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FX Blog- GVI Month Ahead Currency Forecasts

February 18, 2008

Forex Forecast of Major Currency Pairs


The financial markets pretty much have gotten what they wanted from the Fed with the central bank abruptly reducing its Fed Funds target by 125bps in two steps at the end of January. With the central bank now finally ahead of the curve, it now has a respite until its March 18 meeting. This will give the central bank another month or so see more data before deciding whether additional aggressive ease is still required. At 3.00%, the target for Fed Funds is very accommodative. A very low level of short-term interest rates will help on some mortgage resets and will give U.S. banks an opportunity to reliquify their troubled balance sheets. Additionally, a fire has been lit under the federal government and a fiscal stimulus package has already been put into place.

The financial markets can be fickle. Late last week saw investors suddenly develop a case of cold feet about the extent of stimulus, fiscal and monetary, in the system. This saw a minor tremor in the markets with the yield curve in bonds suddenly steepening, gold prices rising and the USD falling. Although the USD appears now to be mired in a trading range, its downside remains at risk.

It is in the nature of markets to discount the future. Recently, the markets have been drawing parallels to the U.S. situation six moths ago with Europe today. The ECB does not have the same twin mandate as the Fed to contain inflation and promote economic growth. Its mandate is only to contain inflation. There are growing concerns that the European Central Bank (ECB) is dragging its feet even though the European economy is showing some signs of slowing.

Concern that the ECB will repeat the mistakes of the Fed has been an issue for the EUR. Similar concerns being expressed about the U.K. and Japan, although the BOE already cut rates in early February. Japanese overnight rates (0.50%) are already hovering at near zero levels.

Forex Market Implications:

Much of the time, interest rate differentials drive the forex markets. Thus with U.S. rates already haven fallen to well below the prevailing levels of the Euro-zone, it is safe to conclude that the USD should be weakening. The international financial markets are more complex than that. The last few months have seen a significant unwinding of JPY crosses and this continues. This departure from carry trades stems a reduction in risk exposure and an environment non-conducive for the carry trade. Carry trades work best in a stable market conditions because they require an extended time period in which to work.

The impetus for this unwinding of trades has been growing concern that the Japanese economy will be turning down as a result of the expected slowdown in the U.S. economy. Fears of a slowdown of the Japanese economy have triggered repatriations of overseas investments back home and a consequent unwinding of carry trades against Europe and the commodity currencies. Unlike the EUR, the USD had not recently been a major recipient of carry trade flows so it has suffered only by a modest amount. Also concern about a future slowdown the Eurozone already has seen fund managers reducing their equity exposures to this region.

The bottom line is that the JPY has been in demand and the USD has been aided by international capital flows out of the EUR. This cyclical USD demand is present for now but is unlikely to endure for the long-term. On a fundamental basis, the unit remains vulnerable. One leading indicator of USD weakness would be a continuing sharp steepening of the yield curve.



The U.S. and Eurozone economies are both slowing, but the U.S. is much further along in the process. Note below in the U.S. Monetary Policy outlook insert below that official U.S. rates still appear headed lower. This development could develop into a significant USD negative. On the other hand a transition into a risk adverse trading environment could become supportive of the U.S. currency.


UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview

  • Decision: March 18 at 19:15 GMT.
  • Fed Funds rate: 3.00%
  • Expected Decision: -50bp cut
  • Short-term market sentiment contnues to exert a strong infuence on Fed policy decisions. On Tuesday January 22, the central bank pre-emptively cut its funds target by -75bps to 3.50%. It then eased by another -50bps on January 30. The central bank only belately realized that it is behind the curve. The markets are still now expecting a -50 bps rate cut on March 18. We feel that might be too aggressive at this juncture.

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.

uscpi

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.

ezcpi

ezcpi




s-t rates

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.

s-t rates


s-t rates

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.




interest rates

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

foreign currency pairs

The ECB has been sending signals that its monetary policy is neutral (see policy insert below). Notable also have been the effective tightening of policy due to rising credit spreads. Restraining the EUR could be expectations for a cooling of the Eurozone economy and an unresponsive ECB.


EUROZONE

GVI European Central Bank Policy Meeting Preview

  • Decision: March 6 at 12:45 GMT.
  • ECB Refi rate: 4.00%
  • Expected Decision: No Change
  • ECB President Trichet signaled no policy changes after its February meetng. While the central bank is till talking tough about inflation, it might now ne taking a more neutral posture on policy. 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.

    ezcpi

    The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

    ezcpi

    ezcpi




s-t rates

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.


interest rates

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

forex forecast services The JPY has gained vs. the USD and EUR as JPY carry trades are unwound. Japanese repatriations have been a key source of JPY demand. Another impetus for this unwinding of positions has been an expectation that China will allow an increased pace of revaluations of the yuan vs. the USD. This remains to be seen, but it is clear that Japan has been restraining the JPY against other currencies to maintain a competitive price level with China for exports.



JAPAN

GVI BOJ Policy Meeting Preview

  • Decision: March 7
  • Current Overnight Target Rate: 0.50%
  • Expected decision: No change.
  • There is market speculation now about a future BOJ rate CUT. Note below that core and headline CPI remain mildly deflationary. Also the economy has started to slow again. The political situation also is unstable. Despite official talk about policy "normalization" a move to higher rates anytime soon is unlikely and would be ill-advised. Note in the short-term rate chart below that the markets have adjusted out the odds of future hikes.

