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The automaker bailout drama has exerted its toll on the financial markets. Last night, news that the bailout deal fell apart in the Senate drove the US dollar to a 13 year low against the Japanese Yen. Almost immediately, the dollar rebounded and its recovery accelerated after reports that the White House may provide assistance to the automakers by tapping the TARP funds. Stocks have rebounded from negative territory, but the unconvincing rally in both the currency and equity markets suggest that traders do not know what to make of the automaker bailout saga, which is sure to drag out into the New Year. With the Federal Reserve expected to cut interest rates on Tuesday, the US dollar could remain weak going into the rate decision.
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ADP Employer Services gauge showed a shocking -693K contraction in employment versus estimates of -495K in job losses. The news sent the dollar tumbling against euro with the pair hitting 1.3737 in post release trade. The ADP figures confirmed the dollar bears worst nightmare nearly hitting the -700K barrier suggesting that the US labor situation has deteriorated significantly over the past month.
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For readers of the Daily Currency Focus, it should be no surprise that the dollar has continued to weaken. On Wednesday, we said that the actions by the Federal Reserve have cemented the downtrend in the U.S. dollar. Given how currency traders have responded to previous Quantitative Easing threats and announcements, the EUR/USD could realistically hit 1.40 (see charts). Although equities have given back its gains and bond yields have rallied, the moves in the currency and commodity markets indicate that the Fed’s actions will have a lasting impact on the financial markets. As we look forward to more dollar weakness, it is worthwhile to consider how a weaker dollar impacts the global economy.
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The greenback faces broad selling today as risk tolerance improves along with equity rallies. The equity rallies were primarily fueled by the gradual uncovering of stress test details and upbeat earnings. The same story of components have been the major market driver for the entire week .Today however, we threw some new factors into the mix including some of the only relevant economic data to be released this week. Even though markets are still net losers since Monday, the voice of optimism is still clearly audible. The Dow today advanced by about 100 points. The dollar was stronger against the pound and yen, but lower against the euro, cad, aussie, and kiwi.
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March Existing Home Sales declined significantly dropping to a 4.57M versus expectations of 4.65M annual run rate. The decline was materially worse than the 4.71M figure for the month of February. Median price of a home fell by 12% from the year prior to $175,000. The news put a damper on equities and risk appetite as investors were anticipating a much more benign decline.
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Cautious optimism is the perfect catch phrase for today’s events. Things are getting better but it is unclear whether or not this is just a break in the storm, or the very beginnings of stabilization. The Federal Reserve seems to believe that we are a long ways off, while recent economic data and earnings reports are pointing toward stabilization. The Dow spent much of the day trying to find the answer to this unanswerable question. In the end, the bulls were barely able to maintain control. The euro and pounds got hammered in today’s session, losing more than 150 and 120 pips respectively. Surprisingly, dollar strength was not enough to keep USD/JPY from sinking further. Commodity currencies were mixed on the day.
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US stock markets finished the day strongly. For most of today’s trading, markets expressed uncertainty about the latest flood of economic reports, most of which did not improve as much as anticipated. By the end of the day, the Fed was able to step in and console investors as to the current stage of stabilization in the US economy. The Fed’s Beige Book, a tabulation of conditions reported within each Federal Reserve District opened with the usual words of concern but then introduced the notion of stabilization. The markets took this news and decided to rally with it by more than 100 points. Currency markets reflected stern euro weakness in turn for broad based pound strength. The dollar was higher against the yen but lost more than 100 pips against the Canadian dollar.
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As we noted, today’s TICs report could prove pivotal to the currency market if it prints yet another negative number. The market is anticipating a rebound to $27 Billion from the prior month deficit of -$43 Billion. However, if the report shows yet another outflow of capital from US for the fourth month out of the past five, it could send tremors through the currency market highlighting the vulnerability of US balance sheet position.
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The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.
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For the second day in a row, the U.S. dollar has appreciated significantly against the Euro and is also trading higher against the New Zealand dollar and Swiss Franc. However, the extent of today’s rally in the greenback basically ends there. The dollar is practically unchanged against the British pound and Australian dollars and is trading lower against the Canadian dollar and Japanese Yen. The 2.3 percent sell-off in U.S. equities coupled with the outperformance of the two lowest yielding G7 currencies indicates that risk aversion is the dominant theme. Yet, with no major U.S. economic data or market moving news over the past 48 hours, traders may be wondering, what changed. As recently as last week, investors were optimistic about a turnaround in the global economy following the more substantial outcome from the G20 meeting.
