FXView

US$ Consolidates After a Week of Gains

The US$ consolidated its recent gains overnight as traders speculate about the possibility that the US economic slowdown is nearing an end and the price of crude retreats from recent highs. Helping push the US$ higher as well, has been recent rhetoric from Fed officials suggesting that inflation has begun to surface at an accelerated pace, leading the Central Bank to ultimately have to hike rates later this year. With expectations of higher US interest rates, the US$ has enjoyed some short-term boost. In addition to monitoring the direction of crude oil prices, the market will watch the flow of US economic data for direction. At 8:30 a.m. Personal Income and Spending were released in line with expectations gaining 0.2% for each category. However it will be data released later this morning that could push the US$ from its current position. Chicago PMI is to be released at 9:45 a.m. expected to register 48.5. At 10:00 a.m., University of Michigan Confidence is to be released expected to register 59.5. Expect trade to be light today with a somewhat positive US$ bias, as the market looks to consolidate gains from this week.

 

The euro remains under pressure this morning as traders focus on a weakening Eurozone economy and the seeming likelihood of the narrowing of interest rate differentials between the US and the region. A report released overnight revealed that German retail sales fell 1.7% in May, after dropping 2.2% in April. This data suggests that consumption in Germany is cooling significantly as higher energy and food prices are being felt in the Eurozone’s largest economy and pinching the consumer. This data reinforces other economic releases this week showing rising unemployment and declining confidence in Germany. Within this backdrop, despite the ECB’s staunch rhetoric that they remain committed to combating inflation pressures, it is unlikely that the Bank will hike rates this year. Rather, rates will likely stay at current levels as the Fed pushes rates higher reducing the appeal of the common currency.

 

The yen continues to remain under modest pressure as traders use the Japanese currency as a proxy for portfolio risk. With crude oil prices declining and equity markets seemingly settling, the yen has come under renewed pressure through the “carry trade.” Expect this pattern to continue for some time, relegating the yen to wide ranges as traders continue to use the Japanese currency as an ultimate barometer of risk appetite.

 

The pound continues to come under renewed pressure as traders have begun to speculate that the UK economy is poised for a significant economic downturn. Yesterday, data showed a significant drop in the price of homes, following previous data revealing that mortgage applications had fallen. With signs that the UK housing market has begun to shrink, the consumer will likely soon ease spending habits, ultimately leading the BOE to cut rates in an effort to stimulate economic growth. These expectations of lower rates will continue to weigh on sterling over the next several weeks.

US$ Gains as Fed Official Suggests Rate Hikes Forthcoming

The US$ rallied across the board overnight following comments from a Federal Reserve official and as the market has had time to digest the recent releases of better than expected US economic data. Overnight Dallas Fed President William Fischer stated that the US Central Bank would hike interest rates should consumers expect quickened inflation. These comments suggest that the Fed is now becoming deeply concerned about the possibility of rising US inflation pressures. This has led to a shift in market interest rate expectations, with Fed Funds futures now predicting a 33.6% probability of a 25 basis point hike at the Fed’s September meeting. These heightened interest rate expectations coupled with the recent releases of better than expected US economic data have helped buoy the US$. Yesterday, we saw the release of better than expected Durable Goods figures after the release the previous day, of improved New Home sales. At 8:30 this morning, the first revision of first quarter GDP is to be released expected to gain 0.9%. In addition, Personal Consumption and Weekly Jobless Claims are also slated for release expected to register a gain of 1.0% and 370,000. Finally, the US$ was also been helped higher by the decline of crude oil prices which dropped a $1.25 overnight, below $130 per barrel. Expect this trend of US$ strength to dominate the day so long as US economic releases remain in line with expectations.

The euro declined overnight after the release of two reports showing weakness in the Eurozone economic outlook. German unemployment unexpectedly rose in May for the first time in over two years. In addition, a report was released showing that confidence among European executives and consumers remained at the lowest levels in almost three years. This weak data should keep the euro under pressure; however, the ECB appears unwilling to shift its current hawkish bias towards interest rates. With the price of food and energy remaining elevated, inflation levels continue to remain robust throughout the Eurozone. It will continue to be these dueling factors of weakened Eurozone data coupled with elevated inflation levels that keep the euro within current ranges albeit with a downward bias.

