Friday, April 15, 2011

Latest Developments in Euro-zone, China Strong Growth, Bank Of England Sentance Talks Up Inflation

This week's trading has been largely characterized by sideways trading
and consolidation after the very strong moves we had the past few

While there were some fresh developments in regards to sovereign debt,
the EUR was not pressured so much as it was unable to move higher,
capped at its recent resistance level near 1.45.

*Here are the main stories affecting the EUR:*

1. In the Euro-zone we saw Greece suffer yet another downgrade, as
Moody's lowered the rating on the country's sovereign debt by two
notches, to Baa3 - one level away from junk status. The concern here
is that the country's fiscal situation will be negatively impacted by
higher borrowing costs from the ECB. For the most part, the markets
bushed off this downgrade.

2. We also seem to have moved beyond the fear of the need for Greek
debt restructuring after several EU and IMF officials came out
forcefully to say that there would be no restructuring. As traders
digested and then discarded that latest bit of the sovereign debt
crisis we saw the EUR/USD swing from 1.45 yesterday, down to 1.4370,
before climbing back up to 1.45 to start today's global session.

3. In fundamental releases we saw the final version for March CPI from
the Euro-zone. Here we saw the annual rate rise to 2.7%, higher than
the flash or preliminary estimate. The news gave the EUR a little bit
of a boost, but the ECB has already moved to raise interest rates, and
at this point today's data likely does not mean that the ECB will be
adjusting its timetable for further rate hikes.

*China's Strong Growth Continued in the 1st Quarter*

In the Asian session, we continue to see the Chinese economy posting
very strong data, showing that its economy continues to roar ahead
despite attempts by Chinese central bank officials to cool the economy
via higher bank reserve requirements and higher lending costs though
higher interest rates.

The economy grew 9.7% in the 1st quarter, stronger than expected,
while consumer prices rose to 5.4% for March, the stronger inflation
since 2008. The news, while a plus for the global economy's pace of
recovery, means that China's authorities will have to continue their
campaign of rather aggressive monetary tightening. Until we start to
see the effect of this policy show up in the data, then countries
dependent on Chinese demand should not be too affected.

*BOE Sentance Talks Up Inflation*

Finally, we also had some hawkish comments from BOE member Andrew
Sentance. After the softer UK CPI data this week, traders scaled back
expectations for an interest rate increase in the next BOE meeting.
Sentance - one of the most hawkish members of the BOE - reiterated
what we had heard from the BOP about a month ago, that annual
inflation can breach the 5% target in the short term.

The GBP was a bit stronger against both the USD and EUR in overnight

Source: ActionForex.Com

READ MORE - Latest Developments in Euro-zone, China Strong Growth, Bank Of England Sentance Talks Up Inflation

Monday, April 11, 2011

Dollar Gets Slammed on Monetary Policy Outlook


* Dollar gets slammed on monetary policy outlook

* ECB keeps its cards close to its chest

* The UK: pricing out a rate hike

* Will the BoC do anything Loonie next week?

* Key technical levels to watch in the week ahead

* Key data and events to watch next week

*Dollar gets slammed on monetary policy outlook*

The U.S. dollar has weakened significantly this past week as monetary
policy divergences became more prevalent and commodities continued to
soar. Precious metals marched higher with gold hitting new record
highs while silver broke above $40 and oil topped $110 a barrel.
Currencies whose countries export commodities were beneficiaries as
highlighted by new post-float highs in AUD/USD which climbed above
1.0500 and multi-year lows in USD/CAD which fell below 0.9600. The ECB
lifted rates by 25 bps to 1.25%, the first move on interest rates
since May 2009 but no gave indication that it will be the beginning of
a series. This is largely different from the Fed's policy stance which
has maintained its commitment to keep rates low for an 'extended
period'. Moreover, while recent speeches by some members of the Fed
have suggested cutting short the plan to purchase $600 billion in
assets through June, this week's FOMC Minutes showed little evidence
that the idea has gained traction among the FOMC voting members. In
the week ahead, FOMC voting members Dudley, Evans, and Yellen are set
to deliver speeches and we would note that these members are
considered to be dovish. The monetary policy outlook remained the key
driver as dollar index sunk to new 16-month lows and though budget
talks and a looming government shutdown are viewed mostly political
theater and are likely to have little economic impact, it gives
investors yet another reason to sell the buck.

