Forex Daily Analysis - Thursday, Sep 6th

Quiet Waters Ahead of the Storm



Soft US ISM figures capped a rising USD yesterday. Carry trades took a hit as the JPY went higher. Watch for Canada rates at 13:00GMT as well as the pending house sales and Beige Book from the US.

Market

  • FX: USD higher across the board helped by turmoil in US figures. JPY strenght on risk aversion.

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 SW Industrial Production MoM/YoY (JUL) 0.5% / 5.2%
07:30 SW Industrial Orders MoM/YoY (JUL) Prior 0.2% / -5.2%
07:30 SW Activity Index Level (JUL) Prior 121.1
08:30 UK Industrial Production MoM/YoY (JUL) 0.2% / 1.0%
08:30 UK Manufacturing Production MoM/YoY (JUL) 0.2% /1.2%
10:00 GE Factory Orders MoM/YoY (JUL) -2.5% / 10.5%
11:00 UK BoE Announces Interest Rates (Sep) 5.75%
11:45 EC ECB Announces Interest Rates (Sep) 4.00%
12:30 CA Building Permits MoM (JUL) -3.3%
12:30 US Unit Labor Costs (2Q) 1.5%
12:30 US Initial Jobless Claims (Sep) 330K
12:30 US Continuing Claims (AUG) 2575K
14:00 US ISM Non-manufacturing (AUG) 54.5
14:00 CA Ivey Purchasing Managers Index (AUG) 56.0
14:30 US DOE U.S. Crude Oil Inventories (AUG) -2200K
23:01 UK NIESR GDP Estimate (AUG) Prior 0.8%
23:30 AU AiG Performance of Construction Index (AUG) Prior 48.8

This and Next Week’s Highlights:

Date Region Release
7 Sep JN Leading Economic Index, Coincident Index
7 Sep GE Wholesale Price Index, Trade Balance, Current Account, Imports, Exports, Industrial Production
7 Sep SW Budget Balance, Riksbank Interest Rate
7 Sep NO Industrial Production, Industrial Production Manufacturing
7 Sep EC Euro-Zone OECD Leading Indicator
7 Sep CA Unemployment Rate, Net Change in Unemployment
7 Sep US Change in Nonfarm Payrolls, Unemployment Rate, Change in Manufacturing Payrolls, Average Hourly Earnings, Wholesale Inventories, Baker Hughes U.S. Rig Count
9 Sep NZ New Zealand House Prices, Producer Prices Input
9 Sep JN A string of GDP’s, Money Supply M2, Broad Liquidity, Bank Lending, ECO Watchers Survey
9 Sep AU Home Loans, Investment Lending, Foreign Reserves
10 Sep NO A string of CPI’s, Producer Prices,
10 Sep UK A string of PPI’s, DCLG UK House Prices,
10 Sep AU Australia Manpower Survey,
10 Sep US Consumer Credit
10 Sep JN Machine Orders


What's going on?

  • USD-Libor Rates spread over Fed’s Funds Rate continues to widen. The liquidity crunch is still an issue… and apparently growing. ECB stating that it may provide more liquidity tomorrow.
  • Terrible US figures yesterday: Pending Home Sales MoM out at the worst reading ever. Now at -15% YoY. Home Sales have been falling for two years. Challenger Job Cuts and ADP Employment Change indicating a beginning weakness in the US labor market.
  • EURUSD finally rallied towards the upper end of its range in the past two weeks. USDJPY looks weak again and could take another nose dive in the next week. A retest of 112 cannot be ruled out.
  • Four important data releases today: BoE and ECB Rate Announcements and US ISM Non-Manufacturing and Ivey PMI from Canada.


FX

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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 1.3551 1.3685 A break of resistance most likely with ECB rate decision coming up. The market is positioning for a no-hike decision. Best risk-reward being long. Buy at 1.3686 bid with a 30 pip stop and target 1.3750.
EURPLN 3.81 3.8306

Buy the break of resistance, stop offer at 3.8209. Target 3.85



MAJOR HEADLINES – PREVIOUS SESSION

  • SZ GDP (2Q) out at 0.7/%2.8% vs. 0.7%/2.4% expected.
  • E-Z PPI MoM/YoY (Jul) out at 0.3%/1.8% vs. 0.1%/1.7% expected. Prior at 0.1%/2.2%.
  • E-Z GDP QoQ/YoY (2Q P) out at 0.3%/2.5% as expected.
  • E-Z Gross Fix Cap (2Q P) out at -0.2% vs. 0.0% expected.
  • E-Z Household Consumption (2Q P) out at 0.5% as expected.
  • E-Z Govt. Expenditures (2Q P) out at 0.1% vs. 0.3% expected.
  • E-Z GDP Forecasts unchanged. Q4 expected at 0.2-0.8%, Q1 2008 at 0.2-0-9%.
  • US ISM Manufacturing (Aug) out at 52.9 vs. 53.0 expected. Prior at 53.8.
  • US ISM Prices Paid (Aug) out at 63.0 as expected. Prior at 65.
  • US Construction Spending MoM (Jul) out at -0.4% vs. 0.0% expected. Prior at 0.1% , revised from -0.3%.
  • UK Nationwide Consumer Confidence (Aug) out at 94 as expected. Prior at 96.
  • AU RBA Cash Target rate out unchanged at 6.50% as expected.
  • AU AiG Performance of Service Index (Aug) out at 51.6 vs. 56.0 prior.

While the markets nervously await the Thursday’s rate decision by ECB, the jittery carry trades continued to unwind through the Asian session with JPY well bid across the board, hitting a low of 115.65 against the USD and 231.94 against the GBP.

The USD was higher across the board, rallying against the Euro to a low of 1.3550, with gains being limited by slightly weaker than expected ISM figures. The manufacturing index, surveying the purchasing executives of roughly 300 industrial companies, came out at index value 52.9 vs 53 expected for the month of August, with the prior figure at 53.8.

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THEMES TO WATCH – UPCOMING SESSION

The proxy for the Non-Farm payrolls, the ADP report, will be released at 12:15 GMT and we expect this to attract some attention to the market players. However, as the report disappointed the market severely (at 48K vs. 80K expected) and was way off the real figure at 92K, we recognise that it should not be underestimated and will have some impact in the market. The pending home sales, released at 14:00GMT will be an important figure, where expectations currently is at -2.0 pct., but we could see the figure surprising to the downside, sending the USD offered against most other majors. We also expect the ISM-Service index tomorrow to fall short of expectations, following the manufacturing index lower. We still see a reading above 50, indicating that the sector still is expanding. Currently we are looking to sell USDCHF at 1.2092 offer, targeting the 1.20 figure with a stop bid at 1.2113.
The Canadian rates at 13:00 GMT will also be of importance. USDCAD has traded sideways for 3 weeks largely between 1.0470 and 1.0670 with the market uncertain where the next big trend will emerge. The technical picture shows a flat correction since June and with the 100-day MA still in decline (now at 1.0712) the downside remains vulnerable in the medium-term. Short-term fluctuations are reacting to changes in the oil price but the main focus is on the BoC announcement later, expected to hold steady at 4.5% in view of the liquidity crisis.
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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