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ECB Preview; Euro Rallies Post Event Risk Should be Sold Aggressively

2011-10-06T15:26:00.003+08:00

DailyFX Home / Forex Market News / Daily Briefings / Opening Comment

By Joel Kruger, Technical Strategist

Very little upside seen to risk rally of past few sessions
Market participants continue to look for guidance and direction from officials
European Central Bank rate decision critical event risk for Thursday trade
Irrespective of decision, we project additional Euro weakness
Technical studies continue to steer us in the right direction; eyeing Eur/Usd 1.2000

The overall state of the markets into Thursday has been rather subdued, with very little upside follow through from Tuesday and Wednesday’s risk sentiment rally. While short-term technical studies have been warning of the need for a more sizeable correction in favor of currencies, the fact remains that we are in a strong underlying risk downtrend which should continue to limit any corrective rallies. On the fundamental front, the eurozone crisis is at the center of all that is wrong with the global macro economy right now, and as such, ongoing developments in the region will continue to play a major role in the direction of markets. With this in mind, today’s European Central Bank rate decision is at the top of the list as far as market moving event risk is concerned, and everyone will be looking for some much needed guidance and insight from the ECB.

Still, we see a similar pattern and market reaction to the ECB as we had seen with the Fed in preceding months. To us, the question is not whether the Euro rallies or not in response to the fallout of the rate decision, rather, if the Euro does in fact rally at all, how long it will be before the beleaguered currency inevitably comes under renewed pressure? In previous months, whenever we saw the Fed respond with additional accommodative measures to monetary policy, the initial reaction would be risk positive on the appreciation from the market that the Fed was doing what they could to help make things easier. But eventually markets would realize that the accommodative measures were being implemented on account of just how bad things really were, and that this ultimately was a risk negative event which led to a more aggressive and offsetting risk liquidation.

We therefore anticipate a similar market reaction to the ECB later today. Market participants are desperately seeking some form of guidance and assurance from officials that there is a clear and definable plan in place to help Europeans get through the twin sovereign debt and banking crisis. But, at the end of the day, we don’t believe that there is any full proof solution at this point which will be able to inspire resurgence in risk appetite and renewed demand for the Euro currency.

It seems as though the best of outcome for the Euro would be an ECB that does nothing on rates, says they are exploring all options, while extending the LTRO beyond a year. However, while on the surface this would be interest rate differential positive for the Euro, investors would likely aggressively sell any rallies, with the decision intensifying fears that the central bank does not want to fully acknowledge or deal with a very severe and dire situation that demands a much more aggressive accommodative response, at the risk of European economic collapse.

On the other hand, if the European Central Bank goes in the other direction and cuts rates at today’s meeting, we could in fact see an initial Euro rally on the news, despite the on the surface Euro negative interest rate differential implication. Market participants would most likely welcome the central bank’s resolve in recognizing that they need to be more aggressive with alternative forms of monetary policy accommodation, and take it as a positive risk sign in that the crisis is being dealt with more appropriately, to help stimulate economic growth. But at the end of the day, these rallies should eventually also be aggressively sold, with the altered policy response showing just how far behind the curve the ECB might be and how much ground they will now need to scramble to cover to have any effective impact on the economic welfare of the eurozone. Interest rate differentials will then narrow back in favor of the US Dollar and peripheral bond spreads could in turn widen out to fresh record levels.

As technicians, we continue to defer to the longer-term Eur/Usd chart which has proven to be the best predictor of price action in recent months. The monthly chart shows the clear formation of a lower top just under 1.5000, with fresh downside projected down towards the 1.2000 area over the medium-term. As such, we see a perfect synthesis in our techno-fundamental outlook and recommend continuing to look to sell the Euro aggressively on rallies, whatever the result of today’s ECB policy decision, in anticipation of deeper setbacks ahead. As far as broader markets are concerned, we believe this should translate into weakness across all currencies (including the Yen), strength in the US Dollar, lower equities, lower oil, and higher gold.

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Australian, New Zealand Dollars Maintain Two-Day Rally as Stocks Advance

2011-10-06T15:24:00.001+08:00

By Candice Zachariahs and Mariko Ishikawa - Oct 6, 2011 3:07 PM GMT+0800

The Australian and New Zealand dollars held a two-day gain versus the U.S. currency as Asian stocks extended a worldwide rally, increasing demand for higher- yielding assets.

Both South Pacific currencies were supported after German Chancellor Angela Merkel said yesterday she’s ready to discuss possible recapitalization of European banks at a European summit this month. The International Monetary Fund renewed its call for theEuropean Central Bank to step up its response to the region’s debt crisis if it continues to threaten growth and destabilize financial markets.

“The crazy jigsaw that is the European debt debacle is starting to see a plan bubbling around in the background and that should be positive for risk,” said Chris Weston, an institutional dealer at IG Markets in Melbourne. “Hopefully we’ll see some further measures from the ECB and that should be good for the euro and also help the Aussie push upward.”

Australia’s dollar traded at 96.78 U.S. cents at 5:49 p.m. in Sydney from 96.59 in New Yorkyesterday, when it rose 0.9 percent. The currency fetched 74.26 yen from 74.17. New Zealand’s dollar bought 76.68 U.S. cents after advancing 0.8 percent to 76.62 yesterday. It was little changed at 58.84 yen.

The MSCI Asia Pacific Index of stocks rose 2.8 percent, snapping four days of declines. The Standard & Poor’s 500 Index climbed 1.8 percent yesterday while the Thomson Reuters/ Jefferies CRB Index of raw materials advanced 1.9 percent.

European Banks

The German chancellor said she supports recapitalizing European banks “if there is a joint assessment that the banks aren’t adequately capitalized” and finance officials develop “uniform criteria.”

The IMF said in its biannual regional economic outlook for Europe that a “significant number” of euro-region banks should be strengthened as they lack sufficient capital buffers.

Benchmark interest rates are 4.75 percent in Australia and 2.5 percent in New Zealand, compared with as low as zero in the U.S. and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

The Aussie has dropped 3.3 percent in the past month, the second-worst performer among 10 developed nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. New Zealand’s currency has fallen 2.1 percent.

U.S. Jobs

“The market was oversold so we’ve seen a rally in the Aussie and kiwi with lots of exporters coming in at the lows,” said Tim Kelleher, Auckland-based head of institutional foreign- exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. “We’d be sellers on rallies expecting more equity weakness later in the week.”

The MSCI World (MXWO) Index of stocks has dropped 9.1 percent since Aug. 31 amid concerns that U.S. economic growth will slow and Europe’s debt crisis will worsen.

Gains in the Australian and New Zealand dollars were limited before the U.S. Labor Department releases its employment report tomorrow.

U.S. employment climbed by 59,000 workers in September and the jobless rate was unchanged at 9.1 percent, according to the median forecast of economists surveyed by Bloomberg News. Employment was unchanged in August, the report showed last month, compared with the median forecast for a 68,000 gain.

“We will see a cap on gains in riskier assets like the Australian dollar heading into the U.S. payrolls number,” said Tim Waterer, a foreign-exchange dealer at CMC Markets in Sydney. “The last payroll number disappointed and that brings back into focus the weakness in the U.S. economy.”

Australia’s 10-year bond yield increased 10 basis points, or 0.1 percentage point, to 4.17 percent, rising for a second day. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates which is sensitive to interest-rate expectations, gained two basis points to 3.05 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney atczachariahs2@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

Euro Rallies Vs Yen as G-20 Signals Response

2011-09-23T11:18:00.003+08:00

By Candice Zachariahs and Kristine Aquino - Sep 23, 2011 11:02 AM GMT+0800

The euro maintained a rally fromits lowest level in a decade against the yen after the Group of20 nations pledged a “strong and coordinated” response tochallenges facing the global economy.

The 17-nation currency rebounded from an eight-month lowversus the dollar as Bank of France Governor Christian Noyersaid the nation’s banks are able to handle a default by Greece.The yen was still set for a weekly advance against all 16 majorpeers as Asian stocks slid. The dollar pared weekly gains versusits most-traded counterparts before meetings of theInternational Monetary Fund and World Bank.
If the G-20 statement “is enacted, that’s a major,important step and that could provide a floor for risk appetiteand for confidence,” said Callum Henderson, global head offoreign-exchange research in Singapore at Standard Chartered Plc.“The good news is the euro is not collapsing.”

