Tuesday August 5, 2008 - 22:58:20 GMT
Share This Story
FXCM - www.dailyfx.com
Forex - US Dollar: Will the Bulls Bail Out as FOMC Leaves Rates at 2.00%, Signals Neutral Stance Going Forward?
â€˘ British Pound Manages to Hold Above Support At 1.9525
â€˘ Commodity Currencies: Aussie Gets Slammed as the Reserve Bank of Australia Turns Dovish
US Dollar: Will the Bulls Bail Out as FOMC Leaves Rates at 2.00%, Signals Neutral Stance Going Forward?
The Federal Reserve left rates unchanged at 2.00 percent â€“ as expected â€“ but as usual, it was the FOMCâ€™s policy statement that made all the difference for the US dollar. The Committee essentially said that they would leave rates steady at 2.00 percent going forward, as they noted downside risks to growth and upside risks to inflation. Furthermore, the statement said that â€śthe substantial easing of monetary policy, combined with ongoing measures to foster market liquidity should help to promote moderate economic growth.â€ť With the FOMC shying away from their hawkish bias, fed fund futures are now only pricing in a 25.8 percent chance of a 25bp hike in September, down from 30.2 percent yesterday. This is why the greenback edged back versus many of the majors, though the currency has struggled to move against the euro. Indeed, we tend to see that when it comes to FOMC rate decisions and policy statements, the underlying sentiment does not always feed through until the next day. Meanwhile, business activity in the non-manufacturing sector, which composes a large majority of US GDP, contracted for the second consecutive month in July according to the latest ISM survey. However, the index did manage to rise slightly to a reading of 49.5 from 48.2 thanks to a jump in the employment component to 47.1 from 43.8. Nevertheless, this still indicates worsening labor market conditions. My fundamental bias for the US dollar on Wednesday: bearish. Overall, the odds are becoming stacked against US dollar bulls given these recent developments and there are no major economic releases scheduled tomorrow to help counter this sentiment.
Euro Struggles Under Weight of Weak Euro-zone Retail Sales â€“ Chance for Recovery Tomorrow
Economic indicators out of the Euro-zone continue to disappoint, as retail sales dropped 0.6 percent during the month of June, dragging the annual rate of growth down to a worse-than-expected -3.1 percent. Likewise, Euro-zone services PMI was confirmed at a reading of 48.3 in July, down from 49.1, which marks not only the second straight month of contraction but also a five year low. While ECB President Jean-Claude Trichet was fairly clear in stating that there were significant downside risks to growth during his monthly press conference in July, when the central bank hiked rates to 4.25 percent, he maintained that growth was â€śmoderateâ€ť and â€śongoing.â€ť However, given these broad indications of slowing expansion, Mr. Trichet may be more inclined to admit the deterioration in the economy during his 8:30 EDT press conference on Thursday. Looking ahead to Wednesday, German factory orders are expected to rise slightly during the month of June, but the annual rate is anticipated to drop to -4.7 percent. While the PMI Manufacturing reports for Germany during that period did reflect growth during that month, the index has steadily fallen throughout the year, creating some downside risks for this release. However, the currency is more likely to continue trading as an anti-dollar vehicle throughout the day, and as a result, lingering sentiment from the FOMCâ€™s policy statement may have a greater impact. My fundamental bias for the euro on Wednesday: bullish. Check out our Chief Strategistâ€™s forecast for EUR/USD.
British Pound Manages to Hold Above Support At 1.9525
The British pound tumbled toward support at 1.9525 on Tuesday as UK industrial output contracted for the second month in a row and kept the annual rate down to -1.6 percent. While energy and mining producers are keeping pace, manufacturers are clearly suffering as output has fallen negative in five of the past seven months. Looking ahead to tomorrow morning, weâ€™ll see the release of BRC Shop Prices for the month of July, but given persistent price growth in the UK economy, thereâ€™s some upside potential for this report. However, I think that like the euro, the British pound may trade more based on anti-dollar sentiment. As a result, my fundamental bias for the British pound on Wednesday is bullish.
Commodity Currencies: Aussie Gets Slammed as the Reserve Bank of Australia Turns Dovish
Broad declines in commodities like oil and gold led the Canadian, New Zealand, and Australian dollars lower, but AUD/USD took a particularly hard hit thanks to dovish sentiment by the Reserve Bank of Australia. Indeed, the RBA left rates steady as expected at 7.25 percent, but the Boardâ€™s policy statement was straightforward in suggesting that their next move would likely be a rate cut, as they said, â€świth demand slowing, the Boardâ€™s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.â€ť While the most recent CPI numbers were surprisingly strong, indicators of economic growth in Australia have been broadly weak and the upcoming releases of the Home Loan Index and AiGâ€™s Performance of Construction Index are anticipated to reflect the same thing. Likewise, Canadaâ€™s Ivey PMI report is forecasted to fall to a reading of 61.0 from 69.6 in July, pointing towards rapidly deteriorating business activity. My fundamental bias for the Australian and Canadian dollars on Wednesday: bearish. However, traders should beware of sharp moves in oil and gold, as this could shake up the currencies.
Japanese Yen Holds Despite Rally In Equities
The Japanese yen rose slightly versus the majority of the majors, but fell against the US dollar as indicators of risk sentiment â€“ such as the CBOEâ€™s VIX Index â€“ declined while and US equity markets rallied. There was no pertinent economic data on hand for the currency, though itâ€™s questionable if that matters as the yen is likely waiting for the next big shift in risk appetite market-wide. Like many markets, indexes like the DJIA may not fully respond to the Federal Reserve news until Wednesdayâ€™s trading session, and as a result, thereâ€™s still downside potential for USD/JPY. My fundamental bias for the Japanese yen: slightly bullish.
**New Coverage of Emerging Markets â€“ South African Rand Dragged Down By Gold, Mexican Peso, Turkish Lira Hold Strong
Emerging market currencies like the Mexican peso and Turkish Lira edged lower on Tuesday, but both remain relatively strong as the Banco de Mexico and the Central Bank of the Republic of Turkey (CBRT) both remain hawkish and likely to hike rates again before year-end as price pressures persist. The Mexican Peso was weighed down a bit as consumer confidence fell to a 7-year low of 88.4 from 90.7, as these increasing costs limit disposable income. Meanwhile, the South African Rand plummeted versus the greenback thanks to a 2.4 percent drop in gold futures to $886.10/oz. South Africa is extremely dependent upon exports for growth, and with prices falling, the value of those exports will only serve to erode the nationâ€™s trade balance. Looking ahead to tomorrow, there is no data scheduled for release so traders should keep an eye on commodities and the US dollar for direction.
For more in-depth analysis on the MXN, ZAR, TRY, HKD, and SGD published every Friday, please see our Emerging Market FX Weekly.
Written by Terri Belkas, Currency Strategist for DailyFX.com
Glad to see our new coverage of emerging market currencies? Let us know: [email protected]
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."