Sentiment May Save Europe as Business Managers Foresee Better Times (Euro Open)

European markets tomorrow may be looking toward the release of the German IFO series of sentiment surveys. The outlook is expected to be positive for a second straight month after global stock markets erased losses seen in early-2009. As an indicator that leads overall growth by nine-twelve months, IFO's outcome may be heavily favored if it does indeed post an upward move.

Key Overnight Developments

• North Korea Tests Nuclear Weapon, South Korea Reports
• Japan’s All Industry Activity Index Fell in March

Critical Levels



Euro traders saw the the currency gap upward 14 pips against the Dollar to reach a high of 1.4044 before pressure forced the pair down to levels last seen during the second half of Friday’s session. Sterling exhibited similar characteristics despite lacking a gap. Both pairs ultimately established downward trends in the early hours of this week’s trading session.

Asia Session Highlights



Geopolitical tension may have rocked markets in Japan after South Korea’s office of the president reported that North Korea had tested a nuclear weapon. The U.S. Geological Survey reported a 4.7 magnitude earthquake 230 miles north-east of Pyongyang, the North Korean capital. Intraday Japanese stock trading saw the Nikkei fall from a high of 9402.76 to a low of 9331.74 in the 30 minutes following the release of the news.

Japan’s All Industry Activity Index fell 2.4% in March. The figure, which has declined on all but one occasion dating back to October, might not necessarily be indicative of the current economic environment in Japan because of the three month lag between the month’s empirics and its release. In fact, the previous week saw an analyst at Merrill Lynch upgrade the share price outlook for IHI Corp., Japan’s second-largest manufacturer of heavy-machinery, to “buy” from “underperform,” citing an increased demand for such equipment from emerging markets. If such a prediction comes into fruition the Asian country may benefit from a boost in its export sector, which has been battered over the year as a result of dying demand for electronics and vehicles from abroad.

Euro Session: What to Expect



A series of German sentiment survey’s will be released tomorrow. The IFO Business Climate survey is expected to increase for a second consecutive month after having fallen eight of nine sessions prior. A move upward here would be a sign of relaxed pessimism coming off of a stock market rally which saw global equities erase losses seen in the first two months of the year. Because business and investor sentiment generally lead the real economy by at least nine-twelve months, the IFO surveys are seen as a key point of interest for those looking to estimate prospects for growth.

As the largest economy in the Euro-Zone, Germany’s outlook is of utmost importance for the region. With nearly a quarter of all Euro-Zone external exports coming from Germany, the world’s third largest economy, improving sentiment among German business managers may provide foreigners a larger sentiment to invest in the European economy.

Written by Ilya Spivak, Currency Analyst
Article Source - Sentiment May Save Europe as Business Managers Foresee Better Times (Euro Open)

Forex Trading Weekly Forecast - 05.25.09

US Dollar Plunges Into Oversold Levels, Signals Potential for Reversal

Fundamental Outlook for US Dollar: Neutral

- US homebuilder confidence rose to the highest levels since September, according to the NAHB
- On the other hand, US housing starts and building permits plummeted to new record lows
- The Federal Reserve’s outlook for growth and unemployment has deteriorated, according to the latest FOMC minutes

The US dollar was easily the weakest of the majors last week, which was interesting in light of the fact that US equities and the CBOE’s VIX volatility index ended virtually unchanged, albeit with some rocky price action in between. Indeed, if there were any signs that US assets were losing their status of “safe havens,” it was this: After Standard & Poor’s downgraded the outlook for the UK from “stable” to “negative” due to their “deteriorating public finances,” ballooning national debt in the US spurred speculation that the same could happen to their economic outlook, if not their long-term credit rating altogether. In fact, the US dollar decline was in lockstep with a plunge in Treasury prices, highlighting a drop in demand for all things dollar-related. However, given the extent of the greenback’s decline, this coming week should be very interesting. Will the US dollar go back to trading in line with risk trends, gaining with other low-yielding currencies, or will it trade as the one of the “riskiest” assets out there? Since the DXY index is well into oversold levels, technical factors suggest that the dollar could bottom in the near-term. As they say though, “the trend is your friend,” so traders should be cautious.

This week’s US economic calendar is chocked full of releases. On Tuesday, the Conference Board’s consumer confidence index for the month of May is forecasted to continue rising from its record low of 25.3 reached in February up to 43.0. With record keeping having begun in 1967, the steady plunge in sentiment from the 2007 highs of 111.90 makes the extent of the recession especially clear.

On Wednesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose 2.0 percent in April to an annual pace of 4.66 million from 4.57 million. However, there are indications that the results could prove to be disappointing as the Commerce Department reported on May 19 that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000.

On Thursday, the release of US durable goods orders are projected to show that domestic demand may have increased slightly at the start of Q2, as they are forecasted to have risen 0.5 percent in April, but excluding transportation the index is anticipated to fall 0.3 percent. While the headline result will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The three-month annualized figures remain deeply negative, but the monthly component has improved over the past two months and a continuation of this dynamic would be supportive of outlooks for a slow recovery in the US economy.

Finally, on Friday, the second round of US Q1 GDP estimates are due to hit the wires, and the results could be market-moving. The preliminary reading is forecasted to be revised up to -5.5 percent from -6.1 percent, which also marks an improvement when compared to the Q4 2008 result of -6.3 percent. There is some evidence that revisions will be to the downside, though. First, the US trade deficit widened for the first time in eight months during March by 5.5 percent to $27.6 billion. A breakdown of the report showed that exports slumped 2.4 percent to a more than two-year low of $123.62 billion while imports fell 1.0 percent to $151.196 billion. According to Bloomberg News, the Commerce Department used a much larger increase in exports when calculating Q1 GDP, suggesting that initial estimates of a 6.1 percent annual contraction may have been optimistic. Also, personal consumption is forecasted to be adjusted to 2.0 percent from 2.2 percent after March advance retail sales were revised down to -1.3 percent from -1.1 percent.

What Happens to the Euro Rally When Risk Appetite Settles?

Fundamental Outlook for Euro This Week: Neutral

- Euro Zone factory and service sectors contract at the slowest pace in 8 months
- German investors lament current conditions but growing more optimistic over the future
- Is the EURUSD breakout just beginning or is this the last gasp? Read the weekly technical outlook

The euro was set on a steady and aggressive rally against its primary counterpart - the dollar – this past week. The drive for this rally evolved with time: from scheduled event risk to general market sentiment to speculation over national credit health. However, when the dollar is subtracted from the equation, is the euro really as strong as the EURUSD advance would suggest? Looking over the crosses, the single currency was eking gains against those economies that are struggling to maintain stability and depreciating when measured up to the high yielders. This should be considered a reminder that there are general market themes and euro-centric fundamentals; and the market will follow whichever has the greater influence at the time. Looking ahead to next week, there are a number of factors that could come into play including monetary policy speculation, growth forecasts and the permanence of sovereign credit ratings. Which will take responsibility for the guiding the euro?

Considering the market’s reaction to Standard & Poor’s downgraded forecast for the UK’s credit rating this past week, this has the greatest potential for market impact going forward. The pound immediately dropped when the news crossed the wires; but the real reaction came from the dollar as rating concerns spread to the United States as budget deficits and bank rescues swell debt levels. For the world’s largest economy, even a passive threat of a credit downgrade is substantial (as its assets are the benchmark for risk-free); but what is the danger to the Euro Zone? Speculation is a tricky thing to gauge; but under the right conditions, a threat to the European regional credit rating could certainly undermine the currency. With the US losing its safe haven status, UK considered financially unsound and Japan suffering from a record-breaking recession; the Euro Zone is considered one of the most secure, developed economies. Invalidating this perception could quickly undermine confidence in the economy and its assets. However, we have to consider how real a threat this is. According to Eurostat numbers, the government debt to GDP ratio through the end of the year was at 69.3 percent. What’s more, we have already seen Greece, Spain, Ireland and Portugal downgraded individually. With the global policy makers trying to stabilize a global recession and stamp out the lingering effects of a financial crisis; all major economies are at risk.

Another potentially, potent fundamental driver for the euro going forward is monetary policy. While its benchmark lending rate is well below the Australian and New Zealand targets, the Euro Zone rate advantage was considered relatively stable – until recently. At the authority’s last policy meeting, officials cut rates once again to 1.00 percent and relented in taking the first step into un-conventional territory by announcing their intentions to purchase covered bonds. Forecasts among policy officials vary widely as to whether the central bank has done enough or if they are lagging the potential for crisis. Divergent commentary will continue to split the market and bolster volatility; and the louder the call is for additional cuts and expanding quantitative easing, the heavier the euro will become.

The third potential driver for the euro next week is scheduled event risk. A prominent list of economic indicators, the docket may not only trigger short-term volatility; but it will also feed into the aforementioned themes. The offerings are substantial. Sentiment is covered by the IFO business and GfK consumer numbers. Growth forecasts will follow German employment and retail PMI figures. And, though its influence is likely dampened German and Euro Zone consumer-inflation data could still contribute to rate forecasts.

