» 2007 » August

Written by Terri Belkas, Currency Analyst DailyFX

Interest rates have a huge impact on forex trading, and currently, central banks have been on edge as volatility in the financial markets may have derailed plans for further monetary policy tightening. Over the course of the next week, a total of four central banks will meet and announce their rate decisions, and the Australian dollar, Canadian dollar, Euro, and British pound could all be subject to a jump in volatility as the RBA, BOC, ECB and BOE all continue to hold a hawkish bias. However, only one bank shows a substantial risk of an imminent hike this week. Who will it be? Also, what will the Federal Reserve’s next move be?The chart below highlights which central banks we consider to have the most severe tightening bias and more importantly, which are the most likely to increase interest rates in the near term. While all of them have demonstrated a hawkish stance lately, certain factors pertinent to their respective economies leave banks, such as the European Central Bank, prone to earlier action.

Federal Reserve: The Rate Decision That Will Be Heard Around the World Rate Announcement: September 18, 2007 at 18:15 GMT Bias: Possible Rate Cut

The US markets have made it very clear that they are begging for a rate cut on September 18th, and the stakes are quite high for the Federal Reserve, as a continued liquidity crunch threatens to severely impair financial operations and economic growth. The Federal Reserve has taken many measures to try to stem some of these pressures, as they lent billions of dollars of temporary reserves to the banking system and also went so far as to cut its discount rate by 50 basis points to 5.75 percent on August 17th in an attempt to help distressed banks borrow money.

Nevertheless, Ben “Helicopter” Bernanke could be coming in with additional assistance for the markets, and he will have the opportunity to discuss his next move with the rest of the FOMC and central bankers from the Bank of England and the Bank of Japan (European Central Bank President Jean-Claude Trichet cancelled his appearance this morning) on August 31st at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming. Currently, Fed fund futures are pricing in a 25 basis point rate cut on September 18th and as many as three rate cuts are expected by year end. However, any commentary by Bernanke that sways investor sentiment on coming monetary policy will shift market expectations and spark major price action. Traders should also keep in mind that Bernanke and other policymakers attending the conference could also be quoted over the course of the weekend events, which may be reflected in the markets on Monday.

Next Week Is Full of Central Bank Decisions – Who Is at Risk of Raising Rates, and Who Isn’t?

Reserve Bank of Australia – No Hike This Month, But Tightening Bias Remains Rate Announcement: September 4, 2007 at 23:30 GMT Bias: No Change

On August 8th, the RBA raised rates 25bp for the first time since last November, lifting the overnight cash rate to an 11-year high of 6.50 percent. The move was widely expected after inflation figures for the second quarter came in stronger-than-estimated at 2.1 percent. The bank’s bias going forward was considered to be hawkish as well after RBA Gov. Glenn Stevens said in his policy statement that “the high CPI outcome for the June quarter indicated a less favorable near-term outlook, with the implication that any further increases in inflation would take place from a higher starting point than previously envisaged.”

Furthermore, with unemployment rates holding at 33-year lows of 4.3 percent and domestic data signaling resilient growth in demand and activity, the RBA may remain concerned that strong economic conditions will put upward pressure on inflation. However, in order to preserve stability, the bank will likely want to gauge the impact of past policy actions before considering hiking again. The next round of CPI data not due out until late-October, but interest rate swaps are currently pricing in a 25 basis point hike before year end, creating the potential for an increase in November. Bank of Canada – Neutral Stance Until 2008 Rate Announcement: September 5, 2007 at 13:00 GMT Bias: No Change

The Bank of Canada sprung no surprises on July 10th when they raised rates by 25 basis points to 4.50 percent, but the central bank was widely perceived to have maintained as a hawkish bias when they said in their post-meeting policy statement that “some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term,” citing “excess demand” in the economy that could lead inflation to peak at 3 percent this year. However, recent volatility in the financial markets, which has taken a particularly harsh toll on Canadian commercial paper markets, has also deferred rate hike expectations until 2008 from previous estimates of a September rate increase. Indeed, Bank of Canada Deputy Governor Pierre Duguay recently said,”given recent events in global credit markets, we need to assess the extent to which the risks around our July projections have shifted.”

