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FX Blog- GVI Month Ahead Currency Forecasts

November 19, 2007

Forex Forecast of Major Currency Pairs


Forex markets have moved into a transitional period. The recent period of USD weakness against key European currencies has moved into a consolidation phase, but its bias technically remains to the downside. What has changed significantly is that the excess liquidity in the market place is not as plentiful as before as investors have become more risk adverse. The result is that even though Japanese interest rates remain at exceptionally low levels, carry trade flows have been reduced. Also in the current risk adverse environment, existing carry trade positions are being unwound. This has seen the JPY gain and many of the recipients of carry trade flows adjust.

Fundamentally, the USD remains vulnerable. The necessary U.S. interest rate advantage in 10-yr bonds vs. the Eurozone continues to erode and it appears destined to decline further.



Both economies are now starting to slow, but the U.S. is further along in the process. Note below in the U.S. Monetary Policy outlook insert below that official rates appear headed lower. This development is likely to be USD negative. Future Fed policy will be data-dependent. USD weakness had been centered primarily vs. Europe, but as noted the transition to a risk adverse trading environment has been supportive of the U.S. currency.


UNITED STATES

GVI U.S. Feberal Reserve Bank Policy Meeting Preview

  • Decision: December 11 at 19:15 GMT.
  • Fed Funds rate: 4.75%
  • Expected Decision: -25bp cut
  • Fed Chairman Bernanke has made it clear that future policy decisions will be data-dependent. Short-term market sentiment has a strong infuence on Fed policy decisions and traders are convinced that interest rates will be cut by -25 bps at its upcoming meeting on December 11. Many feel that the central bank is feeling intense pressure to get ahead of a slowing economy. The improving trade data below indicate that the weak USD has been a strong stimulus for exports. Jobs growth remain steady.

FEDERAL RESERVE Policy Objective: The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

uscpi

The chart above shows year/year core PCE for the U.S. relative to its its reported "comfort zone for this key price index. Headline and Core CPI figures are also shown.

ezcpi

ezcpi




s-t rates

The above monthly U.S. employment chart is included because its the most closely followed data release each month, and because one of the objectives of the Fed is to maximize employment.

s-t rates


s-t rates

The chart above shows the current three month libor rate, the current Fed funds target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.S. interest rates are headed.




interest rates

The chart above shows the U.S. Fed Funds rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

Major Currency Pairs - Currency Forecasts- Monthly Perspective

foreign currency pairs

At its latest meeting the ECB sent the clear signal that its monetary policy is now neutral as indicated in the insert below. This is likely to be supportive of the unit vs. the USD. At the moment the EUR has been under pressure as EUR/JPY crosses are unwound. The EUR has started to develop into a formidable challenger to the USD role as a reserve currency.


EUROZONE

GVI European Central Bank Policy Meeting Preview

  • Decision: December 6 at 12:45 GMT.
  • ECB Refi rate: 4.00%
  • Expected Decision: No Change
  • ECB President Trichet signaled no policy changes after its most recent meetng. Some felt also that the central bank, while talking tough about inflation, is now taking a more neutral posture on policy. Key Eurozone PMI figures, which correlate well with GDP, are pointing to a developing economic slowdown. The high level of the EUR/USD is another restraint on the economy and overseas price pressures.

    ECB Policy Objective: The primary objective of the ECB's monetary policy is to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term.

    ezcpi

    The chart above shows year/year HICP (Harmonized CPI) for the Eurozone relatrive to its "below 2%" target level.

    ezcpi

    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current ECB  "refi" rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Eurozone interest rates are headed.


interest rates

The chart above shows the ECB refi rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex forecast services The JPY has finally gained vs. the USD and EUR as old JPY carry trades are unwound. The impetus for this unwinding of positions has been expectation that China will soon execute a maxi-revaluation of the yuan vs. the USD. This remains to be seen, but it is clear that Japan has been restraining the JPY against other currencies to maintain a competitive price level for exports.