Japanese Yen Bounces Despite Record GDP Contraction – What Gives?

Fundamental Outlook for Japanese Yen: Neutral

- Japanese Yen rallies as Finance Minister says Ministry of Finance has no planes to intervene in forex market
- Yen bounces on better-than-expected GDP, but economy nonetheless contracts a whopping 4 percent in Q1
- Is the Japanese Yen-funded carry trade recovering?

The Japanese Yen scarcely survived a week of truly dismal economic data, squeezing out a marginal gain against the downtrodden US Dollar but falling sharply against every other major counterpart. Japanese government officials reported the worst Gross Domestic Product contraction in the survey’s 50+ year record, and weak economic fundamentals limited trader demand for the low-yielding Yen. That being said, the currency actually saw a marginal bounce following the GDP news release; forecasters had anticipated an even worse economic contraction. A modestly positive week for the US S&P 500 and other global equity indices only compounded the risk-sensitive Japanese Yen’s woes, and broader JPY momentum remains to the downside.

The USD/JPY finished below the psychologically significant 95.00 marker for the first time since March, and traders expected the Japanese Ministry of Finance to express concern at relative JPY strength. Yet Finance Minister Kaoru Yosano effectively ruled out forex intervention—removing a key source of USD/JPY support. It seems that the days of a highly vocal Ministry of Finance are long gone; current officials are taking a much more hands-off approach to the Japanese Yen exchange rate. We question whether such a laissez-faire stance is truly sustainable, however. Japanese exports have effectively crashed due to the combination of weak global consumption and a stronger Japanese Yen.

Subsequent outlook for the recently-downtrodden Yen is somewhat unclear, but momentum plainly remains to the downside against all except the US Dollar. An ostensibly busy week of economic event risk is unlikely to have a major effect on the Yen. We will instead monitor any and all developments in global risk sentiment—especially as seen through major global equity indices. The correlation between the USD/JPY and the US S&P 500 may have weakened through recent trade, but the equivalent S&P link to the EURJPY and GBPJPY remains near record-highs. In other words, the EUR/JPY and GBP/JPY are likely to take their cues from developments in risky asset classes. The US Dollar’s fate may depend on global investor sentiment towards USD-denominated asset classes.

British Pound Likely to Look Past Economic Data, Continue Higher

Fundamental Outlook for British Pound: Bearish

- Consumer Prices Fall to Lowest in 15 Months in April
- GDP Data Confirms Economy Shrank At Record Pace in First Quarter
- S&P Downgrades UK Outlook to ‘Negative’ on Growing Budget Deficit

The British Pound could continue to rise next week as an uneventful economic calendar offers little event risk to slow the currency’s momentum. Last week, the sterling showed surprising resilience in the face of a record drop in gross domestic product, a weak CPI report , and news that rating agency S&P downgraded their UK outlook from “stable” to “negative”. It seems traders heard everything they needed to about the economy’s prospects a week earlier when the Bank of England’s quarterly inflation report revealed expectations inflation will remain below the target 2% until 2012 as the economy takes a slower path to recovery, taking the punch out of subsequent releases along the same theme. The lack of potency in negative economic data suggests that the Pound remains at levels that are too low to attract new sellers all the while those that are already short become increasingly anxious about overextending their exposure, quickly rushing to cover their positions at the slightest hint of a reversal. Put simply, the British Pound seems heavily oversold and likely needs to correct still higher before it becomes attractive to sell once again.

Little stands in the way of the Pound’s momentum in the week ahead: Nationwide House Prices are set to drop -1% in May to bring the annual pace of decline to -13.7%, a reading well within the range of values that has been seen since the free-fall in property values moderated towards the end of 2008; GfK Consumer Confidence is seen rising to -25 in May from -27 in the preceding month, the seventh consecutive time that the rate of contraction in sentiment has slowed (likely owing to the government’s stimulus measures). While neither release speaks of a robust economy (albeit they do hint at one that is shrinking at a slowing rate), the trends behind these indicators have long been priced in and are unlikely to make or break the current bullish upswing in a meaningful way.

Turning to risk sentiment, short-term studies reveal a declining link between the MSCI World Stock Index and the trade-weighted average value of the British Pound. Indeed, 30-day correlation studies reveal the link now stands at 56% having printed as high as 86% as recently as late April. This suggests that the currency may not suffer a setback even if risky assets confirm a double top at resistance marked by the high from early January’s, a scenario that could well materialize in the near term.