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Markets today are exhibiting the usual signs of uncertainty in light of a new month that has not exactly gotten off to the best start. Among currencies, the Euro, Pound, Canadian dollar, and Australian dollar all showed weakness against the dollar. USD/JPY on the other hand clearly exhibited dollar strength, as a surge to 101.00 is currently under way. The one currency that has managed to buck the trend has been the New Zealand dollar which only narrowly is holding on to gains. Nevertheless, the main driving force is the drop on the Dow today. However, as a sign of resilience in even a down market, the Dow rebounded off of exaggerated losses that extended down by nearly 150 pips to close down 41.74.
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Over the past week, the Australian dollar staged an impressive rally as upside surprises in economic data fueled expectations that interest rates will be left unchanged for the second time in a row. Since March 10th, the Australian dollar has appreciated from a low of 0.6340 to an intraday high of 0.7228 on Friday. The Reserve Bank of Australia has a monetary policy meeting on Monday evening NY time, Tuesday morning in Sydney and the outcome of the meeting will determine whether the Australian dollar is able to sustain its gains. Currently, the market expects the RBA to leave interest rates unchanged, but some people believe that the RBA could cut rates by as much as 50bp, which means the upcoming rate decision, could be a close one. Although, leaving interest rates unchanged has become a common practice of many central banks these days, what sets Australia apart is that interest rates are not at zero, leaving the RBA with room to ease. At 3.25 percent, the country currently has the highest interest rate amongst developed countries.
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The U.S. dollar has ended the week lower against all higher yielding currencies as the actions by Washington and leaders of the 20 largest economies have helped to restore risk appetite. USD/JPY which tracks the market’s sentiment broke 100, to trade at the highest level since November. The fate of the dollar in the week ahead will be largely dependent upon whether we are at a turning point in the global recession or if investors have been misled by false expectations.
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In any other environment, news that 663k people lost their jobs in a single month would be devastatingly.
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The rally in U.S. equities and the improvement in risk appetite drove the U.S. dollar lower against all higher yielding currencies. Thanks to some extra efforts by the G20 and relaxation of mark to market accounting by the Financial Accounting Standards Board (FASB), investors have become more optimistic. However a big event risk lies ahead for the U.S. dollar and it remains to be seen whether the positive sentiment following the G20 and FASB can be sustained. The non-farm payrolls report is traditionally one of the most market moving pieces of data for the foreign exchange market and with the strong possibility of another sharp decline in jobs, it is too early to completely buy into the recovery story (How Could the Dollar React to Non-Farm Payrolls?).
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There is a significant chance that in the month of March, U.S. non-farm payrolls fell by the largest amount in 60 years. What this means is that job losses could have exceeded 700k, a figure not seen since the 1940s. Ask any person living in the United States and they will tell you that the labor market is weak and will probably worsen before it improves. Stocks are up but the layoffs announcements have not ended.
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The next 48 hours in the foreign exchange market should be very interesting as we look forward to three significant events that could trigger massive volatility in the currency market independently, let alone collectively. After some big moves earlier this week, most currency pairs have consolidated as traders wait for the European Central Bank interest rate decision, the G20 meeting and the U.S. non-farm payrolls report. The U.S. dollar strengthened against the Euro and Swiss Franc but lost value against all of the other major currencies. This consolidation should just be a precursor to a bigger move.
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The last trading day in the first quarter of 2009 has ended with a bang. The U.S. dollar sold off against most of the major currencies as repatriation flows come to an end. U.S. economic data was weak, but not a game changer and therefore currency investors chose instead to focus on the positive implications of Japan’s stimulus package and the IRS’ new tax break for U.S. car buyers. The currencies that are performing the best against the U.S. dollar are the ones whose central banks are not expected to adopt quantitative easing, namely the Australian New Zealand dollar.
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The U.S. dollar capped the week off with a strong rally that may have set the tone for trading in the coming week. Despite a number of interesting political developments since Monday, the price action of most major currency pairs have been consolidative – up until now. Many factors have contributed to the sharp appreciation of the U.S. dollar, but for currency traders, their primary question is whether the rally can be sustained in the new and extremely busy trading week. Before even talking about the event risks, it is first important to remember that next week represents the end of the first quarter for many U.S. corporations and the end of the fiscal year for many Japanese companies. Therefore we may have a lot of action in the currency market that is related more to repatriation than economic fundamentals.
