<![CDATA[DJ Forex Focus]]>

<![CDATA[DJ Forex Focus]]> link Thu, 09 Sep 2010 08:59:00 -0500 <![CDATA[Risk Sentiment May Improve, But Not For Euro. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2628/ Thu, 09 Sep 2010 16:37:00 +0000 There is risk and then there is euro risk.

And we are watching the first turn into the second this week.

Classic risk has dominated the market for some time as fears over a double dip recession in the U.S. have continued to hover and investors have preferred safe haven currencies, such as the dollar and the yen, at the cost of high-yielders, including the euro.

However, risk sentiment looked set to improve.

Not only did last Friday's U.S. employment data show signs of improvement but both the White House and the U.S. Federal Reserve finally appear ready to take the bull by the horns.

President Barack Obama has proposed $50 billion of infrastructure spending that will provide another fiscal injection for the country's spluttering recovery.

Also after weeks of hinting at it, Fed officials now look ready to provide another tranche of quantitative easing, the so-called QE2. In a speech on Tuesday, the Fed's former vice chairman Donald Kohn suggested that this is only a matter of time and analysts are now speculating that the move will come at the Fed's policy meeting in early November.

So far so good, safe havens should have lost their attraction and high-yielders, including the euro, should have been back in favor.

But, we have had a shift to euro-specific risk instead.

See how the euro will come back under pressure against the dollar:

Click Image to Enlarge

Concern over the U.S. recovery has been replaced with concern over the euro zone recovery as well as the continued risk of sovereign debt default.

A sharp reminder of the economic difficulties facing the euro zone came over the last week as industrial activity and export orders, particularly in Germany, slowed sharply. This illustrated just how quickly the country's export driven recovery earlier this year will come to a shuddering halt, removing the one bright spot on the euro zone's economic landscape.

This immediately put the spotlight back on European banks, which appear to have underestimated their exposure to sovereign debt in stress tests conducted earlier this year.

Deteriorating growth prospects among the euro-zone's peripheral debtors have also raised the risks of a debt default as these countries struggle to meet their repayment obligations.

Over the last 24 hours, the cost of insuring against default in many of these countries has risen back to their recent highs or even beyond, as in the case of Ireland.

All this has driven home to investors that the euro zone's bank and debt problems are far from over and that they will likely rumble on for some time to come.

It isn't surprising that the euro has found itself being driven down to a new all-time low against the Swiss franc and that hopes for some recovery in the euro back over $1.30 have quickly disappeared.

Instead currency players are waiting to see how long it will take the single currency to break down through $1.26 and bring an end to recent suggestions that the euro could still stage a more prolonged rally.

Early Thursday, the euro was once again under pressure, falling to $1.2683 by 0645 GMT from $1.2716 late Wednesday in New York, according to EBS. Although market sentiment had earlier been lifted by a Beige Book suggesting that the U.S. economy is still expanding even if at a slow momentum and a hawkish rate hike by the Bank of Canada.

Stronger than expected employment data from Australia and a rally in Asian stocks all contributed to the improved mood.

However, as European trading got underway the focus returned to the risk associated with the euro zone's peripheral debtors as the market waits to see how much Ireland will have to pay at its auction of EUR400-600 million of six-month and eight-month bills later in the day. Yields over 2% to 2.35% could be seen as a sign that investor support is waning.

The euro was also down at Y106.22 from Y106.72 while the dollar fell to Y83.72 from Y83.92 as the market continued to speculate that the Japanese will hold off on intervention until after next week's leadership election in the ruling DJP party. The new leader would automatically become prime minister.

In the meantime, Bank of Japan Governor Masaaki Shirakawa reduced expectations of an imminent move by reporting that intervention wasn't discussed in a meeting with the government.

]]> <![CDATA[Aussie Is Still Leader Of The Pack. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2622/ Wed, 08 Sep 2010 09:41:00 +0000 After a bit of a slip, the Aussie should still come out on top.

Sure, the Reserve Bank of Australia has been a little less hawkish than expected, still keeping rates on hold, and the mining tax that upset many investors looks as if it is here to stay, but the Australian currency is still a good bet.

In a cyclical sense, the Australian economy continues to lead the Group of 10 leading industrial nations out of the recession, even though the recovery may be proving a little slower than expected.

Over the last few weeks, the Aussie lost some of its upwards momentum.

The higher tax on mining profits was one reason but a combination of lower global risk appetite, uncertainty about when the Reserve Bank of Australia would next hike rates and the unclear outcome of the general election late last month all encouraged players to stay away.

Even the immediate reaction to Tuesday's news that the Labor Party was finally able to claim victory and that the RBA had left rates unchanged at 4.5% was negative.

For a start, Julia Gillard's ability to negotiate the support of the two of the three key independent members of parliament may have removed political uncertainty but it does mean that the status quo on the mining tax will be preserved. There had been the chance of it being scrapped if the opposition Liberal-National coalition had won.

Then there was the RBA.

On the face of it, the central bank's decision to keep rates unchanged for the fourth month in a row was certainly understandable given that second quarter inflation came in lower than expected.

The problem for the markets was the RBA's assessment of the global economy, in which it warned about "slower" U.S. growth later this year and "weaker" euro zone next year.

New economic data from China later this week, including key trade numbers, could also help to overshadow the RBA's more bullish assessment of Australia's domestic economy. If demand from Australia's largest trading partner declines even more, the strength of the Australian economy will also be called into question.

However, this doesn't mean that the Aussie itself should have to suffer.

Growth in the Australian economy may still be at risk from a slower global recovery but it is still likely to prove stronger than that in most other major economies. If anything, the outlook for the U.S., the euro zone, Japan and now the U.K. are all being downgraded with markets looking for additional monetary--and in some cases fiscal--stimulus.

In Australia, meanwhile, the bias for higher interest rates has not gone away.

If anything, as Australian money markets have lowered their expectations for another rate hike this year, the Aussie will likely be even more sensitive to any suggestion that rates will be increased faster than the markets forecast.

This could well mean an early return to the Aussie's high of $0.9200 last month and even a break of its April high for the year at $0.9390.

Track the Aussie's advance:

Click Image to Enlarge

Early Wednesday, the Aussie was pushing ahead, rising to $0.9159 from $0.9110 late on Tuesday in New York, according to EBS.

This came as the euro staged a rebound despite renewed concerns about the stability of European banks and disappointing German industrial orders. The euro bounced to $1.2718 from $1.2689 but was nearly flat at Y106.27 compared with Y106.33.

The yen got some support from stronger than expected Japanese machinery orders but its gains were capped by a strong reminder from Japanese Finance Minister Yoshihiko Noda that intervention remains a possibility.

The dollar fell to Y83.56 from Y83.80.

]]> <![CDATA[ECB May Take More Interest In Euro Strength Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2613/ Tue, 07 Sep 2010 10:27:00 +0000 A strong euro may soon start playing a more important part in the euro zone's monetary stance.

As the outlook for the euro-zone recovery improves and inflation risks start to rise, the European Central Bank will be anxious to start tightening policy.

But, with many European banks still addicted to the central bank's virtually unlimited liquidity and with lingering risks of a default among peripheral debtors, the central bank probably won't be able to raise rates until 2012.

In the meantime, it has one other option for tightening policy--the euro.

See how the euro has been relatively weak against the dollar in recent weeks:

Click Image to Enlarge

Although a sharp rally in the euro would be bad news for euro-zone exporters and put the current recovery at risk, the ECB is probably more concerned about inflation and the price pressures that will build if the single currency weakens too much again.

This likely ECB support for a stronger euro has kicked in over the last week or two as economic data has shown stronger-than-expected growth in core euro-zone members, such as Germany, alongside an upturn in inflation pressures.

ECB President Jean-Claude Trichet summarized the more upbeat growth forecasts over the weekend with his comments that the probability of a double-dip recession have diminished.

For the ECB, this brings a new and more even more urgent problem--the likely resurgence of inflation.

In the U.S., where the Federal Reserve is responsible for both promoting growth and fighting inflation, such a development won't bring such an immediate policy response. The Fed has already made it clear that with the U.S. recovery remaining so weak, it has no plans to hike rates for the foreseeable future.

For the ECB, though, which is charged with the prime purpose of price stability, a hawkish response to any inflation upturn is more imperative.

Although the price pressures are hardly large at this stage, they are only likely to get worse as the global recovery spreads and the price of commodities increases.

But, as the fallout from the recent global crisis suggests, ECB hawks may not be able to respond as quickly as they would like with traditional monetary moves.

Only last week, the ECB was forced to extend most of its extreme liquidity measures into early next year to help preserve stability in the banking system.

Despite the publication of bank stress tests only a few weeks ago, there appears to be a lack of confidence with some banks in the region still being forced to pay large premiums on their credit default swaps.

On Tuesday, the Wall Street Journal reported that many European banks underestimated their exposure to sovereign debt in the stress tests.

Also, with many sovereign debtors still struggling under the burden of fiscal austerity, the last thing they will need is a rise in interest rates that would make their debt burden even worse.

So, with rate hikes essentially out of the question for now, the ECB will be anxious to ensure that the single currency doesn't weaken as well--a development that would lower import prices and increase inflation pressures in the region even more.

The euro was coming under pressure early Tuesday largely because of the WSJ story, which pushed the single currency down to $1.2793 by about 0645 GMT from $1.2879 late on Monday in London, according to EBS. U.S. markets were shut for Labor Day Monday.

The euro was also down at Y107.40 from Y108.51, while the dollar slipped to Y83.95 from Y84.22.

]]> <![CDATA[Sterling's Mask Is Starting To Slip. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2611/ Mon, 06 Sep 2010 10:39:00 +0000
For most of this summer, the pound has held up well as investors have focused more on the problems of other major economies, including the U.S. and the euro zone.

If anything, the U.K. has been seen as the best of a bad bunch and sterling has benefited.

But last week, the mask started to slip.

New data showed that the risks of a double-dip recession are much higher than expected and that the prospects for the U.K. economy are now decidedly ugly.

Not only is this likely to hasten the pound's decline against the dollar, it is also likely to bring a sharp reversal in its recent rally against the euro.

See how the pound has started to lose its shine against the dollar:

Click Image to Enlarge

And against the euro:

Click Image to Enlarge

At the moment, financial markets are a little shell-shocked by the economic news.

Most experts had been expecting that a combination of the global slowdown and Britain's harsh austerity budget would ensure that the 1.2% growth achieved in the second quarter of this year couldn't be achieved in the second half.

However, the litany of disappointing data last week, on house prices, employment and activity surveys in manufacturing and construction still came as a big surprise. The final straw was the news that activity in the country's dominant services sector had dived to a 16-month low.

The purchasing manager's survey that brought the bad news are generally seen as forward-looking indicators, making it likely that by the fourth quarter the economy will be contracting again.

With a return to 'negative growth' now looming, speculation over more quantitative easing from the Bank of England is likely to rise, putting the U.K. at the forefront of those countries that have found their first attempts at extraordinary monetary easing have essentially failed.

In the U.S., the Federal Reserve has indicated that it may also need to inject more liquidity but appears in little hurry to do so.

While in the euro zone, the European Central Bank may have extended its liquidity measures for as long as the market needs but has also suggested that, rather than slowing down like the U.K., the euro-zone economy could grow more than expected later this year.

Sterling is also likely to look less attractive against the euro due to the steady decline in concern over sovereign debt. Last week, peripheral debtors including Spain raised funds in the open market with little problem, suggesting that they should continue to service their borrowing and lower the risk of default.

Of course, the euro would still be at risk if the euro-zone economy turns down and sovereign debt becomes an issue once again.

But for now, flows that once helped sterling as investors fled from euro-zone asset markets are now likely to go into reverse and the euro, like the dollar, may not look so ugly against the pound after all.

Early Monday, the pound is flat against the dollar, trading at $1.5473, only a tad higher than $1.5470 late on Friday in New York, according to EBS. But the euro did climb to GBP0.8344 from GBP0.8313 as the single currency benefits from the latest improvement in global risk sentiment.

Last Friday's better-than-expected non-farm payrolls from the U.S. lifted sentiment and triggered fresh flows into riskier assets. In Asia, most stock markets rallied with the Nikkei in Japan gaining 2.1% and the Shanghai Composite in China rising 1.3%.]]> <![CDATA[The Swiss Franc Has Much Further To Run. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2605/ Fri, 03 Sep 2010 13:31:00 +0000 If the Swiss franc really is the new Deutsche mark, then the Swiss currency could have a lot further to run, especially against the euro.

Of course, much depends on the confidence the Swiss National Bank has in the recovery of the economy and the ability of exporters to withstand further gains in the franc.

For the moment, the SNB appears fairly relaxed and happy to stand back from the market now that deflation fears have faded.

In fact, new inflation figures later Friday could show that the central bank has even less reason to intervene in the market now than it did before as a strong currency might be needed to fight growing price pressures. The year-on-year rise in the consumer price index is expected to be only 0.3%.

The upward trajectory of the Swiss currency has become even more pronounced in the last week or two as the Swiss economy has gone from strength to strength, showing that it is even more closely linked to the recovery in Germany than previously thought.

See how the euro has fallen agianst the franc in the last few weeks:

Click Image to Enlarge

Sure, the latest purchasing managers' index for Swiss manufacturers and KOF sentiment index have been a little disappointing, both looking ahead to the likely slowdown in growth that will hit most global economies in the third quarter.

However, second-quarter growth data Thursday showed that the Swiss economy expanded by a robust 3.4%, much more than the 2.6% increase that had been forecast and just behind Germany's 3.7% second-quarter expansion.

This, combined with a 4.8% rise in Swiss retail sales, suggests that the Swiss economy has proved much more resilient to the recent strength of the Swiss franc than anyone had expected.

Not only will this make the SNB less likely to intervene in the currency in the near future, it also confirms the Swiss franc's increased appeal to investors wanting to buy into the recovery in the euro zone but still keen to avoid the risks associated with the sovereign debt crisis that continues to hang over the euro.

In a new research piece calling the franc the "new mark," Mansoor Mohi-uddin, chief currency strategist with UBS in Singapore, lists not only the strength of the Swiss economy but the country's massive foreign reserves, its traditional safe-haven status as well as its close trade links with Germany, which take 20% of all Swiss exports, as all reasons to buy the franc.

Raghav Subbarao, a currency strategist with Barclays Capital in London, expects the franc to rise against the euro particularly because of a widening in the fiscal risk premium between the two currencies in recent months.

Back in May, when the sovereign debt crisis was at its peak, the Swiss franc was seen to be just as much at risk from a euro-zone default as the euro, given that Swiss banks are just as exposed to peripheral euro-zone debtors as euro-zone banks.

But now that bank stress tests have been conducted and key borrowers in the region have successfully returned to the market, the franc is no longer seen to be at risk from the debt crisis, while the euro is still seen as tarnished by the risks associated with the tough fiscal austerity packages that many of the debtor nations have had to adopt.

Subbarao said that this implies that the euro is overvalued against the franc and that there is a possibility of some further limited weakness in the near term.

Early Friday, the euro had ticked up to CHF1.2995 by 0645 GMT from CHF1.2985 late Thursday in New York, according to EBS, as global risk sentiment improved marginally.

For the most part, major currencies remain range bound as the investors wait for the latest U.S. non-farm payrolls later in the day to give some indication over just how badly the U.S. recovery is faltering.

The euro is hardly changed at $1.2824 from $1.2821 but the dollar did manage to climb to Y84.28 from Y84.21 as Asian stock markets posted small gains.

The euro was also able to rise to Y108.08 from Y107.96.

]]> <![CDATA[Euro Bears Pick Time To Pounce. By Katie Martin]]> http://www.fxclub.com/dj-forex-focus/review2595/ Wed, 01 Sep 2010 09:47:00 +0000 Have euro floggers given up?

It rather looks like they have.

The single currency has spent barely a moment under $1.25 against the dollar since the start of July, and data on speculative bets show that negative punts on the euro--not so long ago the laughing stock of the currency markets--are still very cautious.

To euro fans, this is proof that the market's assault on the currency at the start of this year was overblown, and that the European Union and International Monetary Fund's rescue package has put the euro area back on a solid footing.

To everyone else, this is still a blip. A big blip, for sure, but one that simply has to run out soon.

Right now, the bond markets are taking the strain. As Commerzbank's analysts pointed out Tuesday, euro-area government bonds, and the cost to investors of protecting against those bonds defaulting, still imply "a high probability of the Greek rescue package failing."

Meanwhile, aside from the cash currencies market, options "are pricing in a high risk of the euro nose diving against the dollar," the bank said.

So why is the euro itself not budging?

The complicating factor, analysts agree, is the U.S. economy. Expectations for interest rate rises from the Federal Reserve any time soon have pretty much evaporated. The once dominant view that the U.S. would raise rates quickly--a slam-dunk reason to sell the euro against the buck--has now switched into growing expectations for further Fed easing. That inevitably pushes the euro higher even though few believe that the euro area's woes have been solved.

Now, though, euro pessimists are growing increasingly confident that the currency bloc's structural problems will resurface as a big theme in the market, and the euro will tumble.

Simon Derrick, a senior currencies analyst at The Bank of New York Mellon in London, points out that judging by his bank's custodial flows, which capture portfolio shifts by investors around the world, it's clear that the tide is turning.

It's worth watching these flows. Back in early June, even while currencies analysts continued to predict a meltdown in the euro, they showed a slowdown in shifts out of euro holdings before the currency stabilized and later started climbing. In hindsight, Derrick said, they were a solid leading indicator of what was to come.

Now, "we're starting to get some outflows from the euro," he said. "The underlying structural issues have not gone away, and we could easily see stresses in Spanish or Irish banks bring them to the market's attention again," he said. Brace for the euro to buckle soon, he predicted.

Euro bashers have made these calls [unsuccessfuly] before, and they'll make them again. But whichever way you cut it, the possibility--no matter how small--that a euro-zone sovereign borrower could default, or that the euro could conceivably cease to exist in its current form, is a bigger negative than a spell of loose monetary policy in the U.S.

"The failure of the Greek aid package would be a disaster for the euro, as it would illustrate that effective aid measures within the euro zone are impossible," said Commerzbank's analysts Tuesday. "This scenario hangs over the euro like the sword of Damocles. As a result, the fact that nobody expects a U.S. rate rise does not support the euro against the dollar," the bank said.

Maybe this time the euro doubters are right. It would be foolish to ignore that possibility, particularly if Japan starts intervening to weaken the yen. If that were to happen, and push the dollar higher across the board, then euro bears could well seize their moment.

