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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: WHAT ARE THE CHANCES OF A BREAKOUT?
• EUR/USD: BUOYED BY STRONGER DATA
• GBP/USD: HIT BY VERY DISAPPOINTING GDP NUMBERS
• USD/CAD: COMES WITHIN WHISKER OF YTD LOW
• AUD/USD: GOLD PRICES AT $951, OIL AT $68
• NZD/USD: RBNZ MEETING ON TAP
• USD/JPY: BUSY WEEK AHEAD

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%					Rates Expected to Remain Unchanged In Aug and Sept
	8/12 Meeting	9/23 Meeting
NO CHANGE	80.1%	77.7%
CUT TO 0BP	19.9%	19.2%
INCREASE TO 50BP	0.0%	3.1%
INCREASE TO 75BP	0.0%	0.0%

U.S. DOLLAR: WHAT ARE THE CHANCES OF A BREAKOUT?

It has been an extremely quiet day in the currency market.  The dollar traded lower against all of the major currencies except for the British pound which was hit by weak GDP numbers. Taking a step back, outside of the rally in USD/JPY and the sell-off in USD/CAD, range trading has been the dominant theme in the forex market this past week.   The euro and British pound for example ended the week virtually unchanged against the dollar while the Australian and New Zealand dollars strengthened marginally.  The listless action in the currency market has many traders wondering what the chances are for a breakout in the dollar next week.  

Chances of a Breakou t

The chance of a breakout in any of the major currencies is usually contingent upon how much market moving data we have on the calendar.  From the U.S., we have housing market data, consumer confidence, durable goods, the Fed’s Beige Book report and second quarter GDP numbers due for release.  Of all these reports, the most important will be the Q2 growth numbers on Friday.  A further slowdown is expected for the second quarter but the contraction should be more modest.  In Q1, the U.S. economy shrank by 5.5 percent.  The current forecast for Q2 growth is -1.5 percent.  The earnings season also continues with 25 percent of the S&P 500 companies reporting.  The focus will be on oil companies, financials, telecom and media.  Some of the big names reporting include ConocoPhillips, Exxon, Chevron, Deutsche Bank, Daimler, Sony and Colgate.  Although there are enough event risks to trigger an upside or downside breakout in the U.S. dollar, outside of the U.S. GDP figures, none of the numbers will really surprise the markets.  For the most part, we know that the housing market has stabilized, consumer confidence is improving and manufacturing activity is increasing.  Even if the data disappointments, it will only confirm the general belief that it will be a long and hard recovery.  Therefore we think that the chances are in favor of more range trading than a breakout in the coming week.  However the key will lie in equities.  If equities continue to push higher, we may see an upside breakout in currency pairs such as the EUR/USD, but the rise in VIX futures suggests that risk aversion is returning and therefore equities could face a correction.   

Forex Positionin g

Based upon the latest CFTC Commitment of Traders report, for the week ending July 21, forex traders on the futures market added to their short dollar positions.  Their demand increased the most for Euro, Australian and New Zealand dollars.  In fact, net long euro positions surged from 13,899 contracts a week earlier to 34,722 on July 21.  This is the largest amount of long positions since March 2008 and the sharpest gain that we have seen in a very long time.  Long Australian dollar positions also increased to the highest levels since August 2008.  Whenever there is such a strong increase in net long positioning, it suggests that the currency pair is prone to profit taking on any piece of bad news.  Depending upon the severity of the news, the reversal could also be very sharp.  

Forex Opportunities in Second Hal f

We have published a special report on FX360.com about the opportunities in the currency market in the second half of the year.  The whole idea centers around buying what China buys .  In the article, we talked about how China reported last week that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the U.S. and China will begin their Economic and Strategic Dialogue on Monday. Premier Wen Jiabao has pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad. China has long preferred to take stakes in companies that meet their resource needs and based upon their 2008 trade activities, we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment and commodities in countries like Saudi Arabia, Brazil, Australia and even Japan or Germany. So from that perspective, we believe that for currency traders, this would provide opportunities in the Brazil Real, Australian Dollar and Japanese Yen.  

