US Currency Outlook -- Forex Currency Pairs

The Global-View.com Month Ahead Currency Outlook is prepared weekly by the trading professionals at GVI Forex. For information on the GVI Forex Service Click Here

The USD is back at the precipice again following a difficult week for the currency. The focal EUR/USD relationship seems to be trying to distance itself from the 1.5500 neutrality level again. Triggers for this change of heart were a less hawkish than expected Fed statement, renewed concerns about the financial sector, a rising oil price and expectations for an ECB +25bp rate hike in the week ahead.

There is also a perception that the U.S. and ECB, despite the rhetoric to the contrary have not fully decided that a strong and stable USD could help in establishing some stability in crude oil and commodity prices. This surprises many traders because they feel that ECB policies are leading to a weak USD, and a falling USD is a key contributor to rising oil prices.

As for monetary policy, there is not much doubt that the ECB will be hiking rates by +25bps next week, while that the Fed is now unlikely to execute a policy tightening before the November U.S. elections. Monetary policy is critical to the forex markets. The 2yr bond spread is a key determinant of the EUR/USD level.

Click on chart for two year history


In Japan, no important changes in monetary policy are in store for the near term. There is no pressure for higher interest rates from the BOJ. The economy is presenting a more negative picture at the present time. No major shifts in the spread in the 2-yr bond spread between Japan and the U.S. is likely anytime soon.

Click on chart for two year history


We are now starting to question our premise that forex trading is in a broad transitional phase away from the weak USD period. The EUR/USD is mired in a broad 1.50 to 1.60 trading range. A EUR/USD above the 1.60 line could elicit some sort of central bank activity.

The U.S. and Eurozone economies have been slowing. The U.S. is much further along in the process. Note below in the U.S. Monetary Policy outlook insert that official U.S. rates have reached a floor.

UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview Decision: August 5 at 18:15 GMT. Fed Funds rate: 2.00% Expected Decision: No rate change Short-term market sentiment contnues to exert a strong infuence on Fed policy decisions. On Wednesday June 25, the central bank held its fed funds target steady at 2.00%. The policy statement disappointed the markets because it did not clearly signal a policy tightening. Future policy decisions now will be data-dependent. FEDERAL RESERVE Policy Objective: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. The chart above shows year/year core PCE for the U.S. relative to its its reported "comfort zone for this key price index. Headline and Core CPI figures are also shown.

The above monthly U.S. employment chart is included because its the most closely followed data release each month, and because one of the objectives of the Fed is to maximize employment.

The chart above shows the current three month libor rate, the current Fed funds target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel U.S. interest rates are headed.

The chart above shows the U.S. Fed Funds rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

Major Currency Pairs - Currency Forecasts- Monthly Perspective

The ECB has sent signals that monetary policy has moved into a temporary tightening phase due to inflationary pressures (see policy insert below). The ECB remains fixated on its anti-inflation mandate to the chagrin of key politicians. One token +25bp rate hike is on the cards.

EUROZONE

GVI European Central Bank Policy Meeting Preview Decision: July 3, 2008 at 12:45 GMT. ECB Refi rate: 4.00% Expected Decision: High risk of +25bp rate hike. ECB President Trichet signaled a likely rate hike in July after the June ECB governing council meeting. The uncertainty he expressed about what the decision would be suggested that the central bank was waiting for upcoming data. Either decision is still covered. Key Eurozone PMI figures, which correlate well with GDP, are pointing to a developing economic slowdown. ECB Policy Objective: The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term. The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

The chart above shows the current three month libor rate, the current ECB "refi" rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Eurozone interest rates are headed.

The chart above shows the ECB refi rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Japanese economy is in a mixed state with inflation finally starting to show up in key price indices. Tokyo would not be unhappy with a weakening JPY.

JAPAN

GVI BOJ Policy Meeting Preview Decision: July 15, 2008 Current Overnight Target Rate: 0.50% Expected decision: No change. Speculation about a future BOJ rate cut abounds. The economy has started to turn more mixed. The political situation also is unstable. BANK OF JAPAN Policy Objective: The Bank of Japan Law states that the Bank's monetary policy should be "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy." The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index.