In early European trading hours Wednesday, the euro was a little higher against the dollar at $1.2716 from around $1.2675 late in New York Tuesday according to trading system EBS, reflecting a modest pickup in equities that signals stronger investor sentiment.

Similarly, the dollar was up against the yen at Y84.46 from around Y84, while the euro was at Y107.39 from Y106.50. Sterling was at $1.5403 against the dollar from $1.5350.

The Swiss franc was a little weaker, again reflecting a slightly more positive tone in the financial markets, with the euro trading at CHF1.2920. The single currency sank to a fresh all-time low of CHF1.2850 in New York hours Tuesday. The dollar was at CHF1.0161, a shade above its levels late in New York.

]]> <![CDATA[The Waiting Game On Switzerland And Japan. By Katie Martin]]> http://www.fxclub.com/dj-forex-focus/review2583/ Tue, 31 Aug 2010 08:58:00 +0000
The chance that either will come into the market to tackle the soaring yen or franc is enough to put many traders off buying either currency against the dollar or the euro.

That means that buying one against the other in a "who will blink first?" trade is happy hunting ground for the brave.

This is, perhaps, a sign of how desperate currencies analysts are getting for good trades. Almost all major currencies [and indeed commodity-linked and emerging-market currencies too] are flashing bright red sell signals at the moment, so analysts and investors are forced to come up with some pretty creative ideas.

It does make sense, though, so it's worth weighing up the two.

By one measure, the Swiss are the more likely to take the plunge. After all, in real terms, the franc is stronger now than the yen, BNP Paribas pointed out in a note to clients last week. Some market-watchers believe that means the Japanese authorities will sit back and watch the yen climb much more--as long as it's a slow and steady move--before they try to flog it back down.

Still, even though the franc is now at an all-time high against the euro, which Monday sank below CHF1.2950 for the first time, few if any serious franc-watchers think a sting is coming.

That's partly because the Swiss economy keeps on proving itself perfectly capable of taking this strain, despite the risk to exports. Friday, the country's KOF index--a key leading indicator--did edge lower, suggesting that the country's economic recovery will slow for the rest of the year. Still, it was not a sharp pullback, and it comes after the index hit its highest level in four years in July.

If franc strength is seriously damaging, then that's not clear in the KOF think-tank's report, and the central bank is still reasonably likely to raise interest rates at some point late in 2010.

What's more, the SNB has already tried a heavy-duty program of franc selling this year, and it didn't exactly work, although one can argue that the franc would be much higher now if the central bank hadn't worked so hard to hold it down. The central bank's interventions, particularly during April and May when it was swimming against a heavy tide of euro weakness, "were a mistake," BNP Paribas said.

So, rule Switzerland out of the race to intervene, and buy the franc against the yen, the French bank concludes.

The chorus of political pressure in Japan for the central bank there to do something, anything, about yen strength is certainly pretty loud, and indeed, further easing measures are starting to emerge.

At an emergency meeting Monday, the Bank Of Japan's policy board voted to offer domestic financial institutions Y10 trillion of six-month loans at an ultralow rate of 0.1%. This was in addition to the Y20 trillion in three-month loans it had already been offering. We are constantly reminded that the authorities in Tokyo are watching the yen's climb with intense interest. Right now, though, the market is skeptical, and traders are continuing to push the currency higher.

Direct intervention, of the kind that is being threatened probably wouldn't work for long, particularly if Japan dived into the market without the help of the U.S. or the euro zone. It would also undermine international efforts to convince China to let the yuan climb. Still, a Japanese zap on the yen does seem somewhat more likely than a Swiss move. If the worst comes to the worst, and neither blinked, selling the yen against the franc in anticipation of such a development is a cheap bet to run.

In early European trading Tuesday, the currencies market was showing clear signs of nerves, with the yen and the franc--both seen as safe havens in times of stress--moving higher.

The euro was at CHF1.2940, according to trading system EBS, having dipped to a fresh record low of CHF1.2932 in Asian trading hours. It was at around CHF1.30 late in New York Monday.

The dollar was at Y84.12 against the yen, from around Y84.75.

The euro was weaker at $1.2643 from $1.2675, while sterling was also lower at $1.5431, from $1.5466.]]> <![CDATA[Aussie Will Suffer As The Doves Start To Circle. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2573/ Fri, 27 Aug 2010 10:04:00 +0000
In fact, the Aussie's rally over $0.90 earlier this month is hardly likely to repeated again just now.

The problem for the Australian currency is the increasing risk of a double dip recession in the global economy, which already has the dovish elements both in the U.S. and Japan seeking to increase monetary easing.

This is quite a turnaround from the days when financial markets were confident the recession was over and, as a leading commodity currency, the Aussie was able to capitalize on the prospect of increased global demand.

As reports from the central bankers' symposium in Jackson Hole, Wyoming, later today are likely to show, both Japanese and U.S. officials are now well aware that their economies aren't staging the recoveries that had been expected and that more monetary help is needed.

But in both cases the monetary easing hasn't emerged as quickly as expected.

In Japan, discussions between the government and the Bank of Japan over how to tackle the strong yen and fight deflation pressures have been going on for weeks. Only now are there signs that the country might be about to opt for an increase in non-conventional monetary easing, rather than direct market intervention to cap the yen's rise.

Similarly, in the U.S., dovish elements in the Fed may well be arguing for more quantitative easing now that more evidence that the recovery is stalling has emerged. But, these doves are facing opposition from Fed members who continue to fear the inflationary consequences of easy policy. Many even opposed the Fed's decision earlier this month to just hold liquidity conditions at current levels.

So, while both Japan and the U.S. negotiate their policy reactions to the new economic risks, chances are their economies will slow even further, ensuring that demand for commodities in general continue to decline.

For the Aussie, additional concern has come from China, Australia's principle trading partner. Efforts by Beijing to prevent the economy from overheating have proved even more successful than expected with recent trade data from both Japan and South Korea showing that while Chinese demand is still relatively strong, it has certainly lost momentum.

As the price of commodities have tumbled, so too have the prospects for further Aussie gains as the market waits to see how long it will take for the next global upswing to emerge.

Australian politics certainly aren't helping the Aussie either.

In itself, last Saturday's general election ending in a hung parliament shouldn't have posed a problem. With its budget deficit well under control, Australia isn't at risk from a downgrade like many other major economies, including the U.S.

However, coalition negotiations over the last week have thrown the issue of a tax on mining companies, that could hurt Australia's mining-intensive economy, back into the equation.

With three out of the four independent and Green members of parliament involved in the coalition talks supporting the tax, there is a high chance that it will have to be resurrected, especially now that Labor leader and incumbent prime minister, Julia Gillard, appears to be pulling ahead in the polls.

Just the headlines this week confirming the MP's tax position were enough to knock the Aussie lower.

Early Friday the dollar is also little changed against the majors as most players move to the sidelines ahead of events in the U.S. later Friday that should dictate the dollar's fate for many sessions to come.

At 1230GMT the second estimate of U.S. 2Q GDP figures will be released, where growth is expected to be revised down to 1.3% from the 2.4% advance estimate released in late July.

Then at around 1400GMT Federal Reserve Chairman Ben Bernanke speaks on the economic outlook and the Fed's response at the Kansas City Fed Symposium in Jackson Hole, Wyoming.

At Around 0640GMT Friday the AUD trades at $0.8873, little changed from $0.8867 seen in late New York trade Thursday.

The euro fetches $1.2720, down slightly from $1.2724 while the pound is worth $1.5522, down from $1.5530 and the dollar fetches Y84.70, up from Y84.41 seen in late U.S. trade Thursday.

The JPY slipped a little in Asia Friday as local newswires reported Japan's prime minister would hold a press conference later in the day to outline steps that would be taken to fight yen strength.]]> <![CDATA[Euro/Swiss Will Just Keep On Sliding. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2570/ Thu, 26 Aug 2010 07:30:00 +0000
Safe haven buying of the Swiss currency is showing little sign of waning as global recovery worries increase.

At the same time, though, the risk of Swiss National Bank intervention to stop the franc's rise is starting to fade. For now, the market remains highly nervous about pushing the franc too far in case the SNB steps in.

After pushing the euro down to a new record low of CHF1.2973 early Wednesday, investors have stepped back, letting the single currency bounce back over CHF1.30.

See the euro's latest performance against the Swiss franc:

However, they are likely to become bolder in coming days, especially if the SNB remains silent about its intentions and if new Swiss data continues to show strong growth, rising inflation and healthy exports.

UBS reckons that current levels for the euro against the franc are the "new normal," reflecting the Swiss currency's safe haven status as well as its strong economic fundamentals. Over at Societe Generale, forecasts are for the euro to fall as far as CHF1.25.

This is a long way from the view that prevailed for much of the last 18 months or so, as the Swiss central bank struggled to halt the franc's advance. Repeated intervention, aimed at preventing deflation, failed to stop the euro from sliding from well over CHF1.50.

Despite some respite earlier this summer, when the euro was able to rise close to CHF1.40, the single currency has come under pressure again amid worries over the global economic recovery and fears of a double dip recession.

A general investor move out of risky assets markets have put safe havens, such as the franc, back at the top of the "buy list."

But, as the UBS "new normal" tag suggests, the Swiss economy is strong enough to withstand more franc strength this time around.

Not only is the latest KOF survey, due Friday, expected to show a further improvement in sentiment but second quarter GDP numbers and the new consumer price index next week should confirm that the economy is still growing and that inflation, rather than deflation, could now be a problem.

As the SNB President Philipp Hildebrand made it clear late last week, deflation is now longer the problem it once was for Switzerland.

The SNB, meanwhile, is probably only too happy to step back from the markets.

Figures from the central bank last month showed a paper loss of about $9.5 billion because of interventions. The loss, calculated when the euro was between CHF1.33 and CHF1.34, is only likely to have grown even more now that the euro is down close to CHF1.30.

So as long as the franc's advance against the euro doesn't show any signs of accelerating in a disorderly manner, the SNB will more likely remain on the sidelines as the exchange rates adjust to new realities.

Early Thursday recovery in global risk sentiment helped the euro to continue its bounce back against the franc, with the single currency rising to CHF1.3090 by 0645 GMT from CHF1.3023.

The euro was also up, at $1.2700 from $1.2655 as Asian stocks staged a small rally despite Wednesday's disappointing new home sales and durable goods orders from the U.S.

The euro was also up, at Y107.62 from Y107.20 and the dollar was up a tad at Y84.73 from Y84.70 as the market continued to speculate on when the Japanese authorities will move to halt the yen's advance.

Sentiment towards the euro was helped by the latest German Gfk survey of consumer sentiment, which rose a little to 4.1 for September from 4.0 in August.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Dollar Will Gain As Global Worries Rise. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2566/ Wed, 25 Aug 2010 09:02:00 +0000
Sentiment has becoming increasingly gloomy in recent weeks as the risk of a double dip recession in the U.S. has grown and the outlook for the global recovery has been downgraded.

The problem for investors is that there is no reassurance that the authorities are taking appropriate action.

Just look at the U.S. A few weeks ago, the Federal Reserve did agree to extend its bond purchases and so preserve levels of market liquidity for now. However, there is no agreement within the central bank to do any more.

As it is, a report in The Wall Street Journal this week shows that seven of the 17 members of the Fed were against maintaining the size of the balance sheet. This split means that extending quantitative easing, in other words expanding the Fed's balance sheet even more, will prove even more difficult than expected.

It will be interesting to see how much this is acknowledged by Fed Chairman Ben Bernanke in his Jackson Hole speech at the end of the week. His speech will coincide with the release of data that are expected to revise second-quarter gross domestic product growth all the way down to 1.3% from 2.4%.

The problem is that it isn't only the U.S. recovery that is faltering so badly.

In Europe, second-quarter German growth may have been a more bullish 2.2%. However, its economy is still highly reliant on exports, which will only get worse as the global economy slows again, and its smaller weaker neighbors are only likely to act as an economic drag.

The sovereign debt problems of some members show little sign of going away and Moody's provided a further reminder of the risks by warning that it could knock Spain's credit rating lower next month. Standard & Poor's has already lowered Ireland's rating to AA- from AA late Tuesday.

The outlook for the U.K. is also deteriorating rapidly as massive public spending cuts kick in this autumn. Even the Bank of England's newest member, Martin Weale, has warned that the risks of a double dip recession in the U.K. are "significant."

Over in Japan, matters are even worse. The yen's recent role as a safe haven that has pushed the dollar to a 15-year low under Y85, has taken its toll. Growth is weak, deflation predominates and the Nikkei has tumbled below 9000 for the first time in 15 months.

See how the dollar has fallen against the yen in recent years:

But, there is little sign that the Japanese authorities are ready to either intervene in the markets or introduce some new policy easing to stop the yen's rise just yet, despite reports in Tokyo that the Bank of Japan will call an emergency meeting.

For investors, this lack of any imminent policy action by any of the major central banks or governments will only increase uncertainty and reduce their appetite for risk. With the CRB Index on the slide and commodity currencies under pressure, safe havens still look like the best bet.

Until now, the dollar has played this role along with the yen as well as the Swiss franc. However, as the U.S. currency slides to a 15-year low under Y85 and as the Swiss franc starts to become more of a problem for the Swiss authorities as the euro falls towards CHF1.31, chances are that the threat of action by central banks in both of these countries will rise.

As a result, both the yen and the Swiss franc could slide down the safe-haven league table, leaving the dollar to benefit more than before as the global outlook deteriorates once again.

Early Wednesday in Europe, global sentiment continued to slump, with data showing a further slowdown in Japanese export growth adding to the gloom. However, speculation over a Bank of Japan meeting helped to take the yen off its highs.

By 0645 GMT, the dollar managed to rise to Y84.30 from Y84.15 late on Tuesday in New York, according to EBS. The euro slipped to $1.2662 from $1.2674 but rose to Y106.73 from Y106.64.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Getting Ready To Deal With Yen Bulls? By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2560/ Tue, 24 Aug 2010 09:06:00 +0000
With concern over the global recovery still rising and with global appetite for risk still falling, the yen is likely to remain in demand as a safe haven.

This isn't good news for Japanese exporters, who have watched a decline in the dollar down to nearly Y85 erode their profits in the last few months.

See the dollar's fall against the yen in recent months:

Pressure on the Japanese authorities to do something about the yen's strength is only likely to grow later this week as new data from Japan, including unemployment, consumer prices and household spending, will reinforce forecasts for continued slow growth and more deflation.

Also on Tuesday, the Nikkei Index fell under 9000 for the first time since May 2009 because of exasperation over the lack of policy response.

So far, though, there has been little concrete sign of action by either the government or the Bank of Japan and yen bulls have been getting bolder.

Direct market intervention by the Bank of Japan has been largely ruled out, given the accusations Tokyo would face from the U.S. of currency manipulation.

This is certainly something the Japanese authorities would want to avoid ahead of the next meeting of finance ministers from the Group of Seven nations early next month.

Meanwhile, there has been a lot of talk that the central bank will ease monetary policy instead. This is being seen as another, more diplomatic, means of weakening the yen.

Speculation over such a move has been rife over the last week with the Tokyo rumor-mill going into overdrive about a meeting between Prime Minister Naoto Kan and Bank of Japan Governor Misaaki Shirakawa.

In the event, the two are said to have held only a 15-minute telephone conversation that didn't cover foreign-exchange intervention.

This lack of policy action has only encouraged the view that there is no consensus between the government and the central bank over how to tackle the strong-yen issue.

With the risk of early official action apparently removed, the yen has become that much more attractive as a safe haven, and investors have pushed it a little higher.

The latest data from the Chicago Mercantile Exchange showed that although yen long positions may have been reduced a little in the week to last Tuesday, they remained close to historical highs.

Also, the increase in safe-haven demand that has taken place since last Tuesday means that there is a good chance that yen positions have been increased again.

And this could be just what the Japanese authorities want.

By boosting market confidence that nothing is imminent, and encouraging more investors to go long of the yen, the Bank of Japan could be building the element of surprise.

So if the central bank does decide to make an unexpected policy change, the yen could fall sharply, springing a trap that would squeeze long positions and push the Japanese currency much lower.

This would certainly help to explain the complete lack of coherent policy coming out of Tokyo despite the growing pressure from corporate Japan for action.

Early Tuesday in Europe, the dollar slipped a little more against the yen, falling to Y84.94 from Y85.25 late on Monday in New York, according to EBS, as global risk sentiment took another hammering.

Contributing to the deterioration are a disappointing performance in global stock markets, a warning by a newest member of the Bank of England monetary policy committee that there is a "significant" risk of the U.K. falling back into recession, and expectations of another sharp fall in U.S. existing home sales later in the day.

The euro fell to Y107.29 from Y107.95, at one stage hitting a 8-year 9-month low at Y107.21.

The euro was also down at $1.2635 from $1.2665.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

Click Image to Enlarge

The way for the euro's decline has been opened by a combination of the latest wave in global anti-risk sentiment, proof that a strong Swiss franc isn't damaging the Swiss economy and clear signals from the Swiss National Bank that it isn't too keen on intervening again, at least for now.

The wave of anti-risk sentiment has been building for some time as concern over strength of the global recovery has become more acute. Momentum really took off last week, though, when a strong increase in U.S. jobless claims and a sharp fall in the Philly Fed index resurrected fears of a double-dip recession.

Put this together with chronic market fears of a sovereign debt default by Greece and investor interest in safe havens, such as the Swiss franc, is inevitable.

Of course, this happened in the past. But then, selling the euro against the franc was more of a problem as the Swiss National Bank had taken up nearly a permanent position in foreign exchange markets, trying to stop the franc from rising too fast.

Much has changed since the central bank was last thought to have intervened in mid-May.

For a start, the deflationary forces that the SNB so feared never materialized. On the contrary, the recent purchasing managers survey and the latest ZEW business sentiment index, which jumped by an unusually large 6.9 to 9.1, both point to a strong economic recovery.

Expectations of an interest rate rise have increased and even the SNB has hinted that it can't keep policy accommodative forever.

Swiss trade data late last week also gave Swiss franc bulls just the evidence they were looking for--a strong 1.9% rise in exports last month proving that Swiss industry has been able to cope with recent franc strength.

But, it is the evidence that the SNB is retiring from the market, at least for now, that should ensure that euro bears get their way.

Over the last few weeks, the central bank has reported hefty balance sheet losses created by the open market intervention that it has been conducting on and off since early last year.

SNB officials have now hinted that they have little appetite for accumulating more foreign exchange reserves and there was even speculation Friday that the central bank had been busy offloading its stocks of euro's in favor of the U.S. dollar.