Furthermore, economic data doesn’t signal an urgent need for monetary policy tightening, as retail sales for the month of June recently plummeted a greater-than-estimated 0.9 percent. Also, the Bank of Canada’s core CPI measure eased closer to their 2.0 percent inflation target to 2.3 percent, down from 2.5 percent the month prior. On the other hand, the unemployment rate fell to a fresh 33-year low of 6.0 percent in July, creating the potential for increased consumption and tighter capacity. Given these upside inflation risks, the Bank of Canada is anticipated to raise interest rates once again in early 2008. European Central Bank – 25bp Hike Priced In, But Will Trichet Delay It Until October? Rate Announcement: September 6, 2007 at 11:45 GMT Bias: No Change, But Chance of Rate Hike

Though European Central Bank President Jean Claude Trichet and his fellow policy makers were supposed to be on their summer break, the group surprised the market on August 2nd by calling an impromptu press briefing after their monetary policy meeting in Frankfurt. As expected, the bank left rates steady, and the policy brief made sure to repeat the upbeat forecast for growth and projected “upside risks to price stability over the medium term.” Nevertheless, it was the reinsertion of the phrase “strong vigilance” that garnered all of the attention. Since the European Central Bank began raising interest rates, these two words have preceded a rate hike with 100 percent accuracy.

Over the past two weeks, however, Trichet has started to backpedal as volatility in the financial markets has weakened the case for an aggressive policy tightening stance. On August 28th, Trichet commented, “What I said on the second of August was before the market turbulence…the next assessment is to be made on September 6. We will then have to assess all of the elements of…the economy. We will assess the risks…and will take the appropriate steps at that moment.” Though a rate hike by the European Central Bank is certainly not off of the table, Trichet has made it clear that his decision has not been made quite yet, and the status of the financial markets up until the meeting will likely play a large role in whether or not he goes through with a 25 basis point hike to 4.25 percent. Bank of England – Has the Tightening Cycle Come to an End? Rate Announcement: September 6, 2007 at 11:00 GMT Bias: No Change

As expected, the Bank of England’s Monetary Policy Committee announced on August 2nd that it was leaving the nation’s overnight lending rate unchanged at 5.75 percent. The pass came as little surprise to both economists and market participants as the central bank had lifted the overnight cash rate by 25 basis points at its previous gathering on July 5th. Nevertheless, the bank was perceived as remaining unabashedly hawkish, especially following the publication of the Bank of England’s quarterly inflation report, where it warned that inflation risks were “slightly on the upside” and forecasted that without an increase in rates to 6 percent, inflation was likely to continue overshooting its 2 percent target.

This perception of a tightening stance remained until inflation figures for the month of July were released. Headline CPI surprisingly plummeted below the Bank of England’s inflation target to a reading of 1.9 percent from 2.4 percent, effectively negating one of the central bank’s main reasons for tightening monetary policy further. Moreover the MPC minutes reflected a 9-0 for no change in rates at its August meeting, and also showed that most members emphasized they had no firm view on whether rates would need to rise further. As a result, the Bank of England is likely to follow the market’s lead, which is currently pricing no change in interest rates before year-end.

In Case You Are Wondering:  What Are The Rest Of The Central Banks Doing?

Reserve Bank of New Zealand – On Hold Until Further Notice Rate Announcement: September 12, 2007 at 21:00 GMT Bias: No Change

On July 26th, Reserve Bank of New Zealand Governor Alan Bollard announced the bank’s fourth consecutive 25 basis point interest rate hike, which brought the overnight cash rate to a staggering 8.25 percent – the second highest amongst Aaa-rated countries (Iceland’s rates are the highest) and a new nine-year high in its own right. In the bank’s subsequent policy statement, Bollard said, “New Zealanders have been showing early signs of moderating their borrowing,” and provided that this trend continues “the four successive rate increases delivered will be sufficient,” signaling that the tightening cycle may be over.

Though the market and economists were aligned in their expectations of the policy decision, the central bank’s stubbornly hawkish streak has received substantial opposition, as the surge in interest rates helped push the New Zealand dollar to multi-decade and record highs against its major counterparts, incurring much damage to the country’s exporters. Supporting the notion that interest rates have grown excessive are a number of consumer, business and inflation reports. Local firms have arguably suffered the most with the high rates through costs incurred through loans and demand, with sentiment surveys like the quarterly NZIER Business Opinion gauge and the monthly ANZ Business PMI reporting a pessimistic turn en masse. As a result, markets are pricing in steady rates throughout the rest of the year, as expansion could suffer quite heavily with the economy operating in such tight monetary conditions.