The yen continues to weaken as the “carry trade” again resumes a prominent role in steering the direction of the Japanese currency. Expect this pattern of trade to continue for some time, with investors continuing to favor the low yielding yen as a preferred vehicle to finance risk across a broad spectrum of asset classes. This pattern of funding will likely continue for some time exerting downward pressure on the yen.

The pound fell modestly overnight after the release of a report showing that U.K house prices fell at the quickest pace in almost 17 years, adding some fodder to the argument that the BOE will need to reduce rates later this year. The price of the average UK home declined 2.5% during the month of May, as the early signs of a slowdown mimicking the US takes hold in England. Concerns about this slowdown and expectations about the direction of UK rates will weigh on sterling fro some time.

US$ Gains as Oil Drops

The US$ continues to push modestly higher this morning as the price of oil declines and traders read some hope into yesterday’s better than expected housing data. Yesterday oil prices dropped close to $4 per barrel as market participants are beginning to view the recent surge in prices as the early signs of a speculative bubble and in turn have decided to liquidate positions at recent highs. This selloff in oil appears to be continuing this morning with crude prices already some $2.00 lower than yesterday’s close. With declining oil prices and somewhat better than expected New Home Sales data released yesterday, US equity markets appear to basing as well, and staging a modest rally. This in turn has boosted confidence in the US economy and in turn led the US$ modestly higher. Traders will focus on additional data slated for release today. At 7:00 a.m. Mortgage Applications were released at a better than expected decline of 4.6% vs. expectations of a 7.8% decline. At 8:30 Durable Goods Orders are to be released expected to decline 1.5 %. Should Durable Goods reveal better thane expected data and oil prices continue to decline the US$ could enjoy a significant rebound today.

 

The euro continues to come under modest pressure as traders shift assets back towards the US$ amidst a decline in oil prices. However, with inflation pressures continuing to surface within the Eurozone, traders remain more convinced that the ECB will maintain its hawkish interest rate bias for some time, leading to some support of the common currency. Earlier this morning a report released in Germany showed that import prices climbed more than forecast in March as economic growth has accelerated. This has led some analyst to speculate that German inflation could top 2.9% in 2008, far above the ECB’s designated 2.0% ceiling. With mounting inflation pressures throughout the Eurozone, speculation is ripe that not only will the Central Bank maintain its hawkish bias but could lead to a further rate hike this year.

 

The yen continues to come under pressure as traders continue to reintroduce risk to their balance sheets, using the yen as the primary vehicle to finance positions across a broad spectrum of asset classes. Expect this trend to continue for some time, as the declining price of oil appears to be adding stability across several markets, leading traders to use the yen through the “carry trade.”

 

The pound came under modest pressure overnight ahead of an industry report slated for release tomorrow night, which is expected to reveal that UK housing prices dropped for the seventh straight month, as an economic malaise appears to be overtaking the UK economy. As this slowdown appears to be more far reaching than originally thought, traders are now expecting that the Bank of England will soon shift its bias towards lower rates as it ignores inflation pressures and attempts to revive economic growth. This perceived policy shift would weigh on sterling for some time.

Trader Focus: Housing and Oil Markets

The US$ gained modestly overnight as holidays in both the UK and US limited trader action. The market’s focus this week will surely rest on the flow of US economic data and the ever-rising price of oil. Oil continues to push higher trading above $133.00 per barrel as continued buying coupled with US$ weakness pushes crude higher. With oil prices continuing to push higher, many analysts have begun to worry that the US economic slowdown will last for longer than originally thought, leading to prolonged weakness throughout the whole economy. These fears were seemingly reinforced, as it appears consumers are not spending the recently issued government refund checks but rather holding on to the money or paying down debt. The market will look to US economic data slated for release this morning which will likely promote further US$ weakness. At 9:00 a.m. the S&P/Schiller Home Price Index is to be released expected to show housing prices declined 12.5% from last year. In addition, Consumer Confidence is to be released expected to show further declines to a reading of 60.0. At 10:00 a.m., New Home Sales expected to decline 1.1% to 520,000 and the Richmond Fed Index expected to register 1 are to be released. Any signs of below expectation readings in this data will almost certainly weigh on the US$. Later this week Durable Goods Orders, GDP and the Chicago PMI are to be released, also expected to show weakness throughout the economy.