JAPAN

GVI BOJ Policy Meeting Preview

  • Decision: December 20
  • Current Overnight Target Rate: 0.50%
  • Expected decision: No change.
  • Despite a lot of empty bluster by the central bank, no increase in rates is likely from the BOJ anytime soon. Note below that core and headline CPI remain mildly deflationary. Also the economy has started to slow again. The political situation also is in turmoil. Despite official talk about policy "normalization" a move to higher rates anytime soon is unlikely and would probably be ill-advised. Note in the short-term rate chart below that the markets have been adjusting down the odds of future hikes.

BANK OF JAPAN Policy Objective: The Bank of Japan Law states that the Bank's monetary policy should be "aimed at, through the pursuit of price stability, contributing to the sound development of the national economy."

Nationwide CPI

The chart above shows year/year core nationwide CPI and the reported BOJ goal of between 0% and 2% for this price index. 

Manufacturing PMI


s-t rates

The chart above shows the current three month libor rate, the current BOJ overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Japanese interest rates are headed.


interest rates

The chart above shows the Japanese overnight rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

major currency pairs There has been growing speculation about the risk of a BOE rate cut; nevertheless the GBP continues to be supported vs. the USD by the soaring EUR. The BOE has been subject to considerable criticism recently because of its slow monetary policy response to the sub-prime crisis. The BOE more than most other major central banks has surprised the markets with its policy decisions, no rate cut is expected in December, but 1Q08 appears to be a likely target for a move.


UNITED KINGDOM

GVI Bank of England Policy Meeting Preview

  • Decision: December 6 at 12:00 GMT.
  • BOE Repo Rate: 5.75%
  • Expected Decision: No Change but there is a slight risk of a -25bp rate cut.
  • There are growing concerns that the U.K. economy might be negatively impacted by the fall-out from the global credit crisis. Note below that both the U.K. Manufacturng and Services PMIs have turned south. Inflation data are mixed, but don't appear to be a major issue any longer. Note below that the short-term credit markets are expecting a -25 bp cut in 1Q08 and more rate reductions subsequently.

    BANK OF ENGLAND Policy Objective: The Bank's monetary policy objective is to deliver price stability, low inflation, and, subject to that, to support the Government's economic objectives including those for growth and employment. Price stability is defined by the Government's inflation target of 2%.

    ezcpi

    The chart above shows year/year CPI for the U.K. relative to its 2% target for this key price index. 


    ezcpi




s-t rates

The chart above shows the current three month libor rate, the current Repo Rate  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel U.K. interest rates are headed.


interest rates

The chart above shows the U.K. repo rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

forex currency market reports The Swiss National Bank tries to maintain a stable relationship of the CHF vs. the EUR. It is never pleased with weakness of the CHF against the EUR. SNB President Roth has sent a clear signal that the final rate hike of this tightening cycle has probably been seen.



SWITZERLAND

GVI Swiss National Bank Policy Meeting Preview

  • Decision: December 13 at 13:00 GMT.
  • SNB 3mo Swiss libor target: 2.75%
  • Expected Decision: No Change
  • There are growing concerns that the global economy might be slowing. The SNB has indicated recently that following a steady rise in interest rates, that the peak in interest rates has been reached. The rise of the CHF has been a restraint on the economy as well. The Swiss CPI (see below) is well below its target ceiling. The SNB manages the value of the CHF as critical element of monetary poilcy.

    SWISS NATIONAL BANK Policy Objective: The National Bank equates price stability with a rise in the national consumer price index (CPI) of less than 2% per annum. In so doing, it takes account of the fact that not every price movement is necessarily inflationary. Furthermore, it believes that inflation cannot be measured accurately. Measurement problems arise, for example, when the quality of goods and services improves. Such changes are not properly accounted for in the CPI; as a result, inflation, as measured by the CPI, will be slightly overstated.

    ezcpi

    The chart above shows year/year CPI and the Swiss goal of less than 2% for this price index. 


s-t rates

The chart above shows the current three month libor rate, the current three-month Euro-Swiss target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Swiss interest rates are headed.


interest rates

The chart above shows the Swiss three-month Euro-swiss rate target, three month libor, and two- and ten-year bond yields over the past twelve months.

currency exchange forecast The Australian economy has been improving. A key focus for the Reserve Bank of Australia remains inflation, employment and commodity demand. This has kept the AUD in demand. An election has been called for November 24, with the Australian Labor Party (ALP) ahead in the polls.