The euro gained to 103.28 yen at 12:02 p.m. in Tokyo from102.64 in New York yesterday. The shared currency yesterday fellas low as 102.22, the least since 2001. It rose to $1.3539 from$1.3465 yesterday, when it reached $1.3385, its lowest since Jan.19. Japan’s currency traded at 76.32 per dollar from 76.24.
Finance chiefs from the G-20 nations said they will address“renewed challenges” facing the slowing global economy in astatement released after talks in Washington.

The officials said they are “committed to a strong andcoordinated international response to address the renewedchallenges facing the global economy, notably from heighteneddownside risks from sovereign stresses, financial systemfragility, market turbulence, weak economic growth andunacceptably high unemployment.”

To contact the reporters on this story:Kristine Aquino in Singapore at kaquino1@bloomberg.net;Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story:Garfield Reynolds at greynolds1@bloomberg.net

Australian, New Zealand Dollars Advance as IMF, World Bank Hold Meetings

2011-09-23T11:17:00.001+08:00

By Masaki Kondo - Sep 23, 2011 9:20 AM GMT+0800

The Australian and New Zealanddollars rebounded from their lowest levels in more than fivemonths as policy makers gather in Washington for annual meetingsof the International Monetary Fund and World Bank.
The so-called Aussie gained versus most of its 16 majorcounterparts after U.K. Prime Minister David Cameron and fiveother leaders of Group of 20 nations urged French PresidentNicolas Sarkozy to use his chairmanship of the body to findagreement on actions to boost the global economy. New Zealand’scurrency rose against the yen for the first time this week as atechnical indicator signaled currency losses were too rapid.
“Traders tend to speculate around meetings, particularly”when major leaders are involved, said Kara Ordway, a foreign-exchange strategist at City Index Asia Pacific in Sydney. “I dothink this will be a catalyst for them, combined with such bigmoves overnight, to cover their short positions.”
Australia’s dollar rose to 98.24 U.S. cents at 11:18 a.m.in Sydney from 97.42 cents in New York yesterday, when ittouched 96.92 cents, the lowest since Dec. 2. It jumped 0.9percent to 74.91 yen. New Zealand’s currency advanced to 78.68U.S. cents from 78.05 cents after sinking to 77.53 centsyesterday, a level unseen since April 12. The so-called kiwiclimbed 0.8 percent to 60 yen.
“We need decisive action to support growth, confidence,and credibility,” Cameron, along with the leaders of Australia,Canada, Indonesia, South Korea and Mexico wrote to Sarkozy inthe letter released by the U.K. prime minister’s office. “Wehave not yet mastered the challenges of the crisis.”

‘More Force’

U.S. Treasury Secretary Timothy F. Geithner yesterday saidEurope will act “with more force” to combat the debt crisisthreatening global growth. He spoke as finance ministers andcentral bankers from the G-20 nations gather for a three-daymeeting of the IMF and World Bank, which will end on Sept. 25.
The New Zealand dollar’s 14-day relative strength indexversus the yen slid to 22.7 yesterday, below the 30-level thatsome traders see as signaling an asset’s price may reversedirection after falling too rapidly.
The Aussie and kiwi were headed for their biggest weeklylosses in 16 months as stocks tumbled globally, sapping demandfor higher-yielding currencies.
“During this kind of risk-off period that we’re seeing,the Aussie and kiwi are traders’ favorite risk currencies tosell,” said City Index’s Ordway. “People are realizing thatthe U.S. and Europe are staring at recession in the face, and Iguess moving on from that, what people are now worried about isthat we’ll see a bigger slowdown in Asia.”

Weekly Slumps

The MSCI Asia Pacific excluding Japan Index dropped 0.9percent today, set for a 9.2 percent slump this week, the worstfive-day performance since November 2008. Japan’s financialmarkets were closed today for a national holiday.
The Australian dollar has retreated 5.7 percent versus theyen since Sept. 16, while the New Zealand currency has slumped5.5 percent during the period. They were the biggest weeklydeclines since May 2010.
Yields on Australia’s 10-year bonds fell below 4 percentfor the first time since January 2009. New Zealand’s two-yearswap rate, a fixed payment made to receive floating rates basedon three-month bill rates, slid to 3.015 percent, the lowestsince at least 1993 when Bloomberg started collecting the data.Swaps are often used to speculate on changes in interest rates.
To contact the reporter on this story:Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story:Garfield Reynolds at greynolds1@bloomberg.net.

Post Euro Declines for Third Day Versus Dollar After S&P Lowers Italy’s Ratingstle

2011-09-20T13:52:00.000+08:00

By Kristine Aquino and Candice Zachariahs - Sep 20, 2011 12:44 PM GMT+0800

The euro fell for a third day against the dollar after Standard & Poor’scut Italy’s credit rating, adding to concern Europe’s worsening debt crisis will raise borrowing costs for countries in the region.

The 17-nation euro extended declines versus the yen into a third day before Greece resumes discussions with its creditors over the next installment of rescue funds. The dollar gained versus most major peers before the Federal Reserve’s policy meeting today. Australia’s dollar held losses even after the Reserve Bank said it was “well placed” to respond to economic risks. South Korea’s won dropped to its weakest this year as a slump in Asian stocks curbed demand for emerging-market assets.

““We’re going to see the euro continue to come under pressure,” said Chris Weston, an institutional trader at IG Markets in Melbourne. “One of the big things we’re very concerned with is what’s going to happen with Italian borrowing costs and this could see some further selling of bonds.”

The euro slid to $1.3607 as of 1:19 p.m. in Tokyo from $1.3686 in New York yesterday. It declined to 104.11 yen from 104.82. The dollar bought 76.52 yen from 76.58.

The MSCI Asia Pacific index of shares declined 1.1 percent. The Standard & Poor’s 500 index lost 1 percent yesterday and the Stoxx Europe 600 index slumped 2.3 percent.

The rating for Italy, which has Europe’s second-largest debt load, was lowered to A from A+, S&P said yesterday in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

‘Weakening’ Prospects

“Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. The European Central Bank last month started buying Italian and Spanish government bonds after the region’s debt crisis pushed their yields to euro-era records.

Greek Prime Minister George Papandreou’s government will hold another call with European Union and International Monetary Fund officials tonight in a bid to secure a sixth installment of rescue funds, amid concern the austerity measures demanded are deepening a three-year recession and making it harder for the government to meet its deficit goals.

Finance Minister Evangelos Venizelos held “substantive” discussions with the officials, the finance ministry said in an e-mailed statement after a teleconference last night.

‘Selling Into Rallies’

“I’d be selling into rallies in the euro,” said Richard Grace, the Sydney-based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “The conditions of receiving the payment are that Greece implements austerity measures and it looks like they’re having difficulty doing that. The implication is the next tranche is withheld.”

Papandreou is considering holding a referendum on whether his nation should remain in the common currency, the Kathimerini newspaper said, citing people it didn’t name. A bill to set up a referendum on the euro may be submitted to parliament and discussed in the coming days, the Greek newspaper said.

Fed Policy

The dollar held on to its advance versus most of its major counterparts before Fed officials begin a two-day meeting today.

Fed policy makers may decide to replace some of the short- term Treasuries in the central bank’s $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists at Wells Fargo & Co., Barclays Plc and Goldman Sachs Group Inc. Some analysts dub the maneuver Operation Twist because it would bend long-term yields lower.

The Fed may go further by also reducing the interest rate paid on reserves, according to Adrian Foster, head of financial- market research for Asia at Rabobank Groep NV in Hong Kong.

“Everyone is worried about all the risks, so this time around when we see a central bank actually taking more aggressive action than the average market expectation, you may get a bit of a boost to the dollar,” Foster said.

The yen strengthened against all of its 16 most-traded peers. Japan’s trade minister Yukio Edano said the country will deal with any speculative currency moves.

RBA Minutes

The Reserve Bank of Australia said it was well positioned to respond to global and domestic economic risks or the threat of an acceleration of inflation, according to minutes of a Sept. 6 meeting at which policy makers kept its cash target unchanged at 4.75 percent.

“Members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions,” the minutes showed.

The so-called Aussie slid to $1.0202 from $1.0222 yesterday. It earlier fell to as low as $1.0149, its weakest level since Aug. 11. It fetched 77.99 yen from 78.29, after earlier losing as much as 0.7 percent.

South Korea’s won and Malaysia’s ringgit reached 2011 lows as Asian stock losses and the European debt crisis damped demand.

“Risk aversion has gone to the next level and the losses are justified given that European officials have not been able to reassure the markets on the default risk,” said Suresh Kumar Ramanathan, a strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “Asian assets are getting sold off in favor of cash.”