If that continues, then rather than discouraging a further decline in the euro against the franc, the SNB may be actively encouraging flows that would only contribute to further gains in the franc against the single currency.

Around 0700 GMT, the euro was trading at a fresh seven-week low of CHF1.3107, down from CHF1.3142 late Friday in New York, according to EBS.

The euro was also up at $1.2724 from $1.2706, while the dollar was down at Y85.40 from Y85.75.]]> <![CDATA[The Pound Will Be More Resilient Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2549/ Fri, 20 Aug 2010 12:26:00 +0000
Not only is the U.K. economy in better shape to withstand the fiscal austerity storm that is about to break over its head, but continued investment fears of a sovereign default across the channel and a lack of confidence in the U.S. recovery means that the euro and the dollar are even less attractive alternatives.

Sterling bulls had long assumed the post-election party for the pound was over.

The pound had bounced all the way from nearly $1.40 to nearly $1.60 as the new coalition government led by the Conservatives promised a reduction in the massive budget deficit that threatened to undermine the country's first-class credit rating.

However, draconian public sector spending cuts and the higher taxes announced in the emergency budget in June soon injected some economic reality.

By early August, buyers were losing their appetite for the pound as the prospect of prolonged austerity brought speculation that the Bank of England would have to extend quantitative easing.

This week has proved, though, that those fears both about the economy and about early quantitative easing were overdone.

See how the pound is holding onto its gains:

For a start, minutes of the last Bank of England meeting showed that while the central bank may well have discussed introducing more liquidity, at least one member of its monetary policy committee meeting remains convinced that the bank should be starting to tighten, not loosen, policy.

Further evidence that the U.K. is more robust than markets expected came from a 1.1% rise in retail sales last month, nearly double the 0.6% increase that had been forecast. The data is remarkable in that it showed consumer confidence remaining strong in the month after the emergency budget was unveiled.

This followed last week's news that the U.K. jobs market is also proving more robust than anticipated.

On top of that, the country's finances may not be quite so dire after all, with the public sector net borrowing for July shrinking even more than economists had calculated.

Of course this doesn't mean that the U.K.--or the pound---is off the hook.

Far from it. Savage spending cuts are expected to start biting this autumn and early next year.

There are already signs of a major slowdown emerging in other economic figures released this week, including the slowest rate in M4 money supply growth since the data was first collected in 1983 and a sharp fall in mortgage approvals, that will hasten the recent downturn in house prices.

This could still mean another dose of quantitative easing from the Bank of England further down the line, especially if the recent spike in consumer price inflation is as short-lived as the central bank predicts.

However, this doesn't mean that the pound will lose all its attraction.

On the contrary, over the last week or two, developments in the U.S. and in the euro zone have reduced the attraction of the dollar and the euro as alternatives to sterling.

In the case of the dollar, the Fed may not be rushing into further QE either but its decision to preserve current levels of liquidity shows that the central bank is hardly confident in an early economic recovery.

Similarly, in Europe, hopes that the sovereign debt crisis is passing didn't last long. Several peripheral debtors may have held successful bond auctions over the last week or two but the cost of insuring Greek debt remains at sky-high levels, proving that investors still see Greece as a basket case.

As the Greek economy shudders to a halt under the pressure of its own austerity package, the chances of a Greek default are climbing and the attraction of the euro relative to sterling is once again on its way down.

Early Friday, the pound was under pressure like most other so-called high-yielders as risk appetite declined after the U.S. reported a sharper-than-expected rise in jobless claims last week and a dive in the latest Philadelphia Fed index this month.

As global stock markets fell back, the pound declined to $1.5565 from $1.5606 late on Thursday in New York.

However, the euro bounced back from an earlier decline to trade at $1.2826, up a little from $1.2820 late on Thursday. It was also up at Y109.47 from Y109.40 while the dollar was up at Y85.34 from Y85.29 as the Japanese government appeared to have eased pressure on the Bank of Japan to take action against the strong yen right away.

Economics Minister Satoshi Arai said the government had no specific plans for the Bank of Japan despite speculation earlier this week that the central bank is about to ease monetary policy even further.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Greece Will Keep Euro On The Slide. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2547/ Thu, 19 Aug 2010 13:05:00 +0000
Forget successful auctions in Ireland or bill issues in Spain, or even higher than expected second-quarter growth in Germany.

Instead, international investors remain convinced that the Greek economic restructuring is not going to work and that the country will still default on its debts.

The evidence is there for all to see in the price for insuring Greek debt.

Instead of falling in recent weeks as tensions over the sovereign debt crisis in the euro zone have eased, the cost of Greek credit default swaps has remained firmly over 800 basis points.

Not only is this higher--up to a factor of six--than the cost of insuring most other euro-zone debt, but it has continued to increase even after countries such as Spain and Ireland tapped the financial markets successfully this week.

On Wednesday, the cost of Greek CDS rose to as much as 826 basis points after closing lower Tuesday at 804, completely undermining any hopes that the sovereign debt crisis is going away.

In fact, tensions over the crisis could increase, especially as forward-looking surveys suggest that euro-zone growth could fall off a cliff in the second half of this year, making conditions even more difficult for those countries struggling to pay their debt.

A hint of the problems to come were flagged in the latest ZEW business sentiment survey from Germany this week, which showed that while current market conditions might be much better than expected, economic expectations were much lower than forecast.

So even though the euro may have staged a little bounce on the news that Spain and Ireland had successfully completed their latest round of funding, market attention has quickly refocused on Moody's warning over Spain's fiscal outlook and the admission by the Bank of Ireland governor that the country's domestic banking system needs more capital.

News that the European Central Bank's overnight borrowing reached a three-month high this week will also have injected fresh concerns about the health of European banks in general.

It is not surprising that the euro, which not so long ago looked as though it were headed for $1.35 or higher, now finds itself struggling below $1.30. Even the news from Ireland and Spain wasn't enough to help it back over resistance just above $1.2900.

See how the euro has slipped against the dollar in recent weeks:

Click Image to Enlarge

While a further decline against the U.S. dollar is more than likely, especially if the U.S. Federal Reserve doesn't raise expectations of further quantitative easing, the euro could find that fiscal fears about Greece keep it sinking particularly fast against the currencies of countries where fiscal rectitude remains the rule, such as the Norwegian krone and the Canadian dollar.

The euro was taking another hit early Thursday in Europe after a report in German magazine Der Spiegel suggested that the Greek economy was being dragged down by the country's austerity measures, with unemployment rising to 70% in some places.

By 0645 GMT, the euro has fallen to $1.2813 from $1.2860 late Wednesday in New York, according to EBS.

However, the euro bounced to Y110.09 from Y109.87 after a report in a Japanese newspaper, Sankei, suggested that the Bank of Japan was considering additional easing measures including fresh injections of liquidity. The dollar rose to Y85.91 from Y85.43.]]> <![CDATA[GBP Triangle by Andrei Tratseuski]]> http://www.fxclub.com/dj-forex-focus/review2543/ Wed, 18 Aug 2010 14:38:00 +0000
Trading the Pound will be hard until the dreaded Retail Sales release. Nonetheless, there is some sort of technical analysis that is prompting the currency pair to move. On 1-Hour Chart, GBP/USD is showing a solid Broadening triangle (Right Angle/Descending Triangle). The following formation tends to be bullish. Being on the bottom of a downtrend, the following formation calls for a possible move to the upside. In order for this pattern to manifest, a resistance level needs to be breached. Current Resistance level hovers at 1.5715, a break of the following level would prompt a rally to the upside. Nonetheless, there are some obstacles that need to be leaped over in order for the pattern to manifest. First of all, the volume has decreased during a rallying stage, suggesting a possible exhaustion of a movement. Nonetheless, we have to keep in mind that big portion of the money is sitting on the fence waiting for the release of Retail Sales. Furthermore, the flow of Money has dwindled during the same timeframe, causing room for a concern. The key for future movement to the upside will be the price action today. IF the price action will be able to hold above the lower 1st Standard Deviation of the Bollinger Bands located at 1.5525, we can expect a price movement to the upside. However, if currency breaks that support level, expect a move to the lower bound of the triangle formation.

]]> <![CDATA[Aussie Looking Ripe For A Fall. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2540/ Wed, 18 Aug 2010 10:18:00 +0000
If anything, the currency's climb back over $0.90 makes it look even more ripe for selling.

See how the Aussie has bounced:

Click Image to Enlarge

At the moment, a recovery in global risk appetite combined with an upbeat assessment from the Reserve Bank of Australia have helped to fuel the rebound.

After all, the Australian economy is still well out front in terms of growth prospects of major economies. As the latest business sentiment survey from Germany reminded us Tuesday, strong improvements in the first half of the year are likely to disappear quickly in the second half.

However, despite all the optimism from the RBA, which has some economists anticipating another Australian rate hike as early as November, the outlook for the Australian economy, and for the Aussie, is not anywhere as good as it once was.

The decline that has brought the Aussie back down from well over $0.92 early this month looks very much like it is here to stay.

First of all there are international pressures.

The outlook for the global recovery is being ratcheted steadily lower, not only because of disappointing growth data from the U.S., the euro zone and Japan, but also from signs that the Chinese economy is losing momentum.

This means that Australia's primary trading partner is not living up to scratch and commodity prices, to which the Aussie is so closely aligned, are likely to continue softening.

As Bank of New York Mellon's currency strategist Neil Mellor pointed out: "Perhaps significantly, the Australian dollar's lock step retreat with the Commodity Research Bureau index since early last week has also coincided with a modest retreat by investors from Australia's asset markets."

There is also the risk element.

If the global economic outlook continues to deteriorate and international investment flows continue to shift in favor of safe havens, then the higher-yielding Aussie will be even more in the firing line.

Domestic developments aren't helping the Aussie either.

Although the RBA may say the current level of interest rates is appropriate for now, there are those who feel that the central bank's past rate increases have been overdone. In other words, the RBA has raised rates too fast too soon, given that the global recovery is now struggling.

As these higher interest rates start to bite, Australia could well be forced to scale back its growth projections even more.

Last but not least of the domestic risks for the Aussie is this weekend's general election. Prime Minister Julia Gillard's bid to keep her Labor Party in power could easily fail--leaving Australia with a hung parliament that would hardly be seen as supportive for the country's currency.

Early Wednesday, the Aussie had slipped slightly to $0.9027 by 0645 GMT from $0.9052 late Tuesday in New York, according to EBS.

Profit-taking hit most high yielders, which had previously benefited from stronger data from the U.S., upbeat comments about the economy from Minneapolis Fed President Narayana Kocherlakota and rallies in both the Dow Jones Industrial Average as well as the Nikkei.

The euro slipped back to $1.2847 from $1.2879 and to Y109.81 from Y110.12. The dollar was flat at Y85.51 compared with Y85.50.]]> <![CDATA[The Euro's Ascent by Andrei Tratseuski]]> http://www.fxclub.com/dj-forex-focus/review2538/ Tue, 17 Aug 2010 14:28:00 +0000

Looking at the technical analysis spectrum, we find that Euro remains in relatively stable intermediate uptrend. However, the tides might be changing if the EUR/USD pair can fall below pivotal technical levels. Current support lingers at 1.2830, represented by 20-period SMA on 1 hour Charts. The following level is also a lower bound of uptrend channel. The volume gauge has increased during selling of the EUR/USD suggesting that a move to the bottom of the channel is highly probable. Nonetheless, 1.2830 will act as a key barometer whether or not the current rally will hold. A move below 1.28 is highly likely within the next 24 hours if the support level is breached. On the upside we see a strong resistance level of 1.2920. The current resistance level is represented by the high of the day which failed to be cleared for the second consecutive session. There are no key economic events which may spur the currency pair in either direction, therefore, anticipate technical’s to rule the day.]]> <![CDATA[Why The Dollar Should Rise Some More. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2535/ Tue, 17 Aug 2010 09:36:00 +0000
Over the last week, the risks of U.S. deflation have receded.

On the other hand, the outlook for the Japanese economy has deteriorated and hopes for an early end to the euro zone's debt crisis appear to have been too high.

In other words, the attraction of the U.S. currency should continue to rise.

See how the euro has started to slide against the dollar this month:

Click Image to Enlarge

Let's look at the U.S. itself.

The economic recovery there remains fragile, as reflected in the Fed's decision to sustain market liquidity levels for now and remain on guard to extend quantitative easing if needed.

However, gentle improvements in consumer confidence, a rebound in retail sales and even the latest consumer price figures suggest that the recovery may not be stalling quite as badly as many feared.

In fact, inflation numbers last Friday suggested there has been little increase in deflation pressure over the last month and the need for more quantitative easing is that much less likely.

This slightly more robust view of the U.S. contrasts with developments in both Japan and the euro zone.

News on Monday that Japan had achieved annualized growth of only 0.4% in the second quarter came as a shock, given forecasts for growth of 2.3%.

This will only increase political pressure on the Bank of Japan to pour even more liquidity into financial markets, not only to help the economy by easing policy but by helping to cut off the yen's recent rise.

Japan has been suffering of late from the yen's safe haven role, that has pushed the currency higher and poses a threat to the country's export-led upturn.

Developments in the euro zone may have been different but are no less negative for the euro.

The cost of debt funding in peripheral euro-zone debtor countries has started to rise once again, making it more expensive for these countries to refinance their borrowing and increasing the risk of default.

This has combined with data showing that growth in Germany is soaring not only ahead of expectations but well ahead of most of its euro-zone neighbors.

For the euro, however, this of little consequence. Global investors are well aware that the risks for the single currency are all associated with the problems of the peripheral countries.

They will be more focused on the results of the latest bond auctions in Ireland and Portugal, later Tuesday and Wednesday, respectively, for any evidence that funding costs are still rising.

However, there is another reason why investors will steer clear of the euro. The diverging growth patterns between core euro-zone members, such as Germany, and the rest of the region, suggest the European Central Bank will face an even greater difficulty setting monetary policy at an appropriate level for all members.

So while interest rates are likely to remain low in most countries for the time being, those in the U.S. could well be increased first in a move that would leave Japan and the euro zone lagging far behind.

Early Tuesday, the euro was finding a little support on hopes that the Irish bond auction, which should raise about EUR1.5 billion, proves successful. The market will not only be looking at overall demand for bonds but also the price Ireland has to pay.

More good news could come from Germany too, in the form of the latest ZEW business sentiment survey, especially if the current conditions index comes in up at 21 from 14.6 as forecast.

By 0645 GMT, the euro had risen to $1.2834 from $1.2818 late on Monday in New York, according to EBS. The single currency was also up at Y109.49 from Y109.35.

The dollar ticked up a little to Y85.35 from Y85.30 as speculation over Bank of Japan intervention to halt the yen's rise increased after former finance ministry official Hiroshi Watanabe said Tokyo may intervene if the yen rises too rapidly, but that there is no need to act on the yen for now.

Investors are also looking ahead to a meeting between Prime Minister Naoto Kan and BOJ Governor Masaaki Shirakawa next Monday to see if they decide to introduce any further monetary easing.]]> <![CDATA[USD/JPY and Deflation]]> http://www.fxclub.com/dj-forex-focus/review2531/ Mon, 16 Aug 2010 19:44:00 +0000
First and foremost, Japanese government is participating in the quantitative easing program. Quantitative easing is fiscal and monetary actions to jump start the economy through artificial measures. Secondly, the newly elected government is proposing to alter the economy. The officials are attempting to add growth to the economy internally by creating a greater demand domestically from a consumer. In turn, the Japanese government is hoping that the will be capable on simulating the same economy that the United States has. In short, Japan wants to be consumer driven economy, not export based economy. There are many advantages and disadvantages for this, yet in order to circumvent to this they need to raise the value of the currency. By raising the value of the currency, the demand internally will finally originate as it will be cheaper for the consumer to purchase goods. The government in turn is risking a lot, persist the inflation and continuing to down weight the economy as corporate businesses fail to make adequate profits.

So for the time being, the Yen has a lot of pressure on heading down further. The only obstacles on its weigh are positive readings from other economies which may prompt risk appetite frenzy. Currently, we will turn our attention to 1-Hour chart, where the USD/JPY currency pair is drastically oversold. The Money Flow Index is certainly in the oversold territory, while the Volume in the Hammer Candlestick formation was rising. The following suggests that the bulls and the bears are battling for that ground. With less money pressing on the US Dollar, we may see a quick relief rally to the upside. Currently, we expect for the USD/JPY to jump to 85.75, a 38.2% Fibonacci Retracement of today’s low and yesterday’s high before turning again to the downside. Nonetheless, with a tremendous downward trend the pair might take us below 85.00, before any reversals can originate.

]]> <![CDATA[Swiss Franc Is Even More Of A Problem Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2527/ Mon, 16 Aug 2010 07:36:00 +0000
As the global recovery falters and concerns over the euro zone's debt funding problems return, the Swiss franc is once again on the rise.

With the economy now weaker than it was a few months ago, a strong franc is the last thing Switzerland needs.

But, as the SNB found out earlier this year as it fought to prevent the euro from falling under CHF1.50, intervention doesn't really work.

The problem is, the need to intervene appears even more imperative than it was before.

The SNB always claimed that its previous intervention was designed to prevent deflation. Only a few weeks ago, one of the central bank's board members Jean-Pierre Danthine was crowing that "deflationary trends have practically disappeared today."

But here we are three weeks later with a Swiss economy showing distinct signs of a slowdown and with spare capacity showing little signs of shrinking.

To make matters worse, the latest set of consumer price figures show that deflation still remains a threat with the core inflation rate hovering just above zero at 0.1% on the year.

The data should ensure that any vestigial talk of interest rates hikes when the SNB next meets on September 16 is dropped fast as the Swiss central bank, like those of most other major economies, contemplates what may be needed to prevent their economies facing a double dip recession.

However, unlike most other central banks, which are faced with weaker currencies that will essentially ease monetary policy and make exports more competitive, the SNB is burdened with a rising franc that will inflict even more damage on a beleaguered Swiss economy.

The problem for the SNB now is how to respond.

Despite its repeated intervention, selling the franc against the dollar and the yen, not only did the euro still manage to fall from over CHF1.50 all the way down to CHF1.30 by the end of June but the central bank itself ran up a bill of CHF4 billion in exchange rate losses in the first half of the year.

Since then, the euro may have managed to bounce back to about CHF1.40 but as its strength erodes the single currency has already fallen back to under CHF1.35, posing an even more serious dilemma for the SNB this time around.