The exception to USD weakness has been against the Japanese yen which
has continued its sharp reversal lower following the G7 coordinated
intervention. Japan was struck with another earthquake, this time
around the magnitude of 7.1. While reports of the earthquake were
initially met with risk aversion, markets breathed a sigh of relief
after tsunami warnings were retracted and resumed their appetite for
risk. The week ahead will include the Fed's Beige Book to give clues
on the outlook of the economy, speeches by FOMC voting members, and
inflation data. We would anticipate a stabilization in the buck as
investors take profit ahead of key levels and events.

*ECB keeps its cards close to its chest*

So the ECB hiked rates as anticipated but the question now for
investors is what they will do next. The market thinks there will be a
further two hikes before the end of the year with the next hike coming
in July, according to the Eonia swaps market.

The 11 per cent increase in the euro versus the dollar since the start
of this year suggests that a lot of the expected ECB tightening is
already priced into the single currency. So if things stay as they are
then the euro may lose its yield advantage and could come under
pressure. This would happen if investors think the ECB may not deliver
as much policy normalisation as they originally anticipated.

However, on the back of last week's meeting we know two things:
firstly that the ECB has not yet decided if this will be the start of
a rate hiking cycle, and secondly, that the future trajectory for
interest rates depends on inflation since price stability is the ECB's
sole mandate.

So this week's second inflation reading will be crucial for interest
rate expectations in the currency bloc. The first reading saw
inflation rise to 2.6 per cent in March from 2.4 per cent in February.
Above target inflation is unacceptable to ECB policy makers and
March's price data most likely sealed Thursday's rate hike. We will
get the regional breakdown of the inflation figures on Thursday. We
already know that inflation in Germany rose to 2.2 per cent while even
debt-laden peripheral nations have experienced inflation pressures
including Ireland, where EU harmonised inflation jumped from 0.9 per
cent in February to 1.2 per cent in March.

It is the large jumps in inflation that the ECB want to avoid, and
right now price pressures continue to build as energy prices surge to
multi-year highs. If we see an upward revision to inflation next week
then a rate hike before July becomes a possibility.

We think that dips in EURUSD will remain fairly shallow and a weekly
close above 1.4420/30 may herald further gains to 1.4700 then 1.5000.
But a caveat to this is the dollar. Arguably weakness in the greenback
is pushing the euro higher and any swift resolution to the US's budget
impasse could see a reversal in short dollar positions and thus weigh
on the euro in the short-term. In the long-term the direction of
EURUSD depends on the clarity provided by the Fed about its intentions
regarding monetary policy normalisation.

*The UK: pricing out a rate hike*

It wasn't that long ago that the UK was considered the first of the
major central banks to hike interest rates. Yet that seems like a long
time ago now. The ECB has moved first and the UK's growth outlook has
deteriorated sharply. This has weighed on interest rate expectations
and 3-month Sonia rates (GBP inter-bank swap rates that follow
interest rate expectations closely) have fallen sharply.

The market is increasingly coming to the conclusion that the Bank of
England won't hike interest rates at their next meeting in May, and
instead will wait until August to do so. This is consistent with our
call and we expect the BOE to remain on hold this quarter.

Economic data has been largely weak with only a couple of upside
surprises. One was service sector data for March, yet we believe this
was an anomaly and service sector activity played catch-up after
weather-related disruption in January and February.