Written by Terri Belkas, John Kicklighter, David Rodriguez, Ilya Spivak and John Rivera, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 05.25.09

Dollar Volatility Set to Impact Forex Market Today

The USD's volatility is set to continue today as forex trader's eye Federal Reserve Chairman Ben Bernanke's speech as 6 GMT. In the meantime, however, it would be a wise move for investors to open some important positions as they can take advantage of the forex market prior to and after this main news event. Key economic data releases from the leading economies should also be a vital inspiration for traders today.



USD - Dollar Tumbles to a 5 Month Low

The U.S currency continued to slip against the EUR yesterday, dropping 1% to as low as 1.3950. It also dropped to its lowest this year against many of its other major currency pairs as worries about swelling U.S. deficits soured investor's appetites on U.S. assets.

The Dollar has fallen every day this week against the EUR and Pound Sterling, and it marked its third straight daily decline against the Japanese Yen yesterday. Analysts attributed the fall in the Dollar, which has been treated as a lower risk, safe-haven investment, to growing optimism that the worst of the financial crisis has passed. This has caused investors to unwind positions in favor of the U.S. currency built up when fear was widespread, credit was frozen and stock markets were in free fall.

A leading indicator released yesterday was U.S. Unemployment Claims. This number handedly beat last week's result. However, it failed to provide strength to the Dollar as investors may be waiting for key data due to be released today to implement their trading strategies.

Looking ahead today, the news event that may have a very large impact on the Dollar and its main currency pairs in today's trading is Federal Reserve Chairman Ben Bernanke's speech at around 18:00 GMT. This speech is very important as it is very likely to Impact the Dollar volatility. Traders are advised to watch closely, as this is likely to set the pace of the Dollar going into next week's trading.

EUR - The EUR Continues to Strengthen against the USD

The EUR rallied yesterday against the Dollar as encouraging news about the European economy emerged. This sparked hope that the 16-country Euro-Zone may be emerging from the depths of recession. The EUR touched a 5- five month high versus the Dollar to above the 1.3950 level. The European currency finished around 80 pips higher against the JPY to finish yesterday's trading session at the 131.19 level.

The Euro-Zone's manufacturing and services sector recorded their best performance in 7 months, suggesting the Euro-Zone economy will shrink only slightly in the 2nd quarter after a record slump in the 1st quarter. The survey showed a significant improvement, thereby boosting hopes that the rate of decline in the Euro-Zone economy is now moderating after a particularly torrid 4th quarter of 2008 and 1st quarter of 2009. The reduced contraction in manufacturing activity in May suggests that the sector is starting to benefit from the massive de-stocking that has taken place.

Sentiment in the Euro-Zone economy has brightened in the past week following better-than-expected news. The EUR is showing signs of resilience even though there was volatility throughout non-Euro crosses. It will be crucial for traders to identify how the preceding economic indicators from the U.S., Japanese, and other key economies will affect their positions.

JPY - JPY Slides against EUR and Spikes versus the Dollar

The Japanese Yen completed yesterday's trading session with mixed results versus the major currencies. The JPY fell against the EUR yesterday, pushing the oft-traded currency pair to 131.19. The JPY slipped only marginally yesterday against the GBP to the 149.31 level. The JPY did see some bullishness as well as it gained 35 pips against the USD and closed at 94.17.

The Japanese market should have a heavy effect on the JPY versus its major currency counterparts, as the Overnight Call Rate will be announced today. The rate is expected to remain unchanged, but traders should pay close attention to the BoJ Press Conference that will follow to look for expectations of Japan's economic future. A bullish statement from the BoJ could lead some traders to believe the BoJ is forecasting a rosier financial climate in Japan.

Crude Oil - Crude Oil Rises Despite Economic Concerns

Crude Oil rose slightly by 21 pips to $61.63 a barrel yesterday, continuing its comeback. This was despite the U.S. Federal Reserve cutting its forecast for the economy of the U.S., the world's biggest energy-consuming country. Crude is trading for less than half year-ago levels, as demand has softened with the economic crisis. Expectations that consumers may once again want more Oil when the recession bottoms have partly fueled the rally, with traders watching the stock market for economic telltales.

Concerns about the reliability of supply also have begun to creep into the market, highlighted by an escalating conflict between rebels and security forces in Nigeria's Oil-rich southern region this week. There is a reasonable possibility that Oil prices will continue to be bullish going into next week, providing that the economic situation of the leading economies continues to rapidly improve.