The euro fell modestly overnight after the release of data pointing to declines in both German consumer confidence and French business confidence. A Gfk AG reading for June declined to 4.9 in May, from a revised 5.6 last month, showing the German consumer is beginning to become concerned about skyrocketing energy costs and a high euro. These declines in confidence were matched by data revealing that French manufacturer’s confidence slid to the lowest levels in over two years. However, these euro losses will likely be tempered, as the ECB seems determined to maintain its hawkish interest rate bias in the face of surging oil prices. Overnight ECB board member Klaus Leibscher stated that the current risk of inflation “leaves no room to cut interest rates.” With this backdrop, the euro will likely continue to remain in current ranges albeit with an upward bias.

The yen fell modestly overnight as traders again shorted the Japanese currency for use in the “carry trade.” A recovery in Asian stock markets prompted traders to again shift into these assets using the yen as the preferred financing vehicle for these positions. Expect the fortune’s of Japan’s currency to remain tightly correlated to the performance of global equity markets, as traders seem poised to continue to use this cheap financing option the yen affords to facilitate positions in these other markets.

The pound fell overnight as data released overnight revealed that the slowdown in the UK housing market is deepening. In addition, the Financial Times reported that some 20.0% of UK homeowners with a weak credit profile have begun to fall behind in their mortgage payments. While these delinquencies pale in comparison to the US market, they are indicative of a developing strain within the UK economy. With housing prices slumping and now an emerging mortgage delinquency issue, the Bank of England will almost certainly keep interest rates at current levels for some time. This will certainly keep sterling within current ranges if not exert some downward pressure.

 

US$ Consolidates Ahead of Long Weekend

The US$ continues to consolidate in lower ranges as traders remain focused on surging oil prices and the concerns about the continued drag that this will have on the US economy. Oil continues to flirt with its all-time highs near $135 per barrel, leading traders to speculate about the effect that this will have on the US interest rate outlook. With seemingly little relief being offered from the market, traders have been left to guess what this surge in prices will do to steer Fed policy makers. In addition to this seeming “oil watch” traders will focus on the release of Existing Home Sales at 10:00 a.m. This data is expected to show a decline of 1.6% to 4.85 million units. With the US economy, dominated by a deep slump in housing, the Fed is stymied between keeping policy accommodative and reacting to the inflation pressures a surge in oil prices creates. This juggling act will ultimately steer the course of the US$ over the next several weeks.

 

The euro continues to consolidate at recent levels as traders keep the currency firm based upon the hawkish bias of the ECB. With ECB policy makers seemingly keeping rates firm at current levels as they combat mounting inflation pressures, brought about by the recent surge in energy and food prices, traders continue to favor the common currency. However, this euro positive bias could soon be shifting as various political officials are again expressing their dismay over the declining US$. Overnight the French Finance Minister Christine Lagarde stated that she believes that the “US$ needs to be pulled up.” These comments somewhat echo similar commentary from US Treasury Secretary Paulson yesterday who stated that the “US supports a strong US$.” However, until there is some concerted action amongst G7 members to bolster the greenback expect the euro to remain firm in recent ranges.

 

The yen continues to remain relegated to wide ranges, as the “carry trade” is the steering principal behind the direction of the Japanese currency. With Japanese interest rates continuing to remain the lowest amongst the G7, Japan’s currency has become a barometer for market risk. Expect the currency to continue to have its direction steered as the market’s appetite for risk ebbs and flows.

 

The pound also continues to consolidate in recent ranges as opposing factors steer the UK currency. Overnight data was released, showing that the UK economy grew at the slowest pace since 2005 as tightened credit markets hurt construction and business spending. GDP rose a paltry 0.4% in the first quarter as the UK economy continues to struggle. However, these growth concerns were countered as inflation continues to surge in the UK. BOE policy maker Andrew Sentence said “very significant cost pressures” remain in the economy. These comments suggest that the UK Central Bank now finds itself in the difficult situation of juggling growth concerns with inflation. This will almost certainly keep sterling relegated to recent ranges.

