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[FXCM-PR Rep]

Euro Benefits From Risk Sentiment, British Pound Pares Overnight Decline

Euro extended the advance from the previous day and rallied to a high of 1.2915 during the overnight trade as investors increased their appetite for risk, and the single-currency may push higher going into the U.S. session as the economic docket is expected to reinforce an improved outlook for global growth.

Talking Points

* Japanese Yen: Weighed By Risk Appetite
* Pound: U.K. CPI Continues to Hold Above Government’s 3% Limit
* Euro: German Investor Confidence Weakens For Fourth Month
* U.S. Dollar: Housing Starts, Building Permits on Tap

Meanwhile, the current account deficit in the Euro-Zone narrowed to a seasonally adjusted EUR 4.6B in June from a revised EUR 7.4B in the previous month, while the headline reading showed a EUR 1.0B surplus following a EUR 17.9B short fall in the month prior.

At the same time, the German ZEW investor confidence weakened more-than-expected in August, with the index tumbling to a 16-month low of 14.0 from 21.2 in the month prior, which exceeded forecasts for a drop to 20.0, while the gauge for the current situation jumped to 44.3 from 14.6 July to mark the highest reading since January 2008. As the region continues to benefit from the rise in global trade, with Europe’s largest economy expanding at a record pace, policy makers may look to increase their outlook for future growth, and the Governing Council may look to carry out its exit strategy over coming months as financial conditions improve. However, the European Central Bank is widely expected to maintain a loose stance over the coming months as the governments operating under the fixed-exchange rate system withdraw fiscal support and target the budget deficits, and subdued inflation will certainly allow the central bank to support the real economy throughout the second-half of the year as it maintains its one and only mandate to ensure price stability.

The British Pound bounced back during the European session to trade along the 20-Day SMA at 1.5663, and the GBP/USD may hold steady going into the North American session as price action continues to move within the previous day’s range. Nevertheless, consumer prices in the U.K. fell back to an annualized pace of 3.1% in July from 3.2% in the previous month, which led Bank of England Governor Mervyn King to write another letter of explanation to Chancellor of the Exchequer George Osborne, while the core rate of inflation fell back to 2.6% from 3.1% in June to mark the slowest pace of growth since November. BoE Governor King said the central bank stands “ready either to expand or to reduce the extent of monetary stimulus” as it maintains its dual mandate to ensure price stability while fostering full-employment, and went onto say that there is “substantial risks in both directions relative to the MPC’s central view” as the economic outlook remains clouded with uncertainties. In response, Chancellor Osborne said he welcomes the “committee’s flexibility and commitment” to manage monetary policy, and noted that “temporary factors” have contributed to the rise in inflation as price growth continues to hold above the government’s 3% limit.

The greenback continued to lose ground against most of its major counterparts, while the USD/JPY was relatively flat throughout the European trade after bouncing back from a low of 85.11, and the dollar is likely to face increased volatility going into the North American session as the economic developments are expected to reinforce an improved outlook for future growth. Housing starts in the world’s largest economy is forecasted to increase 2.0% in July to an annualized pace of 560K from 549K in the previous month, while building permits are projected to slip 0.5% following the 2.1% advance in June. In addition, the producer price index is anticipated to climb to an annual rate of 4.2% from 2.8% during the same period, while industrial outputs are expected to increase another 0.5% after expanding 0.1% in June.

 

[TamingSari]

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[TamingSari]

Euro extended the advance from the previous day and rallied to a high of 1.2915 during the overnight trade as investors increased their appetite for risk, and the single-currency may push higher going into the U.S. session as the economic docket is expected to reinforce an improved outlook for global growth.

Talking Points

* Japanese Yen: Weighed By Risk Appetite
* Pound: U.K. CPI Continues to Hold Above Government’s 3% Limit
* Euro: German Investor Confidence Weakens For Fourth Month
* U.S. Dollar: Housing Starts, Building Permits on Tap

Meanwhile, the current account deficit in the Euro-Zone narrowed to a seasonally adjusted EUR 4.6B in June from a revised EUR 7.4B in the previous month, while the headline reading showed a EUR 1.0B surplus following a EUR 17.9B short fall in the month prior.

At the same time, the German ZEW investor confidence weakened more-than-expected in August, with the index tumbling to a 16-month low of 14.0 from 21.2 in the month prior, which exceeded forecasts for a drop to 20.0, while the gauge for the current situation jumped to 44.3 from 14.6 July to mark the highest reading since January 2008. As the region continues to benefit from the rise in global trade, with Europe’s largest economy expanding at a record pace, policy makers may look to increase their outlook for future growth, and the Governing Council may look to carry out its exit strategy over coming months as financial conditions improve. However, the European Central Bank is widely expected to maintain a loose stance over the coming months as the governments operating under the fixed-exchange rate system withdraw fiscal support and target the budget deficits, and subdued inflation will certainly allow the central bank to support the real economy throughout the second-half of the year as it maintains its one and only mandate to ensure price stability.