Article Source - Dollar Volatility Set to Impact Forex Market Today

British Pound Strength May Endure on Confirmation of Record UK GDP Decline (Euro Open)

The British Pound may shrug off confirmation that the UK economy shrank the most since 1979 in the first quarter despite downward revisions to private consumption and investment with traders already pricing in sluggish performance in the foreseeable future. Overnight data saw the Bank of Japan upgrade their economic outlook for the first time since 2006.

Key Overnight Developments

• Bank of Japan Upgrades Economic Outlook for First Time Since 2006
• Euro Higher, British Pound Range-Bound in Overnight Trading

Critical Levels



The Euro extended gains in Asian trading hours, adding as much as 0.5% against the US Dollar. The British Pound remained range-bound, oscillating in a well-defined 70-pip band above 1.5820.

Asia Session Highlights



The Bank of Japan kept overnight interest rates at 0.10%, as expected, and maintained their monthly purchases of government bonds at 1.8 trillion yen. The bank did another step toward easing lending conditions however, announcing it will now take foreign bonds as collateral for borrowing. US, UK, German and French government debt will be accepted. Most notably, the central bank upgraded their economic outlook for the first time since July 2006, saying growth will begin to recover in the second half of the 2009 fiscal year, an improvement from previous expectations of a rebound in the first half of FY2010. The BOJ expects the recovery will be export-driven, saying domestic demand will probably continue to weaken.

Euro Session: What to Expect



The second revision of UK Gross Domestic Product is set to confirm that the economy shrank -1.9% in the first quarter, the most since 1979. Although the headline figure is likely to remain unchanged, a number of key components are expected to see downside revisions to paint an even bleaker view of the struggling economy. Most notably, the fall in Private Consumption is expected to be scaled up to -1.0% from the originally reported -0.7% while the drop in Gross Fixed Capital Formation (i.e. investment) is expected to nearly double the originally reported result of -2.3% to print down -4.1%.

Although this is surely bad news for economy, the ability of the release to meaningfully derail the recent rally in the British Pound seems limited. Sterling traders heard everything they needed to about growth prospects when the Bank of England’s quarterly inflation report revealed expectations inflation will remain below the target 2% until 2012 as the economy takes a slower path to recovery. Indeed, this week saw the UK unit shrug off a weak CPI report as well as news that rating agency S&P downgraded their UK outlook from “stable” to “negative”.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound Strength May Endure on Confirmation of Record UK GDP Decline (Euro Open)

Is The Carry Trade Recovering?

The carry trade has fallen far from its place as a lucrative trading strategy since the subprime crisis progressed into a general financial crisis nearly two years ago. However, after evolving through a period of anti-carry, forced deleveraging and a complete collapse in interest rate differentials; have we finally come to the bottom in sentiment and the reversed carry flows?

Currently, interest rates are still scraping recent historical low and there are significant pitfalls that could spark a second wave of fear and flight to safety. On the other hand, with rates essentially on a level playing field and the concept of safety dramatically altered by the events of the past few years, the response to such a dire turn for the market could be substantially different. With the markets looking to enter a new phase, we will cover the risk and reward of the traditional carry trade strategy and then talk about how it can be used in today’s markets.

Fundamental Pitfalls

To get to the point the market is at now, the once-popular carry strategy was wrung for both risk and return. When the financial crisis was really hitting its stride through the end of 2007 and into 2008, the sheer panic was driving the markets. Investors were looking to transfer their funds not from a risky asset to a risk-free one – they were still trying to find an alternative with a high return. However, when liquidity seized, the realization of just how dire conditions had become dawned. The exodus from speculative positions and instruments was immense; and only recently have we seen interest in high yielding currencies return. It is true that the ‘basing’ period of the past six months has passed without the threat of another major bankruptcy, default, or liquidity crisis. Does this mean the path is free and clear for a return to pure carry? No. There are still bigger concerns looming; and any one of them can stoke fear.

Recessions Are Still Prevalent – Speculative interests often spurn the present in expectation of a greater source of return later down the line. However, traders may have to wait a long time and suffer significant drawdowns along the way if they start calling for positive growth, earnings and capital investment now. Most, timely data to this point has offered only improvement in pace, not in absolute terms. For example, consumer confidence indicators from many of the world’s leading economies have stepped up from multi-decade lows; but are still under water. More discouraging is the general pace of growth data. Japan recently reported its worst contraction on record and US officials recently downgraded their projections for 2009. Should expectations for a late-2009, early-2010 return to growth fall apart so too will trader sentiment.