Swiss National Bank – Rate Normalization Schedule Intact Rate Announcement: September 13, 2007 at 12:00 GMT Bias: No Change

As expected, the Swiss National Bank voted to raise the target range for the three-month Libor rate 25 basis points to 2.00 – 3.00 percent at the conclusion of its June 14th meeting. The commonly quoted 2.50 percent average marks a six-year high and the seventh increase in the past two years for the benchmark lending rate. While inflation was well below the central bank’s self-imposed 2.0 percent limit, the heady pace of economic expansion over the past few quarters kept the threat of a rebound in price growth at hand.

While headline inflation has remained remarkably tepid at an annualized rate of 0.8 percent, but the import and producer price index recently hit 11 month highs, and these undercurrents have not escaped the vigilant eye of policy officials. In the statement following the announcement of June’s hike, President Roth intensified his hawkish language, leading the investment community to price in further hikes down the line. Furthermore, recent volatility in the financial markets is unlikely to dissuade Roth from normalizing rates, as he said on August 20th, “We hope that volatility stays higher. What we had was not normal, namely, practically no volatility…Markets cannot be a one-way street, or you will get excess.” With a 25 basis point rate increase priced in for the September meeting, traders will likely be proved correct as the Swiss National Bank keeps their rate normalization schedule intact. Bank of Japan – 25bp Priced In Despite Clear Government Opposition Rate Announcement: September 19, 2007 at approximately 4:00 GMT Bias: No Change

For the past six months, the Bank of Japan has kept interest rates unchanged at 0.50 percent - by far the lowest overnight lending rates amongst the industrialized countries. The Bank’s neutral stance has not been entirely surprising as CPI has consistently indicated that the Japanese economy is still in deflation, as Tokyo core CPI (excluding fresh food and energy) recently fell -0.3 percent on an annual basis, marking the sixth consecutive month of contracting prices. Nevertheless, Fukui is widely perceived as remaining determined to secure his legacy of “normalizing” monetary policy after successfully putting an end to zero-interest rate policy (ZIRP) in 2006, despite major resistance from political and fiscal officials. In fact, LDP Secretary General Hidenao Nakagawa – who is under pressure to resign – directly blamed previous BOJ rate hikes for the LDP losses in July’s upper house election, saying that the bank left the government unable to achieve its growth target.

With consumption growth still very tepid, traders only see a 13 percent chance of a rate hike at the bank’s September meeting. However, the interest rate curve is pricing in one rate hike by the end of the year, and it appears that a return to positive price growth is all that is needed for Fukui to feel vindicated in continuing rate normalization this year.

Source: DailyFX

The Nikkei jumped 2.6% on reports that U.S. President George W. Bush would push forward a plan to aid subprime mortgage borrowers. Federal Reserve Chairman Bernanke on Wednesday stated that the Fed was “prepared to act as needed” to protect the U.S. economy.

Source : ACM

Written by Boris Schlossberg, Senior Currency Strategist, DailyFX

Talking Points

• Japanese Yen: off the lows but demand for carry persists
• Aussie: Continues to be bid as private capital expenditure climbs
• Euro:  Retail PMI bounces above 50 but unemployment indicates peak may have been reached
• Pound: Housing remains strong
• Dollar: GDP on tap
Generally a quiet night in the currency markets but the greenback was boosted by several reports that the Fed may not necessarily cut rates at the upcoming September 18th meeting of the FOMC.  Two famous Fed watchers – Greg Ip of the Wall Street Journal and Bloomberg’s John Berry both suggested that the Fed may stand pat in light of the fact that global markets appear to have stabilized after the US Central Bank cut the discount rate by 50% last Friday.

The assumption that markets will remain stable is a  huge one t make. Nothing will bring back the specter of a rate cut faster than a 1000 point drop in the Dow. Indeed the lack of  Fed cut may precipitate further weakness in equities forcing the Fed’s hand to loosen monetary policy. However, for the time being with the Dow comfortably holding the 13,000 level, the interest rate story may become the new dominant trading theme in the currency market next week.

For the past two weeks, all of FX trading has been governed by one dynamic only – risk or no risk. As carry trade rallied the dollar gained against the yen and lost against all other G10 currencies. As risk aversion swept the market the reverse took place. Tonight for the first time  since turbulence hit the credit markets, the dollar held its own against the yen while gaining on all of it G10 counterparts as interest rate differentials once again came into focus. Indeed, if the Fed holds rates steady while the ECB shies away from a rate hike next week, the greenback may see more strength as the rate spread between the two currencies will not contract any further for the time being.