But, while we think the BOE may be on hold longer than the market
currently expects, there are a couple of important caveats to
remember. The first is the Q1 GDP release on 27 April. This is the
deal-breaker in our view. Lacklustre quarterly growth - something
below 0.8 per cent would be viewed as a disappointment - would make a
rate hike less likely in the current environment.

Another risk is the May Inflation Report. We think the economic
backdrop, the impact of austerity measures and weak wage growth will
be enough for the Bank to maintain its cautious stance in May. The
Bank tends to hike rates after an Inflation Report, so the next
logical date for an increase in rates would be August - after the
Bank's summer Report.

This makes the pound a sell on rallies in our opinion. It has already
tested 1.6400 highs, but we think it is vulnerable to a pullback
especially versus the dollar and the euro since a lot of its recent
strength was fuelled by rate hike expectations. With this major source
of support gone, sterling strength is likely to be curtailed going

*Will the BoC do anything Loonie next week?*

On April 12th the Bank of Canada will announce their interest rate
decision. By nearly all measures the market is expecting them to
remain on hold at 1.00%, but their statement will be closely watched
for any potential changes to their accommodative stance. As a result
of rising food and energy prices economists have begun to shift their
inflation forecasts higher for 2011 and 2012, however immediate
pricing pressures continue to remain subdued. Nevertheless, such a
backdrop makes the BoC's job that much more challenging as they begin
to deliberate on the path of future rate hikes.

On Wednesday the BoC will release the April Monetary Policy Report.
The MPR is going to provide further economic incite and will likely
touch upon turmoil in the Middle East and earthquake/tsunami in Japan
- which has caused a rise in oil (energy) prices, as well as provide a
slightly more optimistic bias regarding GDP over the coming quarters.
While the stronger CAD has restrained Canadian exports, something
Governor Carney continues to highlight, it will be unable to keep the
BoC on the sidelines for too much longer. Going forward we believe the
BoC is likely to remain on hold until the beginning of the 3rd
quarter, where we expect a rate hike of 25bps at each meeting through
the end of 2011 (July, Sept., Oct. & Dec.).

The CAD has been one of the strongest commodity currencies since the
beginning on 2011, appreciating roughly 4.4% year to date, as it has
benefitted from strong domestic fundamentals, improving global growth
and rapidly rising oil prices. Just today crude oil (WTI) made fresh
multi-year highs around $112.55/60,and firm demand from both emerging
& developed economies, as well as ongoing unrest in the MENA region
will likely to continue to support the 'black-gold' going forward.
Therefore, while commodities remain strong and the U.S. dollar remains
offered, we'll look to be a seller of USD/CAD on rallies towards
0.9625/35 and 0.9680/00 in the week ahead.

*Key data and events to watch next week*

The greenback remains on the offer, driven fundamentally by widening
rate differentials between the U.S. and other CBs. The USD Index broke
below its short term bear flag formation to fresh yearly lows just
above the 75.00 figure. Additionally, USD weakness is being confirmed
by other asset groups - gold broke above the key 1450 level, also the
neckline of an inverted H&S pattern suggesting a measured move
objective to the 1550/75 area. Technical developments this week
suggest the greenback's woes may continue but considering the steep
rate of USD declines, pullbacks should be expected and may provide
better value for those looking to establish USD shorts.

*EUR/USD*: The ECB's 25bp hike to the main refi rate may be a historic
step as the central bank could be initiating a tightening cycle before
the Fed for the first time. Uncertain Fed policy direction continues
to weigh on the buck elevating EUR/USD above key technical levels. The
most significant being the weekly close above primary downtrend
resistance (around 1.4300) suggesting sustainable EUR strength in the
weeks ahead. 1.4450 (61.8% retracement for the 1.6035/50-1.1875/80
decline) , however, is proving to be a formidable hurdle as EUR
strength was capped into it on Friday trading. Below 1.4300 sees
additional support into the 1.4250 pivot which may provide decent
value for EUR longs as the medium term technical outlook has now
shifted to the upside.