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Over the past few months, a rally in U.S. equities has generally been met with a sell-off in the U.S. dollar. The primary reason was because parking money into the low yielding U.S. dollar was synonymous with risk aversion. Therefore one would expect that today’s 2 percent rally in equities should have driven the U.S. dollar lower against all of the major currencies. We did see dollar weakness, but it was only against the Australian and New Zealand dollars. The greenback increased in value against the Euro and British pound leading many traders to wonder why those currencies failed to participate in the rally.
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UK Retail Sales printed much worse than expected coming in at -1.9% vs. -0.3% forecast as UK consumers faced with the worst labor market conditions since the early 1980’s sharply cut their spending in February. The news was not totally surprising given the weakness in the overall UK economy and the steep drop in CBI March Distributive Trades survey yesterday.
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It has been an extremely interesting day in the currency market with Treasury Secretary Timothy Geithner tripping over his comments about the U.S. dollar and an auction of 5 year Treasury notes seeing surprising weak results. Geithner’s fumble could not come at a worst time as investors remain skeptical about the effectiveness of the Obama Administration’s efforts to stimulate the U.S. economy. Top that off with the failed Treasury auction and it is clear that the actions of everyone in the Obama Administration from the Treasury Secretary to the Federal Reserve Chairman have left an air of uncertainty across the financial markets. The U.S. dollar has weakened against the Euro and Japanese Yen but ended the day unchanged against the commodity currencies.
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In a blink of an eye, the U.S. dollar has collapsed against the Euro, Japanese Yen and other major currencies. The trigger was comments from Tim Geithner who said that the U.S. is "quite open" to China's suggestion of moving towards a Special Drawing Right (SDR) linked currency system
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Compared to yesterday’s sharp moves in the currency and equity markets, trading has been relatively quiet. U.S. stocks meandered in and out of negative territory while the U.S. dollar traded higher against nearly all of the major currencies. Profit taking has hit the financial markets dragging equities and currencies lower. This consolidation gives investors the time to think about whether Monday’s rally is the beginning of a new bull market or just a strong bear market rally. Since March 6th, the S&P 500 has increased 23 percent, which is marginally less than some of the rebounds that we saw during the Great Depression. The point is that equities could still extend its gains while remaining in an overall downtrend.
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The U.S. dollar initially traded higher after the Treasury released details for the Public-Private Investment Program aimed at taking bad debts off bank balance sheets. Their actions help to create a floor under the toxic assets, reassuring global investors. However early gains in the U.S. dollar was overshadowed by the massive rally in the U.S. equity market. The 6.8 percent rise in the Dow or close to 500 point move reflected stronger risk appetite and growing demand for higher yielding currencies such as the Euro, Australian and New Zealand dollars at the expense of the greenback. If the Dow hits 8000, we could see a new 2 month high in the EUR/USD above 1.38.
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A new trend has emerged in the U.S. dollar this week courtesy of the Federal Reserve’s decision to start buying U.S. Treasuries. However judging from the price action across the financial markets, investors are not entirely convinced that the central bank’s actions will be enough to stabilize the U.S. economy. Stocks and gold prices have retreated after rallying on Wednesday while bond yields recovered. The U.S. dollar has also bounced but remains very weak. Given that the most significant consequences of the Fed’s action are higher bond prices (lower bond yields) and a weaker U.S. dollar, traders should not be distracted by the sell-off in U.S. equities. With no economic data or major announcements from the U.S. on Friday, profit taking has hit the currency market.
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FOMC's stunning announcement yesterday that it will buy up to $300 Billion in Treasury bonds took the currency market by surprise and rallied the EUR/USD by more than 500 points in less than 24 hours. As we wrote earlier the FOMC announcement ,” represents an 'all-in' bet on massive monetary stimulus in order to stem the worst contraction in the US economy since World War II. The move is of course wildly dilutive to the currency with nearly $1 Trillion created out of thin air. Little wonder then why the dollar collapsed across the board even as other asset classes rallied. It also indicates that the Fed may have come to the conclusion that the two biggest customers for US debt – China and Japan – may be unable or unwilling to provide additional capital to finance the gargantuan expansion of US fiscal spending this year and next.”
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The reverberations from yesterday’s surprise announcement by the Fed continued in the currency market with EUR/USD remaining bid in early European trade but the 1.3500 handle remained serious resistance as the pair had trouble penetrating that level. Yesterday’s announcement by the FOMC that it will purchase up to $300 Billion in US Treasury securities, spurred a massive dollar sell off as few traders expected the Fed to initiate quantitative easing quite so soon and on such a large scale.
