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Forex Market Update
Published: Aug. 07 2006, 13:37 GMT
Markets Await Tomorrow's Fed Meeting.
Dollar gains slightly as traders look beyond tomorrows FOMC.
MAJOR HEADLINES â€“ PREVIOUS SESSION
â€¢ Sweden GDP rose YoY 5.5% vs. 4.2% exp., QoQ 1.4% vs. 1.1% exp.
â€¢ GE Bloomberg Retail PMI 54.2 vs. 54.7 prior
â€¢ FR Bloomberg Retail PMI 57.7 vs. 60.3 prior
â€¢ EC Bloomberg Retail PMI 53.8 vs. 55.1 prior
â€¢ NO Industrial Production (Jun) MoM -0.3% vs. -0.4% exp., YoY 1.7% vs. -5.2% exp.
â€¢ NO Ind. Prod. Manufacturing (Jun) MoM -0.1% vs. 0.2% exp, YoY 1.7% vs. 5.0% exp.
â€¢ UK Industrial Production (Jun) MoM -0.1% vs. 0.2% exp., YoY -0.7 vs. -0.3%
â€¢ UK Maanufacturing Production (Jun) 0.1% vs. 0.2%, YoY 0.9% vs. 0.9% exp.
FROM THE MORNINGS UPDATE
â€¢ US Change in Non Farm Payrolls (Jul) 113k vs. 144k exp.
â€¢ US Unemployment Rate (Jul) 4.8% vs. 4.6% exp.
â€¢ Canadian Ivey Purchasing Managers Index (Jul) 60.1 vs.53.0 exp.
â€¢ New Zealand Labor Cost Private Sector QoQ (2Q) 0.6% vs. 0.7% exp.
â€¢ Australia ANZ Job Advertisements (Jul) -1.2% vs. -3.2 prior.
â€¢ ECB Board member Bini Smaghi said Euro zone interest rates are still "very accommodating" and more adjustments should be expected in coming months.
â€¢ On Sunday, Lebanon rejected the outright the Franco-American draft of a UN resolution to end Israelâ€™s war with Hizbollah.
THEMES TO WATCH â€“ UPCOMING SESSION
The Yen continued to feel the effects of having the lowest interest rate in the G7 and being the funding currency of choice for most carry trades. With a wealth of figures due out this week it will be interesting to see if this trend persists. However, itâ€™s yet to be seen if the market is currently trading on economic health or just differentials.
The GBP has continued to out perform the market. After the surprise BoE rate hike, traders will be very interested in reading the UK Inflation Report on the 9th. This report will provide an early guide to the new, proactive MPC thought process. We believe, it will show inflation well over the 2% BoE comfort levels and will support further rate increases.
1. Scenario 1: has the highest probability and is the outcome most market participants expect.
2. Scenario 2: least likely scenario. While providing the USD with a short-term bounce, lingering prospects of a pause will reinstate a USD negative bias.
3. Scenario 3: perhaps the most interesting scenario. We believe the fed will hold rates but might not be done tightening. This could be the most interesting trade tomorrow.
FOMC Decisions Comments USD Reaction
1. Pause at 5.25% Dovish USD Weaker â–¼â–¼
2. Hike to 5.50% Either way USD bullish USD Stronger â–²
3. Pause at 5.25% Hawkish USD Stronger â–²â–²
FROM THIS MORNING UPDATE
Fridays lackluster Non-farm payrolls and unemployment figures ended most analysts expectations of continued tightening and sent the USD tumbling. Fed Funds are now trading at 5.29% for August and 5.31% for September. Without the on going support of widening interest rate differential its back to fundamentals for the green back which donâ€™t look encouraging. With dropping GDP, rising core CPI and asset class which look precarious at best, investors will seek opportunities outside the US. The USD should see light, range bound trading with a weakening bias, before tomorrows FOMC.
The pound has been unstoppable in the last few sessions against the USD and JPY. Traders will be looking any reason to continue buying including todayâ€™s Industrial Production and Manufacturing Production which is expected to post it second consecutive MoM gain. With the BoE watching for signals that the economy needs additional tightening, and positive figure should support further rate hike and lead to GBP strength.
On a day with a light economic calender and a market looking options outside the US traders will be watching Swiss Unemployment Rate. In July unemployment fell to the lowest in three years as economic growth accelerated. Continued growth in GDP and a tightening labor market will pressure the country central bank to further tighten interest rates. We see the CHF as a good alternative to USD weakness.
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 (1.2867 @ 13:36 GMT)
Monday: EURUSD remains bid through Asia and we look for intra-day support in the 1.2815-35 area to hold. Buy the dips for another break of 1.2900 for a retest of 1.2980.
07 Aug 06
British Pound/US Dollar
GBPUSD (1.9093 @ 13:36 GMT)
Monday: GBP made the largest gains against the USD with the surprise 25 bps gain and Friday's dissapointing US NFP adding to the upside acceleration. buy dips towards 1.8990-1.9025 for a 1.9225 target this week.
07 Aug 06
US Dollar/Japanese Yen
USDJPY (114.94 @ 13:36 GMT)
Monday: USDJPY making a corrective recovery from testing 114.00 support last week. For the upcoming session sell rallies towards 114.75 50% (115.53-113.96) with a stop above 115.00.
07 Aug 06
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