Government Aid – Dealing with a state of financial disaster, the world’s governments were forced over the past few years to inject liquidity into the market, extend guarantees on corporate debt, buy shares, nationalize banks and take trillions of dollar worth of toxic debt onto their books. This has led to tremendous, fiscal strain for the world’s largest economies (which has even begun to threaten the stability of some stalwart nations). Though policy makers acted quickly to put out the financial fire; they did not do so without mind to the eventual ‘exit strategy.’ At some point, the stabilizers will be removed from the market; and we will see if the market can make it on its own. Without doubt, the greatest threat to in the government’s exit is the rotation of toxic assets back into the market. Asset backed securities (ABS), mortgage backed securities (MBS) and other illiquid, hard to value derivatives were accepted as collateral so banks could draw liquid funds. As the worst seems to have passed, central banks will be eager to push these securities off their balance sheets; but they will have to do so with finesse and incredible sensitivity as to how their actions are impacting market sentiment.

Regulations Will Stifle The Recovery – Many believe that the worst global economic crisis since the Great Depression was borne from a lack of regulation and responsibility. Law makers certainly fall within that category; and while trying to stabilize the 2007-2008 crisis; they were simultaneously drafting policy to prevent such a cataclysmic event from happening again in the future. In their zeal, however, the markets may flounder. The government’s presence in the market is a natural dampener as their desire is to dampen absolute volatility. They do so by tempering leverage, reducing credit, influencing rates of return, and generally boosting regulation. It seems may seem relatively benign to suggest that accounting rules will be changed to promote transparency; but this could in fact have a tremendous impact on sentiment. In the US, FASB (the Financial Accounting Standards Board) passed rules that would require banks to report billions in additional losses taken on assets and liabilities that were left out in previous earnings.

Interest Rates: The Promise of Returns

For any strategy to work, it has to have an acceptable balance of risk and reward. Over the past two months, carry interests have rallied largely on the presumption that the threats to financial stability have been rectified. However, there can never be a sense of certainty as to how risk develops; so speculators must be compensated for the danger of losses with the allure of comparable returns. In a setting of pervasive recession and cautious investing though, what kind of returns can be expected?

In the table below, we are given the current level of the benchmark Libor rate. This is a better representation of fundamental returns than overnight lending rates. After months of policy easing, the world’s rate of return has depreciated substantially. Interest rates that were once near 9.5 percent in New Zealand, 5.5 percent in the US and 6.5 percent in the UK are now mere shadows of what they used to be. Not only is this meager compensation when considering the potential for another crisis; but it offers little in the way of yield differential. The greatest premium among the eight most liquid currencies comes with AUDJPY; yet this pair is extremely volatile and there is the specter that the high-yield component can be further deflated through a grinding recession. In the ‘Adjusted 3 Month Libor Rate’ column, we have adjusted the current rate to include the expected change in the benchmark over the next 12 months.



How to Use the Carry Trade in Today’s Market

Whether you believe the bullish turn in the market is genuine and we have embarked on the next bull wave or the imbalance of risk to return will weigh speculation for months to come; there is a means to use the traditional carry trade in your strategy.

Interest Bearing: For the first scenario, we will take the optimists’ approach. Should the promise of positive growth eventually translate into greater returns, we will see not only yield income rise but capital gains (as funds are put behind this strategy) as well. In this setting, the most appealing trades will be those that will see their interest rate differential expand rapidly. This requires going long a currency whose benchmark lending rate is already relatively high and is likely to rise quickly; while the opposing (funding) currency will see its target rate hold relatively steady through the most aggressive times. From a fundamental perspective, the Australian dollar is the best candidate for the high-yielder as its economy has suffered a relatively mild slump and the RBA has signaled its intent to dampen its easing regime. Alternatively, the list of low rates is broader. Specifically, the Japanese yen, US dollar and Canadian dollar maintain extraordinarily low rates and their respective policy groups have expressed their intent to keep them that way into 2010. However, of the three, the yen wins out with more than a decade of interest rates below 0.25 percent.

Aligning Speculation: The other method for using carry in your strategy is aligning a pair to the general prospect of rising or falling sentiment. In its most basic form, the carry trade is merely a reflection of trader confidence; and this is a particularly engrossing theme for the markets now. As such, we will look for the currencies most sensitive to interest rate changes. In the bullish scenario, we have already established that the Australian dollar is the most likely to appreciate while the greenback, Canadian dollar and yen are most likely to maintain their pace. In the situation be the opposite and general rates of return be encouraged to fall, the US and Canadian dollars will receive flows as their rates are already as low as they can go (which indirectly means their respective policy officials are willing to do as much as they can to encourage growth). At the same time, the Australian dollar will see its benchmark stumble; but it is the fundamentally weak New Zealand target rate that threatens to drop the quickest.