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On Tuesday, we said that being long dollars equals being long pessimism, but what is more relevant to recent price action is that being short dollars equals being long optimism. The U.S. dollar has sold off across the board following the Federal Reserve’s decision to buy U.S. Treasuries. Although the act of buying U.S. Treasuries is in of itself dollar bearish, the sell-off in the greenback also reflects the market’s confidence in the Fed’s actions. Given the trend of the U.S. economy, buying Treasuries was inevitable but rather than wait a few more months, the Federal Reserve decided to deliver the stimulus now and in turn give the U.S. economy its best chance at recovery.
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A bank report that we read this week had an interesting line summarizing investors’ attitude towards the U.S. dollar over the past few months. They said that being long dollars means being long pessimism and we believe that this is a valid description of the recent price action in the currency markets. Today, the dollar weakened against every major currency except for the Japanese Yen. This weakness as baffling as it may seem is more of reflection of the market’s optimism than pessimism because equities are higher and gold prices are lower.
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With no fireworks from this weekend’s 3 big event risks, the rallies in the currency and equity markets are fizzling. Having been up more than 150 points intraday, the Dow Jones Industrial Average ended the U.S. trading session down 7 points. This lack of follow through was replicated in the foreign exchange market with the Euro and British pound giving up earlier gains. Promises can only take the markets so far and the lack of concrete actions by the G20 has disappointed investors. Although we have previously mentioned that bear markets can rally as much as 25 percent, today’s intraday reversal is worrisome. Looking at the economic calendar this week, there is not much event risk to energize investors
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According to the latest Treasury International Capital flow report, foreign investors were net sellers of U.S. investments and U.S. dollars in the month of January.
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This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks. Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors. For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue. There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.
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This morning's GBP/USD short has reached T1, but T2 may be a stretch heading into the weekend...
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Breakouts are beginning to occur across the foreign exchange market. After consolidating for the past few weeks, we have finally seen an upside breakout in the EUR/USD with the currency pair trading at the highest level since February 24th. USD/JPY has also fallen significantly and is at risk of breaking its March lows while the Australian and New Zealand dollars are attempting to break month long consolidations. The story today is dollar weakness. The greenback has weakened against every major currency except for the Canadian dollar. Other than the equity market’s feeble attempt to extend Tuesday’s gains, there was no major catalyst for the sell-off in the U.S. dollar.
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China’s trade surplus narrowed to $4.8 billion, against expectations of $27.3 Billion as imports fell 24.1% from a year earlier. This was the fourth straight month of decline in China’s trade balance, but today’s data was particularly shocking as it dropped to only one eight of the amount of the previous month.
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With U.S. equities rising more than 5.5 percent today, one would expect the improvement in risk appetite to drive the U.S. dollar lower against all of the major currencies. Unfortunately we did not see a broad based sell-off in the U.S. dollar. The greenback only weakened against the Euro and commodity currencies because investors continued to bail out of British pounds and Swiss Francs. It is also interesting that the EUR/USD is well off its highs indicating that the market’s appetite for dollars has not waned dramatically. The catalysts for today’s rally are not convincing and the moves in the currency market are fizzling, which suggests that we have witnessed nothing more than a bear market rally.
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The U.S. Dollar has weakened against all of the major currencies this morning following the stronger profit forecast from Citigroup. However the correction will most likely be just a hiccup in the dollar’s overall uptrend as the uncertainty about the financial sector has yet to be resolved.
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Markets are once again entrenched in a fear induced environment. Global equity markets are spiraling downward on continued disruptions in the stability of the global financial system. The promise of stability is nowhere to be found, as situations are only worsening despite continued governmental efforts. The concerns over the financial sector in particular have added to investors fears. Between the British nationalization of Lloyds Banking Group and AIG’s proposal for another bail-out, the survivability of financial companies is in question. Currencies have reacted with a determination on dollar strength. As the yen continues to lose its status as safe haven, the availability of a risk-free environment is almost completely limited to the United States. The dollar advanced against the Euro, Pound, Yen, Canadian dollar, Australian dollar, and New Zealand dollar.