US$ Recovers as Traders Await Direction of Oil and Equity Markets

The US$ rallied slightly overnight against the euro and yen, while falling against the pound as traders become more and more concerned about the spiking price of oil and the effect it will have on global growth and inflation rates. Yesterday crude oil traded and closed at an all-time high above $133.00 per barrel. and thus far this morning it seems set to make further gains. This continues to worry markets and make US assets less appealing to investors as evidenced by yesterday’s rout in equity markets. This US$ sell off occurred yesterday, despite a somewhat bullish release of minutes from the Fed’s previous meeting on April 30^th. At this meeting, the Fed cut rates 25 basis points to 2.0%, however, yesterday’s minutes release showed this decision to be less than unanimous and a seeming “close call.” Fed officials, while citing the likelihood of an economic slowdown in the first part of this year, expected growth to rebound later this year. They also cited a growing concern about mounting inflation pressures, all but signaling that the cycle of US rate cuts had ceased. The market will look to the release of weekly jobless claims at 8:30 a.m., expected to register 373,000. At 10:00 a.m. a housing price index is to be released expected to show a quarter on quarter decline of 1.3%. Trade in the US$ today, will likely be steered by the direction of oil and the overall performance of equity markets.

The euro fell slightly overnight as traders adjusted positions following yesterday’s surge in the common currency. With the mounting price of oil coupled with uneasiness in equity markets, many traders have opted to shift their capital into the perceived “safety” of the euro. This trend will continue for some time as high Eurozone interest rates will likely continue to attract capital as the ECB maintains its hawkish bias. However, there could be some euro selling should oil prices ease slightly and some confidence return to the US.

The yen fell slightly overnight, as US equity markets appear poised for a rebound this morning. The yen continues to be used aggressively in the “carry trade” and thus its fortunes continue to be determined by investor appetite for risk and the direction of equity markets. This seesaw pattern of trade in ranges will certainly continue for some time.

The pound gained overnight, pushing to a three week high, after the release of a government report showed that retail sales declined less than forecast in April. This data reinforced the sentiment that the UK consumer remains robust and thus far, isolated from the recent credit market turmoil. This has resulted in a significant reduction in the probability that the BOE will cut rates at its meeting in two weeks, now registering a 3.0% probability of such a cut. These diminished expectations of such a cut will continue to bolster the pound.

Surging Oil and Strong Eurozone Data Weigh on US$

The US$ fell overnight following the release of better than expected Eurozone data and as the price of oil trades above $130 per barrel. With the price of oil surging, concerns have resumed about the possibility of continued woes in the US economy. As gasoline prices will likely soon trade to $5.00 per gallon, there is a strong possibility that the US economy will continue to stumble throughout this year. These views have left many in the market speculating about the course of interest rate policy from the Federal Reserve later this year. There is the dual problem of emerging inflation with the prospect of slowing growth. What tact the Federal Reserve takes in tackling these problems will ultimately decide the course of the US$. At 2:00 p.m. the Federal Reserve releases its minutes from the April 30^th meeting, when the bank slashed interest rates 25 basis points to 2.0%. Traders will carefully parse these minutes to see if the Bank stressed its concerns about a continued slowdown, opening the door for further rate reductions, or if the Bank suggested an end to rate cuts as concerns about inflation pressures mount. With no other significant data slated for release today, trade will likely be steered this morning by the performance of equity and oil markets.

 

The euro gained overnight as traders are again becoming concerned about holding the US$ amidst renewed worries about fallout from sub prime and the spike in oil prices. Also helping the euro push higher was the release of better than expected German Ifo survey measuring business confidence. The Munich based Ifo institute stated that its business climate index rose in May, suggesting that the German economy is more resilient than some analysts had previously thought. This gain in German business confidence gives the ECB more flexibility in holding rates steady, further enhancing the appeal of the euro.

 

The yen gained overnight as risk aversion seems to again be reentering the market. With the recent surge in oil prices, global equity markets have come under pressure. Yesterday’s 1.5% decline in the Dow Jones Average was shadowed by drops in most Asian and European equity indexes. These declines have led some traders to pare their use of the “carry trade,” a process where short yen borrowings are used to finance positions in other markets. With the “carry trade” seemingly unwinding, we can look for further yen gains albeit moderated within recent ranges.