Written by John Kicklighter, Currency Strategist
Article Source - Is The Carry Trade Recovering?

Prices Hit Highs Unseen since 2008

With recent market volatility, the price level for a few currencies and commodities have begun to see prices not seen since last year. For instance, the price of the EUR/USD pair has now risen to a level not seen since the first week of January, 2009. Crude Oil has also shocked the market lately with a continuous uptrend, rising above $62 for the first time since last November. With rallies this large, the forex market becomes more predictable, and traders can reap the benefits.



USD - USD in Down-Trend since April

The USD witnessed a steady depreciation against most of its major currency counterparts on Wednesday. The Dollar has lost ground for 3 straight sessions against the EUR, and 3 of the last 4 sessions against the Yen. The USD was trading at 1.3604 per EUR and 94.85 per Yen at the close of Wednesday's trading sessions.

According to the FOMC meeting minutes there is willingness by the Federal Reserve to go beyond the $1.75 trillion it has already committed to purchasing, and increase the amounts of mortgage and Treasury securities-purchase programs. The Fed made a similar announcement on March 18, stating it would buy $300 billion in Treasuries; this announcement led to the U.S. Dollar plunging. Purchase of Dollar-denominated debt can have a negative affect on the value of the currency since the Fed pays for these purchases by printing more money and therefore devaluing the currency. In addition, the U.S. recession appears to be deeper than expected and a slower recovery is being factored in over the next two years since labor markets remain under pressure.

While the USD recovered some of its immediate losses since the release of the FOMC meeting minutes, it has been declining significantly since the start of the week and shown a downward trend since mid-April. This is due in part to the recovery in equities markets, which increased traders risk appetite. Important economic indicators to watch today are the Unemployment Claims, to be released at 12:30 GMT, and Fed Chairman Ben Bernanke's speech tomorrow. Positive news will put further pressure on the Dollar.

EUR - EUR Benefits from Heightened Risk Appetite

Yesterday's release of the U.S. Federal Open Market Committee's (FOMC) meeting minutes sent the EUR to its highest level against the USD since early January. The EUR advanced 1% to 1.3768 from 1.3630 yesterday. Earlier the EUR touched the 1.3830 price level, the highest since Jan 5th. However, the EUR slid against the USD slightly after a German report showed producer prices fell at the fastest rate in almost 22 years. The EUR also decreased 0.2% to 130.51 yen from 130.81 Wednesday.

Currently there is a shift into a risk-taking environment spurred by a rally in the stock markets and a decrease in volatility. The USD is the anti-risk currency. It also appears that investors are still confident that the U.S. is set first for a recovery compared to others like Japan, the U.K or the Euro-Zone. According to the International Monetary Fund (IMF), the Euro-Zone regional economy will contract 4.2% this year, more than the projected 2.8% contraction in the U.S. and the 4.1% fall in the U.K.

The EUR may gain for a 4th day versus the USD as the Flash Manufacturing PMI and the Flash Services PMI (German, French and Euro-Zone) reports are due to be released today at 7:30 and 8:00 GMT, respectively, and may show that the region's manufacturing and service sectors contracted at the slowest pace in 7 months.

JPY - Yen Rises after News of Japan's Record Economic Contraction

The Yen rose versus all 16 of the most-traded currencies yesterday after Japan reported that its economy shrank at a record pace. The Japanese currency advanced to 130.04 per EUR, up from 130.77 yesterday. The Yen appreciated 1.3% to 94.75 per Dollar, up from 95.97 Wednesday.

The JPY gained modest ground after Japan's Cabinet Office said the economy shrank an annualized 15.2% in the 3 months ending March 31st, following a revised 14.4% contraction in the previous quarter. Japanese Gross Domestic Product (GDP) fell 3.5%, the most since records began in 1955. Speculations that the recession in the U.S, the world's largest economy, is far from over helped to further boost demand for the Japanese currency as a refuge from the international downturn. However, there are signals that the U.S. currency may have fallen too quickly against the Yen and could strengthen.