See how the euro has fared against the franc in recent months:

With risk appetite remaining poor early Monday in Europe, the Swiss franc was being pushed higher - with the euro falling to CHF1.3381 by 0645 GMT from CHF1.3415 late on Friday in New York, according to EBS.

The dollar was down at CHF1.0436 from CHF1.0516.

The dollar also fell to Y85.88 from Y86.28 as weaker than expected Japanese GDP growth in the second quarter sent investors scurrying for safe havens.

However, after early losses, the euro was staging a rebound in early dealing, rising to $1.2822 from $1.2757. It was also back up at Y110.19, nearly unchanged from Y110.21.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Sterling Has Uglier Sisters. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2523/ Fri, 13 Aug 2010 12:39:00 +0000
So, while it may now have seen the best of its recent gains against safe haven currencies, such as the dollar and the yen, it will still do better than others, such as the euro.

See how the pound has started to come down against the dollar:

Click Image to Enlarge

But how it has held up against the sliding euro:

Click Image to Enlarge

At the moment, there are two reasons to sell the pound.

Global risk sentiment has taken a hammering in the wake of the Federal Reserve's decision to lower its U.S. growth outlook and preserve market liquidity for longer.

As concern over the global recovery has risen, investors have lost their appetite for risk and headed straight for traditional safe havens.

The other reason to bring sterling's rally to an end is this week's downgrade in the Bank of England growth outlook for the U.K., which helped to confirm market fears about the economy.

While the country's second quarter growth may have been better than expected, new data showing a downturn in house prices, tighter credit conditions and softer consumer confidence all suggest that the recovery is stalling just as the new coalition government prepares to introduce even more fiscal austerity.

With the central bank also lowering its outlook for inflation in the next year or two and with dis-inflationary forces showing signs of growing, there is still the risk that the Bank of England will need to resort to further quantitative easing.

The bank's governor, Mervyn King, may have sidestepped a direct question on the possibility of more QE but he did suggest that more could be introduced if that was appropriate.

As far as U.K. interest rates are concerned, there is little sign that hikes will be under discussion any time soon.

With the U.K. growth downgrade just adding to worries about the global recovery, risk is likely to remain off the table for even longer, providing more reason to look for sterling losses against the safe havens.

Nevertheless, there are other currencies against which sterling will remain on top--such as the euro.

This week has seen the return of financial market jitters in the euro zone as slower global growth and disappointing euro-zone data, including Thursday's disappointing fall in industrial production, suggest that conditions for debtor nations will remain difficult.

Without a quick recovery, the risks of debt default will start to grow again. This has already been reflected in wider yield spreads and a higher cost for credit default swaps.

So while economic conditions in the U.K. may appear tough, those in the euro zone appear to still be even tougher, ensuring that the pound should continue to trade at a premium against its euro zone counterpart.

Although, the euro is still holding up over GBP0.8200, market analysts are still looking for an early test of support around GBP0.8180.

Early Friday in Europe, the euro was getting a lift from news that Germany's second quarter GDP growth was 2.2%, much more than the 1.4% that had been expected and much faster growth than the 0.2% that the country managed in the first quarter.

This had lifted hopes that euro zone GDP figures as a whole, due later in the day, will also come in better than forecast and lift some of the market's recent concerns about the higher funding costs being faced by peripheral members such as Greece and Ireland.

Otherwise, market sentiment is still dominated largely by a flight to safety as concerns over the global recovery remain high. Thursday's data showing the largest rise in U.S. jobless claims in six months and worries about retail sales and consumer confidence figures due later Friday are likely to continue driving the market.

By 0645 GMT, the euro had rebounded a little to GBP 0.8249 from GBP0.8236 late on Thursday in New York, according to EBS. It was also up at $1.2890 from $1.2833.

The pound rose to $1.5625 from $1.5581 while the dollar rose to Y86.10 from Y85.90.

The euro also rose to Y110.95 from Y110.23.]]> <![CDATA[Renewed Euro-Selling Is On Its Way. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2519/ Thu, 12 Aug 2010 10:16:00 +0000
And for the euro, that is not good news.

A renewed widening in yield spreads, heightened fears that peripheral European nations are falling behind their core peers and a general fall in appetite for risky assets all mean that the single currency will come under renewed selling pressure.

It isn't surprising that forecasts for euro parity with the dollar as early as next year are once more being expressed.

For the past few weeks, the euro has had some respite, reversing about one-third of its previous drop as investors were distracted by disappointing U.S. economic data and fears that the U.S. central bank's Federal Open Market Committee would extend its quantitative easing program.

In the event, the Fed's policy shift wasn't quite as radical as that but its downgrade of growth forecasts and its decision to preserve current liquidity levels once again undermined investor confidence in high-yielding assets.

The investor-pull back from the euro, which has already brought the single currency back down under $1.30 from over $1.32 in the immediate aftermath of the FOMC decision, is only likely to get worse in coming weeks as data show the euro zone's strong second-quarter economic performance already coming to an end.

See how the euro has already started to turn down against the dollar:

Click Image to Enlarge

Earlier this week, industrial production figures from France showing a 1.7% fall in June gave a taste of things to come.

The problem is that this slowdown in the core countries of the region, such as France and Germany, will be even more damaging for the peripheral members that are already lagging well behind.

Now, with the Fed downgrading the U.S. outlook, and with both Chinese and Japanese economic data of late proving less robust than expected, the prospects for economic recovery in the euro zone and the wider world have deteriorated that much more.

As a result, worries about the euro zone's financial stability, and the ability of some peripheral countries to keep on funding their deficits, have once again started to rise.

Over the last few days the yield spreads of peripheral countries have widened relative to those of German government bonds and the cost of five-year credit default swaps from Greece, Ireland, Italy, Spain and Portugal have all risen.

And now, the rise seen in swap spreads between the euro zone and the U.S. in recent months is likely to reverse, ensuring that the euro loses much of its current yield attraction against the dollar.

The currency strategy team at Commerzbank AG puts it this way:

"It is unjustified that the spread between two-year dollar swaps and two-year euro swaps has widened from levels around 0 at the end of May to almost 70 [basis points] now. As soon as this realisation takes hold on the markets a part of the current euro strength is likely to disappear again."

Of course, a weak euro should help the core euro-zone countries by boosting their export income, but the peripherals will more than likely be left behind, increasing their divergence from the core, making a two-speed Europe more likely and putting the future of the single currency even more in doubt.

Early Thursday, the euro staged a small rebound despite a continued decline in Asian stock markets. By 0645 GMT, the single currency was up at $1.2887 from $1.2882 late on Wednesday in New York, according to EBS.

It was also up at Y110.21 from Y109.99.

The reversal was helped by a rebound in the dollar against the yen after its brief decline under Y85 on Wednesday prompted fresh verbal intervention from Japanese officials. Japanese Finance Minister Naoto Kan is said to have described the yen's recent moves as "rough" and a "little too rapid."

The U.S. currency rebounded to Y85.55 from Y85.37 as a result.]]> <![CDATA[Now Watch Currency Tensions Rocket. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2515/ Wed, 11 Aug 2010 09:26:00 +0000
Growth in the three major economies is proving disappointing with domestic demand faltering and reliance on exports growing. Just look at the Fed's latest downgrade for U.S. growth Tuesday, prompting it to extend its liquidity measures for the market.

Japan has long been the main basket case of the three, with repeated fiscal stimuli failing to kick start consumer demand. Even hopes for a solid rebound in the country's machinery orders earlier Wednesday were disappointed.

In recent months, as the dollar tumbled towards Y85 and the yen has become less competitive, currency tensions have worsened.

So far, there has been little sign of Tokyo doing anything about the yen's rise, apart from increased verbal intervention about the damagingh effects of further yen strength on the economy.

Despite expectations to the contrary, the Bank of Japan let its latest policy meeting this week pass without resorting to any further monetary easing, which might have helped to pull the yen back down.

The other option--direct market intervention--is still on the table but is unlikely to be used just yet.

First, the Bank of Japan would have to conduct any such exercise on its own as there is little reason for any other central bank to help.

Secondly, market intervention, pushing the dollar higher, would hardly go down well in Washington as the U.S. tries to avoid its own slide back into recession.

The Bank of Japan also has a third problem, China.

Greater demand for Japanese assets, at the expense of U.S. Treasurys, further increases the likelihood that the dollar will soon fall under key support at Y85 and head toward Y80.

See how the dollar has fallen against the yen:

Click Image to Enlarge

China is now more of a global problem in other ways too.

Trade data for July show exports were stronger than expected while imports failed to meet expectations--suggesting that while global demand is still doing well, Chinese demand is slowing faster than anticipated.

This will destroy hope that Beijing will be confident enough to allow the Chinese currency, the yuan, to advance any faster than it has over the last few weeks since the Peoples' Bank of China released the currency from its fixed dollar peg.

As Mark Williams, senior Chinese economist at Capital Economics in London said: "Something will have to change if China is to avoid a period of sub-8% growth, which we believe remains politically-unpalatable."

As the U.S. faces its own deflation fears, Washington will hardly be keen to see the dollar staging any serious recovery at this stage.

In fact, pressure on China to stop manipulating its currency will increase once again just as disapproval of any attempt by Japan to drive the yen lower through market intervention are likely to grow.

The latest data suggest that there will be little pressure on Beijing to change the status quo. The country's retail sales growth has slowed and consumer price inflation hasn't risen as strongly as expected. In other words, there is even less reason to have a stronger yuan.

Early Wednesday in Europe, the dollar was displaying considerable resilience in the wake of the Fed's decision to use the proceeds from maturing mortgage-backed securities to buy U.S. Treasurys and so prevent any decline in market liquidity.

As investors sought the comfort of safe havens, the euro was pushed down to $1.3048 by 0.645 GMT from $1.3187 late Tuesday in New York, according to EBS.

The single currency also tumbled to Y111.42 from Y112.58 while the dollar traded little chnaged at Y85.36 from Y85.35.]]> <![CDATA[Turning Dollar's Losing Streak Into A Winner. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2511/ Tue, 10 Aug 2010 09:27:00 +0000
At the moment, financial markets are heading into the Federal Open Market Committee later Tuesday expecting the Federal Reserve to confirm the worst.

The decline in U.S. two-year Treasury yields to a new record low suggest markets are braced for the Fed to confirm that deflationary risks have returned to the U.S. economy and that quantitative easing needs to be increased, not just preserved at current levels.

As a result, dollar support has continued to ebb away, especially against the yen, in a market that has been driven largely by yield differentials.

See the dollar's steady decline against the yen:

Click Image to Enlarge

Despite concerns about Japan's recovery and constant warnings about what the yen's rise will do to Japanese exports, the market had remained fixated by evidence that the U.S. recovery is faltering and that a double-dip recession is in store.

However, this is the point at which market fears could turn into reality and investor appetite for yields finally disappear.

Chances are that if the Fed does confirm that the U.S. outlook is as bad as the market has been speculating, yields could fall even further but investors just won't care.

In fact, global market sentiment could take another dive as investor concerns about the U.S. recovery leads to a retreat from risky assets--back into safe havens such as the dollar.

Let's face it, if the U.S. is in such dire straits, where are the other major fiscally-constrained economies headed?

One comment from UBS currency strategists sums it up: "We remain constructive on the dollar's prospects given that growth differentials between the U.S., the euro zone, Japan and the U.K. are likely to widen to the dollar's advantage into year-end."

Of course, that is the worst case scenario, where the U.S. is seen hurtling towards deflation, taking other major economies behind it.

The other option is that financial markets have got it wrong. They have got carried away, read too much into recent dovish comments from Fed officials and pushed Treasury yields much lower than is warranted.

So if the Fed comes out later today, either just preserving liquidity levels for a little longer, or postponing any monetary moves until its next meeting on September 21, global risk appetite may not come under pressure after all.

But, Treasury yields will more than likely bounce, ensuring that at least some of the support that the dollar has lost in recent weeks returns.

For speculators, who cut their dollar positions by the largest amount in a single week since July 2008, this could be bad news, as a dollar rally would force a scramble to cover dollar shorts.

Early Tuesday, the dollar was finding a little respite from last-minute book-squat ring ahead of the FOMC as well as from news that China's trade surplus had grown more than expected with its exports rising by a hefty 38.1% in the year to July. This signalled that while domestic demand might be flagging, global demand is strong.

The dollar remained steady at Y85.86, compared with Y85.84 late on Monday in New York, according to EBS, as the Bank of Japan confirmed that it was leaving rates and liquidity levels unchanged. Some market players had been looking for signs that the central bank would ease more.

The euro fell to $1.3165 from $1.3225 as well as to Y113.02 from Y113.57.]]> <![CDATA[Wheat Rally To Help Emerging Markets Next. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2506/ Mon, 09 Aug 2010 13:19:00 +0000
But, it is in emerging markets, especially in Asia, where the main gains might come.

News that Russia is banning wheat exports has already sent the Canadian currency soaring up to barely a cent away from parity against the U.S. dollar.

See the U.S. dollar's fall against its Canadian counterpart:

Click Image to Enlarge

Not only will Canada benefit as a major wheat exporter from the nearly 94% rise in wheat prices, but the country will also gain if the reduced use of wheat in alternative energy projects pushes the price of crude oil higher too.

Elsewhere in the developed world, other major wheat exporters such as Australia and the U.S. should also find some benefit in their terms of trade.

But Japan and the U.K. will also suffer given their dependence on imports.

But, it is the relative impact on global inflation pressures that will probably decide which currency gets the most help from the wheat rally.

Of course, the higher wheat prices, and the fall out they will have on other food prices including meat and wheat substitutes, will soon filter through to higher consumer prices around the world.

This could well hasten a global rise in interest rates despite continued doubts about the strength of the global recovery.

The impact on rates in each country will not only depend on where inflation pressure are at the moment but also on how important food prices are in their economy.

This is where, as far as winners are concerned, emerging market currencies could step up to the plate.

Unlike their counterparts in the developed world, who are still saddled with the credit and banking crisis that plunged the world into recession two years ago, their economies have pulled well ahead.

If anything, growth has accelerated to levels where demand has started to outstrip supply and consumer prices have started to rise.

However, it is the relative importance of food, and thus wheat, in their economies that will increase upward pressure on rates.

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, said that while food only accounts for 10-15% of the consumer price index baskets in the developed world, in China it is about one-third and in India, Vietnam, Pakistan, Philippines and Russia, it is anywhere up to 40%.

Given the economic recoveries that have taken place in many emerging markets, corporate pricing power has also risen, ensuring that companies are less likely to absorb the higher prices in their margins and more likely to pass them on to the consumer.

Higher interest rates and higher emerging market currencies could also be more readily tolerated, especially in that they help to reduce the cost of food imports and lower political pressure on many emerging market governments.

So while the Canadian dollar may be coming on top right now and while global yields in general might rise, it is the currencies of emerging markets that could well find themselves back in the spotlight if this rally in the world wide cost of wheat continues.

Early Monday, the Canadian dollar was experiencing a little correction against its U.S. counterpart after Canadian unemployment data disappointed. This helped the U.S. dollar to stage a bounce even though U.S. non-farm payroll data came in lower than expected and encouraged more speculation of further easing by the U.S. Federal Reserve on Tuesday.

The U.S. dollar rose to CAD 1.0283 by 0645 GMT from CAD1.0268 late Friday in New York, according to EBS.

The dollar also bounced a little to Y85.55 from Y85.40 as investors squared positions ahead of the Fed. The Yen was probably helped lower by comments from Japanese Finance Minister Yoshihiko Noda that he is closely watching the Japanese currency's movements.

The euro was down a little at $1.3288 from $1.3294 even though German exports figures came in at the highest level since October 2008. The single currency was also up at Y113.70 from Y113.48.]]> <![CDATA[Is Kiwi Losing Commodity-Currency Status? By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2502/ Fri, 06 Aug 2010 08:47:00 +0000
For weeks now, the New Zealand currency has been cashing in like most other commodity currencies on the prospects of a global recovery.

The upward ride hasn't been smooth, especially with Chinese growth slowing down and the U.S. economy showing signs of faltering.

But the general theme has been similar for New Zealand, Australia and Canada: their economies are recovering, their interest rates are rising and, as long as investor appetite for risk remains high, their dollars remain attractive.

This week, however, the kiwi found itself tumbling to the bottom of the economic greasy pole.

While the New Zealand dollar may still be able to hang on to gains against the U.S. dollar-- if fears of monetary easing in the U.S. continue to increase--it now looks set to suffer both against its Australian and Canadian counterparts as investors factor in the outlook for the New Zealand economy failing to live up to expectations.

The negative news has been building gradually over the last week or two. With economic data repeatedly disappointing on the downside, Reserve Bank of New Zealand Governor Alan Bollard has been trying to scale back expectations of rate increases.

However, the extent of the disappointment wasn't driven home until Thursday, when the government released data showing that unemployment jumped up all the way to 6.8% from 6.0%.

Not only did this lead to an instant re-rating of the New Zealand economy but it also erased any hopes that the RBNZ will increase rates again next week.

The unemployment numbers were particularly damaging as they came at the end of a week in which Australia had been celebrating a record trade surplus that showed extensive export growth.

This proved that even if its domestic economy were to flounder, export demand would keep growth on track, unlike the growth of its smaller antipodean neighbour.

As strategists at Societe Generale SA said, where once their policy was go "long antipodeans," it is now just to go long aussie.

How badly the kiwi suffers against the U.S. dollar will probably depend very much on U.S. rate expectations. However, the New Zealand currency could still find some support as long as New Zealand rates are still expected to rise before those in the U.S.

Its performance against the other commodity currencies is likely to be more certain as investors start to differentiate among the factors that drive the different commodity economies.

How far the kiwi will be pushed remains to be seen but some are now forecasting that the aussie's next stop will be up at NZD1.28.

See how far the kiwi has already fallen against the aussie:

Early Friday in Europe, the Australian dollar was up at NZD1.2595 at 0645 GMT. The aussie dollar had also been able to rise to $0.9169 from $0.9158 late on Thursday in New York, according to EBS, while the kiwi slipped to $0.7287 from $0.7302.

The kiwi failed to benefit from a general improvement in market sentiment that helped the euro to rise to $1.3197 from $1.3186 and to Y113.63 from Y113.16. The dollar was also up at Y86.12 from Y85.74 as the market waits for the latest U.S. payrolls data later in the day.

Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)]]> <![CDATA[Dollar Bears Will Soon Have Had Their Day. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2497/ Thu, 05 Aug 2010 09:55:00 +0000
A combination of soft U.S. economic data, over cautious Fed officials and sliding Treasury yields have all raised expectations of more quantitative easing.