The won dropped 1.6 percent to 1,155.78 per dollar after earlier touching 1,156.50, its lowest level since Dec. 22, according to data compiled by Bloomberg. Malaysia’s ringgit retreated 0.5 percent to 3.1380 per dollar. It earlier dropped to as low as 3.1425, the weakest since Dec. 21.

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

Asia Currencies Drop to Six-Month Low on Europe Debt Woes, Growth Concern

2011-09-20T13:50:00.005+08:00

By Yumi Teso - Sep 20, 2011 10:27 AM GMT+0800

Asian currencies weakened, with South Korea’s won and Malaysia’s ringgit reaching 2011 lows, on concern Europe’s worsening debt crisis will spur an exodus from emerging-market assets.

The Bloomberg-JPMorgan Asia Dollar Index fell to a six- month low after Italy’s credit rating was cut one level to A by Standard & Poor’s. Reports this week will show growth in Taiwan’s export orders, an indication of shipments in the next one to three months, slowed in August and Thailand’s overseas sales increased by less than the previous month, according to economists surveyed by Bloomberg.

The won dropped 1 percent to 1,148.68 per dollar as of 10:54 a.m. in Seoul, according to data compiled by Bloomberg. Indonesia’s rupiah declined 0.3 percent to 8,988, Thailand’s baht fell 0.4 percent to 30.61 and the Philippine peso slipped 0.3 percent to 43.612. Malaysia’s ringgit retreated 0.2 percent to 3.1300.

“Risk aversion has gone to the next level and the losses are justified given that European officials have not been able to reassure the markets on the default risk,” said Suresh Kumar Ramanathan, a currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. “Asian assets are getting sold off in favor of cash.”

The Asian Development Bank cut its 2011 growth forecast for Asia excluding Japan to 7.5 percent from an April estimate of 7.8 percent, according to a report issued on Sept. 14. Global funds sold $2.9 billion more Indonesian, South Korean and Taiwanese equities than they bought this month through yesterday, exchange data show.

Market Monitoring

The rupiah has weakened more than 5 percent this month and dropped below the 9,000 per dollar level for the first time since February today. Indonesia is preparing a stimulus package that it may implement in the first half of 2012 should the global economy deteriorate and hurt growth, the government said Sept. 15.

South Korea’s financial regulator will strengthen market monitoring and take additional stabilization steps if needed, the Financial Services Commission said today. The regulator is watching stock market volatility and rapid outflow of overseas funds, it said in an e-mailed copy of a report submitted to parliament. The commission will regularly review whether banks are meeting foreign-currency liquidity guidance and limits on foreign-currency forward contracts, it said.

The currency market has reacted “excessively” to concerns about the global economy, Deputy Finance Minister Choi Jong Ku said today.

‘Safe-Haven Demand’

“Italy’s credit rating cut is boosting safe-haven demand in the market,” said Kim Ji Myoung, a currency trader at Korea Development Bank in Seoul. “Currency declines will depend on the amount of government intervention and exporters’ selling dollars to convert income.”

Thailand’s baht dropped for an 11th day, the longest losing streak since June 2008. The currency touched the weakest level in more than two months before a report that’s expected to show export growth slowed to 27.4 percent in August from 38.3 percent in July, according to the median estimate of economists in a Bloomberg survey.

“Europe’s crisis is spurring sales of riskier assets such as stocks and emerging-market currencies,” said Tohru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo. “Asia will be hit through exports as Europe is a major buyer of goods from here. The region’s currencies will remain under downward pressure for the time being.”

Elsewhere, Taiwan’s dollar dropped 0.4 percent to NT$29.892 against the greenback, according to Taipei Forex Inc. China’s yuan was little changed at 6.3873 and Vietnam’s dong declined 0.1 percent to 20,832.

To contact the reporter on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

Canada Dollar Gains for First Time in Three Days as Oil Near 29-Month High

2011-03-24T22:55:00.002+08:00

By Alexandra Harris - Mar 24, 2011 10:09 PM GMT+0800

Canada’s dollar strengthened against its U.S. counterpart for the first time in three days as crude oil, the nation’s biggest export, traded at almost the highest level in 29 months.

The Canadian currency rose versus most major peers as speculation Portugal will get an international bailout bolstered confidence in the economic outlook, spurring demand for higher- yielding assets. Elections became more likely in Canada after Michael Ignatieff, an opposition leader, said yesterday his Liberal party will introduce a non-confidence motion in the government tomorrow.

“The market has the feel that risk is on,” said C.J. Gavsie, managing director for foreign exchange trading at Bank of Montreal’s BMO Capital Markets unit in Toronto. “Higher oil pricesare going to lead the Canadian dollar today.”

Canada’s currency, also known as the loonie for the image of the aquatic bird on the C$1 coin, gained 0.5 percent to 97.66 cents per U.S. dollar at 10:07 a.m. in Toronto, from 98.16 cents yesterday. One Canadian dollar buys $1.0240.

Crude oil for May delivery advanced as much as 0.9 percent to $106.69 per barrel in New York as U.S. and allied warplanes carried out further strikes against Muammar Qaddafi’s ground forces in Libya. Oil touched $106.95 a barrel, the highest level since September 2008, on March 7.

Stocks rose, with the Standard & Poor’s Index gaining 0.3 percent and the MSCI World (MXWO) Index of equities up 0.4 percent.

Loonie Versus Euro

The loonie appreciated 0.2 percent to C$1.3805 per euro as Portugal moved closer to needing external aid after Prime Minister Jose Socrates’s offer to resign left his government in limbo as a European Union summit opens on the region’s debt crisis. A bailout of Portugal may total as much as 70 billion euros ($99 billion), according to two European officials with direct knowledge of the matter.

Leaders of Canada’s three opposition parties said C$7.6 billion ($7.7 billion) in new measures announced March 22 by Finance Minister Jim Flaherty in his budget presentation weren’t enough to warrant their support. Opposition lawmakers hold a majority of seats in the House of Commons.

Gilles Duceppe, leader of the Bloc Quebecois, and Jack Layton of the New Democratic Party told reporters in Ottawa they will support the Liberal non-confidence motion.

Harper, speaking yesterday to reporters in Ottawa, said Canada’s economy is not a political game and the opposition’s rejection of the budget will hurt the nation.

Political ‘Noise’

“The market will treat any political development as noise,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. “It’s hard to see the political situation dislodge the Canadian dollar.”

Shorter-term Canadian government bonds fell, pushing the yield on the two-year note up two basis points, or 0.02 percentage point, to 1.70 percent. The price of the 1.75 percent security maturing in March 2013 decreased 4 cents to C$100.10.

The number of Canadians receiving jobless benefits fell for the sixth time in seven months in January, Statistics Canada said. The number of regular beneficiaries declined 2 percent to 640,150. It dropped 9.2 percent from the same time a year ago.

To contact the reporter for this story: Alexandra Harris in New York ataharris48@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Euro Gains Versus Dollar on Summit Outlook, ECB Rate Increase Speculation

2011-03-24T22:53:00.003+08:00

By Allison Bennett and Emma Charlton - Mar 24, 2011 9:48 PM GMT+0800

The euro advanced against the dollar for the first time in three days as European Union leaders began a two-day meeting on measures to contain the region’s sovereign debt crisis.

The 17-nation currency gained against the yen as speculation the European Central Bank is poised to raise borrowing costs outweighed fiscal turmoil. The euro fell earlier against the dollar and yen as Moody’s Investors Service cut the ratings of 30 Spanish banks and after Portugal’s Prime Minister Jose Socrates resigned yesterday. Currencies linked to commodities surged as raw material prices rallied as allied forces intensified attacks in Libya.

“The euro is in a tug-of-war between relatively strong economic data and the pretty strong belief that the ECB will raise rates soon against the lingering unresolved sovereign debt crisis,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “The European economic data continues to show strength in the core, which gives the market an enormous amount of confidence that the ECB will raise rates. The euro is really trading right now off interest rate differentials.”

The euro appreciated 0.3 percent at $1.4123 at 9:43 a.m. in New York, from $1.4088 yesterday, erasing a 0.2 percent drop. The euro touched $1.4249 on March 22, matching the level on Nov. 5. The currency appreciated 0.3 percent to 114.30 yen, from 114 yen, after declining 0.4 percent. The dollar was at 80.93 yen, compared with 80.92.

Economic Data

The dollar remained lower against the euro after U.S. government reports showed durable goods unexpectedly declined in February and jobless claims declined last week.

