Forex Daily Analysis - Tuesday, Sep 18th

FOMC Rate Decision Tonight


The market is pricing-in a 25 bps. rate cut. Some argue for a 50 bps. cut. The best outcome would in our opinion be 25 bps., but the USD might still sell off.

Overnight News Bullets

  • GE Wholesale Prices MoM (Aug) out at 0.1%. Prior -0.4%.
  • NO Trade Balance (Aug) out at 26.8B vs. 26.0B expected. Prior 26.1B.
  • NO Exports (Aug) out at 64.2B. Prior 61.1B.
  • NO Imports (Aug) out at 37.5B. Prior 35.0B.
  • E-Z Euro-Zone (July) Trade Balance out at 4.6B vs. 7.0B expected. Prior 7.8B
  • E-Z Euro-Zone (July) Trade Balance sa out at -0.6B vs. 4.0B expected. Prior 4.4B (revised from 5.2B)
  • PO Avg Gross Wages (August, MoM/YoY) out at -0.3%/10.5%/ vs -1.2%/9.7% expected. Prior 0.8%/9.3%.
  • PO Employment (August, MoM/YoY) out at 0.4%/4.8% vs. 0.3%/4.7% expected. Prior 0.3%/4.7%.
  • US (Sep) Empire Manufacturing out at 14.7 vs. 18.0 expected. Prior at 25.1.
  • CA (July) International Securities Transactions out at C$1.502 vs -C$1.500 expected. Prior -C$4.330 (revised from -C$4.521).
  • JN Tertiary Industry Index MoM (July) out at -0.5% vs -0.5% expected. Prior 0.1%.

O/N Data Heat map:

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


Calendar

Today's Highlights:

Time (GMT) Region Release Consensus
07:15 SZ Industrial Production QoQ/YoY (2Q) 5.2% / 8.3%
07:30 SW GDP QoQ/YoY (2Q) 1.0% / 3.6%
08:30 UK CPI MoM/YoY (AUG) 0.4% / 1.9%
08:30 UK CPI Core YoY (AUG) 1.8%
08:30 UK Retail Price (AUG) 207.0
08:30 UK RPI MoM/YoY (AUG) 0.5% / 4.0%
09:00 GE ZEW Survey Econ. Sentiment (SEP) -17.0
09:00 GE ZEW Survey Current Situation (SEP) 75.0
09:00 EC ZEW Survey Econ. Sentiment (SEP) -15.0
12:30 US Producer Price Index MoM (AUG) 3.2%
12:30 US PPI Ex. Food and Energy MoM/YoY (AUG) 0.1% / 2.2%
13:00 US Net Long-term TIC Flows (JUL) $100.0B
13:00 US Total Net TIC Flows (JUL) $60.0B
17:00 US NAHB Housing Market Index (SEP) 20
18:15 US FOMC Rate Decision (SEP) 5%
21:00 US ABC Consumer Confidence (SEP) Prior -17

This and Next Week’s Highlights:

Date Region Release
19 Sep AU Wespac Leading Index
19 Sep JN BoJ Target Rate, Coincident Index, Leading Economic Index, Nationwide Department Sales, Tokyo Department Sales, BoJ Monthly Report
19 Sep GE Producer Prices
19 Sep SZ Adjusted Real Retail Sales
19 Sep UK Bank of England Minutes
19 Sep US MBA Mortgage Applications, a string of CPI’s, Housing Starts, Building Permits, DOE U.S. Crude Oil Inventories
19 Sep CA A string of CPI’s,
19 Sep NZ Current Account Balance, Current Account %GDP,
19 Sep JN BSI Large All Industry, BSI Large Manufacturing
20 Sep AU HIA New Home Sales, Reserve Bank Bulletin, RBA Foreign Exchange Transactions
20 Sep SZ Trade Balance, Producer & Import Prices, ZEW Survey Expectations,
20 Sep UK Retail Sales, Public Finances, Public Sector Net Borrowing, UK CBI September Industrial Trends
20 Sep EC Construction Output
20 Sep US Initial Jobless Claims, Continuing Claims, Leading Indicators, EIA Natural Gas Storage Change, Philidelphia Fed
20 Sep NZ NZ Tax Receipts for July


What's going on?

  • GBP continues to weaken. CEBR says bonuses in London will drop 15%. That may be too conservative.
  • The really, really big event these days will be the FOMC Decision tonight. We believe the Fed will cut rates by 25 bps. More would signal a quite bearish view on the economy and would likely be counter-productive. Less would signal a careless attitude to the current turmoil and would lead to large sell-offs in the Financials.
  • The USD likely getting hit by a rate cut. With GBP also weakening, we could see another leg lower in the Carry Trades.