As a result, the dollar has been sold heavily over the last few weeks as investors have turned elsewhere for higher returns.

See the euro's rise against the dollar:

However, the whole dollar-selling exercise has been overdone.

Chances that the Fed will actually ease policy further at its open market committee meeting on Tuesday are slim, to say the least.

Even if the Fed does surprise financial markets with a move, there is growing evidence that other central banks will have to follow suit.

This is hardly a reason for bears to continue selling the U.S. currency against other majors.

One of the unusual and telling developments in recent weeks has been the diverging performances of U.S. Treasurys and U.S. equities.

While Treasury yields have edged steadily lower to new record lows, with the two-year yield reaching a new nadir of 0.51% this week, equity markets have continued to rally.

Now, it looks more and more that the buoyant equities are right.

Sure, Fed officials are standing by, ready to react if the U.S. economy is about to fall back into recession. The fact that inflation expectations have subsided have only made them wary that further easing might be needed.

But falling inflation expectations aren't the be-all and end-all of Fed policy.

As Steve Barrow, senior currency strategist at Standard Bank in London, pointed out, Fed policy is also being guided by the inflation rate itself as well as unemployment.

"Right now, we'd say that there's only one of these three factors (out of inflation, inflation expectations and unemployment) that's flashing warning signs and that's not enough for a material change in Fed policy," Barrow said.

Fears of deflation certainly won't disappear right away, despite the strong ADP and non-manufacturing ISM that came out Wednesday.

Financial markets will no doubt remain nervous ahead of the latest U.S. payrolls on Friday and the dollar is hardly likely to stage any serious recovery before then.

By next week, however, as Fed officials start to gather for their latest deliberations, U.S. yields should start looking far too low by discounting a further easing in liquidity conditions that is hardly likely to come.

If anything, expectations of other major central banks having to contemplate looser policies of their own, could well prove the catalyst for turning the dollar around.

Take Japan. Its economic data has also weakened, suggesting that the economy remains reliant on exports. With the yen rising back to a 8-month high against the dollar, the Japanese authorities are under pressure to do something.

As market intervention isn't really a political option at the moment, the Bank of Japan will likely come under increasing pressure to open its liquidity taps even further.

On Thursday, as Japanese financial markets took this on board, 10-year Japanese government bond yields fell under 1% for the first time in seven years, ensuring that the yen's attractiveness, relative to the dollar, has diminished.

Similarly, in the euro zone, strong data at the end of the second quarter has started to give way to softer numbers at the start of the third quarter.

As a result, the risks are that German bond yields, which have been holding up fairly well, could start to buckle too.

Once again, the dollar, which has been driven steadily lower against the euro in recent weeks, should find a firmer footing.

Early Thursday in Europe, profit-taking was already stripping the dollar of some of the gains it made after the strong Wednesday data as investors start to square up ahead of payrolls.

The euro, meanwhile, is coming under pressure ahead of the latest European Central Bank policy meeting in case the bank's president, Jean-Claude Trichet, alludes to concerns over global growth in his press conference after the meeting.

By 0645 GMT, the dollar has fallen to Y86.14 from Y86.30 late on Wednesday in New York, according to EBS.

The euro was also down at $1.3140 from $1.3169 and at Y113.19 from Y113.65.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Weak Dollar Should Give Pound One Last Run. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2491/ Wed, 04 Aug 2010 09:34:00 +0000
After that, though, economic realities will hit home and support for the U.K. currency will wane.

For the moment, stronger than anticipated U.K. data, good bank earnings and favorable merger and acquisition flows are all helping the pound to extend the two-and-a-half month rally that has brought it up from under $1.4300.

See the pound's rally against the dollar:

Click Image to Enlarge

More support for the currency will emerge later this week as long as the Bank of England doesn't express any dovish sentiments after its policy meeting on Thursday and as long as U.S. employment data on Friday increase speculation of more monetary easing by the Federal Reserve.

This will likely weaken the U.S. currency even more and send the pound hurtling as high as $1.63.

Thin trading conditions in August as well some signs of a short squeeze in the pound make this move even more probable.

After that, though, sterling's run should come to an end.

Not only will the currency start to look overpriced up at that level but, as recent data have shown, the U.K. economy won't be looking as good as it was.

Second quarter growth may have proved stronger-than-expected and contributed to the pound's rally.

But, the summer has brought proof that this strength is not sustainable.

U.K. house prices remain very subdued with little sign of serious recovery. Credit growth, in both the personal and business sectors, is still soft both because of a lack of demand and because of tight credit conditions.

And now, with euro-zone growth prospects being downgraded as fiscal austerity kicks in, the U.K.'s export outlook is also at risk. Hopes that higher export demand would help to compensate for lower domestic activity are looking badly misplaced.

So far, there has been little real talk of further Bank of England easing. The central bank is likely to confirm that its quantitative easing will be left unchanged at this week's policy meeting.

However, there is growing concern that if the Fed is considering pouring more liquidity into financial markets, then the Bank of England may be following suit--a consideration that could be reflected in the minutes of Thursday's meeting when they are released in two weeks time.

If that is the case, sterling will quickly lose any yield attraction and the rally that has lasted since the Conservative/Liberal Democrat coalition came to power will come to an end.

Early Wednesday, the pound was trading a little higher at $1.5957 at 0645 GMT, compared with $1.5948 late Tuesday in New York, according to EBS.

Further speculation of more U.S. monetary easing left the dollar under pressure against most other major currencies as well, with the U.S. currency falling to Y85.51 from Y85.85 despite talk that the Japanese government may put pressure on the Bank of Japan to ease its policy further to prevent the yen from getting any stronger.

The dollar did stage some recovery against the euro, which fell to $1.3200, but it has since stabilized to trade hardly changed at $1.3230 from $1.3233. The single currency was also down at Y113.08 from Y113.60.]]> <![CDATA[Euro Rally Built On Weak Foundations. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2487/ Tue, 03 Aug 2010 09:04:00 +0000
For the last week or so, the single currency has managed to stay above $1.30. On Monday, it even reached a three-month high at nearly $1.32.

But this support has had much more to do with dollar weakness than with independent euro strength.

If anything, the single currency has struggled to hang on to the gains it has made.

A break over $1.3050 has hardly given the currency the upward momentum that had been anticipated and even a stronger-than-expected manufacturing purchasing managers' index for the euro zone on Monday failed to provide anything more than a short-lived spike.

See the euro's performance over the last few days:

The problems for the euro are fairly simple.

Like most other major economies, the euro zone experienced a healthy economic bounce in the first half of this year, evidence of which is coming through in the data now.

In the euro zone's case, the bounce was probably even greater than expected given the weakness in the euro earlier in the year.

This has coincided with rising hopes that the worst of the sovereign-debt crisis in the region is over, especially after the results of recent bank stress tests were published the week before last.

In the U.S., meanwhile, economic data have disappointed. This has raised fears of a double-dip recession, increased talk of further quantitative easing by the Fed and driven U.S./euro zone yield spreads further in favor of the euro.

Spreads could well remain this way for now, especially if U.S. data continue to disappoint and if European Central Bank President Jean-Claude Trichet expresses any hawkish sentiments after this Thursday's policy meeting.

There are already fears that U.S. employment data Friday will show another 60,000 decline in non-farm payrolls. That would be less negative than the 125,000 fall in June but the improvement is already being put down to an increase in part-time jobs.

The problem for the euro, is that while the U.S. recovery may be slowing now, it is the euro zone that will be slowing next.

Mansoor Mohi-uddin, head of currency strategy at UBS, summed it up nicely: "The longer-term picture remains bearish. The structural problems of high debts, low growth and diverging current account imbalances remain, and fiscal austerity will likely undermine euro-zone growth this year and next. The ECB will not be in a position to raise interest rates until well into 2011, at the earliest."

Also, there is still the little problem of sovereign risk. While markets have calmed down for now, there remains a high risk of further funding problems, especially when the coming economic slowdown hits the already-suffering peripheral members of the euro zone.

So, as long as current fears about further monetary easing in the U.S. remain, the euro will probably continue to find support, helping to keep it around current levels.

But as yield spreads eventually start to move out again, chances are that the euro will swiftly see the end of its recent rally.

A story in the Wall Street Journal that the Fed is considering the purchase of new mortgage or Treasury bonds has raised the specter of further monetary easing in the U.S.

This has further undermined the dollar against the euro early Tuesday, with the single currency rising a little to $1.3276 by 0645 GMT from $1.3172 late Monday in new York, according to EBS.

The euro was unchanged at Y113.87 but the dollar also fell to Y86.39 from Y86.51.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)]]> <![CDATA[Bank Of Japan Should Leave The Yen Alone. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2480/ Mon, 02 Aug 2010 10:18:00 +0000
As the Japanese economic recovery stumbles and as the yen rises to a new 2010 high against the dollar, pressure for the central bank to intervene is likely to become extreme.

But, if the bank waits long enough, the market may well do the job for it and push the yen back down again of its own accord.

The big test for the Bank of Japan isn't far away.

As the dollar falls towards Y85, Japanese exporters are likely to suffer, putting the Japanese economy at even greater risk and the central bank's intervention policy under deeper scrutiny.

See the dollar's recent slide against the yen:

Click Image to Enlarge

For diplomatic reasons alone, Japan would prefer not to intervene.

The last thing Tokyo wants to do is justify currency manipulation to Washington, where U.S. officials are still pressing the Chinese to let their currency rise. An official from the ruling DJP has already been floating the idea of easing monetary policy rather than employing market intervention to halt the yen's rise.

The problem for Tokyo, though, is that the yen's rally is rapidly gaining momentum.

Last week, confidence in the U.S. economic recovery took a hard knock, with even one of the more hawkish governors of the Federal Reserve, James Bullard, warning that the risks of deflation have risen in the U.S.

This coincided with more bad news from Japan, showing that the recovery is even more reliant on export growth than before. Industrial production fell in June, while unemployment rose and consumer prices fell for the sixteenth month in a row.

The net result was a sharp drop in U.S. Treasury yields and a further narrowing of the yield spread with Japanese government bonds.

Given the recent renewed appetite for carry trades and an increase in the correlation between yield spreads and the dollar/yen's performance to nearly 95%, the dollar's fall has picked up momentum against the yen.

A similar rise in the yen against the euro means there will be little headwind to stop the move.

So while the dollar might hesitate if it falls to Y85, with market players looking to see if the Bank of Japan is going to jump in to stop it, chances are that the dollar could fall as far as Y82, a level last hit in May 1995.

It is at that point that the Bank of Japan will have to show its mettle.

Despite all indications, the dollar is unlikely to slip into a free fall.

First, the current bearish outlook for the U.S. economy could well prove overdone and yield spreads could soon bounce back in favor of the dollar.

Also, the mere threat of Bank of Japan intervention remains a powerful weapon that could convince many players to take long dollar positions as the yen falls on the assumption that they want to be on the side of the central bank.

Take into account the fact that the skew in dollar/yen risk reversals still isn't stretched and there is even is less reason for the Bank of Japan to move.

So, even though the yen's rise may be nasty and the political fallout may be messy, the Bank of Japan will probably find that if it keeps its nerve and just waits the Japanese currency will fall into reverse with the central bank never having to employ its ultimate weapon for currency control.

Early Monday in Europe, the yen was easing back a little as strong Asian stock markets and relief that China's purchasing managers' index for manufacturing didn't fall under 50, indicating economic contraction, helped to lift risk sentiment.

The dollar was able to rise to Y86.61 by 0645 GMT from Y86.41 late on Friday in New York, according to EBS.

The euro was also up at Y113.22 from Y112.76 and at $1.3070 from $1.3053.]]> <![CDATA[Kiwi's Climb Has Come To An End. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2476/ Sat, 31 Jul 2010 00:30:00 +0000
The New Zealand currency started the week in fine form.

It looked poised to break through to a new high for the year over $0.7740 and there even seemed a chance that it would resume its rally against its Australian counterpart too.

All this optimism came to shuddering halt on Thursday, however.

See the kiwi's latest rise:

Click Image to Enlarge

The Reserve Bank of New Zealand increased interest rates as expected but then sharply lowered the profile for further rate hikes.

At the same time, the central bank made it clear that it wasn't happy with the currency's strength--warning that it was out of line with the country's faltering economic outlook as well as with moderating export commodity prices.

Instead of building momentum to scale new heights for 2010, the kiwi quickly found itself falling back and could well find itself sliding even more.

A dovish RBNZ wasn't the kiwi's only undoing.

Like other commodity currencies, the New Zealand currency remains very much at the mercy of global risk sentiment and market confidence that the global recovery is still underway.

And this week, some of that confidence started to unravel.

Disappointing economic data from the U.S. and lingering fears of a double-dip recession have once again made investors cautious of pushing commodity currencies too far.

The kiwi's relation to its antipodean cousin--the Aussie--hasn't helped either.

The Aussie has also had a bad week. Up until now, rising inflation pressures had been a key element raising expectations of an Australian rate hike as early as next week.

However, unexpectedly low consumer prices last month have changed all that with economists arguing that the Reserve Bank of Australia won't need to raise rates again until much later in the year.

In other words, the rate profiles of both countries have been lowered and both the Aussie and the kiwi can be expected to fall against the dollar.

The kiwi, though, is likely to fall against the Aussie as well.

Since staging a rally against its Australian cousin back in April, the New Zealand currency has been strong.

With exports coming under pressure and the economic outlook proving less strong than anticipated, it isn't surprising that the RBNZ pointed to risks that the currency's strength is posing.

By contrast, the RBA has expressed no such concerns about the Aussie, ensuring that there is little to hinder the currency's advance.

Next week, Australian retail sales and employment numbers from both countries could further fuel the kiwi's slide against the Aussie. Chances are the Australian currency will finally break through resistance at NZD1.24 and make it up to the NZD1.25 level that some strategists are looking for.

Early Friday, the kiwi was more or less flat against the dollar, which had come under selling pressure late Thursday after St. Louis Fed President James Bullard warned that the risks of U.S. deflation are higher.

This added to fears that the U.S. economic recovery is faltering even more seriously than anticipated. The market will now focus on more U.S. data due later in the day to see if they confirm market fears.

Some analysts reckon the dollar could also face more selling because of end-of-month rebalancing of portfolios.

By 0645 GMT, the kiwi was unchanged at $0.7239 from late Thursday in New York, according to EBS.

The dollar bounced back a little with the euro falling to 1.3083 from $1.3090 and to Y113.25 from Y113.77. The dollar was also down at Y86.49 from Y86.96.]]> <![CDATA[Confidence In Risk-Taking On the Rise. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2471/ Thu, 29 Jul 2010 09:47:00 +0000
This doesn't mean that they won't lose their confidence again but it does mean that the dollar might look more attractive.

This more 'risk on' mode has emerged for two reasons: fears of a double-dip recession in the U.S. have largely receded and worries about the European financial system are much reduced now that bank stress-test results have been published.

Of course, disappointing data from the U.S. or signs of some default in Europe could still send investors heading back into safe havens. But, the risks of more wholesale reversal in investment flows, as we have seen in recent months, aren't as high as they were.

Take Wednesday's disappointing 1.0% fall in U.S. durable goods orders and the Beige Book's rather tepid economic assessment. Both failed to knock the dollar sharply lower as they would have done only a week or two before.

See how the euro continues to struggle to establish itself over $1.30:

Evidence that investors aren't as defensive as they were can be seen in the decline of both the yen and the Swiss franc, two of the traditional safe havens that have attracted steady support in recent months, as well as the fall in the price of gold and the decline in bond prices in several key sovereign markets.

Fears of a double-dip recession in the U.S. could well recede further later this week, especially if U.S. GDP data Friday show that the economy continued to grow by a relatively strong 2.5% in the second quarter after expanding by 2.7% in the first.

Recent comments from Federal Reserve officials suggesting that they are less dovish than the market thinks, and that the central bank is prepared to ease monetary policy again if needed, have also helped to persuade many investors that the recovery isn't faltering quite as badly as they had feared.

Although there remain some concerns about the credibility of stress tests conducted on European banks over the last four months, investor support for euro-zone assets has returned and even European banks' share prices have rebounded markedly.

In the esoteric world of credit default swaps, which measure how much investors have to pay to insure debt against default, the gap between European and U.S. benchmark indexes has narrowed to virtually nothing now after hitting a record 23 basis points back in early May when the bank debt crisis was raging.

Of course, one measure of global risk appetite that could continue to steer many leading currencies is the performance of equity markets.

However, this time around, equity strength, indicating continued investor confidence, should play into the dollar's hands.

With the prospects of rate increases remaining very low elsewhere, any suggestion that U.S. yields could start to rise will ensure that the dollar attracts even more support.

Indications of this are not only visible in the euro's recent inability to make a sustained rally over $1.30 but in the dollar's retreat from its recent lows against the yen and calls from some analysts for long dollar positions against the Japanese currency to stay in place for now.

Early Thursday, the euro was being lifted by European buying with the single currency rising to $1.3032 by 0645 GMT from $1.2988 late on Wednesday in New York, according to EBS.

It also rose to Y113.74 from Y113.54 while the dollar slipped to Y87.27 from Y87.44.

Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)]]> <![CDATA[Aussie Will Still Rise Despite Soft CPI. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2467/ Wed, 28 Jul 2010 10:09:00 +0000
These expectations could have been dashed by softer-than-expected inflation figures earlier Wednesday.

However, international developments could take up the slack as optimism over the global recovery returns and even recent concerns about China's slowdown subside.

See how the Aussie rose over $0.90 and then fell back after the consumer price data:

For the Aussie, which generally benefits when investor appetite for risk improves, this can only be good news.

For the last few weeks, the Australian dollar has found support as the Reserve Bank of Australia has raised expectations that interest rates will be increased as early as next week.

Growth data have proved strong and consumer prices look set to keep on rising. In the event, the core consumer price index only rose 2.7% in the second quarter instead of 3.0% as expected.

This could halt rate-hike expectations in their tracks.

But strong trade data have also been showing that export prices are holding up well, adding to the impression of steady flows into the Aussie.

Also, other factors are now entering the Aussie-positive equation.

Over the past few days global risk sentiment has shown a distinct recovery, helped by the release of the European bank stress tests last Friday as well as by hopes that the global recovery is still well underway after all.

Although the bank stress tests were hardly seen as a resounding success, and have left residual concerns about the health of the European financial system, they did lower the market's immediate concerns about sovereign risk.

This has coincided with reassurances from the U.S. that the country is not entering a double-dip recession and signs in the euro zone that growth may be stronger than expected.