There is good reason to believe that the ECB may remain stationary in September.  It appears as though EZ growth may have peaked earlier in the year as today’s eco data showed that German unemployment rolls were reduced by smaller than expected –15K.  Conditions in the 13 member region remain expansionary but with growth decelerating  the ECB  may feel pressure to maintain a neutral monetary policy until it sees stronger signs of a pick up in demand.

Meanwhile US sees Q2 GDP revisions which are expected to raise the growth rate above 4%.  The GDP figures however are backward looking and it will be interesting to see how equity markets react to the notion of no rate cut. If stocks hold firm the greenback may see more bids on the assumption that the worst of the credit market volatility is behind us – but we are skeptical that this will indeed be the case as we head into the fall.

The Yen suffered its biggest one-day percentage decline against the Euro in more than 3 years and the Dollar in more than 2 years on Wednesday, as investors took recovering US stock markets as a cue to slash short-term bets that the Japanese currency would strengthen. Foreign exchange dealers have been using global equity markets as a gauge of risk appetite, particularly because the tightening credit market has lifted volatility and slowed the carry trade, in which investors borrow in low-yielding currencies such as Yen to buy higher-yielding, riskier assets. US economic growth data on Thursday and inflation figures on Friday could give investors a clearer picture on how the recent market turbulence might have affected the real economy, ahead of the keenly watched payrolls report the following week. Speculation is rising that the Fed might cut the benchmark federal funds rate from 5.25% at its next meeting in September.

Source : ACM

The Dollar extended its decline after the release of minutes from the Aug. 7 Federal Reserve policy meeting showing the US central bank acknowledging a policy response may be necessary if financial market conditions worsen. Fed members expected a return to more normal conditions, but recognized the process will likely take some time, particularly in relation to sub-prime mortgages. Volatility in financial markets has fueled speculation the Federal Reserve may cut its benchmark interest rate, after it reduced the discount rate at which banks borrow directly from the Fed by 50 basis points to 5.75 percent earlier this month. Given such speculation, investors are awaiting a speech on “Housing and Monetary Policy” by Fed Chairman Ben Bernanke on Friday that could offer some indications of the future path of Fed policy.

Source : ACM

A quiet release schedule should keep moves limited today

There is little to report from the Asian session with no data releases to brighten an otherwise lackluster day. The Dollar did continue its losses against the European currencies and rise against the Yen on open but this soon faded with a modestly solid reversal.

However, the market too note of the strength in Asian equity markets this morning that saw the Nikkei rise by 0.52%, the Hang Seng by 1.97%, China by 11.17%, Taiwan by .19%, Korea by 0.99%, Australia by 1.34% and Singapore by 1.55%. Sentiment is beginning to see a reduction in the concerns about the credit crunch although most agree that we probably haven’t seen the end of the turmoil overall.

There is little on the agenda for today as well with nothing due from Europe and just Existing Homes Sales from the States. While the Dollar may just slip a little further this shouldn’t see and aggressive move and most probably a Dollar low for the week against the Europeans.

The following economic releases are due today:

July
U.S. Existing Home Sales             5.70mn
U.S. Existing Home Sales (MoM)     - 0.9%

The Dollar-Yen peak at 117.12 has held firm so far with even a second attempt to move up towards there this morning failing to reach. I can’t rule out a retest later but I tend to feel that since it also represents a 50% pullback of the entire decline from 124.13 that we are unlikely to see this break right now. Later, this week is definitely possible though so it’s more a matter of timing.

It seems that this inability for the Dollar to rise against the Yen may well be allowing the Dollar to deepen the correction against the Europeans. As of now there is no obvious sign of reversal but I think the corrective decline shouldn’t have much further to go. I suspect that once the Dollar finishes this decline then we’ll see it rally in tandem against both the Yen and the Europeans.

Now, this weakness in the Dollar has moved beyond where I had thought it should stall. It does open up a number of possibilities but quite probably because the Dollar recovery is merely a correction that should run for a further 3-4 months only that we have only seen the first part of the correction. What comes next is a little more difficult to be sure of at this point.

Against the Euro and Pound the correction appear to have come in 3-waves and this could suggest a longer sideways correction over the next 1-3 weeks. However, if I look at the Swissie I suspect that we should see the Dollar’s upside tested more directly and I’ll use this as a guide and will tend towards a new rally in the Dollar.

