Forex Daily Analysis - Friday, Aug 31st

Focus on US figures


USD bid ahead of major US figures. EUR selling off as market participants reduce bets that the ECB will hike rates on the 6th of September. Carry trades lower.

Overnight News Bullets

  • UK Nationwide House Prices MoM/YoY (Aug) out at 0.6%/9.6% vs. 0.5%/9.7% expected.

  • SW Current Account (2Q) out at 39.7B vs. 67.3B prior.

  • GE Unemployment Rate (Aug) out at 9.0% vs. 8.9% expected. Change at -15K vs. -30K expected.

  • NO Retail Sales MoM/YoY (Jul) out at -2.3%/8.0% vs. -1.9%/9.0% expected.

  • UK M4 Money Supply MoM/YoY (Jul F) out at 1.0%/13.0% as prior figures.

  • UK Net Consumer Credit (Jul) out at 1.1B vs. 0.8B expected.

  • UK Mortgage Approvals (Jul) out at 115K vs. 110K expected.

  • Czech Central Bank raises repo rates surprisingly 25bp to 3.25%.

  • CA Current Account (2Q) out at 8.4B vs. 8.1B expected.

  • CA Industrial Product Price MoM (Jul) out at -0.7% vs. -0.5% expected.

  • CA Raw Materials Price Index MoM (Jul) out at 3.9% vs. 0.5% expected.

  • US GDP Annualized (2Q P) out at 4.0% vs. 4.1% expected. GDP Price Index at 2.7% as expected.

  • US Core PCE QoQ (2Q P) out at 1.3% vs. 1.4% expected.

  • US Personal Consumption (2Q P) out at 1.4% vs. 1.5% expected.

  • US Initial/Continuing Claims out at 334K/2579 vs. 320K/2575K expected.

  • US Help Wanted Index (Jul) out at 25 as expected.

  • US House Price Index QoQ (2Q) out at 0.1% vs. 0.3% expected.

  • FR Unemployment Rate (Jul) out at 8.0% as expected. Change at 0K vs. -15K expected.

  • JN Jobless Rate (Jul) out at 3.6% vs. 3.7% expected.

  • JN Tokyo CPI YoY (Aug) out at -0.2% vs. -0.3% expected. Core Tokyo CPI (ex fresh food & energy) out at -0.2% vs. -0.1% expected.

  • JN National CPI YoY (Jul) out at 0.0% vs. -0.1% expected. Core National CPI (ex fresh food & energy) at -0.5% vs. -0.3% expected.

  • JN Industrial Production MoM/YoY (Jul P) out at -0.4%/3.2% vs. -0.3%/2.9% expected.

  • AU Retail Sales (Jul) out at 0.9% vs. 0.6% expected.

  • AU Trade Balance (Jul) out at -756M vs. -1000M expected.

  • JN Housing Starts YoY (Jul) out at -23.4% vs. -0.1% expected.

O/N Data Heat map:

EU US JP UK SZ AU CA NZ NO SE FR
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Calendar

Today's Highlights:

Time (GMT) Region Release Consensus
07:30 IT Business Confidence (Aug) 92.8
08:00 NO Credit Indicator Growth YoY (Jul) 14.6%
08:00 IT PPI MoM/YoY (Jul) 0.4/2.2%
09:00 E-Z A streak of Euro-Zone Confidence Indicators

09:00 E-Z Unemployment Rate (Jul) 6.9%
09:00 E-Z CPI Estimate YoY (Aug) 1.8%
09:30 UK GfK Consumer Confidence Survey (Aug) -7
12:30 US Personal Income and Spending (Jul) 0.3% / 0.3%
12:30 CA GDP MoM (Jun) 0.0%
12:30 US PCE Deflator YoY (Jul) 2.1%
12:30 CA Quarterly GDP Annualized (2Q) 2.8%
12:30 US PCE Core MoM/YoY (Jul) 0.2/2.0%
13:45 US Chicago PMI (Aug) 53.0
14:00 US Bernanke Speeks at Fed Symposium in Jackson Hole, Wyoming

14:00 US Factory Orders (Jul) 3.3%
14:00 US University of Michigan Confidence (Aug F) 82.5
14:00 US NAPM-Milwaukee (Aug)

This and Next Week’s Highlights:

Date Region Release
3 Sep AU AiG Performance of Manufacturing, TD Securities Inflation, Building Approvals, Inventories, ANZ Job Advertisement, Company Operating Profit.
3 Sep JP Capital Spending, Labor Cash Earnings, Overtime Earnings, Vehicle Sales.
3 Sep E-Z A streak of PMI Manufacturing figures.
4 Sep UK BRC August Retail Sales Monitor, PMI Construction
4 Sep E-Z GDP figures, PPI, Retail Sales, European Commission GDP Forecast.
4 Sep US ISM Manufacturing, Prices Paid, Construction Spending, Vehicle Sales, ABC Consumer Confidence.
4 Sep UK Nationwide Consumer Confidence
4 Sep AU RBA Cash Target, AiG Performance of Services Index
5 Sep E-Z A Streak of PMI Services
5 Sep UK PMI Services, BRC August Shop Price Index, Official Reserves
5 Sep US MBA Mortgage Applications, Challenger Job Cuts, ADP Employment Change, Pending Home Sales, Feds Beige Book
5 Sep CA Bank of Canada Rate Decision


What's going on?

  • President Bush is out with a package to help subprime borrowers. Too late, too little. But serves to illustrate that the administration recognizes its responsibility in spreading home ownership to persons not able to bear the costs of owning a home.
  • The revisions to US GDP figures were slightly disappointing, with Private Consumption growth at 1.3%.
  • Uncertainty about the USD. The fundamental case is weakening, but flows could be supportive. The need for liquidity in US corporations forces them to take home excess liquidity from overseas operations. That is also what happened in 2000-2001, where the US was weakening, but the USD remained strong, until the liquidity need was covered. Consolidtion or USD strength in the next 2-3 quarters cannot be ruled out.


FX

Market: USD offered on back of weak inflation and growth data. Weak CPI in Japan sends JPY offered as well.

MAJOR HEADLINES

  • German GfK Consumer Confidence (Sep) out at 7.6 vs. 8.5 expected.
  • Swedish Manufacturing Confidence (Aug) out at 5 vs. 8 expected.
  • Swedish Consumer Confidence (Aug) out at 19.7 vs. 19.9 expected.
  • Swedish Economic Tendency Survey (Aug) out at 112.3 vs. 116.6 prior.
  • Swiss KOF Leading Indicator (Aug) out at 2.06 vs. 2.15 expected.
  • US MBA Mortgage Applications (out at -4.0% vs. -5.5% prior.
  • NZ Building Permits (Jul) out at -15.5% vs. 15.8% prior.
  • Japanese Large Retailer’s Sales (Jul) out at -3.8% vs. -3.0% expected.
  • Japanese Retail Trade YoY (Jul) out at -2.2% vs. -0.8% expected.
  • Australian Capital Expenditure (2Q) out at 6.3% vs. 2.0% expected.
  • Australian Current Account Balance (2Q) out at -16B vs. -15.7B expected.
  • NZ NBNZ Business Confidence (Aug) out at -33.8 vs. -38.5 prior.
  • Japanese Small Business Confidence (Aug) out at 47.5 vs. 48.4 prior.

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THEMES TO WATCH – UPCOMING SESSION

EUR

As more and more market participants have expressed concerns that ECB should halt rates, the EUR sold off against most majors. In fixed income, the yields in Europe went lower on concerns that the credit market jitters will spill over into the European economy. Debt also rose as Italy became the second nation in the $10.4 trillion euro economy to report a drop in consumer optimism this week, fuelling concern the credit market crisis will crimp growth across the region. European Central Bank President Jean-Claude Trichet said policy makers aren't ``pre-committed'' to raising interest rates next week. Although the analyst community is split whether or not the ECB should raise rates on the September 6th meeting, we will maintain our view that the ECB should raise 25 bp to 4.25 pct. Ahead of today's important US figures at 12:30 GMT, EURUSD had turned nose-down, dropping from 1.3680 to lows at 1.3595. In our mind, the pair should have an upside bias - the break of 1.3685 should gvie scope for a test of 1.3730 and higher. To the downside, the 100 day MA, coming in around 1.3570 should be supportive for now.