Elsewhere, rate increases in India as well as Israel contribute to the view that the expansion of some economies remains robust enough to withstand monetary tightening.

This improved sentiment is evident in the latest rally in global equity markets, a move that is often closely correlated with gains in the Australian currency, especially against the U.S. dollar.

Additional help for the Australian currency could also be coming from China.

A rally in iron ore and steel prices combined with signs of a rebound in Chinese property shares will help to erase recent concerns about a slowdown in Chinese growth and attempts by the Chinese authorities to dampen speculation in Chinese property.

Higher growth in China generally translates into improved prospects for Australia, which is already topping its G10 neighbors with its recovery from the recent slump.

This should certainly help the Aussie to shrug off new fears about Chinese banks, based on reports that one-fifth of the loans they have made to local councils are at risk.

Although some analysts reckon that the Aussie's recent rally has taken it back into overstretched territory, there still appears to be plenty room for a speculative run on the upside given that long positions in the futures market have recently been scaled back according to the most recent data from the Chicago Mercantile Exchange.

Early Wednesday, the Aussie had slipped back to $0.8964 by 0645 GMT from $0.9022 late Tuesday in New York, according to EBS.

The decline came despite an improvement in global risk sentiment, which helped the euro to rise to $1.3028 from $1.3006, while against the yen it was at Y114.71 from Y114.73. The dollar was also up at Y88.02 from Y87.97.

Although weak U.S. consumer confidence data initially dented sentiment, investors appear to be looking ahead to U.S. durable goods figures later in the day that are expected to show a 1.1% rise after a 0.6% fall.

This optimism is being shown in global equity markets, with most Asian indexes closing with gains of over 2.0%.

Bloomberg TNI FRX POV

Reuters USD/DJ

   Thomson   P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)]]> <![CDATA[Euro's Not Going To Stay Over $1.30.By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2460/ Tue, 27 Jul 2010 08:55:00 +0000
Last Friday's stress test results for European banks have failed to boost faith in the European financial system as they were designed to do.

At the same time, evidence that the U.S. recovery is stalling is now well-discounted in the same way that recent signs of strength in the euro-zone economy are unlikely to last.

Optimists may still be hoping the euro will make a technical break up to $1.3125 in order to meet a significant Fibonacci replacement level.

But a move down to the single currency's next support level at $1.2735 now looks more likely.

See the euro's latest attempt to rally over $1.30:

Let's face it, plans to boost investor confidence in European banks, by proving that they can withstand the upcoming economic slowdown, just haven't worked.

Yes, the tests may have increased transparency to a certain extent but they have patently failed to remove the threat of difficulties further down the road.

Yield spreads on euro-zone sovereign debt have hardly moved since the results were announced and the euro itself quickly reversed its small initial gains.

The impression is that little has changed and worries about sovereign risks will remain a drag on the single currency.

Economic data will also provide little support for the euro, certainly against the dollar, just now.

On the U.S. side, a steady deterioration in the data over the last few weeks has raised fears of a double-dip recession and reduced speculation that monetary policy would be tightened.

However, that is all over now. The Fed has reassured markets it is on standby to add even more liquidity if needed. Also, Treasury Secretary Geithner has dismissed suggestions that the economy will shrink again.

If anything, some economists say that U.S. second-quarter GDP Friday will surprise on the upside.

By contrast, the positive economic news that has come out of the euro zone over the last few weeks isn't expected to last. The improvement in economic data has been associated largely with the euro's slide earlier in the year--from over $1.50 towards the end of 2009 to under $1.20 in June. The euro's rebound since then is likely to unravel all the economic benefits that have been produced by higher exports.

It certainly looks as if speculators were already anticipating this, with the latest data on futures positioning from the Chicago Mercantile Exchange showing that long euro positions continued to decline quite sharply last week.

So while there could still be some residual upward pressure on the euro as the single currency bounces around just under $1.30, there appears to be little reason to expect any real momentum to keep it rising above that level.

Early Tuesday, the euro was making another attempt to climb over $1.30 as global risk sentiment improved in the wake of stronger-than-expected U.S. new home sales Monday and a general rally in global equities. Optimism over the global economic recovery also received a boost from news that both Israel and India raised their interest rates this week.

By 0645 GMT, the single currency had risen to $1.3006 from $1.2997 late Monday in New York, according to EBS. It was also up at Y113.13 from Y112.91.

The dollar was also up at Y86.97 from Y86.89.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Yields And Risk Working For The Pound Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2461/ Mon, 26 Jul 2010 10:45:00 +0000
Both yields and risk should now work in the pound's favor.

The U.K.'s surprisingly strong second quarter growth Friday removes the risk of a double dip recession and will raise expectations of a rate hike before the end of the year.

At the same time, improvements in global economic data, stronger than expected second quarter corporate earnings reports and publication of the long-awaited European bank stress tests should help to lift risk sentiment and make the pound even more attractive in the eyes of international investors.

See how the pound has already risen against the dollar:

Optimism over the U.K. economy shouldn't be overdone. The 1.1% quarter-on-quarter seen between April and June certainly won't be sustained in the second half of the year as the new coalition government's austerity package starts to bite.

A breakdown shows that the growth was spread over most sectors even though the lion's share came from services. This will certainly boost the argument for tighter monetary policy, given that most of the upward pressure on prices is coming from the service sector.

Of course, with only one of the eight-member Bank of England monetary policy committee calling of rate hike so far, chances are that a majority vote for a move is still several months down the road.

However, there is another reason why the strong second quarter growth will have a more lasting impact on the shape of the U.K. recovery and on the pound.

As Chancellor George Osborne pointed out after the figures were released, only 0.1% of the rise came from the public sector. This means that most of the increase was due to strong private sector activity that should prove more sustainable in the long run.

The likely increase in rate hike expectations, with yield spreads providing more support for the pound, should coincide with a period of higher global risk appetite.

In the last week or two, stronger economic data combined with stronger than expected corporate earnings have helped to ease fears about the global recovery.

Federal Reserve Chairman Ben Bernanke may have warned last week about the uncertainties facing the U.S. economy but he didn't suggest that the Fed was looking at any imminent monetary easing, as some commentators had feared.

Over in the euro zone, meanwhile, recent data, including forward-looking sentiment surveys, have come in better than anticipated. Hopes that this will also translate into improved growth should encourage international investors to take on more risk.

Last Friday's publication of bank stress tests in Europe will also contribute to improved sentiment, with the tests helping to remove at least some of the fears over the health of the financial system.

Only seven of the 91 banks tested were found to need additional capital. However, the credibility of the tests has been called into question and this could ensure that they act as a drag on the euro.

The pound could also find itself getting help from an unexpected quarter--the Swiss National Bank. Recent data from the central bank showed that market intervention to stop the Swiss franc from rising against the euro this year cost CHF14 billion and pushed the currency balance of its reserves out of kilter.

According to BNP Paribas, the data shows that sterling's weighting fell to 2.4% from 9.8% and the euro's rising to 70.3% from 47.4%. Correcting this could lead to some large scale purchases of the pound that could lead to a more serious fall in the euro back down towards GBP0.80.

Early Monday in Europe, the pound has risen to $1.5494 by 0645 GMT from $1.5432 late on Friday in New York, according to EBS.

The euro was up at $1.2951 from $1.2918 and at Y113.11 from Y112.98 but the dollar was down at Y87.33 from Y87.45.]]> <![CDATA[Coping With A Zombie Currency. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2450/ Fri, 23 Jul 2010 10:18:00 +0000 Like a zombie that just can't be stopped, the yen will continue marching relentlessly higher.

This poses a dilemma for the Japanese authorities, who have already started verbal intervention to at least, slow the rally, and likely hasten further easing in Japan's monetary policy.

The reason for the yen's zombie-like quality is simple. The currency remains a safe haven in times of global uncertainty.

Every time the confidence of international investors has started to rise in recent months, it gets knocked back, putting paid to any interest they may have been showing in higher risk assets.

The latest, and probably the worst knock back came this week, when Federal Reserve Chairman Ben Bernanke confirmed what recent U.S. economic data has been suggesting--that the U.S. recovery is stalling and the Fed may have to ease monetary policy even further.

Not only did this send equity markets lower, despite the recent wave of strong second quarter earnings, but Bernanke's comments also pushed two-year U.S. Treasury yields to a new record low at 0.54% and made dollar assets even less attractive on a yield basis.

The problem for international investors is that if U.S. recovery is stalling, the global economy will more than likely falter too, making riskier assets that much less attractive.

Recent data may have supported the view that Japan has been growing during the second quarter, with a rise in the all-industry-activity index out of Tokyo on Thursday boosting forecasts that the economy will expand during the second quarter by even more than the 1.2% growth seen in the first three months of the year.

However, the dollar's decline from about Y95 early May to under Y87 will eventually take its toll on growth, especially on the export sector that is vital for the Japanese recovery.

Under normal circumstances, growing fears of a double dip recession in Japan as well as the renewed threat of deflation would do the trick and bring the yen back down of its own accord.

Not now, though.

In a world once again dominated by risk sentiment and fears of fresh global downturn, the yen will continue to rise as it has before, with investors turning to the currency for its safe haven qualities rather than as a measure of the Japanese economy.

In the past, the threat of market intervention by the Bank of Japan, as the dollar sinks ever closer towards Y85, may have discouraged investors from pushing the yen any further. But, with Japan keen not to upset the U.S. administration by pushing the dollar higher while China is still preventing its currency from rising too much, chances are that market intervention will only be sanctioned by the Japanese government as a very last resort.

See the dollar's steady fall against the yen in recent months:

This knowledge will make haven seekers even bolder about buying the yen and ensure that any verbal intervention is even less effective than before, as deputy finance minister Motohisa Ikeda found on Thursday when he attempted to warn the market that the government will head off excessive yen strength.

Early Friday in Europe, as financial markets wait for the final results of the European bank stress tests, the yen has eased back a little against the dollar and the euro. The improved sentiment is largely the result of stronger than expected euro zone as well as U.S. data Thursday as well as more strong second quarter earnings reports that have lifted global stock markets and improved risk appetite.

However, most market moves are expected to be limited ahead of the stress test results. Although most banks are expected to pass the tests, there is growing concern that the tests themselves will be seen as too easy.

By 0645 GMT, the dollar had risen to Y87.04 from Y86.93 late on Thursday in New York, according to EBS. The euro was up at Y112.17 from Y112.05 but down at $1.2883 from $1.2892.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Risk Needed To Fuel Aussie Take Off. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2445/ Thu, 22 Jul 2010 10:06:00 +0000
Australian growth remains robust and Australian interest rates will more than likely be hiked again soon.

However, much of the Aussie's fortunes will now depend on the mood of the international investment community.

For the moment, risk sentiment remains fairly strong and the Aussie remains in favor.

See the Australian dollar's recent rise against the U.S. dollar:

This could all change later this week, though, if investors start to worry about another round of quantitative easing in the U.S. or feel that the results of the stress tests on European banks that will be released on Friday just aren't credible.

In the meantime, support for the Australian currency should be growing.

This week's minutes from the Reserve Bank showed confidence in the economy and hinted that interest rates could be hiked again as early as August even though the RBA passed up the chance of raising them when it met earlier this month.

The country's leading index of economic activity also rose 0.4 basis points in May, even if annualized growth in the index eased back slightly from April.

Expectations of a rate rise are only likely to grow if second quarter producer price and consumer price data due next week show the upward pressures that are expected. The RBA's latest Inflation Report on July 28 could also drive this point home.

This outlook for continued Australian growth and even an upturn in inflation has to be taken in the context of slower global growth and the possibility that any tightening in either U.S. or euro-zone monetary policy is likely to be postponed.

If anything, the weakness in recent U.S. and global data suggests that further easing may be necessary. If so, Australian yields will only appear even more attractive as yield spreads widen in its favor.

However, investor appetite for those yields, which have been helping the Aussie to rise this week, could fade, especially if the international investment community loses its nerve.

Fears of a double dip recession, that will probably dampen Australia's growth prospects as well, are a key problem.

But, publication of the European bank stress tests also pose a risk, especially if they fail to reassure financial markets that these banks will be able to withstand the slowdown that is coming.

If that is the case, the global investment community will probably clam up again. Instead of chasing the higher yields being offered by currencies such as the Aussie, they will retreat to safe havens and leave the Australian currency floundering.

Early Thursday in Europe, a decline in risk sentiment hit the Aussie, which fell to $0.8773 by 0645 GMT from $0.8783 late Wednesday in New York, according to EBS.

The 'risk off' mood prevailed after Federal Reserve Chairman Ben Bernanke gave a dovish assessment of the U.S. economy as expected but didn't provide any reassurance of an imminent move to ease policy further.

Despite strong earnings results from companies such as Ebay, most stock markets headed lower and high risk currencies found themselves under pressure.

The euro was virtually unchanged at $1.2764 from $1.2763 but fell to Y110.44 from Y111.09. The dollar fell to Y86.51 from Y87.01, prompting a warning from Japan's deputy finance minister Motohisa Ikeda that the government wants to head off excessive yen strength.

Bloomberg TNI FRX POV

   Reuters   USD/DJ 
   Thomson   P/1066 or P/1074

]]> <![CDATA[Expect Swiss Franc To Make A Comeback. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2441/ Wed, 21 Jul 2010 08:53:00 +0000 Look for the Swiss franc's safe-haven status to start pushing the currency back up again soon.

For the last few weeks, the franc has come under steady selling pressure against the euro as immediate fears about the sovereign debt crisis in the euro zone have subsided.

Hopes that European banks will now sail through stress tests at the end of this week have helped the single currency to ignore downgrades of Portuguese and Irish credit ratings and show little reaction to news that Hungary has fallen foul of the International Monetary Fund.

Now that it has broken over CHF1.35, the euro looks poised to climb up to CHF1.40 for the first time in well over a month.

However, this rally could quickly go awry.

It is not that the bank stress tests will be a problem.

As European politicians have reassured financial markets at every opportunity over the last couple of weeks, the tests will more than likely show that the major banks of the region are well-equipped to face the economic slowdown that is likely to take place over the next two or three years.

Whether the tests themselves are actually seen as adequate is another question. The results will still help to normalize trading and ease credit conditions across the euro zone.

So far, news of the breakdown in Hungary's negotiations over a standby loan has also had little impact on euro sentiment.

If anything, analysts have pointed to the risk of a fallout on the franc if the Hungarian forint starts to fall, given that so many franc-denominated mortgages are held by Hungarians.

Nevertheless, Hungary does still pose a risk to the euro too, especially as any similar disagreements and delays between the IMF and Greece would quickly hit euro-zone bond markets.

In other words, the euro isn't safe until fiscal discipline has been achieved.

But as far as the euro's performance against the franc is concerned, there are two other factors that are likely to push the single currency back down again in short order.

The first is global risk sentiment.

As U.S. economic data continue to spell out the growing risk of a double-dip recession and Fed Chairman Ben Bernanke prepares to reassure Congress that the central bank is on standby to ease monetary policy again, the outlook for the global recovery as a whole will deteriorate.

As a result, appetite for risk, which has been rising in recent weeks and helping the euro to find support, is likely to fall back again, taking the euro with it.

Those investors wanting to keep their funds in Europe but not in the euro will more than likely turn to the franc once again as a safe haven in times of economic uncertainty.

The franc is also likely to reassert itself against the euro just on the basis of yield.

Although the confidence of the European Central Bank may have helped the euro to rally in recent weeks, the Swiss economy remains in better shape than that of the euro zone.

Also, in the pecking order of which central banks are likely to hike rates first, the SNB is still more than likely to be ahead.

If so this is another reason why investors are likely to start selling the euro back down to a level just above CHF1.3150 that marked the start of the recent bounce.

Overnight the dollar traded slightly lower as the minutes of the June Federal Open Market Committee meeting showed a 10-2 split in the vote to keep rates at a record low, with the Kansas City and Dallas Federal Reserve Governors calling for the discount rate to be hiked by 25 basis points to 1%.

For Wednesday, the focus is on Fed Chairman Bernanke's testimony and any comments that could point to further monetary easing.

Around 0650 GMT, the euro fetched CHF1.3557, little changed from CHF1.3560 seen in late U.S. trade Tuesday.

The euro was worth $1.2901, up slightly from $1.2887, the pound fetched $1.5310, up from $1.5275 and the dollar bought Y87.19, down from Y87.38.

Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074

(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com) ]]> <![CDATA[Euro Crisis Rumbles On.By Katie Martin]]> http://www.fxclub.com/dj-forex-focus/review2437/ Tue, 20 Jul 2010 08:48:00 +0000 -So, the euro-zone debt crisis is over, right?

Greece demonstrated last week that it can auction short-term debt with reasonable success and at a more modest yield than it would have to pay to access emergency backstops. The euro is back up at $1.30. Even Monday's downgrade to Irish debt by Moody's failed to have a lasting impact. Panic over.

Don't you believe it.

Let's not forget that Greece shelved plans to auction some one-year debt last week. Hardly long-term stuff. And the euro is up mostly because the dollar is down. As for Moody's ... where has it been for the past few months? Of course Ireland has a heavy debt burden. This is old news.

No, this crisis is far from over. It has calmed down, for sure. Investors are no longer in skittish mood. Greek government debt is no longer one of the top three in the world in terms of default insurance costs. A decline in the single currency to parity against the dollar or even lower within the next few months now looks a bit far-fetched. But this one is going to run and run.

A hefty reminder of that came over the weekend, when the International Monetary Fund and the European Union decided to play hardball with Hungary. The emergency lenders are not satisfied with Hungary's book-balancing plans. Hungary has refused to keep slashing. So that's that. The Eastern European straggler is not getting the next instalment of its EUR20 billion credit line just yet.

This could be worse; Hungary is not in terribly urgent need of the funds and the lenders have not walked away for good.

Still, the country's currency and bonds have come under huge strain as investors are nervous. And it matters for the euro zone: the cost of insuring government debt from euro-member Austria against default has climbed, as its banks are so heavily exposed to the Central and Eastern European region.

What's more, it's also a cautionary tale for Greece. If Greece wants to be eligible for multilateral aid not just this year but every year until this mess is over, then it has to make brutal cuts in public spending for the long haul. Protests over these cutbacks have already been violent on a number of occasions.

"Hungary said it was already in the fifth year of austerity measures and it was not possible to tighten the screws any further. That's critical because it's exactly the problem the euro zone faces; austerity measures ... are not one-offs, they are multiyear projects," said Simon Penn, an analyst at UBS in London.

"The IMF and EU have not fudged a solution. Hungary won't play ball so the funding line is suspended," he added. "Remember, Greece's fiscal position is far worse than Hungary's."