*GBP/USD*: The BoE remained on hold as expected and with rate
differentials driving FX, the uncertain outlook for UK rates has seen
the sterling underperform relative to other majors against the buck.
GBP/USD, however, looks set to close above its respective primary
trendline which technically suggests a potential reversal for the
primary decline from the 2.1160 peaks. 1.6500 is likely to be a
psychological barrier ahead of the key 1.6825/50 daily horizontal
pivot. Immediate support may be seen into 1.6275/00, broken trendline
resistance, ahead of the key 1.5975/1.6000 daily pivot.

*AUD/USD*: Commodities have been screaming higher which has seen
commodity currencies benefit substantially. AUD/USD posted post-float
record highs on a seemingly daily basis this week and looks set to
close near weekly highs around 1.0540/50. The 1.0600 figure is likely
to provide some technical hurdles to further Aussie strength but if
commodity upside continues, the 1.0900 measured move objective for the
symmetrical triangle breakout may be in view next. Downside
corrections may find meaningful support into the rising trendline
around 1.0450 ahead of the 2010 1.0255/60 highs.

*USD/JPY*: Another earthquake in Japan saw USD/JPY upside capped ahead
of the all-important 85.50 barrier. Rumored options related stops
above 85.50 were never hit as the declining trendline from the 2007
124.10/15 peaks and the 55-week SMA effectively stunted further JPY
weakness against the greenback. Immediate support may be seen into the
84.50 daily pivot ahead of 83.50 which sees the 200-day sma converge
with broken daily triangle tops. Considering uncertain USD monetary
policy, USD/JPY is likely to underperform relative to other JPY pairs.

*EUR/JPY*: With loose BoJ monetary policy now a given for the
foreseeable future and the ECB possibly embarking on a tightening
cycle, EUR/JPY blew through a number of key technical levels this
week. 120.00, psychological barrier and Feb. 2010 lows, proved to be
no match for the pair. Furthermore, EUR/JPY has managed to close above
weekly Ichimoku cloud tops ( 121.90/00) suggesting upside trend
continuation may be sustainable and should be a level of immediate
support on downside corrections. Below may find more meaningful
support into the Feb. 2010 lows around the 120.00 figure which may
provide value for EUR/JPY longs.

*Key data and events to watch in the week ahead*

United States: Monday - Fed's Yellen and Dudley speak Tuesday - Mar.
Import Price Index, Feb. Trade Balance, Apr. IBD/TIPP Economic
Optimism, Fed's Tarullo to speak Wednesday - Mar. Retail Sales, Feb.
Business Inventories, Fed's Beige Book Thursday - Weekly Jobless
Claims, Mar. PPI, Fed's Duke, Plosser and Tarullo speak Friday - Mar.
CPI, Industrial Production and Capacity Utilization, Apr. Empire
Manufacturing, Feb. Net TIC Flows, Apr. prelim U. of Michigan
Confidence, Fed's Evans speaks

Eurozone: Tuesday - Mar. final German CPI, Apr. EZ and German ZEW
Survey, ECB's Stark speaks Wednesday - Mar. German Wholesale Price
Index, Feb. EZ Industrial Production Friday - Mar. EZ CPI, Feb. EZ
Trade Balance, ECB's Constancio speaks

United Kingdom: Monday - Mar. RICS House Price Balance Tuesday - Feb.
Trade Balance figures, Mar. CPI, RPI Wednesday - Mar. Claimant Count
Rate, Jobless Claims Change, Feb. Avg. Weekly Earnings, ILO
Unemployment, Mar. Nationwide Consumer Confidence

Japan: Monday - Feb. Machine Orders Tuesday - Mar. prelim Machine Tool
Orders Wednesday - Mar. Domestic CGPI Friday - Feb. final Industrial
Production and Capacity Utilization

Canada: Tuesday - Feb. New Housing Price Index, Feb. International
Merchandise Trade, Bank of Canada Announces Interest Rates Wednesday -
BOC Monetary Policy Report Thursday - Feb. Manufacturing Sales