EUR/USD: BUOYED BY STRONGER DATA

Better than expected economic data has lifted the Euro against the U.S. dollar.  Based upon the Eurozone PMI reports, manufacturing and service sector activity contracted at a slower pace in July.  This improvement was seen across France and Germany with German business confidence also rising for the fourth month in a row to the highest level since October 2008.  Stronger consumer spending and higher factory orders have made German businesses more optimistic. Although these numbers may suggest that the recession is over, the Eurozone economy still faces a lot of uncertainty.  Growing unemployment and the rise in the EUR/USD this month could sap domestic and external demand.  Don’t forget that the IMF expects the Eurozone to be the only region still contracting in 2010.  The outlook for the Eurozone economy is still unclear but next week’s economic data should help part the clouds.  Germany will be releasing its inflation and employment reports while more sentiment indicators are expected from the Eurozone.  We believe that the odds are skewed towards a correction in the EUR/USD in the coming week but the 1.38 to 1.43 trading range should remain intact.  As for Switzerland, the KoF leading indicator report is due on Friday.  Stronger numbers are expected, but with Swiss National Bank sitting at 1.50, we do not expect a major breakdown in EUR/CHF.

GBP/USD: HIT BY VERY DISAPPOINTING GDP NUMBERS

The pound is weaker across the board thanks to a truly dreadful GDP report. Growth in the UK slid by more than double expectations by -0.8 percent marking the fifth straight quarter of contraction, a streak trumped only by the recession in the seventies. Furthermore, annualized figures showed the largest drop since records began in 1955. Anyway you look at it growth prospects in Great Britain suddenly seem much more pessimistic. Among the most depressed sectors was the financial industry, a segment that will be crucial for any chance at recovery. In response to the wake-up call that today’s report provided, former BoE member David Blanchflower is calling for an expansion of Quantitative Easing, potentially doubling programs that are already in place. Blanchflower believes that if the bank does not take action, an economic recovery will never fully materialize. His comments are in stark contradiction with what many have touted as the potential for the unwinding of QE initiatives. In fact, many economists are concerned that letting these initiatives go on for too long may even distort financial markets. However, it is clear that the UK condition is much worse than expected which may require further easing by the BoE. Such a decision would be disastrous for the pound, not to mention a big drain on the bank’s credibility. Economic data for next week include housing data, consumer credit and confidence.  

USD/CAD: COMES WITHIN WHISKER OF YTD LOW

With no economic data from any of the 3 commodity producing countries, the Canadian, Australian and New Zealand dollars traded higher.  Finance Minister Jim Flaherty confirmed the echoed the comments made by the Bank of Canada this week.  He said he sees encouraging signs that the domestic economy is stabilizing and there is potential for growth in the third and fourth quarters, but he is worried about the impact of the strong Canadian dollar.  The loonie came within a whisker of testing its year to date high.  In the week ahead, outside of GDP numbers on Friday, there is no market moving Canadian data on the calendar.  Therefore we expect the loonie to key off oil prices.  Should crude heads towards $70, USD/CAD could fall to a new yearly low.  If it simply stabilizes here or falls, we may see a sharp rebound in the currency pair.  There were no exciting developments for the Australian or New Zealand dollars but that could change next week with the Reserve Bank of New Zealand meeting to discuss monetary policy.  Australian Central Bank Governor Stevens will also be delivering a speech on the “Challenges for Economic Policy.” For the NZD and AUD, official comments will be key.

USD/JPY: BUSY WEEK AHEAD

Today has seen a lull in the action after yesterday’s strong performance in USD/JPY. Traders clearly are not ready to get behind an all out assault on the yen. Even as volatility drops day by day, the dependence on a safe haven is as strong as ever. There is definitely some uncertainty and fear that indices such as the VIX are just not picking up. Economic data disappointed today with the All Industry Activity Index sliding to 0.7% from 2.6%. However, despite the release, the Nikkei 225 index managed to finish higher for the eighth consecutive day. Otherwise, things were quiet in Japan. Next week will be a different story all together. There is a long list of economic data that should make the week a crucial one. We will see Retail Trade on Tuesday, followed by Industrial Production on Wednesday. It is unclear whether or not the recent improvement in production will be hindered by persistent yen strength. Thursday will hold both the Jobless Rate and Consumer Prices. CPI should hold considerable weight because any perceived threat of deflation may spell trouble for the BoJ’s quantitative easing exit plan strategies.

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency in play when trading reopens.  Japan will release Corporate Service Price on Sunday at 23:50GMT or 7:50PM ES followed by U.S. New Home Sales at 14:00GMT or 10:00AM EST on Monday USD/JPY advanced for the second week in the row, putting it in the Range Trading Zone which we determine using Bollinger Bands. Despite a temporary rally, the pair remains in a discrete downtrend. If USD/JPY manages to break next level of resistance hovering at 50-day SMA which coincides with the 1st Standard Deviation at 95.50, an uptrend may emerge. Nonetheless, if the pair drifts below the1st Standard Deviation of the Bollinger Bands which represents current support level at 93.25, the currency pair could head towards 90.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.