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."

Nationwide CPI

The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index. 

Manufacturing PMI


s-t rates

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.


interest rates

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

major currency pairs The BOE cut rates at its February meeting as expected. Future rate reductions are seen. The GBP has come under pressure thanks to the credit exposure of U.K. institutions to the sub-prime debt. The BOE caved following considerable criticism because of its slow policy response to the sub-prime crisis.


UNITED KINGDOM

GVI Bank of England Policy Meeting Preview

  • Decision: March 6 at 12:00 GMT.
  • BOE Repo Rate: 5.25%
  • Expected Decision: Possible -25bp rate cut.
  • In its policy statement on February 7, the BOE outlook was surprisingly balanced. The bank acknowledged that the economy is slowing but epressed worries abount inflationary pressures in the short term. Note below that both the U.K. Manufacturng and Services PMIs have turned south. Inflation data are mixed. Note below that the short-term credit markets are expecting more rate reductions over time.

    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%.

    ezcpi

    The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index. 


    ezcpi




s-t rates

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.


interest rates

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.

forex currency market reports 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. SNB President Roth has sent a clear signal that the final rate hike of this tightening cycle has probably been seen.



SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview

  • Decision: March 13 at 08:30 GMT.
  • SNB 3mo Swiss libor target: 2.75%
  • Expected Decision: No Change
  • There are concerns that the global economy is slowing. The SNB has indicated that the peak in interest rates has been reached. The rise of the CHF has been a restraint on the economy as well. The Swiss CPI (see below) is well below its target ceiling. 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.

    chcpi

    The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index. 

    chpmi




s-t rates

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.


interest rates

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.

currency exchange forecast The Australian economy has been improving. 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: March 4 at 03:30 GMT.
  • RBA Cash Rate Target: 7.00%
  • Strong risk of another +25bp rate hike.
  • Inflation and liquidity concerns are keeping the market bias for future rate hikes in Australia. Recent comments by the Reserve Bank seemed to signal a March tightening. Note in the chart below that the two RBA core measure are pressing the top end of the bank's allowable limit. A global economic slowdown and the historic highs of the AUD are likely to start 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.

aucpi

The chart above shows year/year and the CPI target of 2% to 3% for this price index. 

aupmi


s-t rates

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.


interest rates

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.

us currency Trading in the CAD has become increasingly volatile recently as JPY carry trades are unwound. The Bank of Canada made a precautionary rate cut on January 22. Expectations that the Canadian economy will be dragged down by U.S. economic weakness have yet to be realized. Additional rate cuts could still be in the pipeline.


CANADA

GVI Bank of Canada Policy Meeting Preview

  • Decision: March 4 at 14:00 GMT.
  • BOC Overnight Target Rate: 4.00%
  • Expected Decision: Odds favor another -25bp rate cut. The latest policy statement and BOC comments suggest that further cuts are in the pipeline.
  • There are concerns that the Canadian economy could be negatively impacted by the global economic slowdown and the high level of the Canadian currency. Note below that both the Ivey Manufacturng PMI might have started to weaken. BOC core inflation is below bank estimates. The high level of the Canadian currency. Short-term credit markets anticipate additional rate cuts through 3Q08.

    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.

    cacpi

    The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index. 

    PMI


s-t rates

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.


interest rates

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.

 

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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Amazing Trader EVENT RISK Calendar:

Wed 18 Oct
12:30 US- Housing Starts & Permits
14:30 US- EIA Crude
Thu 19 Oct
01:30 AU- Employment
08:30 GB- Retail Sales
12:30 US- Weekly Jobless
Fri 20 Oct
12:30 CA- Retail Sales & CPI
14:00 US- Existing Homes Sales

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  • POTENTIAL PRICE RISK: HIGH Tue-- 08:30 GMT GB- CPI top tier confirmation of Inflation.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT DE- ZEW Survey second most important German monthly Survey.

  • POTENTIAL PRICE RISK: Medium Tue-- 09:00 GMT EZ- final HICP revision to flash report. Revisions are usually minor.

  • POTENTIAL PRICE RISK: Medium Tue-- 13:15 GMT US- Industrial Production. Top output indicator.



  • POTENTIAL PRICE RISK: Medium Wed-- 12:30 GMT US- Housing Starts and Permits revision to flash report. Useful housing leading indicator.

  • POTENTIAL PRICE RISK: Medium Wed-- 14:30 GMT US- EIA Crude. Top WTI inventory measure.



  • POTENTIAL PRICE RISK: Medium Thu-- 01:30 GMT AU- Employment. Top economic indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 02:00 GMT CN- GDP. Top economic indicator.


  • POTENTIAL PRICE RISK: HIGH Thu-- 08:30 GMT GB- Retail Sales. Top consumption indicator.


  • POTENTIAL PRICE RISK: Medium Thu-- 12:30 GMT US- Weekly Jobless. Employment Indicator.



John M. Bland, MBA
co-founding Partner, Global-View.com

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