The Dollar Index, which tracks the currency against six major trading partners was little changed at 75.819 as two European officials said a bailout for Portugal may total as much as 70 billion euros ($99 billion). The gauge is weighted 57.6 percent to movements in the euro.

Portugal hasn’t asked for a bailout and the figures are preliminary, the officials said. The action would follow Greece and Ireland’s request of aid from the European Union and theInternational Monetary Fund.

Greece accepted a $110 billion-euro aid package from the EU and IMF in May 2009 and Ireland accepted an 85 billion-euro bailout fund in November.

Economic Size

Portugal made up about 1.8 percent of the total 17-nation euro-zone gross domestic product in the fourth quarter last year, according to Eurostat, the European Union’s statistics office, and Bloomberg data, while Ireland accounts for 1.8 percent and Greece makes up 2.3 percent.

Spain, which investors have also speculated may need a bailout, accounts for 10.1 percent of the region’s gross domestic product. Germany, the largest member, contributes 30 percent to the area’s economy and France, the second-largest nation, accounts for 21 percent of GDP.

“The European leaders are gradually putting in place the right measures to try to stabilize the debt problem in Europe, and that is helping to ease some of the downside risks and encouraging longer-term investors,” said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. inLondon. “Euro-dollar is likely to try to grind higher.”

Spanish Banks

Moody’s cut the ratings of 30 Spanish banks by at least one step after Spain’s sovereign downgrade, the company said in an e-mailed statement today.

Spain, whose credit rating was lowered to Aa2 by Moody’s on March 10, is implementing the deepest austerity measures in at least three decades to convince investors it can bring its debt burden under control.

The pound weakened 0.5 percent to $1.6153 as a report showed U.K. retail sales dropped in February more than economists forecast after a surge in the previous month, when shoppers boosted spending to beat a tax increase.

Sales fell 0.8 percent last month after an increase of 1.5 percent in January, the Office for National Statistics said. The median forecast of 24 economists in a Bloomberg News survey was for a 0.6 percent drop.

New Zealand’s dollar advanced against all of its major counterparts after the government said the economy grew in the fourth quarter, avoiding a recession. New Zealand’s currency jumped 0.9 percent to 74.75 U.S. cents and rallied 1 percent to 60.51 yen.

New Zealand Growth

Gross domestic product expanded 0.2 percent in the three months ended Dec. 31 after contracting 0.2 percent in the previous quarter, Statistics New Zealand said. The median forecast of 14 economists was for a 0.1 percent increase.

“The GDP report has been taken well by the market, which was nervous about a negative number,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The kiwi will do reasonably well against the U.S. dollar as risk appetite is proving to be quite resilient.”

The Canadian dollar and Norwegian krone rose against the dollar as crude oil advanced for a fourth day amid heightened concerns about Middle East exports.

Canada’s currency rose 0.5 percent to 97.70, from 98.16 cents, as crude oil in New York jumped as much as 0.9 percent to $106.45 a barrel. The krone advanced 0.5 percent to 5.5842 per dollar.

To contact the reporter on this story: Allison Bennett in New York atabennett23@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Forex Weekly Trading Forecast - 03.20.11

2011-03-20T14:33:00.002+08:00

US Dollar: Why is the Currency at 2009 Lows With Risk Aversion Rising?

By John Kicklighter, Currency Strategist

Fundamental Forecast for the US Dollar: Bullish

The FOMC deviates from the ECB’s hawkish turn, keeps a neutral bearing and tone
Despite a clear swell in risk aversion, the dollar is struggling to gain a footing in its safe have role
A coordinated G7 effort to depress the yen could lift the dollar; but will intervention work?
Dollar’s recovery was curbed but has it technically failed?

The US dollar did not end this past week in a good position. In fact, the trade-weighted dollar index actually broke a blatant three-year rising trendline and subsequently closed at its lowest levels since December 2009. Looking at the trend from the greenback alone over the past two months, this development may not seem so surprising. However, when we line this progress up against the fundamental developments over the past week; this breakdown comes as something of a shock. Why is the traditionally safe haven greenback falling when there was a meaningful tumble in investor sentiment this past week? There are two considerations here. On the one hand, this could speak to another phase of the currency’s fall from favor in currency circles. Alternatively, this could also be a reflection of very unique and otherwise temporary fundamental developments. Regardless, determining the dollar’s performance to this point is critical to understanding what direction it takes going forward.

First, we should start with the pessimist’s view. An uncomplicated assessment of the dollar’s slide to new lows is fitting to many traders and analysts as the greenback has been steadily losing its dominance as the world’s reserve currency and it will continue to do so through the future. That said, have expectations for the dollar really collapsed to the point that its liquidity is no longer a point of safety for the international investors looking to avoid a global liquidity crisis? Unlikely. Sure the dollar is losing its place as the most traded currency and its potential for return is in a word ‘lackluster’; but the need for liquidity during panics rises above such speculation. What’s more, the fact that a considerable amount of US capital founded or otherwise supported by Fed stimulus was invested outside the nation’s markets means there is a wave of funds that can lift the dollar through repatriation or risk aversion.

So, if the dollar is still a viable risk aversion currency, why is the currency still falling off while benchmarks for investor sentiment like the S&P 500 pitch into a meaningful reversal? This can be partially attributed to how we are analyzing its health. The Dollar Index by its very composition is primarily a reflection of EURUSD (the most liquid currency pair in the FX market by far) and USDJPY. Yet, with both of these, we have very unique fundamental considerations. For the yen-based cross, the situation is very unusual. The devastating earthquake Japan suffered on March 11th has contributed to uncertainty on a global scale; but it has also encouraged a carry unwinding and a repatriation effort. These drivers will hold wind for only so long however; and the multilateral intervention effort to boost USDJPY from the G7 certainly will help. The strength of the EURUSD advance is similarly dubious. The ECB has sounded the alarm that a rate hike could be on the slate for next month – which has blinded speculators. On the other hand, it is very unlikely this will lead to a series of hikes and furthermore Europe is facing a very real threat to its financial stability thanks to underlying sovereign credit issues.

Risk appetite anomalies can take considerable time to reconcile; so in the meantime, we need to watch timely developments. For guidance on exogenous influence; we need to watch the S&P 500, the EU summit on Thursday and Friday, the UK CPI figures on Tuesday and the situation with the Japanese Fukushima nuclear plant. Domestically, we have notable indicators like durable goods and the Chicago Fed National Activity Index. That said, Fed commentary could prove far more influential for hyper-sensitive rate speculation.

Euro Traders’ Confidence to be Put to the Test after EU Summit

By David Rodriguez, Quantitative Strategist

Fundamental Forecast for Euro: Bearish

- Euro strengthens as European Union proposes debt fix

- European Summit promises further EUR volatility in week ahead

- Euro correlation to S&P 500 remains high amidst ‘risk’ correction

The euro defied expectations and set fresh highs against the downtrodden US Dollar, fueled by a late recovery in financial market risk sentiment and expansion in emergency measures to contain regional sovereign debt crises. Early signs pointed to a potentially significant pullback in the US S&P 500 and the highly-correlated European currency. Yet by the end of the week, key developments had eliminated a good deal of uncertainty surrounding Europe and broader financial markets. A potentially busy week for European fundamentals and lingering geopolitical risks nonetheless threatens considerable volatility in the days ahead, and it will be critical to watch whether the single currency can continue its torrid uptrend against the US Dollar.

A European Union summit dominates foreseeable event risk in the week ahead, and markets will want to see further details on how recently-announced measures will stave off further sovereign debt crises in the single currency area. Officials announced an expansion to the European Financial Stability Fund (EFSF) and a creation of a permanent fund of the same size, but recent downgrades to Portugal’s sovereign debt rating emphasize that confident is still lacking in fiscal stability. Thus markets will look to the European Union summit to assuage fears. Given recent euro gains, one gets the sense that anything short of full clarity and

This heightened optimism, however, was fully offset this past week. As the week wore on, Greece received a three-notch downgrade, Spain suffered its own sovereign rating cut, Portugal was forced to pay exceptionally high rates at a debt auction and ratings agencies reported that the recapitalizing costs for Spain’s banking sector would be at least two-to-three times greater than the Bank of Spain’s 15.2 billion euro assessment. Whether or not these fundamental concerns can offset the yield forecast and dampen risk appetite remains to be seen; but the market will have a lot to consider come Monday.