In addition, investors are still nursing doubts over the sustainability of the single currency project as a whole.

Monday, Alan Brown, chief investment officer at Schroders, wrote that Germany's insistence that Greece and other errant euro members must "sit on the naughty step for a decade or more" could kill the currency entirely.

Greece could well decide that the austerity measures it is forced to comply with are simply too harsh, and conclude that binning the euro "could be the lesser of two evils," he said.

The idea, often repeated, that too much political capital has been invested in the single currency to allow it to fail, and that a Greek withdrawal from the currency would be ruinous for the country, are not necessarily true, Brown added.

"It is at least conceivable that the euro could break up by way of the strong countries rising out of the euro, leaving Portugal, Italy, Ireland, Greece and Spain with the euro," he said. "The revaluation effects now would be entirely benign with those economies in an unchanged position and with the countries that left the euro with assets denominated in an appreciating new currency," he said. Sure, Germany's exports may suffer, but it needs to boost domestic demand anyway.

"It pays to remember that we have seen currency regimes come and go before," he said, pointing to the Gold Standard and a number of currency unions that rose and fell in the past.

A breakup of the euro may not happen just yet, but it is "highly likely in the medium term," he said. "This tragedy [or pantomime] has many more acts to come. Stay alert," he said. Indeed.

In early European trading hours Tuesday, the dollar's downtrend was still in full swing, with the euro at $1.3012, having earlier hit $1.3029--its highest level since May, according to trading system EBS. Late in New York Monday, the euro was at $1.2945.

The dollar was at Y86.96 against the yen, little changed from Y86.86, while the euro was at Y113.15 from Y112.45. The pound was up at $1.53 from $1.5231.

Bloomberg TNI FRX POV

Reuters USD/DJ
Thomson P/1066 or P/1074

(Katie Martin, Dow Jones Newswires, +44-20-7842-9346; katie.martin@dowjones.com)

]]> <![CDATA[Euro Set To Run Out Of Steam. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2430/ Mon, 19 Jul 2010 07:22:00 +0000
Sure, the single currency visited $1.30 for the first time in nearly three months.

In fact, given the current momentum $1.31 or more could well be possible, especially if next Friday's stress tests boost confidence in European banks as so many politicians insist they will.

The problem for the longer-term euro performance, however, is the same as it has been for the last few months--the euro-zone recovery and euro-zone interest rates aren't going to rise any faster than those in the U.S.

On the contrary, with euro-zone governments pursuing tighter fiscal policies while the U.S. authorities continue to spend, chances are that the U.S. recovery will eventually pull well clear of the euro zone's.

Any sign of this and recent euro gains will be quickly unwound.

For the moment, the single currency is still benefitting, not only from a sharp outflow of funds from U.S. markets but also from covering of previously extreme short euro positions.

Disappointing U.S. employment data, signs of floundering in the manufacturing industry and confirmation from the Fed's minutes last week that further monetary easing could still be needed all encouraged a wholesale selloff in the U.S. currency.

This coincided with successful auctions by several peripheral euro-zone debtors, including Greece, and endless reassurance that European banks will pass their stress tests with flying colors. Little wonder then that the euro became a popular destination as investors moved out of the U.S.

China also helped, with its leaders using a Beijing visit by German Chancellor Angela Merkel to talk up the euro, insisting that the currency remains an important investment vehicle for them.

But as the euro tests resistance at $1.30, the currency is no longer undervalued. It could be argued that at these levels it is overvalued and will soon start posing a risk to the euro-zone recovery by hurting exports.

This is certainly not what European politicians will want to see at a time when global growth is slowing, in line with China's carefully orchestrated deceleration of its own economy, and when fiscal tightening means that domestic demand is hardly likely to take up the slack.

This Friday's stress test results may well provide another reason for the euro to have at least a last hurrah.

The results will no doubt be polished to a shine to ensure that the health of European banks isn't put in doubt.

But, as details have shown, the tests aren't as strong as those for U.S. banks and they are unlikely to resolve the basic sovereign debt concerns that will continue to undermine the euro zone--there are still no serious sanctions that will stop another euro-zone debtor from defaulting.

In time, this will take its toll on both business and consumer confidence, ensuring that while investors worry about the pace of the U.S. recovery now, they will soon return to worrying about whether the euro zone can avoid another slide back into recession.

As Morgan Stanley reported last Friday, the time has come to start increasing short euro positions once again.

Around 0645 GMT, the euro was on the slide after rating agency Moody's downgraded Ireland's sovereign bond rating to Aa2 from Aa1 with a stable outlook.

Moody's cited weakened growth prospects as the main driver of the downgrade.

The euro currently trades at $1.2875, down from $1.2927 in late U.S. trade Friday.

Elsewhere, the major currencies are little changed with the pound trading at $1.5284, down a tad from $1.5298 and the dollar fetching Y86.66 from Y86.61 in late New York trade Friday.

Looking ahead, a light data calendar on both sides of the Atlantic will likely see the market looking to equities for guidance, with U.S. titan IBM delivering its second-quarter results Monday.]]> <![CDATA[A New Safe Haven In Sterling? By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2426/ Fri, 16 Jul 2010 08:19:00 +0000
Like the yen and the Swiss franc before it, the U.K. currency is finding itself in favor despite concerns that the U.K economy may be slowing and that monetary tightening will have to be delayed.

For weeks, investors have been looking for a new safe haven as doubts over the global economy have grown and fears of a double dip recession in the U.S. have increased.

On Wednesday, the Federal Reserve only made matters worse by lowering its growth forecasts for this year and admitting that monetary policy may have to be eased again.

Slower growth data from China, rumbling concerns about European banks ahead of stress tests results later this month have only helped to intensify the search for stability.

Certainly, emerging markets as well as commodity currencies have all found themselves under investor scrutiny in recent weeks.

However, while this has been going on, one major and much more liquid currency has gradually found the spotlight burning brighter.

Step forward sterling.

See the pound's steady rise against the dollar in recent weeks:

Click Image to Enlarge

Ever since Conservative leader David Cameron confounded critics by stitching together an unlikely coalition with the Liberal Democrats after elections in May and then preserving his promise of reducing the budget deficit with a bold emergency budget filled with public spending cuts, investors have started to look at the U.K. in a different way.

Not only is the coalition proving much stronger than expected, with the opposition Labour Party too busy arguing over the publication of memoirs and preparing for a leadership election, but its fiscal probity is standing out prominently in a world where most governments have neither the electoral power nor the commitment to achieve what the U.K. is planning.

As Jonathan Loynes, chief European economist with Capital Economics in London, pointed out, investors have done this all before for the U.K.

"Decisive action by a new government to repair the public finances pushed the pound up sharply in the early 1980s and mid-1990s and could do so again over the coming months," he said.

Of course there are risks.

Chancellor George Osborne has yet to prove his mettle. He may have laid out his plans to slash waste and reduce the public sector.

However, he, Cameron and Liberal Democrat Deputy Prime Minister Nick Clegg have yet to face the full wrath of the unions as well as the party pressures they will face as they try to keep their coalition together.

Although stronger-than-expected employment figures this week may have brought a bright spot for the government and there is continued talk of higher interest rates given sticky inflation pressures, other economic numbers including those for the housing market remain worrying and the slowdown that is expected in the coming months as fiscal cuts bite could prove much deeper than anticipated.

Nonetheless, for investors looking for a safe haven in a much more uncertain world, this may not be of much concern.

For the past year, they have piled into the Japanese yen despite the fact that the Japanese economy remains at risk from deflation and the country is running one of the highest public debts of all major economies.

But, their love affair with the yen could be coming to an end as the fiscal disciplines needed to reduce the deficit may now be at risk.

Upper House elections last month destroyed the ruling DJP's majority and left the government much more susceptible to demands for spending increases. As the latest Bank of Japan projections show, growth this year may prove better than initially expected but growth next year will be disappointing again.

Contrast these uncertainties with the so far smooth fortunes of the U.K. coalition, as unusual as it may be, and it helps to explain why, despite all the worries about the U.K. economy, the pound has staged a nearly relentless rally since Cameron walked into 10 Downing Street two months ago.

Early Friday, the pound was relatively stable, trading slightly lower at $1.5409 at 0645 GMT compared with $1.5412 late Thursday in New York, according to EBS.

Currency market sentiment continued to be dominated by disappointment in the U.S. recovery and concern that the Fed could still ease monetary policy further. Also, weaker-than-expected results from Google late Tuesday helped to undermine some of the support earlier strong second-quarter earnings had given sentiment.

The resulting sharp rally in the yen, as investors turned to safe havens, helped to send Japanese stocks reeling with the Nikkei falling 2.9%.

The dollar is down at Y87.21 from Y87.46 while the euro has fallen to Y112.60 from Y112.81. The euro is also up a little at $1.2910 from $1.2900.]]> <![CDATA[Brave Be The Euro Hunters. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2421/ Thu, 15 Jul 2010 08:40:00 +0000 Buying the euro at current levels is only for the brave.

If European bank stress tests don't knock the single currency back then a fall in global risk sentiment will.

In fact, as it heads towards $1.30, the single currency's gains are already starting to look pretty hesitant.

Fresh optimism about the global economic recovery, an extended rally in global equity markets and new hopes that the worst of the euro-zone debt crisis is over have all helped to drive the euro higher in recent days.

Also contributing to the positive mood has been a stream of comments by European officials trying to reassure investors that the stress tests that are being applied to major European banks aren't a problem.

However, as publication of the actual test details this Friday and the release of the test results themselves next Friday get closer, scepticism about the tests is starting to increase.

The tests have been designed to ease credit conditions by proving that banks are credit-worthy and strong enough to survive another debt crisis.

But uncertainty over just how good the tests are, and claims by European politicians that their banks will pass the tests whatever happens, are steadily undermining market confidence in the process.

"The continued lack of transparency regarding the bank stress tests remains a concern and claims by the German finance minister that all German banks will pass the test, including the Landesbanks, will call in to question the credibility of the process," said Hans Redeker, head of global foreign exchange at BNP Paribas.

If that happens, credit conditions in much of the euro zone will remain tight, the economic recovery will remain more protracted and the risks of further sovereign debt problems will rise again.

Successful open-market auctions by Greece, Italy and Portugal--despite a downgrade in Portugal's credit rating--have contributed this week to the market's complacency that the worst of the debt crisis is over.

Optimism has been helped by economic data from some parts of the euro zone, including Germany, suggesting that the single currency's decline earlier this year is helping the recovery.

However, most of the economic data have remained fragile with even the 0.9% rise in euro zone industrial production Wednesday coming in well below expectations for a 1.3% increase.

Certainly there is little sign that the region's recovery is anywhere near robust enough to create serious price pressures. June inflation data for the euro zone showed annual growth in core prices ticking up to 0.9% from 0.8% but a general slide is expected to continue given the vast amount of spare capacity that still exists in European industry.

There also remains considerable doubt over just how long the latest recovery in global risk appetite, which has been keeping global equity markets on the rise, will last.

A recent spate of interest-rate rises, including the latest from Thailand, have helped to feed hopes that the global recovery remains on track and that demand will continue to pick up.

But there remains considerable doubt about just how robust the U.S. economy is and whether it is still at risk from a double-dip recession.

Also, new data increasingly point to an economic slowdown in China, which could force analysts to scale back some of their optimism over the global recovery and bring an early end to the recent buying interest in risky currencies, such as the euro.

As data earlier Thursday showed, Chinese growth in the second quarter slowed even more sharply than expected to 10.3% from 11.9% in the first. The market had been looking for second-quarter growth to come in at 10.5%.

Coming after dovish minutes from the last U.S. Federal Reserve rate-setting meeting, as well as disappointing U.S. retail sales Wednesday, the news helped to encourage investors back into safe havens and push the euro a little lower.

By 0645 GMT, the single currency wad down at $1.2729 from $1.2735 late on Wednesday in New York, according to EBS. It was also down at Y112.22 from Y112.29 while the dollar slipped to Y88.13 from Y88.19.

]]> <![CDATA[Yen Will Hang On To Safe-Haven Status For Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2417/ Wed, 14 Jul 2010 09:03:00 +0000
In fact, it looks as if the Japanese currency will hang on to its haven status for a little while yet.

Last Sunday's disappointing election results for the ruling DPJ party may not prove quite the political and fiscal disaster that many fear and the Japanese recovery may yet prove more robust than expected.

On top of that, Japanese investors may soon be forced to start bringing money back home under new investment rules coming into force next month.

Indications of the strength of the yen's safe haven came on Tuesday when the yen immediately turned back up against the dollar and the euro after Moody's announced its downgrade of Portuguese debt.

Recent rallies in the dollar and the euro against the Japanese currency had already started to look shaky after China made it clear that it will continue cooling the property boom, despite forecasts that new growth data later this week will confirm that the economy is already slowing.

Both developments sent investors scampering out of risky asset markets and into safe havens such as the dollar.

And, in the event, the yen too.

See how resilient the yen has remained against the dollar in recent weeks:

Click Image to Enlarge

The Japanese currency had been expected to lose its attraction after the DPJ lost its Upper House majority and now faces an uphill struggle to keep Japan's plan to reduce its fiscal deficit on track.

The three major credit agencies--Standard & Poor's, Moody's and Fitch--all warned that the country remains at risk from a debt downgrade as a result of the elections.

However, the ruling DPJ coalition has already ruled out an early election that might have increased political uncertainty, and a senior official from the International Monetary Fund has said he is still optimistic that the country will cut its public deficit, since the main political parties agree on the need for urgency.

The state of the Japanese economy could be another reason for the yen to hang on to its safe-haven status. In a world where the global recovery is far from secure and fears of a double-dip recession in the U.S. remain an issue, Japan is showing some unexpected resilience.

New consumer confidence data have been particularly helpful in boosting optimism.

Here is how Julian Jessop, chief international economist at Capital Economics in London, sees it: "The further improvement in consumer confidence in June supports other survey evidence that Japan's economic recovery still has plenty of momentum, despite the recent uncertainty in the financial markets and signs of weakness in some of the labour and spending data."

Adding to that are new rules that will put a limit on the leverage of margin trading from the start of August.

Tohru Sasaki, a currency strategist with JP Morgan Chase & Co. in Tokyo, said this will mean traders with leverage of more than 50 times will have to unwind those positions before the end of the month.

In a study entitled, "Mr. & Mrs. Watanabe May Need to Buy Back JPY in Coming Weeks," Sasaki noted that a recent survey showed 36% of all margin traders are holding positions with more than 50% leverage.

"Therefore, there should be some yen buying back in coming weeks stemming from the new regulation on leverage."

So instead of counting on a dollar recovery to Y90 or more, the market could well find that the U.S. currency becomes mired in a narrow trading range with the yen, until the Japanese currency starts to seriously lose its haven status.

More relaxed global sentiment, helped by Greece's successful auction of Treasury bills Tuesday as well as positive earnings from Intel, helped to encourage investors back into riskier currencies early Wednesday in Europe.

By 0645 GMT, the euro was up at Y113.05 from Y112.64 late on Tuesday in New York, according to EBS. The dollar was also up at Y88.95 from Y88.58. However, the euro slipped back to $1.2702 from $1.2721 as the market waited to see how Portugal's bond offering fares later Wednesday, after its credit rating was downgraded by Moody's Tuesday.]]> <![CDATA[Sterling's Rally Has Run Its Course. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2413/ Tue, 13 Jul 2010 10:27:00 +0000
As feared by many, the U.K. recession last year has proved deeper than expected and the country's economic recovery this year is proving even more fragile than thought.

And, as new consumer price figures later Tuesday will probably confirm, price pressures will soon subside, ensuring that the Bank of England can afford to keep interest rates down at current low levels for at least another year.

For sterling, this should mean the end of the line.

Ever since the Conservative/Liberal Democrat coalition came to power in May, the pound has been rising.

First, it was bought on relief that the U.K. finally had a government that would pursue fiscal discipline and reduce the country's budget deficit. This was confirmed last month, when Chancellor George Osborne unveiled an emergency budget with public spending cuts that boosted confidence that the deficit will be reduced.

Since then, the pound has attracted additional support as inflation pressures appeared stickier than expected and speculation grew that the Bank of England might have to tighten monetary policy again sooner than forecast.

However, economic data over the last few days have blown this rosy sterling picture apart.

For a start, delayed revisions to first-quarter gross domestic product on Monday showed that the recession that ended in the third quarter of last year was even deeper than expected.

Also, the recovery since then has proved weaker than initially thought, putting growth even more at risk from the fiscal squeeze just introduced by Osborne.

As Standard & Poors warned on Monday, there is still a "material risk" that the country loses its triple-A credit rating if economic growth is not as strong as expected.

Trade data last week showed that even the fall in the pound earlier this year, when it declined from over $1.67 late last year to a low around $1.42 just before the election, failed to boost U.K. exports. The trade gap was revised out to GBP7.41 billion, near the record levels achieved in 2008.

Those counting on inflation pressures to bring an early hike in interest rates will also be disappointed.

Last week's producer prices for June fell even more than forecast and with the revised GDP suggesting that spare capacity is even larger than expected, there will be even more pressure on producers to keep prices down.

The latest CPI numbers later in the day should help to confirm this trend, with a fall in energy prices helping to push the headline CPI down to a four-month low of 3.1% from 3.4% previously.

At the same time, the GDP suggests that the country's savings ratio may well have to fall back close to zero to keep consumer spending growing and to prevent the country from falling back into recession.

"This should further help to ensure loose monetary policy continues for the foreseeable future," said James Knightley, senior U.K. economist with ING Financial Markets in London.

So, any speculation of an imminent rate hike has been killed dead--with analysts now suggesting that the earliest the Bank of England could start thinking of raising rates is next summer or even after that.

And the pound, which appeared to be establishing itself back above $1.50, now looks more likely to revisit its $1.4235 May low, according to currency strategist at BNP Paribas.

See the pound's performance in recent months:

Click Image to Enlarge

Early on Tuesday, sterling slipped a little to $1.4980 by 0645 GMT from $1.5030 late on Monday in New York, according to EBS.

The decline came with a general slide in market sentiment after China made it clear that it will continue to rein in property speculation. Also, new GDP later this week is expected to show Chinese growth slowing.

This downturn in sentiment, reflected in a general decline in Asian stock with the Shanghai Composite losing as much as 1.8% so far Tuesday, eclipsed earlier optimism after Alcoa's earnings surprised a little to the upside and two Fed members insisted that the U.S. economy isn't at risk from a double-dip recession and that further monetary easing isn't needed.