FX

USD coming back a bit, but still at risk of a sell-off after the FOMC Rate Decision tonight.

MAJOR HEADLINES – PREVIOUS SESSION

  • GE Consumer Price Index MoM/YoY (Aug F), out at -0.1%/1.9% vs. -0.1%/1.9% exp. -0.1%/1.9% prior.
  • GE CPI – EU Harmonised MoM/YoY (Aug F), out at -0.1%/2.0% vs. -0.1%/2.0% exp. -0.1%/2.0% prior.
  • FR Current Account (Jul), out at -2.2M vs. -2.0M prior.
  • IT Industrial Production MoM/YoY (Jul), out at -0.4%/2.4% vs. 0.1%/1.5% exp. -0.5%/-0.1% prior.
  • E-Z Euro-Zone CPI MoM/YoY (Aug), out at 0.1%/1.7% vs. 0.1%/1.8% prior. -0.2%/1.8% prior.
  • E-Z Euro-Zone CPI-Core YoY (Aug), out at 1.9% vs. 1.9% exp. 1.9% prior.
  • US Current Account Balance (2Q), out at -$190.8B vs. -$190.0B exp. -$192.6B prior.
  • US Import Price Index MoM/YoY (Aug), out at -0.3%/1.9% vs. 0.2%/- exp. 1.5%/0.7% prior.
  • US Advance Retail Sales (Aug), out at 0.3% vs. 0.5% exp. 0.3% prior.
  • US Retail Sales Less Autos (Aug), out at -0.4% vs. 0.2% exp. 0.4% prior.
  • US Industrial Production (Aug), out at 0.2% vs. 0.3% exp. 0.3% prior.
  • US Capacity Utilization (Aug), out at 82.2% vs. 82.0 exp. 81.9% prior.
  • CA Manufacturing Shipments (Jul), out at 2.3% vs. 1.0% exp. -1.8% prior.
  • CA Labor Productivity (2Q), out at 0.2% vs. 0.4% exp. 0.7% prior.
  • US U. of Michigan Confidence (Sep P), out at 83.8 vs. 83.5 exp. 83.4 prior.
  • US Business Inventories (Jul), out at 0.5% vs. 0.3% exp. 0.4% prior.
  • US Baker Hughes U.S. Rig Count (Sep 14), out at 1787 vs. 1814 prior.

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THEMES TO WATCH – UPCOMING SESSION

With the Friday's core Retail Sales figures for August showing a regression of -0.4% versus an expectation of a 0.2% growth, the U.S. dollar weakness continues to linger ahead of Tuesday's pivotal rate decision meeting by FOMC. The market expectations lean towards a 25 bp rate cut from the current 5.25% with a smaller group of surveyed analysts expecting a 50 bp cut.

EURUSD continues to hover around the all-time high of 1.3927 and trades in a range of 1.3845-3905. Major resistance levels to be tested post-FOMC meetings is in the zone of 1.3950-80 and further up around the major barrier of 1.4000. On the downside, immediate support is seen around 1.3855-45 area and further support around 1.3800 level. We prefer the upward breaks, but will be observing the market action closely after the FOMC rate announcement to get clear technical signs on a move to either direction. Monday is a public holiday in Japan and this has thus far kept the yen fairly subdued with the USDJPY contained in a tight range of 114.70-115.38.

News last Friday that Britain's financial authorities had stepped in to rescue U.K.'s forth largest mortgage bank Northern Rock refueled the fears of a wider spread of the credit crisis and dragged the value of Sterling down. We expect the U.K. economy to suffer most after the U.S. economy from the on-going subprime woos and with the benchmark rates having already peaked in the U.K. at 5.75%, Sterling is set to further depreciate against currencies, such as NOK, that are buoyed by strong growth rates and are more insulated from the credit crises fallout.

For the day, we have played the Sterling against Yen, and have gone short at 230.78 offer, targeting 228.25. We have taken half of our position off at 230.28 and have moved our stop to 230.1 bid for the remainder of the position.

USDJPY to break lower on the FOMC Rate Decision

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EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN
+ - - - + +

FX Trading Strategies

Pair Supp. Resis. Comments
USDJPY 114 116.50 We have a signal to short USDJPY at 114.65. So we placed an
order to sell at 114.65 stop offer, we leave our target open, but look
for test of 114.00 intra-day. Stop at 114.81 bid.
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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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