GBP

Also the GBP took a beating today as the Bank of England announced that they loaned 1.6 billion pounds at its penanlty rate of 6.75 pct., adding to the concerns that the credit market trouble also will be present in the UK. The U.K. currency also dropped from near the strongest in two weeks versus the yen as investors reduced holdings of higher-yielding assets purchased with loans from Japan. Australia's Basis Capital Fund Management Ltd. sought bankruptcy protection for one of its hedge funds today, stoking concern the fallout triggered by unpaid home loans will keep spreading. GBPUSD dropped with EURUSD, from 2.0184 to a test of support (61.8% fibo from 1.9660-2.0660) at 2.004.

EURUSD at Bernanke's Mercy

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EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN
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FX Trading Strategies

Pair Supp. Resis. Comments
EURUSD 1.3560 1.3685 We expect the USD to weaken further on back of weak PCE today. Also the possibility that Bernanke will act today should put a bearish bias on the USD. Buy the break of 1.3685 bid, stop offer at 1.3664, targeting 1.3770.

Risk warning : ForexWebTrader shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Forexwebtrader that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.

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FOREX : Foreign Exchange Market

FOREX is a word play on the term Foreign Exchange Market. It is a market for buying and selling of currencies from all over the world. Certainly, such transactions are bound to be voluminous. It is just an estimate that there are about transactions of $1.5 trillion USD on a daily basis in the FOREX. Now just compare this with the paltry $300 billion USD a day transactions for the US Treasury Bond and the $100 billion a day transactions for the US Stock Exchange.

The FOREX came into existence in 1971 when the fixed currency exchanges were abolished. Currencies no longer had fixed values after that; on the contrary, their rates (mostly taken in comparison with the USD) were fluctuating, and changed on a daily basis. Throughout the seventies and the eighties the FOREX grew steadily, showing more advancement in the later years. The market has stupendously grown from $70 billion USD a day to the staggering amount that it transacts today on a daily basis.

There are actually about five thousand trading institutions in the FOREX. These include international banks, central government banks such as the US Federal Reserve, and commercial companies and brokers for all types of foreign currency exchange. The best thing that shows the unbiased nature of the FOREX market is that it has no fixed headquarters anywhere – it operates primarily from all major cities like New York, Tokyo, London, Hong Kong, Singapore, Paris, Frankfurt, etc. One can even use the telephone or the internet to make the transactions. The major businesses at the FOREX are the buying and selling of products in other countries. Several transactions are also conducted from the currency brokers or traders who stand to make small profits with the daily fluctuations in the market.

Most of the FOREX business is centered on big banks and financial institutions, but it doesn’t mean that the FOREX is inaccessible to small investors. The recent changes in the financial regulations have effectuated this accessibility. Earlier, a minimum transaction size was required to conduct business with the FOREX. But the current rules have made it possible to break large inter-bank units into smaller bits. Each bit is worth as less as $100,000. This makes it possible to each individual investor through loans that are extended for trading, known as leverage. The ratio to control the lots is 100:1. This means, every $1000 USD will allow one to control $100,000 on the FOREX.

The benefits of trading with the FOREX are mentioned below:-

(1) Liquidity of Investments – As the FOREX is a huge market, the funds have a very high degree of liquidity. This is because of the presence of the international banks who provide their bids and carry out a large number of transactions on a daily basis. Therefore, there is always a buyer or seller for any type of currency.

(2) Highest Degree of Accessibility – The FOREX is open 24 hours a day for 5 days a week. Every Monday morning the exchange opens at Australian Standard Time and closes on Friday afternoon at New York time. Greater accessibility is provided because the transactions can be conducted from the person’s home or office.

(3) Open Market – At the FOREX, there are no secrets. All the fluctuations that occur in the market are made accessible to everyone at the same time. There is no insider trading in the FOREX.

(4) No Commission – There is no hassle of paying commission to the brokers in the FOREX. Here the brokers earn by setting up a difference between the buying price and the selling price of a currency, which is known as a spread.

It must be understood by now that for the FOREX to work effectively, the currencies must always be traded in pairs. For instance, the Japanese yen must be traded against the euro. When one kind of currency is sold, there should be another to be bought in its stead.

The profit happens because there is always mobility between the different currencies. Even if there is a miniscule change in the exchange rate, then it could mean substantial changes in the profits due to the large amount of money involved in the transactions. People are thronging to the FOREX and not any other institution due to the trust that they have in it. To add to the advantage, the market is absolutely well-advanced and uses sophisticated software for dealing out its transactions.

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