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All of the major currencies ended Friday’s trading session virtually unchanged against the US dollar. However the muted performance masks significant intraday volatility. The Euro for example raced to a high of 1.2754 following the US non-farm payrolls release but choked up nearly all of its gains on more uncertainty in the financial market. Similar price action was seen in USD/JPY. The currency pair dropped to a low of 96.58 in the European trading session but after a post payrolls rally it ended the US session above 98. The equity market was not spared from the volatility with the major indices falling to fresh 12 year lows before significant reversals. With no major US economic data near the beginning of the week, fear and uncertainty could lead to more volatility in the currency market.
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As we have promised, trading currencies have become more interesting following the interest rate decisions in Europe. The next 24 hours should prove to be just as exciting for forex traders with the February non-farm payrolls report due for release. The US dollar has rallied significantly ahead of the payrolls report, which is traditionally the single most market moving economic data for the EUR/USD. The cohesive rally in the US dollar and the price of gold along with the sell-off in US equities indicate that risk aversion is the main theme of the day. This also provides a clue on how the dollar could trade following Friday’s non-farm payrolls report (February Non-Farm Payrolls Preview).
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There is no question that the US labor market is very weak with job losses expected to extend for the 14th consecutive month. If February non-farm payrolls exceed -450k, then more than 4 million Americans would have lost their jobs since January 2008. The current forecasts for non-farm payrolls are far more pessimistic with analysts predicting a decline of 650k jobs. The US dollar has rallied as risk aversion drags down the higher yielding currency pairs, but if non-farm payrolls surprise to the upside and we that think it will, the dollar may give back some its spectacular gains.
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EUR/USD broke the psychologically important 1.2500 level in early Asian trade after a much worse than expected Australian GDP report triggered a broad dollar rally and tripped stops taking the pair to 1.2457 before it recovered above the 1.2500 handle in early European trade. USD/JPY also saw a tremendous amount of flow taking out the 99.00 barrier and now appears to be poised to tackle the 100 level within the next few sessions.
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The US dollar extended its gains against the Euro, British pound and Japanese Yen as the key players in the recovery story disappoints the market. Overall the price action in the currency market has been muted and the dollar lost ground against other major currencies such as the Australian and New Zealand dollars. US economic data was weak but the dollar rally continued as traders focused on external rate decisions. The central bank of Australia left rates unchanged while Canada cut theirs by 50bp; next up are the Eurozone and UK rate decisions, both of which are expected to lower interest rates.
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Both euro and pound recovered off their North American session lows in a quiet rangebound session that carried very little event risk on the calendar. However, the star of the show in currency market tonight was the Australian dollar which singlehandedly revived risk appetite after the RBA surprised traders by keeping its overnight cash rate at 3.25% instead lowering it by 25bp as expected.
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It has been a rough day in the financial markets with the Dow Jones Industrial Average and S&P 500 falling to the lowest level in 12 years.
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All eyes have been on Washington today with Fed Chairman Ben Bernanke testifying before Congress and Treasury Secretary Geithner releasing details on the US’ capital assistance program. The financial markets have been waiting for the details from the Treasury since they first announced the Financial Stability Plan and now investors have reacted positively. The Dow Jones Industrial Average turned positive temporarily after having been down close to 200 points this morning. Interestingly enough, the recovery in US equities has failed to have a meaningful impact on the currency market. The US dollar strengthened across the board and has remained strong going into the close of the US trading session.
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The Australian Dollar has been trading in a very tight range over the past few weeks and is prime for a breakout.
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As the week began the dollar was in retreat for a second session in a row after a Wall Street Journal article suggested that US government may take a 40% equity stake in Citigroup moving ever close to nationalization of the bank. Fears over nationalization sparked a vicious short covering rally in EUR/USD on Friday as currency traders believed that such a course of action would increase sovereign risk for the greenback by expanding the liabilities of US taxpayers.
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Gold prices hit an intraday high of $999.50 an ounce, just a few cents shy of $1000.
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Capital flight has driven the US dollar higher. On a day when President Obama signed the Economic Stimulus Package into law, the banking turmoil in Europe and the resignation of Japan’s Finance Minister has turned investors away from other major currencies. Even though the greenback is yielding next to nothing, investors are willing to park their money with the US government as long as they keep it safe. The lack of negative game changing news from the US has been very positive for the US dollar. The greenback and gold prices have been moving in tandem since January 14th. This unusual correlation is actually sending a strong message to currency traders.
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With US equity and bond markets closed for Presidents Day, trading was relatively quiet for currencies. The G7 meeting did not lead to any fireworks but the dollar did gap higher against all of the major currencies except for the Japanese Yen at the Asian open on Sunday.
