Share This Story
Forex Blog - FX Charts Strategy from Ashraf Laidi 7/28/08The dollar drops off its
multi-week highs following comments from Minneapolis Fed president Gary Stern
to the Financial Times overnight indicating that the US credit squeeze is
likely to persist for many months and might even get worse. Stern argued that
2% Fed funds rate enable the Fed to cope with any negative surprises on growth,
but do not enable it as well in dealing with negative surprises on inflation.
Stern concluded that either inflation expectations needed to decline, or the
Fed will have to increase rates, or both, in order to achieve lift real
interest rates. Note
that Sternâ€™s comments indicate the deterioration in the credit crunch with more
certainty than they do regarding increased inflation. The remarks are rather
dovish from Mr. Stern who is known to be among the most hawkish members of the
FOMC during the Greenspan days in the late 1990s.
On Real Interest Rates
Negative real interest rates in the US (nominal
rates minus inflation) are as low as -2.3% compared to +0.25% in the Eurozone,
+0.45% in Japan and +1.2% in the UK. Low rate rates in the US are the main
reason why neither the US Treasury nor the Federal Reserve can step up their
strong-dollar rhetoric beyond the usual mantra of a strong dollar being in the
US interest. Currency
traders are well aware that as long as such unfavorable interest rates persist
in the US, the only way for policymakers to effectively lift the dollar is by
following up with an actual increase in interest rates instead of rhetoric. Considering the
deterioration in the credit crisis as well as the prolonged weakness in housing
and employment, the Fed remains not only handicapped in raising interest rates
but at risk of prolonging the credit slump and prompting a contraction of
Tuesdayâ€™s consumer confidence figures from the US should be scrutinized beyond
their headline number, with a detailed look at the â€śjobs sentiment ratioâ€ť,
which indicates jobs hard to find vs jobs being plentiful. The S&P/Case
Schiller Home Price Index is also due at on Tuesday.
Euro to Edge Higher Ahead of Eurozone CPI, US Reports
Last weekâ€™s euro decline was more modest than we had predicted, as the
combination of weak US housing figures and surging jobless claims provided the
currency with solid support against the dollar. Euro pushed up above $1.5750
due to rising oil prices resulting from militant attacks targeting Royal Dutch
Shell pipelines in the Niger delta region. The euro managed to shrug bigger
than expected declines in Germanyâ€™s GfK consumer confidence and record lows in
Spainâ€™s GfK index.
Wednesdayâ€™s string of Eurozone manufacturing PMI
is likely to stress the deteriorating state of the sector in the region, but
markets will remain reluctant to drive down the currency below the $1.56 figure
ahead of the crucial US GDP and employment report in the subsequent two days.
Thursdayâ€™s release of Eurozone advanced July CPI estimates will be crucial in
determining the hawkish foundation of the single currency. Consensus forecasts
expect a new record high of 4.1% following Juneâ€™s 4.0% increase. EURUSD faces
interim upside at $1.5780, but is unlikely to extend gains beyond $1.5840
before Thursdayâ€™s CPI. A figure below 4.0% will likely remain supported at
USDJPYâ€™s Persistent Failure
USDJPYâ€™s persistent failure to breach above the 108 figure is a result of
ongoing concerns with the US credit squeeze and negative macroeconomic figures,
which continue to take turn in acting as catalysts to the pairâ€™s downside. The
fact that the yen has fared lower than was penciled in by most Japanese
corporate forecasts in last quarter is a positive to their operations, thus,
signifies medium term upside for the currency. Fridayâ€™s Japanese June CPI
figures showing a 1.9% annual increase, and a 1.5% rise in the core, may
provide an added boost for the currency via rising bond yields.
From a risk appetite point of view, the week
will be shaped by US GDP and non farm payrolls, but care is urged on the
earnings front. Although the pair continues to trade above its 200-day MA for
the 5th straight day, the inability to regain 108 is prominent on the daily
chart. Even in the event of a breach above 108, the dollar remains unattractive
at 108.40. Interim downside stands at 107.15, backed by intermediate support at
Sterlingâ€™s Downtrend Re-affirmed
Another day passes and another report showing new lows in UK house prices. The
1.2% July decline in Hometrackâ€™s house price index translated into a 4.4%
annual decline, the biggest since the survey began in 2001. The report follow
last weekâ€™s preliminary Q2 GDP figures showing a 1.6% increase, the lowest
since 2005. Although real interest rates in the UK of 1.2% are the highest in
the G7, they represent the Bank of Englandâ€™s policy bind, which we expect to be
ultimately unraveled by renewed easing later this year by two 25-bp rate cuts.
GBPUSD targets 1.9830, followed by 1.9800. The 200-day MA of $1.9930 remains
stacked with accumulating sell orders as reported by dealers.
Currency trading carries a high degree of risk and may result in serious
financial loss. Foreign Currency trading is not suitable for everyone. CMC
Markets is remunerated for its services from the spread between the bid and ask
prices. CMC Markets (US) LLC is remunerated on the bid/ask price. In situations
where third parties introduce customers to CMC Markets commissions may be
charged or compensation provided through the bid and ask spread.
(US) LLC is registered as a Futures Commission Merchant with the Commodity
Futures Trading Commission and is a member of the National Futures Association.
Our NFA Membership number is 0356817. You can view our registration status and
history, as well as that of our registered representatives by visiting
www.nfa.futures.org/basicnet and searching for CMC Markets.
publication is intended to be used for information purposes only
and does not constitute investment advice.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
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."