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Forex Research - A Big Week Lies Ahead with an Election and 3 Important Rate Decisions

A Big Week Lies Ahead with an Election and 3 Important Rate Decisions Last Updated 11/3/2008 5:26:29 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

EUR/CAD ( -509 pips or -3.30%)

USD/CAD ( -321 pips or -2.65%)

CAD/JPY ( +287 pips or +3.55%)

THE STORIES IN THE CURRENCY MARKET

  • USD: A BIG WEEK LIES AHEAD WITH AN ELECTION AND 3 IMPORTANT RATE DECISIONS
  • EUR: A EURO-ZONE RECESSION IS INEVITABLE
  • GBP: STRONG PMI DOES NOT DETER RATE CUT EXPECTATIONS
  • CAD: USD/CAD FALLS MORE THAN 300 PIPS
  • AUD: PROBABILITY FOR A RATE CUT INCREASES WITH WORSE THAN EXPECTED RETAIL SALES
  • NZD: KIWI SHOWS STRENGTH AGAINST DOLLAR AND YEN
  • JPY: RENEWED RISK APPETITE HELPS WEAKEN THE YEN

 

EXPECTATIONS FOR UPCOMING FED MEETINGS

 

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

A BIG WEEK LIES AHEAD WITH AN ELECTION AND 3 IMPORTANT RATE DECISIONS

The Dow has lagged behind broad rallies in European and Asian equity markets, as investors are awaiting some confirmation as to the results for tomorrow’s election. The Dow finishes a relatively quiet day down by about 5 points, or about -0.06%. Such stability has clearly not been seen for months. Today’s trading was characterized by some revitalization of risk tolerance, as the high-yielding currencies posted broad gains against the dollar and yen. The direction for the dollar is subject to many factors this week, including Presidential elections and central bank rate cuts. After this week we may have a better idea of what future trend the dollar will take.

Manufacturing Experiences Large Setback

The Institute for Supply Management’s Index falls from 43.5 to 38.9. Such a move represents more concrete evidence to a depressed manufacturing sector, in addition to Friday’s weak PMI. The manufacturing area has been ravaged by recent economic developments and has fallen to the lowest level of production in more than 25 years. In addition to the unavailability of credit to finance manufacturing activities, the sector has been hit by slowing growth as well as the recent strengthening of the US dollar. The strong relative dollar to international currencies has made imports from the United States undesirable. Additional layoffs are likely, serving as a hit to expectations for job market stability. We will get more of an idea of the impact on jobs in Friday’s employment situation report.

Election Results May Calm Markets Regardless of Winning Candidate

It is clear, that in the midst of a fearful market, the elections have only added to market uncertainty. With campaigns that have stretched a historical length of time, investors have been met with an additional degree of intense concern. Policy measures that may be taken by the McCain or Obama administrations will have very different and distinct impacts on the dollar, the stock market, commodities, and the entire macro-economy as a whole. Without dwelling too much on particular political issues, we will concentrate primarily on the factors that the nominees have most starkly contrasted- taxes and spending.

Presidential nominee John McCain has proposed to cut corporate taxes by 10% while keeping capital gains taxes steady. Meanwhile, he plans to make Bush Tax Cuts permanent. Such policies are expected to be equity positive, as corporations retain more profits and investors keep more returns. A rebound in equities will also promote economic growth, two things that have obviously been failing as of late. However, in addition to measures to continue a war in Iraq, such implementations will continue to be met with a widening budget deficit. The effect of an enlarging deficit, which is already at historic levels, will be a negative force for the continued appreciation of the dollar. In the end, this may be a negating force for growth. One additional point is that McCain would be met with a Congress and House dominated by Democrats. This will likely cause a lock-up in the implementation of planned policies, casting an ambiguous notion onto movements in the financial markets in a McCain presidency. An Obama administration would be primarily focused on additional taxes for corporations, high-income individuals, as well as a 5% increase in capital gains tax, quite the opposite to Mr. McCain’s proposals. This will likely be a negative force for equities, and directly a negative growth factor. Increased taxes and an abrupt end to the Iraqi war will help narrow fiscal deficits keeping the dollar afloat. However the additional spending, on areas such as healthcare, may negate a reduction in the budget deficit. Also plans for increased corporate regulation and oversight will keep equities further depressed. Although, in response to recent Wall Street developments, McCain has said that additional oversight is necessary. In contrast with McCain, Obama may be met with a highly receptive House and Senate, which will likely help the chances that policies will be put in place.

If history can be a guide, the dollar rally may not end after the November 4th elections. In 6 out of the last 7 elections, regardless of whether Democrats or Republicans win, the US dollar has rallied in the 6 months following the election. With this in mind, central banks will have to take more aggressive monetary measures if they want to combat this historical trend. However, if the election gets tied up in cases of voter fraud, we will likely see mass confusion and panic settle in once again. In addition to tomorrow’s election, we will also have ABC Consumer Confidence and Durable Orders.