Crude Oil - Crude Oil Surges above $62 a Barrel

Crude Oil surged yesterday above $62 a barrel, increasing by $1.94 in a relatively short time-frame. This marks one of the largest price jumps seen in almost 6 months! However, early this morning, Crude Oil for July delivery dropped as much as 69 cents, or 1.1%, to $61.35, breaking three days of gains. This was due to a decline in U.S. stocks after the Federal Reserve predicted a deeper recession and a government report showed a drop in fuel demand.

Prices also climbed after refinery fires and unrest in Nigeria threatened supplies. A falling Dollar further assisted the price increase. However, U.S. oil demand hardly improved, and remained 7.6% weaker than a year ago when Americans were already consuming less. There is doubt that the fundamentals of the oil market can support prices above $60 a barrel since there isn't any improvement in demand and no sign the Organization of Petroleum Exporting Countries (OPEC) is likely to reduce output any further in their meeting at the end of this month.

Monday's Memorial Day holiday signals the unofficial start of the U.S. summer driving season. So far gasoline demand gained 3.6% this past week. A continued increase in demand will help push the Oil price further up, however, with the latest report from the Federal Reserve a quick economic recovery in the U.S seems less likely.

Article Source - Prices Hit Highs Unseen since 2008

US Dollar Fails to Gain on Stock Weakness, Pressured by Fed Forecasts (Euro Open)

The US Dollar consolidated at lower levels in the overnight session, failing to capitalize on falling stock prices across Asian exchanges as the minutes from the last Fed policy meeting continued to weigh on the exchange rate. Japan’s service demand fell to the lowest since 1995 while Australian consumers expected lower inflation in May. UK Retail Sales are on tap in European hours.

Key Overnight Developments

• Japan’s Service Demand Falls to the Lowest Level Since 1995
• Australian Inflation Expectations Show Weakness in Consumer Sentiment
• US Dollar Fails to Gain on Stock Weakness, Consolidates at Lower Levels

Critical Levels



The Euro consolidated gains in overnight trading, oscillating in a 50-pip range below the 1.38 level. The British Pound followed suit, trading sideways in a 70-pip band below 1.58. The US Dollar failed to capitalize on losses across Asian stock exchanges, with the typically safety-linked currency weighed down by the Fed’s revised growth forecasts and prospects of expanded quantitative easing.

Asia Session Highlights



Japan’s Tertiary Industry Index fell much more than economists expected in March, tumbling -4.0% versus expectations of a -1.5% result. Service demand dropped by a hefty -9.16% from a year earlier, printing at the lowest level in 14 years. The metric follows how much households and businesses spend on such things as utilities, health care, and financial services. The jobless rate has surged to the highest in nearly five years, trimming disposable incomes and encouraging precautionary saving to weigh on spending. Private consumption accounts for over 58% of total output, pointing to continued weakness in overall growth in the months ahead after the economy shrank by a record 4.0% in the first quarter.

Australia’s survey of Consumer Inflation Expectations saw the headline figure slip to 2.3% in May from 2.4% in the previous month, the second-lowest reading since the metric set a record low at 2.2% in March. Looking at the details, 57.5% of survey respondents expect prices will go up, the most in 6 months. Curiously, hourly wage growth expectations continued lower, with respondents saying those will increase at a pace of 3.9%, down from 4.7% in the preceding month. Extrapolating the likely mentality of Australian consumers as reflected in the data, it is reasonable to suppose that they are likely to buy what they need now, expecting prices to be higher and the wage climate less favorable in the future. This bolsters the negative view of long-term consumer sentiment that we noticed in analyzing March retail sales figures, wherein we saw that the way consumers were spending the government’s fiscal package suggested it was seen as a one-off income boost, hinting at expectations of lower spending power in the months ahead.

Euro Session: What to Expect



UK Retail Sales are expected to rise 2.4% in the year to April, the second consecutive month that sales growth accelerated after setting a record low at 0.4% in February. The improvement will likely come as the government’s spending boost begins to work its way into the broad economy. Still, the metric has been trending firmly downward since May of last year and the expected upswing will hardly amount to a break from that trajectory. Looking ahead, retail activity is likely to remain subdued: the unemployment rate has ticked up to 4.7% in April, the highest in over 11 years, and is expected to top 9% by the beginning of next year, shrinking disposable incomes to put substantial pressure on spending. Indeed, Business Investment is set to fall -4.0% in the first quarter to bring the annual pace of decline to -5.9% from -4.5% in the three months to December 2008 as companies scale back capacity amid dwindling domestic and overseas demand. Household spending accounts for 63% of overall economic growth, hinting that the UK will continue to underperform for some time yet.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Fails to Gain on Stock Weakness, Pressured by Fed Forecasts (Euro Open)