 

The pound fell modestly overnight as traders focused on the euro/sterling cross as the main catalyst for trade. With strong data released in Eurozone overnight traders opted to modestly sell sterling against the euro. This sterling weakness comes despite the release of minutes from the last BOE policy meeting, showing that policy makers voted 8-1 to hold rates steady as concerns about mounting inflation pressures forced their hand. With the BOE now seemingly concerned about inflation, UK rates will likely remain at 5.0% for some time, ultimately helping firm the pound within recent ranges.

US$ Comes Under Pressure after IMF Warning

The US$ fell significantly overnight after a report released from the IMF suggested that risks remain to global financial systems. Helping fuel this US$ selloff were a combination of currency supportive events in the other G7 nations. Overnight, the International Monetary Fund stated that the US housing slump still poses “serious risks” to financial markets. This led investors to vacate US$ positions as concerns were reignited about further difficulties in global financial systems. However, despite this significant US$ selloff, there could be some respite for the greenback today with the release of certain data. PPI is slated for release at 8:30 a.m. and expected to register a monthly gain of 0.4%, and advance year on year at a 6.7% annual pace. Should this data show any signs of surging inflation, traders will certainly adjust expectations for the Fed’s minutes release tomorrow and future policy decisions for the US Central Bank. Currently, traders have forecast with an 80.0% probability that rates will stay steady at 2.0% through the remainder of the summer. It is only later this year that rates are expected to again push higher to combat accelerating inflation. However, a robust PPI figure this morning could accelerate that timetable for rate hikes, ultimately helping push the US$ higher.

The euro gained overnight following the comments from the IMF and after the release of data from Germany showing surging inflation. A government report released in Germany revealed that producer prices grew at the fastest pace in almost two years as surging energy prices pushed PPI to a 5.2% annual reading above the 4.7% forecast and far in excess of the ECB target. This prompted comments from Wolfgang Franz, a senior adviser to the German government, that the ECB should keep rates constant until the financial crisis is over, and then they might need to raise rates. He further stated that his “expectation is that the ECB will raise rates in the near future.” These comment helped the euro firm despite the release of a report from the Zew Center showing that investor and business confidence unexpectedly feel in April to –41.4, a 15-year low, from –37 last month. Despite declining confidence in Germany, traders remain squarely focused on interest rate differentials, which now seem to again be shifting in favor of the euro.

The yen gained modestly overnight as Asian stocks declined for the first time in seven days, prompting investors to curb the use of the “carry trade.” Also helping the yen hold its gains was the decision last night by the BOJ to hold rates steady at 0.5%. BOJ Governor, Shirakawa stated that rising global inflation forced the Bank to hold rates steady. Expect this seesaw pattern of trade to continue to steer the yen as investor sentiment and appetite for risk ultimately steer the direction of the Japanese currency.

The pound gained overnight following a US$ negative report released from the IMF. Sterling continues to remain a haven for investors looking for higher yielding investments as the UK continues to have some of the highest rates amongst the G8 nations. However, with an uncertain outlook for UK growth amidst mounting inflation pressures, the market has speculated that the BOE will likely hold rates steady for some time, further heightening the appeal of sterling deposits. Ultimately, the pound will continue to remain relegated to these wide looping ranges.

US$ Consolidates Ahead of Busy Data Week

The US$ traded in steady ranges overnight after Friday’s selloff ahead of a slew of US data this week as traders attempt to gauge the health of the US economy and future policy initiatives from the US Central Bank. While there is only limited data to be released today, with Leading Indicators scheduled for release this morning at 10:00 a.m. and expected to register a flat reading. With an uncertain outlook concerning the timing of any US recovery prevailing the markets, traders have assigned an 88.0% probability to the likelihood that rates hold steady at 2.0% through the Fed’s August meeting. However, it is at the Fed’s September meeting that rates could increase 25 basis points to 2.25%. This view should ultimately provide the US$ with some upward bias. Later this week, other data is to be released which will likely steer the US$’s direction. Tomorrow sees the release of PPI, expected to show a marginal gain of 0.4%, indicating little inflation pressures. Wednesday sees the release of Mortgage applications and the minutes from the last Fed meeting. Traders will carefully parse these minutes to determine the bias of the US central bank in determining the direction of rates at meetings later this year. The week winds to a close with the release of Existing Home Sales expected to decline 1.6%, indicating continues weakness in the sector. Expect the US$ to remain rangebound through most of today as traders focus on the release of data later this week, and will be unlikely to commit to any particular bias.