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Despite much worse than expected GDP data EUR/USD held its ground near the 1.2900 level for most of Asian and early European trade today as risk appetite returned to the FX market. The return of risk sparked a strong rally in cable and Aussie all night long and sent USD/JPY flying towards the 9200 handle.
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It is a dollar story in the foreign exchange market today as the greenback rises against every major currency. Although earlier risk aversion contributed to the strength of the US dollar, the underperformance of the Japanese Yen suggests that revenge of the low yielders is not the theme in the currency market. Since we are still waiting on the economic stimulus package, the market has shifted its focus away from politics and back onto economics. The comments about sovereign debt ratings by ratings agency Moody have spooked currency traders.
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The Asian equity markets reacted negatively to the news that the US stimulus package was ready for passage as traders grew increasingly skeptical about the bills efficacy to help revive the US economy. Most Asian equity bourses were lower by more than -2% and the European markets followed suit with declines of more than -1% in early London and Frankfurt trade.
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The much anticipated announcements from Washington have triggered a dramatic turn in the currency and equity markets. With investors flocking back into the safety of US dollars and the Dow Jones Industrial Average falling 381 points, it is clear that investors are not satisfied with the Obama Administration’s new programs to unlock the credit the market and rescue the financial sector. If today’s announcements were to be measured by their ability to restore confidence in the financial markets, then the new President has failed miserably. Fortunately we are more optimistic and believe that economic stability will be restored under Obama’s leadership, but patience may be needed.
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Over the next 24 hours, the crisis of confidence will be tested. A number of speeches and announcements are expected from the Obama Administration ranging from the President himself, the Treasury Secretary and the Chairman of the Federal Reserve. The big test tomorrow will be whether or not investors are satisfied with the government’s efforts. Is the rescue plan enough to turn around the US economy or will the critics crush any optimism? The US dollar is trading lower against all of the major currencies suggesting that forex traders are holding out hope that Obama’s plan is well received but this same sentiment is not being shared by equity traders.
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On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January. Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number. Everyone knows that the US economy is very weak and major job losses will continue. Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview). Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner. According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week. This is one of the few things that could strike a meaningful recovery in the currency and equity markets. If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.
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Last week’s counter trend rally in GBP/USD came to a crushing halt in early London trade today as the unit slid nearly 300 points off its highs having reached key resistance at the 1.4500 level before the week-end. The worst snowstorm to hit UK in more than 15 years added to the sterling’s woes as businesses struggled to open at the start of the week. The primary cause for the down draft however was simple risk aversion and profit taking.
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Over the past 6 months, being long US dollars has been one of the best trades in the currency market but as the dollar extends its gains, many traders wonder how much further it can rise. In the currency market, trends can last much longer than anyone would normally anticipate especially if it is driven by fear. As humans, we run from uncertainty and not towards it. Risk aversion has been pushing investors into the safety of the US dollar and out of higher yielding currencies. When Main Street reads in the papers tomorrow about the slowest pace of economic growth in 26 years, their shock could turn into more selling. Next week, we also have the US non-farm payrolls report due for release. A sour mood could hang over the markets for most of the week as traders fear that another 500k jobs were lost in the month of January. The only thing that could improve risk appetite and give investors a reason to cheer would be if the Senate passes President Obama’s economic stimulus package.
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With most of Asian and Australia out on holiday, the liquidity starved conditions in the currency markets created some exaggerated movements in both euro and pound on the first trading day of the week, as both units fell hard at the start of Asia trade only to stabilize and recover on better risk appetite as the night progressed.
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It is not often that we can see the US dollar hit a 23 year high against one currency and a 13 year low against another on the very same day. However that was exactly what happened this morning when the greenback surged against the British pound and collapsed against the Japanese Yen. Volatility ripped through the foreign exchange market as central bank and other US officials comment on their economies and currencies. The milestones were not limited to the GBP/USD and USD/JPY as the NZD/USD and EUR/JPY also fell to a 6 year low intraday. However what was most impressive is the fact that none of the staggering losses were sustained.
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The drop in the GBP/USD at the start of this week has been nothing short of astonishing. In less than 48 hours the pair erased more than 1000 points off its price depreciating by more than 6% against the dollar. Although cable has been in decline since the turbulent markets of last fall, this latest freefall carries a whiff of true panic about it as markets fear that that UK government spending schemes to rescue the country’s ailing banking sector will put unsustainable stress on the Treasury.