AUSTRALIA

GVI Reserve Bank of Australia Policy Meeting Preview

  • Decision Anouncement: December 3 at 23:30 GMT.
  • RBA Cash Rate Target: 6.75%
  • Expected Decision: No Change but there is a slight risk of a +2525bp rate hike.
  • Inflation and liquidity concerns are keeping the market bias for future rates in Australia skewed to the upside. MNote in t chart below that the two RBA core measure are pressing the top end of the bank's allowable limit. A global economic slowdown and the historic highs of the AUD are likely to start to restrain the risk of future rate hikes.

RESERVE BANK OF AUSTRALIA Policy Objective: The policy objective is a target for consumer price inflation, of 2-3 per cent per annum. Monetary policy aims to achieve this over the medium term and, subject to that, to encourage the strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.

cacpi

The chart above shows year/year and the CPI target of 2% to 3% for this price index. 


s-t rates

The chart above shows the current three month bank bill rate, the current Cash Rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Australian interest rates are headed.


interest rates

The chart above shows the Australian overnight rate target, three month bank bills, and two- and ten-year bond yields over the past twelve months.

us currency The CAD is underpinned by M&A flows, a steady economy and commodity prices. Trading has become increasingly volatile as JPY carry trades are unwound. Monetary Policy is on hold while the state of the North American economy is scrutinized in light of the record strength of the CAD.


CANADA

GVI Bank of Canada Policy Meeting Preview

  • Decision: December 4 at 14:00 GMT.
  • BOC Overnight Target Rate: 4.00%
  • Expected Decision: No Change.
  • There are concerns that the Canadian economy could be negatively impacted by the global economic slowdown. Note below that both the Ivey Manufacturng PMI might have started to weaken. Inflation data are an issue, such that an easing of policy cannot even be considered. Note below that the short-term credit markets are anticipating a rate cut later in 1Q08.

    BANK OF CANADA Policy Objective: The Bank of Canada aims to keep inflation at the 2 per cent target, the midpoint of the 1 to 3 per cent inflation-control target range. This target is expressed in terms of total CPI inflation, but the Bank uses a measure of core inflation as an operational guide. Core inflation provides a better measure of the underlying trend of inflation and tends to be a better predictor of future changes in the total CPI.

    cacpi

    The chart above shows year/year CPI-X (core CPI) and the target of 2% for this price index. 

    PMI


s-t rates

The chart above shows the current three month Banker Acceptance rate, the current BOC overnight rate target  and where the futures markets are currently trading three month rates for the specified periods in the future. The chart also includes comparisons of where these futures rates were trading most recently, a week ago and four weeks ago.  The chart provides a view on where the markets feel Canadian interest rates are headed.


interest rates

The chart above shows the Canadian overnight rate target, three month Bankers Acceptance, and two- and ten-year bond yields over the past twelve months.

John M. Bland is a co-founder and partner of Global-View.com. Prior to Global-View.com, he was a Vice-President and senior dealer in a forex inter-bank and futures trading arm of a subsidiary (ContiCurrency) of the Continental Grain Company in NYC. Previous to that, he was one of the early members of the Chemical Bank corporate advisory service in NYC, and also worked in international liability management for that bank. John holds an MBA from the Hass School at the University of California at Berkeley and a bachelor?s degree in International Economics from Berkeley.

 

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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 here.

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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."



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Amazing Trader EVENT RISK Calendar:

Mon 18 Dec
10:00 EZ- final HICP
Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account
Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude
Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP
Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes
Mon 25 Dec
00:00 Christmas Holidays

Forex Trading Outlook


Potential Trading Opportunities

  • POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.


  • POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
  • POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity

  • POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
  • POTENTIAL PRICE RISK: Medium- Wed --15:30-- US- EIA Crude

John M. Bland, MBA
co-founding Partner, Global-View.com EXCLUSIVE: Global-View Daily Trading Chart Points Updated

EXCLUSIVE: Global-View Free Forex Database updated




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