Australia & New Zealand: Tuesday - NZ Finance Minister English speaks,
Mar. AU NAB Business Confidence and Conditions Wednesday - Mar. NZ
Food Prices, Apr. AU Westpac Consumer Confidence, Apr. AU DEWR Skilled
Vacancies Thursday - RBA Governor Stevens to speak, Mar. NZ Business

China: Sunday - Mar. Trade Balance Friday - Mar. Industrial
Production, Retail Sales, CPI, PPI, Industrial Production, Fixed
Assets Investment, 1Q GDP

Source: ActionForex.Com

READ MORE - Dollar Gets Slammed on Monetary Policy Outlook

Saturday, March 26, 2011

Euro Slumps Following EUnited Statemmit Conclusion and Amidst Portugal Worries

*EU Summit shows divisions…*

The EU Summit has came and went, and all the hoopla about a
comprehensive solution to the sovereign debt crisis may have been
misguided. We continue on a similar path of status quo.

What was accomplished was to finalize the details of how the European
Stability Mechanism would be funded after Germany opened up a rift by
claiming the accord agreed upon by finance ministers to start the week
was not acceptable as it caused too much payments up front by Germany.

The ESM, which will take effect in 2013 – after the current European
Financial Stability Facility or EFSF runs its course – will have a
total capital base of 700 billion euros, which will allow it to have a
lending capacity of 500 billion euros and an AAA rating. Of that
total, cash contributions or guarantees will total 80 billion euros,
while the rest of the 620 billion euros will be callable capital.

The funds paid-in capital as of 2013 was cut to 16 billion euros from
the finance ministers originally stated 40 billion euros, on
Germany's insistence and that made up the bulk of the debate during
the EU Summit. After the initial 16 billion euros, countries will make
further 16 billion payments per year over five years. Under the terms
of the ESM deal, eurozone countries agreed that they would speed up
their financial backing of the fund if a large country needed a
bail-out and there was not enough cash in the fund to cover the size
of the rescue.

The sudden change by Germany angered other EU members, but since they
are footing the larger part of the bill for the bail out fund Germany
has the most leverage in having its conditions met.

With tensions high, it undercut the perception that EU leaders were
unified in their stance on tackling the sovereign debt situation.

Also, details on increasing the lending capability of the EFSF was
delayed till June, as there continues to be uncertainty about how to
best go about it. While the fund has enough to cover a potential
Portugal bailout, the news could still upset markets that EU leaders
could not come together to tie up the loose ends needed to put the
sovereign debt crisis to rest.

*…while Portugal's fiscal situation deteriorates.*

Standard & Poor's downgraded Portugal's long-term credit rating by
two notches, from A- to BBB, bringing the country's credit standing
closer to junk status.

The political uncertainty in the country after the failed austerity
vote and resignation of the Prime Minister can damage market
confidence, pushing up financing costs and increasing the likelihood
that Portugal would need a bailout. The interest rate that Portugal
needs to pay to sell bonds shot up across the board, and these yields
were already at levels that the government considers unsustainable.

Portugal has a total of 9.5 billion coming due in April and June, and
while it may meet the redemption on the April debt, its unlikely that
it can do so for the June batch. A bailout – that looks more and
more inevitable – may wait till June though as the country needs to
first figure out its political situation.

Here is a look at redemptions coming due for Portugal in the coming

From Financial Times: " Ms Zhang said that despite the rejection of
European Commission-backed austerity measures by Portugal's
opposition parties, reduced investor appetite for Portuguese debt
meant the next government would have no alternative but to adopt
similar reforms.

European Union leaders meeting in Brussels on Thursday urged
Portugal's political parties to adopt new austerity measures and
economic reforms as proof of their commitment to fiscal

In a blow to market confidence, a major European clearinghouse said
Portuguese government bonds will no longer be eligible as collateral
in certain transactions, which weighed on the EUR.