This would tend to fit in with the position against the Canadian Dollar although the Ausise still seems to have further to rise over time and could be a reflection of the possible carry plays which the market now seems to think are possible. Anyway, I’ll be trying to fine-tune this over the week.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res:  117.56-73    1.3746-84    1.2110-30    2.0317-25
Res:  116.77-12    1.3698-30    1.2018-50    2.0204-46

Spt:   116.00-10    1.3605-15    1.1947-65    2.0135-40
Spt:   115.52-75    1.3470-20    1.1890-08    2.0076-10

See Also

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Source : GFT Forex

Dollar pushing resistance against the Europeans

 The market remains Dollar bearish but concerns over the potential credit crunch are preventing the Dollar from falling too far. We now have a U.K. Times Newspaper article which claims that State Street Corp is holding $22bn worth of asset backed commercial paper conduits and is encountering funding problems to some banks over the past few weeks. According to regulatory filings State Street has credit lines to at least six conduits, which account for 17% of its total assets and this makes it the most highly exposed bank to conduits amongst all U.S. and European Banks.

While I have not been able to find the document, it is also claimed that on the Fed’s web site there is a document that states that the Fed is explicitly exempting a large U.S. bank from its normal funding exposure limit (10% of bank’s capital) to an affiliate, in this case a brokerage.

So not a healthy state of affairs at the moment and serves to remind that a second round of nerves can be triggered at any time.

There hasn’t been any reaction to Abe’s cabinet reshuffle. Predominantly he has reverted to plan B in which he has re-instated the old guard in an apparent effort to woo the voters. It’s a shame that no one has told him that the public has become disillusioned to the old system in which nothing ever changed.

This has been highlighted further by the battle between Yuriko Koike who was a new cabinet appointment as defense minister. However, there has been a widely reported battle between Koike and the resident secretaries which forced her to resign from the role. This story reminds me of the old U.K. comedy series “Yes Minister” which portrayed the concept that it is the ministry’s secretaries that run the show and not the minister himself.

Basically, for all Abe’s changes, read “no change.”

The following economic releases are due today:

July
Swiss UBS Consumption Indicator
Euro-zone M3 Money Supply       (YoY)   11.0%

August
German IFO: Business Climate               105.4
German IFO: Current Assessment           110.7
German IFO: Expectations                     100.2
U.S. Consumer Confidence                     105.0
U.S. Richmond Fed Manufacturing Index      1.0

The minutes of the August 7th FOMC meeting are due to be released

In the absence of any particularly strong desire to push the Dollar one way or another yesterday turned out to be fairly uneventful. It is quite usual for day like yesterday for the market to really push the limits of support & resistance to the full and this can open up some ambiguity in the wave structure. However, what it normally also does is identify the key break areas and this does seem to have occurred overnight, even extending into this morning’s early Asian session.

I had written down the lowest support I could accept while the Euro and Pound still have upside potential and that is exactly where they bounced. The only issue I have is the position within the wave structure in terms that it is unusual (though not impossible) for such a deep pullback at this stage. Frankly within corrections this sort of thing does occur.

I have this nagging preference to see both Pound and Euro make one more high while the Swissie does seem to suggest it needs to push down below the 1.1992 level, but not by too much I feel.

If this morning’s supports in the Euro and Pound give way it suggests the upward correction can continue for a little while longer but will first require the decline to edge a little lower.

Equally Dollar-Yen still hasn’t managed to push above the 117.12 resistance and the depth of the decline does have a slight look of requiring a little more consolidation so it seems we may need to have a little more patience, but the upside is definitely the weaker side and it’ll give way before long. We just need to identify the likely reversal area.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res:  116.74-12    1.3734-39    1.2130-60    2.0138-65
Res:  115.80-00    1.3664-84    1.2046-65    2.0090-00

Spt:   115.14-35    1.3602-16    1.1992-04    2.0005-27
Spt:   114.15-52    1.3539-67    1.1947-65    1.9900-20

See Also

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Source : GFT Forex

Firm Euro numbers should keep the currency underpinned

The Swiss UBS Consumption Indicator dipped by 0.5 points over July to 2.26 but remained well above the long term average which trails at 1.49. The figure is not any real surprise with the economy having been rising along for some months and suggests there is still room for continued growth while the economy is protected from the impact of the credit crunch fears.

