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Forex Market Update
Published: Aug. 01 2006, 12:21 GMT
Market Waiting for PCE and ISM
Market still extremely range bound as traders expect US data to provide a direction.
MAJOR HEADLINES â€“ PREVIOUS SESSION
â€˘ German ILO Unemployment (Jun) 7.9 vs. 8.0% prior
â€˘ Swedbank PMI Survey (Jul) 64.1 vs. 62.1 exp.
â€˘ German Unemployment Rate (Jul) 10.6% vs. 10.8%
â€˘ FR PMI Manufacturing (Jul) 57.2 vs. 56.3 exp.
â€˘ GE PMI Manufacturing (Jul) 58.9 vs. 59.0 exp.
â€˘ EC PMI Manufacturing (Jul) 57.4 vs. 57.4 exp.
â€˘ UK PMI Manufacturing (Jul) 53.8 vs. 54.5 exp
â€˘ EuroZone Unemployment Rate (Jun) 7.8 vs. 7.9 exp.
FROM THE MORNING UPDATE
â€˘ Euro Zone Industrial Confidence (Jul) 4 vs. 2 exp.
â€˘ Euro Zone Consumer Confidence (Jul) -9 vs. -8 exp.
â€˘ Euro Zone CPI Estimates (Jul) YoY 2.5% vs. 2.5% exp.
â€˘ South Africa Trade Balance (Jun) rand -4750M vs. -2750M exp.
â€˘ Canadian GDP (May) MoM 0.0% vs. 0.3% exp.
â€˘ US Chicago Purchasing Manager (Jul) 57.9 vs. 56.0 exp.
â€˘ Australian Building Approvals (Jun) MoM 1.6% vs. 0.2% exp., YoY -7.5% vs. -11.7%.
â€˘ St. Louis Fed President Poole say he is â€ś50 / 50â€ť on rate hike.
â€˘ Israel Cabinet has agreed to widen scoop of ground offensive against Hezbollah.
â€˘ JN Finance Minister Sadakazu Tanigaki suggested itâ€™s not easy to resolve international financial imbalances through foreign-exchange adjustments alone.
â€˘ BoJ's Fukui says has not said BoJ won't raise rates again this year; says future rate hikes will be gradual, in small increments; no pre-set idea on timing of additional hikes.
THEMES TO WATCH â€“ UPCOMING SESSION
The market has slowed down before the release of US figures this afternoon. In a situation similar to that of last Friday the market will be watching for indicators of the US economy and inflationary pressure in the form of ISM and PCE. The market expects core PCE YoY to reach 2.3% and the deviation risk are towards the upside. ISM should rise to 53.5%. For the most part traders will sit this one out in advance of BoE and ECB however there could be a speculative activity should numbers come out firmer then expected.
In addition, Treasury Secretary Paulson will be making his inaugural speak today at the Columbia School of Business. The speak will focus on the challenges and outlook facing the US and global economies. Traders will be very interested in his views on â€śstrong dollarâ€ť and Chinese economic policy which he will call for more flexibility. This event will not be a market mover, barring any extreme comment, but could enlighten traders on US policy moving forward.
The RBA is expecting to tighten its cash rates .25% to 6.00% and the market has already priced this increase. The market will pay significant attention to bias comment on subsequent rate movement which will be released on Fridays MPS. Given the strong Australian economy we believe the comment will be hawkish and bias toward additional rate hikes.
BoE, ECB and RBA
This week trader will be specifically intent on the Central Bank action in the UK, Australia and Euro-Zone which will drive market volatility. Currently market sentiment is overweighting interest rate differentials over other macro factors. Countries looking to hike rates will gain over those in a neutral stance.
ECB â€“ We and the market expect a .25% hike to 3.00% on Thursday, however the risk will come with subsequent comments. There are significant indications that Trichet will take a dovish tone, implying no commitment to further rate hikes. If this occurs the Euro will be sold off.
BoE â€“ In the UK the situation surrounding the MPC is a touch less clear. Only a few analysts expect rate hike and the MPC have signaled no urgency to raise rates. However, recent changes in the labor conditions and housing sectors have added pressures to UK economy, which we believe will have the BoE looking to raise rates. Traders should see a decent broad based GBP appreciation.
RBA - Todays higher Private Sector Credit added an interesting twist to Australia monetary policy outlook. Wednesday Cash Rate is all but in the books to move to 6.00% from 5.75%. However, with a still accelerating economy, and past rate hike unable to slow growth the RBA might look to raise rates above 6.00%. The market will be watching of any additional hawish comments from the RBA with will send the AUD higher.
Fridays GDP and PCE will still have lingering effects on the markets today. The surprise real GPD figure which rose to a softer then expected 2.5% (Q2) and upwardly revised core PCE data might have been just what the FED ordered. Bernanke had anticipated an increase in inflation but was hoping for softer growth, which he got, in order to support a monetary policy which allows for a pause in August. Recent testimony for the FED Chairman has implied that a favored course of action would be hold rate and allow slowing growth to lessen inflation. While these numbers heighten the probability of a pause at the next FOMC meeting we still believe a .25%bp will transpire. Trader will be watching for any additional signals that growth is soft such as this weeks July ISM.
Australian RBA data for June which is a measure of the private sector growth moved steadily upwards printing at 1.2% vs. 1.1% exp. This illustrates that the consumer and business have been unfazed by the upcoming RBA .25% rate hike, and might support additional tightening after Wednesday. We continue to be bullish on the AUD as traders attracted by the strong economic growth and high interest rate differentials will begin to pile in.
Note: the support/resistance levels used in the matrixâ€™s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
EURUSD (1.2761 @ 12:21 GMT)
Weekly Update: EURUSD broke the June lows last week, but was unable to close below 1.2465 50% retacement (form 1.1950-1.2979) keeping the bull trend line from February intact. Look for a daily close above 1.2705 which would give scope for increased upside acceleration for a retest of the inverse-head-and shoulder target at 1.2980.
Monday, Tuesday: Look for EURUSD to target 1.2850 this week as long as 1.2650-70 support remains intact. But for today we expect the 1.2690-10 area to limit the downside.
01 Aug 06
British Pound/US Dollar
GBPUSD (1.8666 @ 12:21 GMT)
Weekly Update: GBPUSD broke key resistance last week at 1.8545 which was the level to look for if upside acceleration was once again to be seen. This gives scope for a 1.8750 and possible 1.8900 target in the upcoming trading week. Intra-week support is now at 1.8400.20.
Monday, Tuesday: GBPUSD remains strong with support now at 1.8600. Buy the pair on dips or a break of 1.8680 to target 1.8750 short term.
01 Aug 06
US Dollar/Japanese Yen
USDJPY (114.70 @ 12:21 GMT)
Weekly Update: USDJPY made a sharp reversal last week after falling short of testing 118.00 resistance. The pair continues to trade within the longer term bear trend line from 1998 presently at 119.00 and last weekâ€™s sell-off gives scope for a 114.65 target this week 38% retracement (from 108.97-117.86) and then to 113.40 support.
Monday, Tuesday: USDJPY continued to retrace in Asia breaking 114.65 support. Continue to sell on rallies from last week to challenge 113.40 support this week. Intra-week resistance is now at 114.90-00.
01 Aug 06
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