After liquidity fully drained this past Friday, EU officials finally emerged from their special summit in Brussels and announced the progress made through the session. Little was expected from this gathering as it was a precursor to the official meeting over March 24th and 25th. However, the updates provided carried more significant than many would have expected. Despite Germany’s adamant position against expanding its rescues liabilities, it was agreed that the EFSF would be able to buy bonds directly in the primary market and Greece would be offered a conditional 100 basis point reduction to its emergency lending rates as well as an extension to its loans out to 7.5 years. On the other hand, officials merely voiced confidence in Portugal’s financial efforts (despite record bond yields) and noted that Ireland was not offered the same reduction in rates on emergency loans.

Where the euro goes from here is fully dependent on how confident in these commitments the market is. Lower rates for Greece are likely dependent on asset sales (a supposed prerequisite German Chancellor Merkel raised in a parliamentary meeting). What’s more, helping one EU member while neglecting Portugal and Ireland could lead the collective to failure just as surely as if they committed extra support to no one. If global market participants remain skeptical following last week’s downgrades and the realization that there is still an extraordinary demand for liquidity amongst the banks; the euro will falter. And, through it all, if the global markets are unwinding in a risk aversion bid; the euro will tumble regardless of its own internal, fundamental debates. -DR

British Pound Rally To Gather Pace On Higher Inflation, BoE Minutes
By David Song, Currency Analyst
Fundamental Forecast for British Pound: Bullish
GBPUSD: Sell Entry Sought on Bounce
British Pound Forecast Unclear Amidst Shift
U.K. Labor Market Unexpectedly Improves in February
The British Pound broke out of its narrow range on Friday, with the GBP/USD rallying to 1.6255, and the rebound in the exchange rate may gather pace over the following as the headline reading for U.K. inflation is expected to breech 4 percent. Consumer prices are projected to grow at an annualized pace of 4.2 percent in February, with the core rate of inflation anticipated to increase 3.1 percent after rising 3.0 percent in the previous month, and heightening price pressures could renew speculation for a rate hike in the first-half of 2011 as the central bank’s credibility to ensure price stability comes under increased scrutiny.
In turn, the BoE minutes could reveal a growing shift within the MPC, and the central bank may show an increased willingness to gradually normalize monetary policy over the coming months in an effort to stem the risk for inflation. A quarterly survey released by the central bank earlier this week showed consumer inflation expectations increase to 4.0 percent in February to mark the highest reading since August 2008, with 62 percent of respondents expecting to see a rate hike over the next 12 months. Although, recent comments from BoE board member Charles Bean suggests that the central bank will retain its wait-and-see approach as higher interest rates impede on economic activity, and the central bank may see scope to support the real economy going into the second-half of the year as it aims to encourage a sustainable recovery.
However, the market reaction to the BoE minutes could be short-lived as Chancellor of the Exchequer George Osborne is scheduled to deliver the budget statement on the same day at 12:30 GMT, and the new coalition in Britain may expand the scope of its austerity measures in an effort to better manage public finances. As the government tightens fiscal policy to curb the budget deficit, the extraordinary measures are likely to instill a weakened outlook for future growth, and the central bank may have no choice but to retain the monetary expansion in order to balance the risks for the region. - DS

Japanese Yen to Rise as Intervention Targets Volatility, Not Direction
By Ilya Spivak, Currency Strategist

Fundamental Forecast for Japanese Yen: Bullish
Japanese Yen Could Continue Higher Despite G7 Efforts
Quake May Help Japan Beat Deflation, Change Yen Dynamics
USDJPY: Standing Aside Amid Volatility, Long-Term Setup Bullish
After a week of breakneck volatility that saw the Japanese Yen surge to a record high only to rapidly reverse course amid the first coordinated G7 FX market intervention in over the decade, the outlook going forward appears anything but clear. Looking ahead, policymakers with a clear challenge vis-à-vis the exchange rate: on one hand, a stronger Yen threatens the critical export sector that will be seen as instrumental in helping the economy recover; on the other, the Yen's increasing purchasing power will help to dull the cost of recovery efforts for individual as well as public and private entities considering so many goods and resources in Japan are imported. On balance, this means Japanese officials will look tomanage Yen volatility rather than push prices in a given direction, suggesting renewed strength may be allowed to progress undeterred provided it progresses gradually.
With this in mind, the reasoning behind renewed Yen strength is compelling given the considerable headwinds still facing risk sentiment, hinting repatriation and an unwinding of carry trades will pressure the Japanese unit higher. First, while yielding a burst of knee-jerk optimism, the G7 action left core issues in the aftermath of the Tohoku earthquake largely unresolved. Indeed, casualties continue to mount, the extent of the damage and cost of reconstruction remains uncertain, and the threat of disaster at the Fukushima Daiichi nuclear power plant continues to linger.
Meanwhile, a new phase of the Libyan crisis began to unfold as the UN Security Council authorized the establishment of a no-fly zone and gave its member countries a virtually blank check to apply force to “protect citizens”, approving just about anything shy of outright occupation. As we have noted previously, markets see the situation in the North African country as a trial run for the worst case scenario in the aftermath of a protest flare-up, so the path chosen by the major powers from here (whether that is to materially intervene or not) will be weighed up as if it were happening to a far more significant crude supplier than Libya itself (i.e. Saudi Arabia). Increasingly intense unrest in Bahrain and Yemen further complicate the geopolitical landscape.
Finally, Friday will bring the much-anticipated summit of Euro Zone finance ministers that has been widely expected to produce a so-called “grand bargain” on dealing with the debt crisis on the currency bloc’s periphery. As we discussed in detail last week, the preliminary outlines of the scheme amounted to nominal progress but fell woefully short of a true bulwark against further sovereign stress, pointing to a wave of disappointed selling across the spectrum of risky assets (and to the benefit of funding currencies, including Yen) if the final version is not substantially strengthened.

Canadian Dollar Could Fall Further on Commodity Price Corrections
By David Rodriguez, Quantitative Strategist

Fundamental Forecast for Canadian Dollar: Bearish
Canadian Dollar may have set important top
Technical strategist remains short Canadian Dollar
The Canadian Dollar and fellow commodity bloc members were the only G10 currencies to finish lower against the downtrodden US Dollar, hurt by noteworthy corrections in oil, gold, and silver prices. A similarly significant correction in Bank of Canada interest rate expectations likewise reduced the attractiveness of Canadian Dollar bets. Looking to the week ahead, relatively Canadian economic calendar suggests that the USDCAD will move off of developments in the US and global commodity markets.
Considerable corrections in commodity prices and financial market risk barometers dragged the Loonie lower, and continued weakness would almost certainly produce the same result in the week ahead. The lowest-ever Core Consumer Price Index reading pushed Bank of Canada interest rate expectations considerably lower—leaving fundamental risks likewise to the downside. We previously argued that the Canadian currency may have set an important top (USDCAD bottom) on sentiment extremes, and such an outcome seems increasingly likely if commodity prices continue their recent reversal.
A Canadian Retail Sales report on Tuesday is the only piece of foreseeable economic event risk. Traders will otherwise need to keep a close eye on financial market risk barometers such as the US S&P 500 and its effects of risk-linked commodity prices. The US economic calendar sees similarly limited event risk. Yet considerable geopolitical risk out of Japan and the Middle East/North Africa region promises no shortage of volatility in the days ahead. - DR

Australian Dollar Pressured Lower as Risky Assets Resume Decline
By Ilya Spivak, Currency Strategist

Fundamental Forecast for Australian Dollar: Bearish
AUDUSD: Selling Opportunity Sought Below the Parity Threshold
Australian Dollar Gains as G7 FX Intervention Bolsters Risk Appetite
The Australian Dollar remains firmly anchored to underlying trends in investors’ sentiment, with short-term correlation readings gauging the link between AUDUSD and the MSCI World Stock Index, a proxy for risk appetite, holding at the strong end of the spectrum. This foreshadows a volatile week ahead but ultimately hints the path of least resistance favors Aussie weakness as sentiment continues to face downward pressure from lingering uncertainty on multiple key issues.
First, the G7 intervention into the Japanese Yen produced a knee-jerk burst of optimism but the underlying issues present in the aftermath of the Tohoku earthquake remain unresolved. Casualties continue to mount, the extent of the damage and cost of reconstruction remains uncertain, and the threat of disaster at the Fukushima Daiichi nuclear power plant continues to linger.
Meanwhile, a new phase of the Libyan crisis began to unfold as the UN Security Council authorized the establishment of a no-fly zone and gave its member countries a virtually blank check to apply force to “protect citizens”, approving just about anything shy of outright occupation. As we have noted previously, markets see the situation in the North African country as a trial run for the worst case scenario in the aftermath of a protest flare-up, so the path chosen by the major powers from here (whether that is to materially intervene or not) will be weighed up as if it were happening to a far more significant crude supplier than Libya itself (i.e. Saudi Arabia). Increasingly intense unrest in Bahrain and Yemen further complicate the geopolitical landscape.
Finally, Friday will bring the much-anticipated summit of Euro Zone finance ministers that has been widely expected to produce a so-called “grand bargain” on dealing with the debt crisis on the currency bloc’s periphery. As we discussed in detail last week, the preliminary outlines of the scheme amounted to nominal progress but fell woefully short of a true bulwark against further sovereign stress, pointing to a wave of disappointed selling across the spectrum of risky assets if the final version is not substantially strengthened.
Source : www.dailyfx.com

Forex Weekly Trading Forecast - 03.14.11

2011-03-13T15:53:00.000+08:00

US Dollar: Start of a Reversal or Minor Bump in Broader Downtrend?