The German IFO Index surprised to the upside with the August numbers failing to decline as much as forecast:
                             Forecast  Actual
Business Climate       105.4    105.8
Current Assessment   110.7    111.5
Expectations             100.2     100.4

These are good numbers indicating above trend growth with the current assessment still remaining decidedly firm although without too much of a surprise the expectations component was the softest of all, but still remained above forecasts. The IFO did observe that confidence has taken a knock due to the recent turmoil but still consider that consumption should soon recover.

The Euro-zone M3 money supply saw a shock rise to 11.7% YoY in July showing that there is still above average strength in money supply at present. The ECB has tended to desensitize the significance of the figures but the fact that the pace of money supply has doubled over the past two years while interest rates have risen by 2.0% is somewhat of a concern. At the moment the significance of the numbers will be overrun by the current liquidity concerns but the ECB will duly take note and this number can only underline the basic hawkish sentiment in the Bank.

The following economic releases are due today:

August
U.S. Consumer Confidence                     105.0
U.S. Richmond Fed Manufacturing Index      1.0

The minutes of the August 7th FOMC meeting are due to be released

The Dollar’s recovery has continued today but there is no guarantee that it will continue for too long. It is very much a day of unknowns being within a corrective structure in which it could break either way without causing any real significant move.

The German IFO and robust money supply figures for the Euro-zone should underpin the Euro with the 1.3602-16 area key support. Risk is higher back to the 1.3684 high with resistance beyond that at 1.3735-77. This may well see the Swissie dip below 1.1992 with key support at 1.1947-65 and distant support at 1.1908.

The Pound on the other hand has dipped a little to far and is unlikely to get back to the 2.0190 high. Dollar-Yen remains subdued but even if there are further dips these should be limited with the underlying risk still higher.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF       GBPUSD
Res:  116.74-12    1.3734-77    1.2130-60    2.0138-65
Res:  115.80-00    1.3664-84    1.2046-65    2.0090-00

Spt:   115.14-35    1.3602-16    1.1992-04    2.0005-27
Spt:   114.15-52    1.3539-67    1.1947-65    1.9900-20

See Also

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Source : GFT Forex

Falling equity markets and subprime fears hit Forex again

With Europe having closed shop for the day quite early all that was left was for the market to watch for the U.S. stats and comments. The first, Consumer Confidence was in line with forecasts at 105.0 in August which is a drop from 6.9 points. This is the lowest reading over the past 12 month and saw losses in all components: current index -8 to 130.3, expectations index -6.2 to 88.2 and labor differential by -3.4 to 7.8. The result is hardly surprising given the current uncertainty but continued declines, if they occur, could contribute to undermining the economy with consumers looking to conserve rather than spend.

On the other hand the Richmond Fed Manufacturing Index was much better than anticipated. The headline manufacturing index was up by +3.0 to +7.0 due to a healthy shipments number. However, new orders slipped. Forecasts had centered on a 1.0 outcome.

On a day when European and U.S. stocks declined to heighten nerves the S&P Case Shiller home price data showed that the average price of resold homes was down by -0.39% in June, the biggest decline since February. This brings the annualized losses to -3.49% YoY but taking the annualized declines in Q1 and Q2 the losses appear to have slackened in pace though this may be seasonal.

The Fed also published the minutes of the August 7th FOMC meeting showing a unified response to the market turmoil which threatens negative impact on growth. However, they still see the risk of overspill into the rest of the economy as minimal. Inflation remains a key concern but consumer spending remains firm. As for investment, the minutes emphasized that “the supply of credit to finance real investment did not appear significantly diminished.” Clearly the Fed will wish to avoid making statements that will undermine confidence but their comments have remained steady and measured. However, there are still risks of further problems coming to light with the ultimate concern being a credit crunch which could force the global economy into reverse.

This hasn’t been missed by Japanese ministers with BOJ Deputy Governor Muto warning that the market turmoil caused by the subprime fallout is already having an impact in Asia and liquidity flows will need to be monitored as they could affect long term price stability.

The economics minister Ota was more sanguine saying that it is too early to be too pessimistic about the U.S. economy but does feel that more time is needed to assess the possible impact of a worsening. However, she commented that the impact of the U.S. housing woes are not yet being felt but warns that any worsening could impact on Japanese exports. Remember that the Japanese export economy is probably over 100% of the total economy – that is the domestic economy is in negative territory – so any serious reductions in exports will hit the economy hard.