From MarketWatch: "Clearing house LCH.Clearnet on Friday said
Portuguese government bonds will no longer be eligible for delivery in
any of its RepoClear baskets effective Monday. The move follows
ratings agency Standard & Poor's decision to downgrade Portugal's
credit rating to BBB. Until the downgrade, Portuguese bonds had been
eligible for inclusion in the firm's single-A basket, LCH.Clearnet
said in a notice on its website."

The Euro which had managed to shrug off most of the negative news
finally succumbed to selling pressure around the mid-point of the NY
session. The EUR/USD fell below 1.40, retesting its lows from
yesterday's session.

The lack of unity at the EU summit amidst the very real problems of
Portugal show us that the sovereign debt situation will continue to
act as a downward force on the Euro even as interest rate expectations
favor it.

The market's focus will now turn to Spain, which is undergoing a
restructuring of its banking sector. If Spain's banks shows weakness
and are unable to re-capitalize it can have damaging effects on the


READ MORE - Euro Slumps Following EUnited Statemmit Conclusion and Amidst Portugal Worries

Wednesday, March 23, 2011

Euro Declines ahead of Portugal Vote

The euro declined ahead of the Portugal austerity vote which has been
delayed and as decisions regarding EFSF measures were reportedly
pushed back as well. EUR/USD fell from above 1.4200 to around 1.4100
and currently trades around 1.4125. U.S. housing data disappointed
with February new home sales falling to 250K from the prior month's
301K (cons. 290K) for a MoM change of -16.90%. The 250K print was the
lowest on record and highlights the Fed's view that the housing market
"continues to be depressed".

U.S. equities gained after a bumpy start to the day with the Dow Jones
Industrial Average climbing by around +0.56% while the S&P 500
advanced nearly +0.29% on the day. Commodities were firmer with silver
outperforming with a rise of around +2.72% while gold and oil edged
higher by around +0.82% and +0.70% respectively. Oil gained despite
higher than expected crude oil inventories which were released today
at 2.1 million barrels (exp. 1.5 million). U.S. Treasury yields were
slightly higher at about 3.34%.

On the data front for the upcoming Asia/Pacific session is New Zealand
4Q GDP, the January Conference Board leading indicator out of
Australia, Japan February trade balance figures, and China's HSBC
flash manufacturing for March.

Source: ActionForex.Com

READ MORE - Euro Declines ahead of Portugal Vote

Sunday, March 20, 2011

EUR Hits 2011 High as Trichet Re-affirms ECB Rate Hike in April

In a speech today, Trichet helped support the Euro, as he iterated
that the ECB continues on its path of hiking interest rates. When
asked about a possible April rate hike, he said the ECB's message has
not changed.


From Bloomberg: Trichet Says His Message on ECB's Rate Stance Hasn't

European Central Bank President Jean-Claude Trichet indicated the
bank still plans to raise interest rates next month, saying he doesn't
want to change his message on the need to contain inflation.

"I have nothing to add, nothing to withdraw," Trichet told reporters
today in Frankfurt when asked if policy makers are still in a posture
of strong vigilance, ECB code words for an imminent rate increase. "No
new message at all," he said.

Positive developments in the form of UN action against Libya and G7
intervention to weaken the Yen helped equity markets stage another
rally, clawing back losses suffered earlier this week.

The return of risk appetite, if you can call it that, did not favors
for the greenback. The dominant theme prior to the Japanese earthquake
was the interest rate differential between the ECB and the Fed. Europe
is more aggressive in halting rising inflation, while the Fed sees
underlying inflation still low and the need to support the US economy
and employment through lower rates.

That different will mean interest rate differential favor the Euro at
the current moment, and heading into the weekend, the market loaded up
on EUR/USD longs.

Source: ActionForex.Com

READ MORE - EUR Hits 2011 High as Trichet Re-affirms ECB Rate Hike in April