The euro held steady in ranges overnight after Friday’s significant advance, as uncertainty prevails the outlook for both US interest rates and the overall economy. While the ECB appears committed to holding rates steady for some time, traders remain uncertain about the timing of any rate hikes from the US Central Bank and whether the US Fed has truly completed its easing cycle. Until there is some clarity on both factors surrounding the US outlook, expect trade to keep the euro well supported in recent ranges.

The yen continues to stumble in recent ranges as the “carry trade” dominates overall price action. Traders continue to use the low interest rates afforded by the Japanese currency as a backbone to financing positions across a broad spectrum of other markets. However, with some of the higher yielding commodity currencies, such as the Aussie and Kiwi, now coming under pressure, the yen has enjoyed some limited gains. With these duel factors in play, the yen will likely continue to remain relegated within current ranges.

The pound also continues to consolidate in recent ranges as traders attempt to guess the next policy action from the Bank of England. With consumer spending slowing and the housing market remaining under duress, one would expect UK rates to fall. However, with energy prices at record highs, inflation pressures have begun to surface, suggesting that the UK Central Bank will delay the timing of any rate cuts. These conflicting factors continue to steer the pound within its current ranges.

US$ Remians Rangebound as Data Improves

The US$ weakened slightly overnight, albeit within recent ranges as traders continue to focus on the course of US interest rates and the flow of US economic data. Yesterday, the market was presented with a mixed bag of results, showing that inflation pressures in the US are nominal despite the surge in food and energy prices. Also there were signs that economic performance could be improving as measured by a better than expected Philly Fed. This improving data has led the market to determine that the US rate cut cycle has bottomed. Futures markets have currently priced in a 90.0% probability that rates hold steady at 2.0% when the Fed meets on June 25^th. There is a 24.2% chance assigned to the likelihood that the bias shifts and rates move higher at the September 16^th meeting. The US released Housing Starts this morning at a surprisingly better than expected 1.032 million vs. expectations of a 939k reading. This data showed a gain of 8.2% in April.  At 10:00 a.m. University of Michigan Confidence is to be released expected to decline to 62.0. With better than expected housing data released, the US$ could enjoy a significant rally, should confidence show a rebound.

The euro gained overnight after comments from an ECB policy maker suggested that interest rates would remain steady this year within the Eurozone. ECB Member Liebscher stated that he sees inflation risks “tilted to the upside,” and that there is no room “for an interest rate cut in 2008.” These comments, despite being very hawkish did not push the euro from its recent ranges. The reason for this is likely the release of very weak French payroll data. French non-farm payroll data grew at the slowest pace since the fourth quarter of 2006, as the economic slowdown affecting the US seems to be spreading to the larger economies of the Eurozone. Within this backdrop of hawkish commentary from the ECB and data clearly pointing to economic slowdown, traders will likely continue to push the euro lower at a measured pace.

The yen continues to trade in very tight ranges as the “carry trade” reemerges amidst an apparent calm returning to credit markets and investors seemingly willing to adopt more risk on their balance sheets. With Japanese rates at 0.5% and likely to push lower over the coming months, as signs of a Japanese slowdown persist, the yen will continue to remain the preferred vehicle to finance positions across other markets. This will certainly keep a downward bias on the Japanese currency.

The pound traded in rather flat ranges overnight as the market continues to take a “wait and see” approach to Bank of England monetary policy. With inflation pressures seemingly rising throughout the UK, Mervyn King and other policy makers have found themselves in a difficult situation. The UK housing market is under terrible strain, while the consumer is beginning to curb spending. This would typically force the BOE to lower rates; however, with inflation pressures the Bank is taking a sideline position. This will likely keep sterling relegated to tight ranges with a slightly downward bias.