A EURO-ZONE RECESSION IS INEVITABLE

A European Commission states the obvious today, saying that the region has probably entered into a recession. There has been no reasoning to deny that a recession is inevitable for the entire European continent. German, Italian, and French Purchasing Manufacturer Index results continue to disappoint the market. Regardless of these reports, which cast a gloomy shadow on the current industrial and manufacturing sectors, all traders are awaiting the ECB rate cut decision expected for later this week. Even though it is a bit premature, market participants are widely expecting that the central bank will cut an additional 50bp leaving interest rates at 3.25%. Many analysts expect that the ECB’s target rate will fall to 2.5% by the middle of next year. Compared to the US, which dropped by 50bp last week, the ECB has a bit more flexibility in continuing rate chopping strategies. Another possibility that comes out of this decision may be some newly devised central bank policy efforts in fighting a rampant recession. For tomorrow, we will see the entire EZ PMI figures, likely to disappoint as corresponding weakness in the largest EZ countries has been shown by example.

RENEWED RISK APPETITE HELPS WEAKEN THE YEN

Traders are still reacting to the Japanese interest rate cut reported last week in the light of few important economic news releases. Such cuts may have served the purpose of weakening the yen, as the currency experiences broad selling in the midst of some renewed risk appetite. Recently the Volatility Index has retraced almost 40% off of recent historic highs. We did learn today that automotive sales have fallen off rapidly for two of Japan’s largest automakers, Toyota and Nissan. Sales from Toyota fell more than 20%, hinting at continued problems for the Japanese economy. The automakers have been hit with weakening international demand due to the accelerated credit crisis sweeping the globe, as well as falling domestic sales. Such weakness from large Japanese corporations will start to hurt the employment situation. Tomorrow’s schedule is relatively subdued with Labor Cash Earnings and Monetary base. We also expect Japanese vehicle sales to mirror the sluggish growth reported by Toyota and Nissan.

STRONG PMI DOES NOT DETER RATE CUT EXPECTATIONS

In contradiction to similar reports from the US and EZ, UK Manufacturing PMI showed some expected strength, coming in both better than expected and above last month’s report. In return, the FTSE Index has continued a rare multi-day rally. However, the report does not signal a renewed UK manufacturing sector. Today’s unexpected jump in PMI represents a slight increase off of the 16-year low reported last month. In addition, since the release is still under the 50 level, manufacturing is still contracting. Such contraction is a foreshadowing of continued job loss, as well as renewed pressure on the BoE to cut rates. Of course the BoE will be meeting Thursday to decide how far it will ease this month. Traders are hoping that the meeting will result in a 50bp cut, along with similar actions from neighboring EZ countries. Tomorrow, we will see construction PMI, which regardless of an unexpected bounce, will still be contracting as numbers are firmly placed below the 50 level.

COMMODITY CURRENCIES STAGE BROAD RALLY

Australian Retail Sales come in worse than expected, increasing the probability for an RBA rate cut tomorrow. Disappointing retail sales, which slid from 0.5% to -1.1%, was met with falling housing prices in a worse than expected Housing Price Index. The RBA rate decision will almost definitely hold a rate cut, as economic conditions have clearly reached a desperate nature. Such a cut will follow the intervention attempt made by the RBA in recent weeks in an effort to reduce the depreciation of the Aussie. In the hopes of lower rates, Australian equities have been rebounding steadily over the last few days. Despite a sharp pullback in oil, the commodity currencies have been staging an overwhelming rally against the dollar and yen. The loonie has retraced to levels not seen for two weeks, as USD/CAD falls more than 300 points. The kiwi is also showing some strength as investors increase risk appetite. NZD ANZ commodity prices are expected tomorrow and will display important information about the health of New Zealand commodity exports.

USD/JPY: Currency in Play for the Next 24 Hours

USD/JPY will be the currency pair in play for the next 24 hours. In addition to tomorrow’s US Presidential Elections, we will also see Japanese Vehicle Sales at 1:00 am ET or 5:00 GMT.

USD/JPY has been able to sustain itself in the Bollinger band neutral zone for about five days now. However, prices have not made a new high in today’s trading. This is because the combination of a previous high and 50-day SMA create a strong resistance level at 99.70. We are placing immediate support at 96.36, which along with yesterday’s low is the one-standard deviation Bollinger band. Given such strong levels, it is likely that the market will continue range-bound until we are certain of the results of the election. Any break above the 99.70 level would be a strong bullish indication.

 

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Kathy Lien will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Kathy Lien do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.




 

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