temporary weakness in the British pound.

The currency quickly recovered however on the heels of a disappointing US Jobless claims report. The Bank of England faces a tough decision next week when they meet to decide on interest rates. With activity slowing in both the manufacturing and service sector, the economy could use a rate cut. However like the Eurozone, the UK faces inflationary pressures. The input price component of the service sector PMI hit a record high. Output prices on the other hand, have moderated slightly but are also very close to its record.

Thursday, April 3, 2008

Bernanke Testimony Sinks The Dollar Before NFP Lull

The tentative dollar rebound from Tuesday was stalled today by an ominous forecast for the economy from Fed Chairman Bernanke during his testimony before Congress. For the majors, the policy official’s remarks led EURUSD to hold a long-term rising trend and rally over 100 points to 1.57. The pound, despite disappointing data of its own, took advantage of the weakened greenback to confirm a triple bottom and rally back to 1.99.

Risk considerations proved to have an influence on the benchmark currency’s direction as well. The yen actually lost ground against the dollar through the early New York session to extend the notable break from yesterday, while the Swiss franc rose nearly 90 points to 1.0070. The high-yielding pairs had the benefit of the risk rebound and weak US currency, sending AUDUSD and NZDUSD back to 0.9150 and 0.79 respectively. Finally, the range bound Canadian dollar pair was able to extend a reversal to around 1.0150

British Pound: Watch Out for More Housing Market Problems

The currency is trading below 2.0 against the dollar, but thankfully there has been no disaster. However, trouble is still brewing for mortgage lenders or banks that have mortgage lending divisions and things are only expected to get worse. First Direct, which is apart of HSBC announced today that they will be withdrawing all of the mortgages to any homeowners who are not existing customers. Standard & Poor’s is also reporting that Lehman Brother’s has stopped writing mortgages to 2 of their UK units. Halifax, the UK’s biggest mortgage lender is expected to follow suit within days. Being forced to turn away business because you have too many customers should be perceived as a good thing, but unfortunately in the world of mortgage lending in UK, the only reason why First Direct and Halifax are being flooded with new applications is because other lenders like Nationwide gave taken measures to increase the interest rate on loans or withdraw their mortgage lending products completely. If everyone stops providing new mortgages, it could cause the entire UK housing market to freeze up. Meanwhile, this morning’s UK economic data was mixed with construction sector PMI contracting for the first time in six years and net consumer credit hitting a five year high. Service sector PMI is due for release tomorrow and unlike the manufacturing sector, we expect activity in the service sector to slow.

Wednesday, April 2, 2008

Will Fed Chairman Bernanke Cut the US Dollar Rally Short on Wednesday?

Today, Federal Reserve Chairman Ben Bernanke will testify on the economic outlook before the Joint Economic Committee of Congress. Bernanke’s comments tend to spark volatility not only in the forex markets, but also in the equity and fixed income markets. Why? Risk trends. At this juncture, the biggest market-mover for global assets tends to be related to the Federal Reserve (interest rates, inflation, the economy) and the US financial sector – and all of these points will likely be touched upon by Bernanke. However, traders will react to whatever topic serves as his main focus. If Bernanke cites inflation as his predominant concern and indicates some worries about moral hazard coming into play, fed fund futures will likely shift quickly to cut back speculation of a 50bp cut on April 30 and instead move to only price in a 25bp reduction to 2.00 percent. On the other hand, Bernanke could keep instability in the financial markets, tight credit conditions, and major downside risks to economic growth as his primary focus. This would not only sound extremely bearish, but it would also lead fed fund futures to quickly price in more aggressive rate cuts in the near term.

British Pound: UK Manufacturing Rebounds, Prices Hit 9 Year High

Despite the gloomy outlook for the UK economy, manufacturing activity accelerated in the month of March.

The US dollar has weakened significantly against the British pound over the past few months but the pound’s weakness against the Euro has helped to offset the slowdown in US demand. Employment increased modestly but prices hit a 9 year high indicating that manufacturers are passing on their costs to consumers. This explains why the Bank of England is so concerned about inflation. Another rate cut this month will be a close call as inflationary pressures bump heads with deteriorating growth; Consumer prices are well above the Bank of England’s 2 percent target while house prices are at 12 year lows.

Tuesday, April 1, 2008

Euro Stalls Ahead of Looming US Event Risk

For the uptrend to be violated, EURUSD would need to close below 1.5730. As that has not been the case, we see current price action as consolidation rather than a trend change. The current lull looks to owe itself to looming event risk, with ISM Manufacturing data due tomorrow and Nonfarm Payrolls on Friday. As the docket clears, we see a return to upside momentum eyeing a test of the psychologically significant 1.6000 where traders will look to Buy Euros ahead of stops.

British Pound Hits Record Lows Against Euro

The British pound extended its losses against the US dollar and hit a record low against the Euro on the back of zero consequential economic data.

Although dollar strength could be partially blamed for the currency’s latest string of weakness, the main reason for the market’s bearishness is their concern that the UK could be in just as much trouble as the US. The only difference is the outlook for monetary policy. With the Federal Reserve, it is clear that they will continue to cut interest rates. Although the ECB is on the other side of the spectrum, they too have let the market know that interest rates will remain on hold for some time. The outlook for the BoE on the other hand is more convoluted. Even though economic data suggests that they should continue to lower interest rates, King warned this morning that it is crucial for them to prevent inflation from getting entrenched.