By David Rodriguez, Quantitative Strategist

Fundamental Forecast for the US Dollar: Bullish

US Dollar makes critical break versus Euro but fails to hold gains
Extremely one-sided forex positioning warns that US Dollar may have set bottom
US Federal Open Market Committee tops event risk in the week ahead
View our monthly Euro/US Dollar Exchange Rate Forecast

The US Dollar finally showed signs of life through the past week of trading, initially bouncing noticeably against the Euro and other currencies before pulling back into Friday’s close. Surprisingly large end-of-week declines dashed hopes that the dollar would carry bullish momentum into the weekend. Yet hope is far from lost for US Dollar bulls; a hold of recent lows against the Euro could keep an overall Greenback recovery on track. Markets now look to the coming week’s US Federal Open Market Committee meeting as top event risk for the beleaguered domestic currency.

Interest rate traders and analysts unanimously predict that the US Federal Open Market committee will leave interest rates unchanged through their upcoming rate announcement, but that does not rule out post-event volatility. It is admittedly unlikely that the FOMC will make any substantive shifts in its post-decision commentary. Core Consumer Price Index inflation remains relatively tame, and it seems improbable that the Fed makes a hawkish shift on price pressures through the foreseeable future. Strong February employment numbers likewise make it less likely that central bankers will take a more dovish shift towards broader economic conditions. Of course, such muted expectations suggest that any surprises could prove especially market moving across US dollar currency pairs. It is difficult to predict exactly how the dollar may react ahead of the event. Market hesitation suggests the coming week could nonetheless prove pivotal for the US currency.

Recent CFTC Commitment of Traders data shows that speculative traders remain heavily short the USD against a broad range of counterparts. Net positioning is at its most net-long the Euro against the US Dollar since the pair traded near the 1.45 mark in December, 2007. And though one-sided sentiment is hardly a guarantee that an asset price will reverse course, any signs of material breakdown would likely involve rapid US Dollar short covering and continued corrections. The past week’s sharp US Dollar rallies initially suggested that the US Dollar could recover from a bearish sentiment extreme. Yet short-term outlook has become considerably less clear given Friday’s sharp Greenback declines.

It remains as important as ever to watch how the US Dollar starts the coming week of trading. Can it continue its earlier move higher against all major counterparts, or is Friday’s sudden sell-off the sign that the USD bounce was a momentary blip? We have made little secret of our US Dollar-bullish bias for some time now, and indeed many of our analysts called for continued strength on earlier-week reversals. A key factor to watch is whether the Euro/US Dollar holds recent highs. If the US Dollar is able to hold significant lows, a short-covering-based rally becomes that much more likely.

Euro Traders’ Confidence to be Put to the Test after EU Summit

By John Kicklighter, Currency Strategist

Fundamental Forecast for Euro: Bearish

- EU officials announce concessions for Greece but not Ireland

- Both Greece and Spain are downgraded, drawing the EU deeper into a sovereign debt crisis

- Has the EURUSD’s tentative reversal fallen apart with Friday’s bullish rebound?

Scheduled event risk thins out over the coming week for the global docket; but that won’t sooth the euro. The shared currency is facing a critical decision that can tip the scales for direction and volatility through the indefinite future. The market will need to decide whether it is more concerned about financial stability in the region or the potential for higher returns through rate hike speculations. At its very core, this is a measure of risk versus reward; but unfortunately, the situation is not so black and white. First the market will need to determine the extent of its concerns and skepticism surrounding the EU’s financial commitments. Then, we will need to assess the bearing and conviction of underlying risk appetite trends.

Though there is always a natural level of equilibrium (or a fair value) for a currency; often times, a persistent bias can emerge when the crowd is naturally optimistic or pessimistic. For the euro, that lean is unclear. The week before last, the currency was exceptionally buoyant as the ECB set the countdown to the first rate hike in two years. Likely spurred to action before the inflation-logged Bank of England and already offering a substantial yield differential to the sterling, dollar, yen and Swiss franc; return hungry traders were drawn to the euro. And, with this natural advantage in place, the currency would be more sensitive to positive developments and resilient to negative events.

Japanese Yen Outlook Unsure Following Natural Disasters

By Christopher Vecchio,

Fundamental Forecast for Japanese Yen: Neutral

The Japanese yen was mixed against its major counterparts for most of this past week but that all changed headed into Friday’s session, after a major 8.9-magnitude earthquake shook investor sentiment. While the Yen was mixed down against its North American and New Zealand counterparts headed into Friday’s session, it ended the week up against all the major currencies, save the Australian dollar, as domestic investors rushed to buy the currency as a safe haven compared to the more volatile equity markets. While a global return to risk sentiment was weighing on the Japanese Yen, the earthquake coupled with the uncertainty spurred by the continued tensions in North Africa and the Middle East give little insight on the direction of the Pacific Rim country. Whereas sentiment was an important indicator of the direction of the recovery in Japan, now, the reaction of the government will likely be the leading indicator as to Yen strength or weakness.

The disaster is truly a setback for the country that was on the cusp of a recovery that was gaining some steam headed into the middle of the year. The leading index, a gauge of broader developments in the overall economy, gained for a fourth consecutive month this week, while bankruptcies were down. Furthermore, the Eco Watchers Survey, a sentiment reading of current conditions and an outlook of the economy in the coming months, also gained. In the week ahead, industrial production data for February is due, which is likely to show strengthening as production has been increasing steadily since November. Similarly, the Tertiary Industry Index for January is forecasted to gain 1.4 percent, marking what would be the third time in four months that industry has expanded. The Bank of Japan has announced that it will hold a limited monetary policy meeting on Monday, but with the devastation, further funding is necessary to help the recovery, and thus it is widely believed that additional economic stimulus will be announced. While this could potentially aide the Japanese economy and the Yen in the short-run, as the rebuilding process is generally perceived as positive given the necessary repatriation of funding, with a debt-to-GDP ratio over 200 percent already, further stimulus does not bode well for the long-term health of the economy nor the Yen; generally speaking, it would increase the yield differential between the Yen and the U.S. Dollar, a bullish sign for the USD/JPY pair on a valuation forecast.

Price was in a violent range this week, with the USD/JPY pair trading in 160-pip range since last Friday; now, traders will need to look towards the steps the Japanese government is taking in the short-term to help prop up the economy in the wake of the disaster. In turn, data from the United States will likely be the price driver for the coming week. Should sentiment gather that investing into the Japanese cleanup and recovery is the best option, the Yen could gain some serious strength in the coming months. As David Rodriguez noted earlier today, following the 1995 earthquake outside of Kobe, Japan, the USD/JPY pair fell to an all-time low of 78.750; it would be interesting to see if the same development could occur once more. -CV

British Pound to Decline as Focus Shifts to Risk Sentiment Trends

By Ilya Spivak, Currency Strategist

Fundamental Forecast for British Pound: Bearish

Last week’s Bank of England rate decision proved to be another non-event, with traders now turning their attention to risk appetite until minutes from the sit-down are released in two weeks, offer a reading on the central bank’s evolving hawkish bias. Indeed, the correlation between GBPUSD and the UK-US 2-year yield spread (a gauge of relative monetary policy expectations) has dropped to the lowest in three months. Meanwhile, the correlation between the pair and the MSCI World Stock Index – a proxy for broad trend in sentiment – has strengthened dramatically through the first two weeks of March. Looking ahead, this hints the path of least resistance leads lower as a confluence of headwinds bears down on the spectrum of risk-sensitive assets.