The euro was knocked back to $1.2559 from $1.2593 and to Y111.39 from Y111.55, while the dollar was up a little Y88.68 from Y88.59.]]> <![CDATA[Euro's Rally Likely To Be Extended. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2406/ Mon, 12 Jul 2010 07:53:00 +0000
Not only did European Central Bank President Jean-Claude Trichet manage to inject some more confidence in the single currency late last week but fears over a double-dip recession in the U.S. continue to linger.

Eventually, of course, concern about the upcoming euro-zone bank stress tests, the realization that Trichet really had nothing concretely positive to say and final proof that the U.S. economy is just going through a 'soft patch' will send the euro reeling again.

For now, though, euro bulls are getting their way, with the single currency trying to climb back over $1.2700 for the first time in nearly two months.

See the euro's performance:

Click Image to Enlarge

Much of this was down to a remarkably cheerful performance by the recently very dour Trichet in his post-policy-meeting press conference on Thursday. He helped dispel fears that the euro zone itself is slipping back into recession and suggested that the recent rise in euro-zone money market rates wasn't an issue.

He sidestepped questions about the details of bank stress tests, the results of which should be out later this month, but still managed to calm financial markets and give the euro an obvious boost.

"It looked as if Trichet's main objective was to convey confidence," said Carsten Brzeski, senior euro zone economist at ING Financial Markets in Brussels.

If so, he certainly did the trick.

He was helped, of course, by a general improvement in global sentiment as equities rose and rate hikes in Malaysia and Korea added to optimism about the global economic recovery.

Confirmation that the U.S. wasn't going to name China as a currency manipulator after last month's release of the yuan's dollar-peg also helped sentiment.

For the euro's performance against the dollar, additional help came from the continued fear that the recent slowdown will tip the U.S. economy back into recession.

Confusion reigns, however, as data at the end of last week showing an unexpectedly large fall in jobless claims raised hopes that the slowdown is nothing more than a brief interlude.

Currency strategists at BNP Paribas reckon the dollar will rally back against the euro whichever way this confusion is resolved.

They noted that if a 'soft patch' is eventually confirmed, the dollar should rise as speculation over U.S. rate hikes increases again.

On the other had, if a double-dip recession does look as if it is on its way, then a return to tight global credit conditions will be favorable for the dollar as well, with investors turning to the U.S. currency as a safe haven.

If this all coincides with poor, or unconvincing, stress test results and any new evidence that euro-zone banks are having difficulties raising funds, support that has been helping to keep the euro rallying for nearly a month and a half will soon disappear.

Early Monday, the euro was coming under selling pressure after initially benefiting from a rise in global sentiment at the end of last week.

News over the weekend that China's exports rose by 44% in the year to June helped to boost sentiment at first, but the data showed the increase may have been driven more by an increase in export prices rather than a rise in volume. Also, Chinese import growth was considerably softer, indicating that domestic demand in the country is slipping.

A resounding defeat for Japan's ruling DJP party in Upper House elections Sunday was also bad news as this will make it more difficult for the government to preserve fiscal discipline. Standard and Poors have already described the results at "potentially negative."

Like other financial markets, currencies will now be looking for the second-quarter earnings season that gets underway this week to supply more evidence on the U.S. recovery.

By 0645 GMT, the euro was down at $1.2592 from $1.2640 late Friday in New York, according to EBS. It was also down at Y111.85 from Y112.07.

The dollar was up, however, at Y88.83 from Y88.65.]]> <![CDATA[Emerging Market Currencies Have Their Day. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2401/ Fri, 09 Jul 2010 08:06:00 +0000
As the global recovery splutters and interest rates in the major economies look set to remain lower for longer, the attraction of major currencies is fading fast.

Now, with China's growth slowing, as data over the next week or so is likely to confirm, even commodity currencies that have been supported by strong Chinese demand could fall out of favor.

And these negatives are unlikely to go away.

The stress tests for European banks are likely to hang over euro zone markets for weeks to come, threatening the single currency with more losses if they fail to boost market confidence in the banking system.

Also, the recent rally in global equity markets is hardly likely to last very long once the second quarter earnings season gets underway and company profits start disappointing as much as growth data has recently.

Even the Japanese yen, which has often provided a safe haven in times of turmoil, could find itself coming under selling pressure now as investors start worrying about Upper House elections this weekend.

If the ruling DJP looses, the fiscal discipline that has been encouraging investor confidence will likely fall apart, and Japan's massive public debt will come back to haunt it. Sovereign debt concerns that continue to linger over the euro zone will spread quickly to Japan, undermining the yen's role as a safe haven.

By contrast, the currencies of countries that haven't been directly hit by the credit crunch, that have been able to hike interest rates and that have avoided the debt crisis will find themselves back in the spotlight.

As the currency strategy team at Societe Generale wrote: "Risk on/risk off gyrations aside, the Swedish krona, the Norwegian krone, the Brazilian real, the Australian dollar, the New Zealand dollar, the Canadian dollar and the Polish zloty all look better on a long-term view."

While major money markets have been scaling back expectations of another interest rate hike in the U.S., the euro zone and Japan, countries such as Sweden, India, Korea and Malaysia have been able to announce increases that will make their yield returns even more attractive.

Expectations of further rate hikes in Australia and Canada have also been growing.

Even the Turkish lira could be seen in a better light after most of the legal changes that would have affected much of the country's constitution cancelled this week, removing some of the political uncertainty that could have forced an early election.

Strategists at BNP Paribas label the lira as positive, alongside the Polish zloty, which is expected to benefit from more rises in interest rates.

The Polish currency has already been benefiting from the results of the presidential election earlier this week, which has raised hopes of further economic reform.

See the recent fall in the dollar against the zloty:

Click Image to Enlarge

Other gainers have been the Hungarian forint, the Korean won, the Romanian leu, Mexican peso, the South African rand and the Czech koruna.

Early Friday in Europe, the recent improvement in global sentiment helped to keep emerging market and commodity currencies rising. The euro benefited as global equity markets headed higher too.

Better-than-expected jobless claims figures in the U.S., reassuring comments from European Central Bank President Jean-Claude Trichet about euro zone recovery and the health of its banks as well as Korea's surprise rate hike, all helped to encourage investors back into risk for now.

By 0645 GMT, the euro was up at $1.2718 from $1.2703 late on Thursday in New York, according to EBS.

The euro was also up at Y112.64 from Y112.27 while the dollar rose to Y88.57 from Y88.38.]]> <![CDATA[China Helps Yen But Hurts Commodity Currencies. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2397/ Thu, 08 Jul 2010 10:36:00 +0000
Instead, Beijing's policies are acting more like shadow puppets in the background, likely increasing support for the yen but undermining the outlook for commodity currencies.

The country's decision to release its yuan peg against the dollar last month for the first time since 2008 was certainly momentous. However, the subsequent rise in the yuan has been much more gradual than the market anticipated, with the Peoples' Bank of China still anxious not to move too fast.

See the dollar's fall against the yuan since the peg was released:

Click Image to Enlarge

This is hardly surprising given recent economic data suggesting that Chinese growth is starting to slow down. Further negative figures on the economy are expected next week.

But, while this is a reflection of attempts to cool the country's overheated property, Beijing appears eager to rebalance the economy at the same time, announcing plans to invest $100 billion in 23 priority projects in western China this year.

So with inflation recently rising over the PBOC's 3% target and with GDP growth still expected to clock up as much as 9.5% this year, the yuan will probably continue rising at its recent gradual pace. Since the peg was released the dollar has fallen to CNY6.7781 on Wednesday from CNY6.8275.

Even if the PBOC wishes to slow the yuan's rise even more, upward pressures on the currency are likely to remain given the balance of payments surplus that China runs with the rest of the world.

On the margin, this should be good news for the yen.

A stronger yuan makes China's goods less competitive in Asia and should only prove a plus for Japan, where export growth remains the primary engine of recovery.

There is also the increased interest in Japan from Chinese investors, with recent figures showing that China bought Y541 billion of short-term Japanese government bonds in the January-to-April period after largely ignoring the market for five years.

The impact on commodity currencies, however, should be more negative in the near term as slower growth in the property market takes its toll and the resulting slowdown in the global recovery as a whole dampens world trade in general and demand for commodities in particular.

Elsewhere, China appears keen not to rock the boat.

On Wednesday, the State Administration of Foreign Exchange not only reassured markets that U.S. Treasurys will remain an important market but that the euro zone also remains key despite the recent sovereign debt crisis.

"Europe was, is, and will be one of the major investment markets for China's foreign exchange reserves," SAFE said, referring to the more than $2.4 trillion that it has at its disposal.

Early Thursday in Europe, improved risk sentiment helped to dampen recent interest in the yen, with the euro pushing to a new seven-week high of $1.2688 against the dollar.

An upbeat global assessment from the International Monetary Fund, higher-than-expected employment in Australia and some optimism about the stress tests that will be given to major European banks all helped to lift investor confidence, with Nikkei following the Dow Jones Industrial Average's strong 2.8% rally with its own 2.8% rise.

By 0645 GMT, the euro was up at $1.2658 from $1.2648 late Wednesday in New York, according to EBS. It also rose to Y111.91 from Y110.93.

The dollar also rose to Y88.39 from Y87.70, while the Australian dollar made it up to $0.8769 from $0.8747.]]> <![CDATA[Dollar Should Get Its Safe Haven Status Back. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2393/ Wed, 07 Jul 2010 08:53:00 +0000
For the past month or more, the single currency has been climbing as fears of a double-dip recession in the U.S. have grown and the outlook for U.S. rate hikes has been scaled back.

The loss of the dollar's safe-haven status has allowed the euro to benefit as fears over the euro-zone debt crisis subsided.

See the euro's recent rally against the dollar:

Click Image to Enlarge

The market's shift in favor of the euro was emphasized by the rise in two-year German/U.S. yield spreads all the way to +5 basis points from -30 points a month ago.

It isn't surprising that the euro has rallied nearly 5% as those double-dip fears rippled through financial markets.

However, indications are that the market's fears about the stalling U.S. recovery may be overdone.

Yes, growth in the U.S. in the second half of this year is unlikely to be as strong as in the first, and the U.S. Federal Reserve is unlikely to start moving rates higher again just now.

But that doesn't mean that the U.S. economy will fall back into recession or that the Fed will have to ease monetary policy some more, as many have feared.

Daragh Maher, deputy head of global foreign exchange strategy at Credit Agricole in London, explained it thus: "The double-dip brigade still need to battle against the reality that non-residential investment in equipment and software is rising strongly, as firms upgrade and modernise their capital stock. Strong profits growth provide the ammunition for this expenditure, with rising capacity utilisation providing the impulse for action."

Put this together with strong export growth and the fact that the government's fiscal stimulus still has more to run later this year, and the currently bearish view of the recovery looks distinctly overblown.

"There are clearly headwinds to activity, but these point to a curtailed upswing, not an outright reversal," Maher concluded.

Of course, there are still risks abroad for the U.S. economy. Chinese growth is slowing and worries over the global recovery remain high.

Not all is gloom, though, as the Reserve Bank of Australia surprised markets with its more upbeat economic assessment Tuesday suggesting that there is room for the central bank to hike rates again as early as September.

Just as the pessimism surrounding the U.S. outlook has been overdone, so probably has the recent optimism over the euro zone.

Certainly, recent data from the stronger core members have come in better than expected and even the peripheral debtors have been able to continue raising funds in the open market, dispelling fears of an impending sovereign default.

But the crisis in the region is far from over as politicians and the European Central Bank struggle to resolve the issue of a unified policy.

"Questions over the long-term sustainability of the monetary union in the face of diverging economies remain unresolved," said Michael Hart, a currency strategist with Citigroup.

Of more immediate concern for the euro will be the stress tests on major euro-zone banks to see if they could withstand any serious loan crisis without causing contagion to financial markets as a whole.

The results of these test are due to be released July 23 after they have been studied by the ECB and major banks.

On the one hand, they could help boost confidence in the euro zone and the euro, even providing room for the single currency to extend its gains for now.

But, as Hans Redeker, head of global foreign exchange strategy at BNP Paribas in London, warned, "questions remain about whether the tests are strenuous enough: any suggestions that the final results are too rosy would be counterproductive."

So, euro buyers should beware as the single currency's rally against the dollar appears increasingly unjustified.

Early Wednesday in Europe, the euro was slipping as global sentiment turned negative after Tuesday's disappointing U.S. Institute for Supply Management data for non-manufacturing industry.

By 0645 GMT, the euro was down at $1.2590 from $1.2619 late on Tuesday in New York, according to EBS. It was also down at Y109.95 from Y110.42.

The dollar fell to Y87.33 from Y87.48 as the yen once again showed its safe haven status in times of nervousness about the global economy. In Japan, the Nikkei fell 0.6% in line with a general decline in Asian stocks.]]> <![CDATA[Sterling Is Due For A Pounding. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2386/ Tue, 06 Jul 2010 08:25:00 +0000
For the past week or so, sterling has been gliding higher, boosted by the new coalition government's fiscal discipline and by talk from one Bank of England monetary policy maker that rates should rise.

In a world where austerity is becoming the norm, Chancellor George Osborne's plans to slash public spending even more than expected removed the risk of a credit downgrade.

For investors who have spent the last few months dodging the debt crisis sweeping through the euro zone, this could only be seen as good news.

However, as data on Monday indicated, the economic price for reducing the country's deficit so fast will be high.

The economic recovery that showed signs of taking off in the first half of this year has already started to falter, even before the fiscal measures in the emergency budget late last month have been introduced.

Although manufacturing industry may not have contracted quite as much as many feared last month, the much larger and much more important services sector of the economy has proved a lot less resilient. The latest purchasing managers' index fell much more than expected with business expectations plunging to a 15-month low.

Coming against a background of increased fears about a double-dip recession not only in the euro zone but in the global economy as a whole, the prospects for the U.K. economy are looking decidedly dim.

So although the economy may have achieved growth of 0.6% in the second quarter, that is the best the country is likely to see for some time.

"The survey data have continued to cast doubt on the ability of the private sector to weather the fiscal tightening when it begins in earnest soon," warned Vicky Redwood, U.K. economist with Capital Economics, an independent research group, in London.

By taking its fiscal medicine on the chin, the U.K. economy may yet achieve more sustainable growth sooner than its competitors, paving the way for U.K. interest rates to start rising well before their peers do.

But, there is little sign that higher U.K. rates are needed in the near term.

On the contrary, pricing power in the service sector appears fairly limited while input prices are running at the lowest level in six months.

Given this, there should hardly be any fresh pressure for the Bank of England to start tightening policy when its policy members hold their next meeting on Thursday. Last week, three other members of the policy committee made it clear that they didn't support any early move.

This should ensure that sterling remains at a disadvantage to high yielders just now and even if general market sentiment improves that the pound loses some of its recent support.

Even though sterling is still trading firmly over $1.5100, technical analysts suggest that its recent rally is more or less over.

See how the pound has glided higher against the dollar:

Click Image to Enlarge

At Den Danske Bank, analysts are putting out a sell recommendation for any rise over $1.5304, warning that there is scope for a return all the way back down to $1.3500.

Early Tuesday, financial markets were having a little bit of relief rally with the Nikkei rising 0.8% and the Shanghai Composite gaining 1.1% after the Reserve Bank of Australia left rates unchanged as predicted but proved much less dovish about global growth prospects than expected. A larger-than-expected increase in Australia's trade surplus also helped to offset some of the recent negative sentiment that has been dominating global markets.

By 0645 GMT, the pound was up at $1.5192 from $1.5135 late on Monday in North America, according to EBS.

The euro was up at $1.2585 from $1.2541 and rose to Y110.50 from Y110.02. The dollar was essentially flat at Y87.77 compared with Y87.75.

The improvement in sentiment may not last long given that a continued decline in the Baltic Dry Index points to a further reduction in global trade, suggesting lower demand from countries such as China. Also, the latest Institute for Supply Management survey for U.S. non-manufacturing is expected to show another decline, reminding investors that the U.S. recovery is stalling.]]> <![CDATA[Asian Risks For Aussie Now. By Nicholas Hastings]]> http://www.fxclub.com/dj-forex-focus/review2382/ Mon, 05 Jul 2010 09:53:00 +0000
However, the Australian currency now faces a new and possibly larger obstacle to extending its rally: China.

Or to be exact, probably China and the rest of Asia.

Last week, while Gillard was accepting a reduction in the proposed tax on surplus mining profits to 30% from 40% and keeping the mining companies happy, most major Asian countries were reporting a distinct fall in manufacturing activity.

Frederic Neumann, a co-head of Asian economic research at HSBC in Hong Kong, notes that activity in Asia has started to level off.

In a piece of research entitled "It Sure Ain't Pretty," Neumann noted that purchasing managers' surveys across the region are "pointing south" and that leading indicators have "turned the wrong way as well."

So just while Gillard may have been convincing mining companies not to up stakes and knock the Australian economy flat on its back, evidence was rolling in that export markets in Asia for the commodities they produce may be shrinking.

Neumann insists that the data aren't evidence of a double-dip recession, and are only a sign that restocking is fading and that the impact of earlier fiscal stimuli is wearing off.

But there are other reasons to fear that Asian growth in general isn't going to be as strong as it used to be.

Chances are that as inflationary pressures start to increase, central banks across the region will start raising interest rates and putting a further cap on growth prospects.

Having said this, there is still plenty reason not to lose faith in the Aussie just yet.

Despite the recent rise in global aversion towards risk, which put the Aussie on the back foot, the Australian economy is still likely to outperform its G-10 counterparts.

As a sharp decline in the U.S. dollar against most other major currencies late last week showed, yield differentials are becoming more important again.

So even if Australian interest rates fail to rise as fast as previously anticipated, fears of a double dip recession in the U.S. mean that rates there all also remain low for longer and differentials should remain in favor of the Aussie.

This could all help to lift the Aussie at least a little more to $0.87 but there are few forecasters suggesting that the Australian currency's upward path will extend much beyond there just now.

See the Australian dollar's recent performance against the U.S. dollar:

Click Image to Enlarge

Early Monday in Europe, the Aussie was up a little, at $0.8456 by 0645 GMT, from $0.8421 late on Friday in New York, according to EBS.

There was a small improvement in market sentiment, with the Nikkei gaining 0.7% on the day, after last Friday's confirmation that U.S. non-farm payrolls declined in June.

The dollar itself was up at Y87.92 from Y87.70 while the euro was down a little at $1.2538 from $1.2543. The single currency also rose to Y110.24 from Y109.56.]]>