Falling equity markets and the continued nervousness over the stories circulating over U.S. banks’ exposure to the subprime took its toll yesterday with Dollar-Yen slumping and while the strong German IFO survey propped up the Euro temporarily this too fell back by the end of the day.

At the moment the Forex market is still composed and quite orderly but with corrections to the initial movements now having seen a sufficiently deep retracement a resumption of the Dollar’s rally cannot be ruled out. There is still a little more room for the Euro to climb but this is not set in stone.

Certainly the dip in Dollar-Yen had a similar impact on crosses with the carry trade argument taking a step back. However, it will return and even if we see a dip to new lows the market has demonstrated that the Yen at higher levels presents good value and any dips should be short lived – if seen at all.

The economic release schedule is fairly quite this week and has little to provide much of an impact so all eyes will be on the equity markets and discount window in order to spot any weakness developing again.

More later when the analysis is complete.

The following economic releases are due today from Asia:

Australian July HIA New Home Sales   (MoM)
Australian Q2 Construction Work Done          +2.0%

See Also

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Source : GFT Forex

Dollar begins the week as last week ended

More evidence of the European economy slowing in its upward pace was provided by the PMI numbers for August:
                       Forecast Actual
Manufacturing     54.5      54.2
Services             58.0      57.9
Composite          56.9      57.2

Clearly we are seeing Q2 growth having slowed quite considerably but at current levels still indicate a robust economy, at least before entering the turmoil earlier this month. The uncertainty now lies in how much impact the equity declines and fears of a credit crunch have really impacted the global economy. Note that the PMI’s do not measure confidence but just the levels of activity although the levels of orders prior to the turmoil would tend to suggest to continued growth.

However, the risk at this point is that the services sector has been the main driving force behind the economy and thus the damage to the financial services sector does pose significant uncertainties on how much damage has been done. Indeed, the expectations component of the services sector did fall sharply from July to its lowest level in almost 4 ½ years.

This now provides the ECB with a nagging headache with the next ECB market policy meeting next week. A source from the ECB has been reported to have stated that the CB will keep its options open at this meeting, requiring the market to normalize to take a decision to hike rates again. There is no doubt that that the policy is still hawkish and another hike is due, but they will not want to risk any further market instability at this point.

The U.K. Q2 GDP (second estimate) numbers came in smack on forecast, and unchanged, at +0.8% QoQ and 3.0% YoY. The numbers are strong but the deflator at +3.8% was the highest in over 10 years and points to continued inflationary pressure. It will keep Sterling from declining too much at present with the implied risk of the BOE maintaining a hawkish stance with the chance of further rate hikes. We should remember also that should the market normalize there will be a strong attraction to the carry trades again which will almost certainly benefit the Pound.

Over in the States the July Durable Goods Orders saw a surprisingly strong rise of +5.9%, well above the forecasts of +1.0%. There is no doubt that this is a volatile series which is difficult to predict due to the unsteady flow of large capital orders but this number was never-the-less quite strong. Key orders were seen for Boeing, in autos, communications equipment, machinery, metals and military equipment. Excluding transportation, July new orders rose 3.7%.

In many ways these also demonstrate that the U.S. economy was recovering well prior to the subprime turmoil and thus there can still be prospects for the economy to recover through to the end of the year. However, we’ll need to see August and September statistics to gain a better view.

So then the focus is also on the housing numbers but in July there was a healthy uptick in demand for new homes which rose by +2.8% MoM. This is significantly above forecasts of -1.1%. However, this is still on the back of lower average prices which have dropped around $11K over the past 12 months.

Still, the downside risks still threaten to stall any recovery in the economy and until we see numbers suggesting to the contrary the market sentiment will remain bearish and consumers nervous.

Last week ended with a stronger than expected decline in the Dollar versus the European currencies while there is growing evidence of the carry trade beginning to dominate Yen movements.

The market has opened this morning in Asia in the same mood and may just fuel a slightly deeper move. However, we are approaching some key Dollar supports against the Europeans and how the market reacts will be important.

Overall the Dollar has rising cycles through to the end of the year against both Yen and the European currencies. Equally it seems more likely that the Australian Dollar will begin to see a larger sideways consolidation and the implication is for carry trades to be restricted for now but still this does imply a higher Dollar-Yen over the coming months.

More later when the analysis is complete.

The following economic releases are due today from Asia:

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Source : GFT Forex