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Flight to safety continues to drive the US dollar higher against all of the major currencies outside of the Japanese Yen. US markets were closed today in observation of Martin Luther King, Jr. Day but that has not limited the volatility in the currency market. Europe dominates the headlines with big developments in the UK and Spain. Most Americans will be distracted by the Presidential Inauguration tomorrow, which leads us to comment on the possibility of an Obama Bounce on Tuesday.
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The theme in the markets this morning is a return of risk appetite. The US government has bailed out Bank of America for the second time, reminding investors that they are still here and ready to help the banking sector. BoA received another $20B to ease their absorption of Merrill Lynch.
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Better than expected US economic data was like a breath of fresh air for the currency markets today. Producer prices fell less than expected last month while manufacturing conditions in the Empire State and Philadelphia regions improved. The dollar rebounded against the Japanese Yen indicating that risk aversion is abating, albeit modestly. The overwhelmingly pessimistic investors will not be easily swayed by a few pieces of secondary economic data, especially since all of the numbers are still in negative territory. Looking ahead, we will have another busy day in the currency market with US consumer prices, the Treasury International Capital flow report, industrial production and consumer confidence due for release.
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For the 6th month in a row, US consumers have cut back spending. The December consumer spending data tells us that retailers had a very tough time this holiday shopping season. Consumers reduced their spending by 2.7 percent but if you take out year end deals in the auto sector, retail sales actually fell 3.1 percent, the largest decline in at least 16 years.
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What to expect from a fundamental and technical basis for the US dollar, Euro, British pound, Japanese Yen and other major currencies in the year ahead.
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The euro started off the new week the same way it ended the last one – by sliding against the dollar as focus in the currency shifted towards the ECB. The central banker in Frankfurt are facing escalating pressure to lower rates in light of the severe slowdown in economic activity in the Eurozone. In contrast , Friday’s US Non Farm payrolls, though horrid at -525K, were far better than the whisper number of -700K and as a result support for the greenback stiffened as the data refused to confirm the dollar bears worst expectations.
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The US dollar is selling off aggressively ahead of Friday’s non-farm payrolls report on the fear that for the second month in a row, job losses may have topped 500k. The recent moves in the currency and equity markets suggest that everyone expects a very weak labor market report. Although the consensus forecast is -520k, the whisper number is closer to -650k to -700k. Sentiment is strongly skewed in one direction which can be dangerous considering the fact that some of the leading indicators for non-farm payrolls call for a rebound. The Non-farm payrolls report is the most market moving release for the currency market and it should live up to its volatility inducing reputation.
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Concerns about the US economy are growing as the Dow Jones Industrial Average erases all of its year to date gains, taking the US dollar down with it. The rally that we have seen in the first few days of trading will be difficult to sustain with all of the weak economic data that we expect in this month. Although the US government has thrown a lot of monetary and fiscal stimulus at the US economy, we may not see the fruits of their labor until the second quarter at the earliest. There is a major risk of a sharp drop in this month’s non-farm payrolls, retail sales and fourth quarter GDP reports and only after we have seen the last of depression like numbers can we begin to see a meaningful recovery in the US dollar.
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The resonance of the New Year is starting to show its true colors at the start of the first full trading-week this year. The Dow finished a volatile day lower, in some ways ruining the sense of stability that pervaded in last week’s market. Volatility in equity prices was complemented by some extreme moves in the fx markets. Looking at today’s biggest percentage movers we can see the sheer magnitude of price action today, with some moves extending to more than 3.0%. The dollar in particular was heavily mixed across the board. We have seen some substantial gains against the euro and yen, in conjunction with weakness against the pound and commodity currencies. Today’s trading was a truly unorganized and unpredictable force.
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Dollar rallied strongly on the opening day of the first full working week of the year as enthusiasm over President elect Obama stimulus package pushed the unit higher against the yen while the euro suffered a 300 point loss on worries over the burgeoning Italian bond scandal. According to the Independent in UK , Italian municipalities may face as much as $35 Billion in losses over a financing scheme gone wrong, sold to the them by major investment banks such as UBS and Deutsche Bank. The Italian authorities are considering the possibility of suing the principal market makers or misrepresenting the risks to the municipal investors in these complex over the counter deals.
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The US dollar sold off modestly today on stronger European economic data and weaker US data. The dollar’s weakness was seen against every major currency except for the Canadian dollar which followed oil prices lower. Trading remains extremely quiet in the foreign exchange market and any moves that we have seen thus far are still nominal. The only currency pair that is really moving is the EUR/USD, but thin liquidity could be exacerbating the pair’s trading ranges.