The bears have their pick of reasons to push prices lower. Turmoil in the Middle East and North Africa continues, with Libya now engulfed in all-out civil war and protests heating up in Yemen, Bahrain and – perhaps most dangerously with regard to oil prices – Saudi Arabia. Further, signs of material economic slowdown are becoming increasingly apparent in China following a dismal trade balance report. Finally, the end-game to the Euro Zone debt crisis appears to have been fumbled even before the crucial March 25 sit-down of the region’s leaders as a preliminary summit on Friday yielded an agreement conspicuously heavy on rhetoric but short on substance, opening the door for sovereign default fears to swell anew. Policymakers announced changes that were largely ceremonial: the European Financial Stability Facility (EFSF) will now be able to access its full capital base of 440 billion euros, and set “goals” rather than binding targets on budget rules for member states. These are half-measures at best: the bailout fund is still woefully inadequate to deal with the rescue of a larger state like Spain, and Euro Area members’ past record on adherence to the Stability and Growth Pact (which outlines budget deficit limits) suggests the new benchmarks will not amount to much in practice.

Turning to the economic calendar, February’s Jobless Claims figures amount to the only bit of top-tier event risk on the docket. Expectations are calling for benefits applications to rise 1,300 from the previous month while the Claimant Count – a proxy for the jobless rate – holds steady at 4.5 percent. On balance, the report falls well within the range of outcomes recorded since July, pointing to relatively stable labor-market conditions. To that affect, the figures are unlikely to meaningfully dislodge investors’ priced-in view of the UK economy and so will probably yield a muted reaction at best from price action.

Source : www.dailyfx.com

Euro Rallies Most Against Dollar in Six Weeks on ECB Rate-Boost Prospects

2011-03-07T00:25:00.001+08:00

By Catarina Saraiva and Allison Bennett - Mar 5, 2011 1:00 PM GMT+0800

The euro climbed the most versus the dollar in six weeks as the European Central Bank said it may raise interest rates next month, while Federal Reserve officials signaled the U.S. economystill needs stimulus.

The Swiss franc rose to a record against the U.S. currency as turmoil pushed oil to a 29-month high. The greenback fell versus most major peers on speculation a payrolls gain wasn’t enough to spur the Fed to raise rates soon. Fed Chairman Ben S. Bernanke wouldn’t rule out more Treasury buys to support growth. U.S. retail sales rose last month, data next week may show.

“The takeaway from a very busy week is still a clear tightening signal from the ECB, relatively dovish comments from Bernanke and a U.S. jobs report that’s positive, but not positive enough to alter U.S. rate expectations,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There’s scope for some further near-term dollar weakness or euro strength.”

The euro climbed 1.7 percent to $1.3987, the most since the five days ended Jan. 21, from $1.3754 on Feb. 25. It added 2.5 percent to 115.13 yen, from 112.35. The dollar appreciated 0.8 percent to 82.32 yen, from 81.68.

The franc advanced 0.4 percent to 92.45 centimes per dollar and touched a record 92.02 centimes on March 2. It tends to gain during periods of financial stress because Switzerland’s export- reliant economy doesn’t need foreign capital to balance the current account, the broadest measure of trade.

Rate Outlook

The euro gained versus 15 of its 16 most-traded counterparts on March 3 after ECB PresidentJean-Claude Trichet said an “increase of interest rates in the next meeting is possible” to counter inflation. He spoke in Frankfurt after the ECB left its key rate at 1 percent, where it’s been since May 2009.

The Fed has held its benchmark at zero to 0.25 percent since December 2008, and won’t increase it until the first quarter of 2012, according to the weighted average in a Bloomberg survey of 74 economists.

“Trichet’s comments were a game-changer,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “The U.S. has 407,000 jobs created over the last three months -- that’s good, but I’m not popping the champagne bottle.”

Employers in the U.S. added 192,000 positions in February, the most since May, after a revised gain of 63,000 in January, Labor Department data showed yesterday. The median forecast in a Bloomberg News survey was for 196,000. The unemployment rate unexpectedly fell to 8.9 percent, the lowest since April 2009.

ECB ‘Out Front’

“The unemployment number was by no means a blowout number that’s going to make the Fed consider tightening anytime soon,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “That leaves the ECB way out front in terms of interest-rate differential.”

Bernanke, in two days of semiannual monetary-policy testimony to congressional committees this week, said rising commodities won’t derail the recovery. He reiterated that while U.S. economic growth will accelerate, he still wants to see a “sustained period of stronger job creation.”

The Fed chief also signaled he’ll keep the central bank on course to finish buying $600 billion of Treasuries through June to spur growth, and didn’t rule out another round of purchases.

U.S. retail sales increased 1 percent in February, from 0.03 percent the previous month, according to the median forecast of 63 economists in a Bloomberg survey before the Commerce Department reports the data March 11.

Bets on Euro

Futures traders increased bets to the most since January 2008 that the euro will gain versus the dollar, figures from the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 51,308 on the week ended March 1, the most since Jan. 11, 2008.

Crude oil for April delivery rose as much as 7.5 percent this week to $105.17 a barrel in New York, the highest level since September 2008, on concern supply will be disrupted.

Libyan rebels seeking to end Muammar Qaddafi’s 41-year rule clashed yesterday with security forces loyal to him after repelling government attempts to retake oil hubs in the east. The conflict has left 6,000 people dead, compared with a 1,000 estimate cited by the United Nations, the opposition forces’ spokesman, Abdullah Al Mahdi, told Al Jazeera yesterday.

New Zealand’s dollar reached the weakest in 18 years versus its Australian counterpart on speculation its central bank will cut borrowing costs after the second earthquake in six months.

IMF Forecast

The currency, nicknamed the kiwi, fell versus all of its 16 most-traded peers this week after theInternational Monetary Fund said it will “likely” cut its New Zealand growth forecast from the current 3 percent after the earthquakes. IMF spokeswoman Caroline Atkinson spoke at a news conference in Washington this week.

The kiwi touched NZ$1.3769 per Australian dollar yesterday, the weakest level since June 1992. It tumbled 1.4 percent on the week to NZ$1.3735, and fell 1.8 percent to 73.83 U.S. cents.

The Reserve Bank of New Zealand will reduce its benchmark rate by 0.15 basis points over the next 12 months, compared with a prediction for an increase of 54 basis points a month ago, according to a Credit Suisse Group AG index.

The two quakes may have caused as much as NZ$20 billion ($15 billion) of damage, according to Prime Minister John Key.

To contact the reporters on this story: Catarina Saraiva in New York atasaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Canadian Currency Climbs for Third Straight Week as World Oil Prices Rally

2011-03-07T00:20:00.001+08:00

By Charles Mead - Mar 5, 2011 1:02 PM GMT+0800

Canada’s dollar rose for a third week against the greenback as crude oil, the nation’s biggest export, surged on concern unrest in Libya will spread to other North African and Mideast nations and curb shipments.

The loonie slid from a three-year high on March 1 as Bank of Canada Governor Mark Carneyreiterated that a strong currency poses challenges to exports while keeping borrowing rates unchanged. The Canadian dollar dropped against most of its major counterparts including the euro before a report next week forecast to show employers added fewer jobs in February than the previous month.

“The Canadian dollar is still very resilient,” said George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada in Toronto. “We continue to see very firm commodity prices and crude oil prices. A lot of people are worried we may see some more unrest in the Middle East over the weekend, so I think that backdrop is helping the Canadian dollar.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, appreciated 0.4 percent to 97.34 cents per U.S. dollar yesterday, from 97.74 on Feb. 25. It touched 96.84 cents on March 1, the strongest level since November 2007. One Canadian dollar purchases $1.0273.

Crude oil for April delivery increased for a third week, advancing 7.4 percent to $105.08 a barrel on the New York Mercantile Exchange after touching a 29-month high. Crude has gained 28 percent from a year ago.

Canada’s dollar reached its highest level since November 2007 hours before the Bank of Canada decided to hold borrowing costs steady. A day earlier, the government said the economy expanded more than expected in the fourth quarter at a 3.3 percent annual rate.

BOC Rate Decision

The Bank of Canada, which led the Group of Seven nations with three interest-rate increases last year, has kept its target rate for overnight lending between commercial banks at 1 percent since September.

Exporters still face “considerable challenges” from a currency trading near three-year highs and “poor relative productivity,” Carney and five deputies said in a statement.