The chart above shows the current three month libor rate, the current BOJ overnight rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Japanese interest rates are headed.

The chart above shows the Japanese overnight rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The BOE cut rates at its April meeting as expected. Future rate reductions are now on hold due to inflationary pressures. Odds are the BOE policy is now on hold until yearend. The GBP had been under relative pressure due to worries about a sharply deteriorating economy.

UNITED KINGDOM

GVI Bank of England Policy Meeting Preview Decision: July 11, 2008 at 12:00 GMT. BOE Repo Rate: 5.00% Expected Decision: No change. BOE policy makers continue to balance concerns about inflation against the risk of a slowing economy. Note below that both the U.K. Manufacturing and Services PMIs have turned south. Inflation data are a worry and will prevent any ease in the near future. BANK OF ENGLAND Policy Objective: The Bank's monetary policy objective is to deliver price stability, low inflation, and, subject to that, to support the Government's economic objectives including those for growth and employment. Price stability is defined by the Government's inflation target of 2%. The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index.

The chart above shows the current three month libor rate, the current Repo Rate and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel U.K. interest rates are headed.

The chart above shows the U.K. repo rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. It is never pleased with weakness of the CHF against the EUR and could raise rates in response to an ECB policy tightening.

SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview Decision: June 19 at 08:30 GMT. SNB 3mo Swiss libor target: 2.75% Expected Decision: Risk of +25bp The SNB had indicated that the peak in interest rates had been reached. However, intensifying inflationary pressures and a probable ECB rate hike in early July could tip the scale to higher rates. The Swiss CPI (see below) is well above its target ceiling of 2.0%. The SNB manages the value of the CHF as critical element of monetary poilcy. SWISS NATIONAL BANK Policy Objective: The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, inflation, as measured by the CPI, will be slightly overstated. The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index.

The chart above shows the current three month libor rate, the current three-month Euro-Swiss target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Swiss interest rates are headed.

The chart above shows the Swiss three-month Euro-swiss rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

The Australian economy is clearly starting to slow. A key focus for the Reserve Bank of Australia remains above target inflation, plus strong employment and commodity demand. This has kept the AUD underpinned. The Reserve Bank of Australia is still trying to rein in price pressures.

AUSTRALIA

GVI Reserve Bank of Australia Policy Meeting Preview Decision Anouncement: July 1, 2007 at 04:30 GMT. RBA Cash Rate Target: 7.25% No rate changes likely. Inflation continues to be a problem for the Reserve Bank. Nevertheless, officials have suggested that some softness might be developing in the economy. This suggests that rates have reached their cyclical peaks. Note in the chart below that the two RBA core price measures are testing the top end of the bank's allowable limit. The global economic slowdown and historic highs of AUD are likely to restrain the risk of future rate hikes. RESERVE BANK OF AUSTRALIA Policy Objective: The policy objective is a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term and, subject to that, to encourage the strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy. The chart above shows year/year and the CPI target of 2% to 3% for this price index.

The chart above shows the current three month bank bill rate, the current Cash Rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Australian interest rates are headed.

The chart above shows the Australian overnight rate target, three month bank bills, and two- and ten-year bond yields over the past twelve months.

Trading in the CAD had been volatile as the Bank of Canada was making aggressive rate cuts to keep pace with the Fed and to get ahead of a possible economic slowdown. No more rate reductions are in the pipeline.

CANADA

GVI Bank of Canada Policy Meeting Preview Decision: July 15 at 13:00 GMT. BOC Overnight Target Rate: 3.00% Expected Decision: no rate change. The Bank of Canada surprised the markets on June 10 by holding rates steady. It also clearly signaled that policy now is on hold. It said: "the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely. BANK OF CANADA Policy Objective: The Bank of Canada aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range. This target is expressed in terms of total CPI inflation, but the Bank uses a measure of core inflation as an operational guide. Core inflation provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI. The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index.

The chart above shows the current three month Banker Acceptance rate, the current BOC overnight rate target and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago. The chart provides a view on where the markets feel Canadian interest rates are headed.

The chart above shows the Canadian overnight rate target, three month Bankers Acceptance, and two- and ten-year bond yields over the past twelve months.

John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor�s degree in International Economics from Berkeley.