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With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound. Trading continues to be very thin with commodities being the only products that are really moving. The tensions in the Middle East have driven oil and gold prices higher. US stocks also gave back Friday’s gains and remained contained within its week long trading range.
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It has been an exceptionally active year in the foreign exchange market as currency volatilities hit record highs. In the first half of the year, everyone was worried about how much further the dollar would fall but in the second half of the year the concern became how much further the dollar would rise. More specifically, after hitting a record low against the Euro in the second quarter, the US dollar surged to a 2 year high against the currency in the beginning of the fourth quarter. From trough to peak, the dollar index rose more than 23 percent in 2008.
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The US dollar appears to be unfazed by this morning’s mixed economic reports. Thin trading conditions continue to dominate in the currency market, leading to inconsistent trading for the US dollar. The greenback strengthened against the Japanese Yen and British pound but weakened against the Euro. The latest reports on the US economy were weak but not as weak as the market had expected. There was the potential for really bad numbers and the fact that they did not materialize has actually helped the dollar.
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It is the first trading day of what is typically the least liquid period in the financial markets. As a result, there was no consistent trading pattern in the US dollar today. The greenback weakened against the Euro but gained strength against the British pound and Japanese Yen. We still believe that the US dollar has hit a top and could be at the cusp of a major reversal. The EUR/USD’s resilience to the US stock market sell-off indicates that we are finally seeing the weak outlook for the US economy reflected in the weakness of the US dollar. In 2009, the greenback may no longer be the market’s safe haven currency of choice as yields on Treasury bills sit at zero to negative levels.
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After seeing the US dollar sell off for 5 straight days against the Euro and Japanese Yen, we were not entirely surprised to see today’s recovery, especially on the heels of better than expected economic data. The market has become accustomed to disappointments so good news was a welcome change. The European Central Bank has also reduced the interest rate that it offers to banks that deposit with them in order to encourage lending. The 15 percent rally in the Euro has led many to people to believe that the ECB may reconsider their plan to hold interest rates steady in January and the deposit rate cut was seen as a step in that direction. Thin market conditions near the holidays have exacerbated the volatility in the currency market. However even though the greenback is higher today, we had both positive and negative news impacting the dollar.
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Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. The US dollar is selling off aggressively going into the rate decision as traders realize that after tomorrow, the dollar will either be the lowest or second lowest yielding G10 currency. No matter how you look at it, an interest rate of 0.50 percent is just as bad as an interest rate of 0.25 percent.
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With dollar denominated assets yielding next to nothing, we have continued to see money flow out of the US dollar. The greenback fell to the lowest level against the Euro since September and dropped to a new 13 year low against the Japanese Yen. The losses have been even more staggering since the beginning of the month. The dollar has fallen 14 percent against the Euro and 8 percent against the Japanese Yen. This significant sell off begs the question How Much Further Can the Dollar Fall? If you watched the price action in the currency market this past year, you will know that trends dominate. With only 2 weeks until the end of the year, we could be stepping into a longer phase of dollar weakness.
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The US dollar fell to a 2 month low against the Euro following the Federal Reserve’s decision to cut interest rates by 75bp to 0.25 percent. The greenback is now the lowest yielding G10 currency and for that reason, we should see foreign selling of US dollars exacerbate. At 0.25 percent or more specifically, a target range of zero to 0.25bp, foreigners may not find the yield attractive enough to warrant the risk. Despite the selling that we have already seen in the dollar today, this could just be the beginning of a longer phase of dollar weakness that may last into the first quarter of 2009.
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Tuesday’s FOMC meeting will be remembered for decades to come as the Federal Reserve brings interest rates down to the lowest level this generation has ever seen. With 2 realistic options on the table and economist and traders divided on how much the Fed will cut interest rates, the only certain outcome is significant volatility for the currency market. No matter how you look at it, an interest rate of 0.50 percent is just as unattractive as an interest rate of 0.25 percent.
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EUR/USD got off to a strong start on the first trading day of the week, as optimism among Asian equity investors, whetted risk appetite pushing the pair to within a whisker of 1.3500 level in early European trade. Both Nikkei and Kospi propelled higher rallying more than 5% each on the day, boosted by a variety of factors from the expectations of bailout of US automakers to the more than 7% spike in Baltic Dry Goods index on Friday.