The rate on the June 2011 bankers’ acceptance contract dropped to 1.46 percent, from 1.50 percent the day before the Bank of Canada’s decision. So-called Bax contracts have settled an average of about 0.20 percentage point above the central bank’s target rate since 1992, Bloomberg data show.

“It’s a self-defeating argument trying to buy the Canadian dollar on the expectations that they’re going to raise interest rates,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. A stronger loonie “is softening the inflation trajectory all the time, which inherently means they’re not going to have to tighten rates,” he said.

Loonie Versus Euro

The loonie slid 1.2 percent to C$1.3615 against the euro in its biggest weekly drop since Jan. 21 as European Central Bank President Jean-Claude Trichet signaled on March 3 that policy makers may increase the shared currency region’s main refinancing rate next month from a record low 1 percent to contain inflation.

Canadian 10-year bonds fell for the first time in three weeks, pushing the yield on the benchmark up four basis points, or 0.04 percentage point, to 3.33 percent. The price of the 3.50 percent note maturing in June 2020 slid 33 cents to C$101.14.

Employers added 25,000 jobs in February after an increase of 69,200 in the previous month, according to the median forecast of 23 economists before Statistics Canada’s March 11 report. The unemployment rate may have decreased to 7.7 percent, from 7.8 percent.

Ivey Index

The Ivey purchasing managers’ index was 69.3 in February after a January reading of 41.4, according to a statement on the University of Western Ontario business school’s website yesterday. Readings of less than 50 indicate purchasing by governments and companies declined.

In the U.S., Canada’s biggest trading partner, employers added 192,000 workers in February after a gain of 63,000 in the previous month, the Labor Department reported yesterday. The median forecast of 84 economists in a Bloomberg News survey was for an increase of 196,000. The unemployment rate unexpectedly dropped to 8.9 percent last month from 9 percent.

To contact the reporter for this story: Charles Mead in New York at cmead8@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Pound Strengthens Against Dollar After Construction Growth Beats Estimates

2011-03-02T21:41:00.000+08:00

By Garth Theunissen - Mar 2, 2011 8:47 PM GMT+0800

The pound strengthened against the dollar as an industry report showed U.K. construction grew at the fastest pace in eight months in February, adding to signs the economy may withstand a rise in the benchmark interest rate.

Sterling also advanced versus a basket of nine developed- nation currencies according to Bloomberg Correlation-Weighted Currency Indexes. A gauge of construction activity measured by a survey of purchasing managers rose to 56.5 from 53.7 in January, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said today in London. The median estimate in a Bloomberg survey was for a reading of 52.8.

“The market is pricing in higher rates and certainly today’s data will encourage those that believe monetary policy needs to be tightened to control inflation -- that’s why sterling is being bought,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London.

The pound rose 0.2 percent to $1.6301 as of 12:34 p.m. in London, and gained 0.4 percent to 133.64 yen. Britain’s currency weakened 0.1 percent to 84.78 pence per euro.

Sterling has advanced 4.5 percent against the dollar this year amid mounting speculation that the Bank of England will raise interest rates from a record low 0.5 percent to quell inflation. Consumer-price growth accelerated to an annual 4 percent in January, the 14th consecutive month above the government’s 2 percent target.

MPC ‘Hawks’

Policy maker Andrew Sentance has led calls for the central bank to raise its benchmark interest rate since June and last month voted for a 50 basis-point increase. Minutes from the bank’s Feb. 10 meeting showed policy maker Spencer Dale joined Sentance and Martin Weale in voting for higher borrowing costs.

Dale and Weale favored a 25 basis point rise. The next rate decision is scheduled for March 10.

“The hawks on the MPC will view today’s data as a sign that the economy will be able to absorb higher rates,” said Jones. Market expectations for higher interest rates are likely to boost the pound to about $1.6750 and between 80 and 82 pence per euro by June, Jones added.

Money markets signal policy makers will probably raise the key rate by about 63 basis points by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show. So-called Sonia rates indicate an increase of about 20 basis points in May.

‘Self-Defeating’ Gesture

Increasing the benchmark interest rate as a gesture in the fight against inflation would be “self-defeating,” Bank of England Governor Mervyn King told lawmakers in London yesterday. Still, King said he expects to have to write letters to Chancellor of the Exchequer George Osborneexplaining why inflation remains above the government’s 3 percent upper limit “through the rest of this year.”

King was forced to write a fifth letter after the January inflation data was released on Feb. 15.

Two-year yields, typically more responsive to short-term rate expectations, slid one basis point to 1.38 percent. Ten- year gilt yields were little changed at 3.62 percent.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Pound Strengthens as Oil Surge Boosts Bets BOE Will Increase Interest Rate

2011-02-28T22:43:00.005+08:00

By Garth Theunissen - Feb 28, 2011 10:02 PM GMT+0800

The pound gained against the dollar and euro as rising oil prices stoked bets the Bank of Englandwill be forced to raise interest rates this year to curb above- target inflation.

The British currency appreciated against a basket of nine developed-nation peers measured by Bloomberg Correlation- Weighted Currency Indexes. Crude traded near a 29-month high in New York after turmoil that cut Libya’s output spread to Oman, raising concern Middle East production may be disrupted further.

“Rate-hike expectations are still taking the front seat and that’s being priced into sterling,” said Chris Walker, a currency strategist at UBS AG in London. “The key theme we’re seeing right now is that currencies of countries where rate hikes are expected are being rewarded.”

The pound appreciated 0.7 percent to $1.6237 as of 1:58 p.m. in London, snapping a two-day decline. Sterling strengthened 0.1 percent to 85.22 pence per euro.

Britain’s currency advanced 1.3 percent against the dollar this month and 3.9 percent this year amid mounting pressure on the U.K.’s central bank to raise its key interest rate from a record low 0.5 percent. Consumer-price growth accelerated to 4 percent last month, a Feb. 15 report showed, the 14th consecutive month above the central bank’s 2 percent goal.

Rate-Rise Bets

“The market is betting on a rate hike in May,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors.

Money markets signal policy makers will probably raise the key rate by about 67 basis points by year-end, according to the sterling overnight index average forwards, Tullett Prebon Plc data show. So-called Sonia rates indicate an increase of about 21 basis points in May.

The implied yield on the December short-sterling futures contract was at 1.59 percent compared with 1.25 percent at the beginning of the year. A higher yield indicates traders added to bets that policy makers will raise the benchmark interest rate.

Benchmark 10-year gilts rose for a sixth day, pushing yields to the lowest in a month, as political turmoil in the Middle East and North Africa boosted demand for the relative safety of the debt.

The 10-year yield fell two basis points to 3.6 percent, after earlier declining to 3.586 percent, the lowest since Jan. 25. The 4.75 percent security due March 2020 rose 0.04, or 40 pence per 1,000-pound ($1,623) face amount, to 108.70. Two- year note yields, typically more sensitive to interest-rate expectations, were one basis point lower at 1.4 percent.

‘Watch-and-Wait’

“It’s a watch-and-wait situation with the Middle East,” said Gavin Friend, a markets strategist at National Australia Bank Ltd. in London. “People still aren’t sure which way things are going to go and that’s pushing yields just a little bit lower.”

Anti-government protests have spread to Bahrain, Algeria, Morocco, Jordan, Iraq, Yemen and Oman, threatening to disrupt crude production and pushing oil prices to more than $100 a barrel in New York this month. The pro-democracy unrest in the region has already toppled the governments of Egypt and Tunisia.

The rise in gilts was due to “a classic flight to quality,” said Stamenkovic. “The concern is that what’s happening in Libya is going to spread right across the Middle East so you’re seeing more demand for safe-haven assets.”

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Pound Strengthens as Oil Surge Boosts Bets BOE Will Increase Interest Rate

2011-02-28T22:43:00.003+08:00

By Garth Theunissen - Feb 28, 2011 10:02 PM GMT+0800

The pound gained against the dollar and euro as rising oil prices stoked bets the Bank of Englandwill be forced to raise interest rates this year to curb above- target inflation.

The pound appreciated 0.7 percent to $1.6237 as of 1:58 p.m. in London, snapping a two-day decline. Sterling strengthened 0.1 percent to 85.22 pence per euro.

Rate-Rise Bets

“The market is betting on a rate hike in May,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors.

Benchmark 10-year gilts rose for a sixth day, pushing yields to the lowest in a month, as political turmoil in the Middle East and North Africa boosted demand for the relative safety of the debt.

‘Watch-and-Wait’

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net