The British Pound bounced back during the European session to trade along the 20-Day SMA at 1.5663, and the GBP/USD may hold steady going into the North American session as price action continues to move within the previous day’s range. Nevertheless, consumer prices in the U.K. fell back to an annualized pace of 3.1% in July from 3.2% in the previous month, which led Bank of England Governor Mervyn King to write another letter of explanation to Chancellor of the Exchequer George Osborne, while the core rate of inflation fell back to 2.6% from 3.1% in June to mark the slowest pace of growth since November. BoE Governor King said the central bank stands “ready either to expand or to reduce the extent of monetary stimulus” as it maintains its dual mandate to ensure price stability while fostering full-employment, and went onto say that there is “substantial risks in both directions relative to the MPC’s central view” as the economic outlook remains clouded with uncertainties. In response, Chancellor Osborne said he welcomes the “committee’s flexibility and commitment” to manage monetary policy, and noted that “temporary factors” have contributed to the rise in inflation as price growth continues to hold above the government’s 3% limit.

The greenback continued to lose ground against most of its major counterparts, while the USD/JPY was relatively flat throughout the European trade after bouncing back from a low of 85.11, and the dollar is likely to face increased volatility going into the North American session as the economic developments are expected to reinforce an improved outlook for future growth. Housing starts in the world’s largest economy is forecasted to increase 2.0% in July to an annualized pace of 560K from 549K in the previous month, while building permits are projected to slip 0.5% following the 2.1% advance in June. In addition, the producer price index is anticipated to climb to an annual rate of 4.2% from 2.8% during the same period, while industrial outputs are expected to increase another 0.5% after expanding 0.1% in June.

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[FXCM-PR Rep]

British Pound Rallies on Bank of England Minutes, Euro Pares Advance

British Pound surged to a high of 1.5669 during the European session as the Bank of England dropped it dovish outlook for inflation, and the exchange rate may continue to trend higher going into the U.S. trade as price action bounces back from the 200-Day SMA at 1.5498.

Talking Points

* Japanese Yen: Mixed Against The Majors
* Pound: BoE Votes 8-1, Andrew Sentance Dissents
* Euro: Construction Expands For First Time Since 2008
* U.S. Dollar: Risk Trends To Drive FX Market On Thin Event Risks

The BoE meeting minutes showed the MPC voted 8-1 earlier this month to hold the benchmark interest rate at 0.50% and maintain its asset purchase target at GBP 200B, while board member Andrew Sentance continued to dissent against the majority and pushed for a 25bp rate hike for the third consecutive month.

The central bank said “growth had been surprisingly robust” despite the ongoing slack within the real economy, and saw a risk for inflation expectations to be de-anchor over the coming months as price growth continues to hold above the government’s 3% limit. At the same time, Mr. Sentance argued that “economic conditions had improved over the past 12 months and the inflation outlook had shifted sufficiently to justify beginning to raise rates gradually,” and went onto say there “there was evidence that firms had found it easier to pass through price increases” as the recovery gathers pace. As a result, the central bank reiterated that the committee stands ready to move monetary policy in either direction as it aims to balance the risks for the economy, but expects the substantial amount of spare capacity to bear down of inflation as households and businesses continue to face tightening credit conditions. As the economic outlook remains clouded with uncertainties, the BoE is likely to maintain a neutral policy stance throughout the remainder of the year, but the stickiness in price growth could spur an increased split within the MPC as it maintains its dual mandate to ensure price stability while fostering full-employment.

The Euro fell back from a high of 1.2908 to maintain the narrow range carried over from the previous week, and the single-currency could face increased selling pressures going into the North American session as investors scale back their appetite for risk. Meanwhile, the Basel Committee on Banking Supervision said the new capital and liquidity measures could weigh on economic activity and sees GDP curbed by an average of 0.04% over the next four and a half years, but went to say growth will return “to its baseline path in subsequent years” as the region emerges from the recession. Nevertheless, the economic docket showed construction in the Euro-Zone expanded 2.7% in June following a revised 0.7% decline in the previous month, while outputs increased at an annualized pace of 3.1% to mark the first positive reading since February 2008. As growth prospects improve, the European Central Bank may see scope to reemploy its exit strategy over the coming months, but at the same time, the Governing Council may look to support the economy going into the following year as the governments operating under the single-currency withdraw fiscal support.

The greenback weakened against most of its major counterparts, with the USD/JPY paring the previous day’s advance to reach a low of 85.18, and risk trends are likely to drive price action in the currency market throughout the day as the economic docket remains fairly light for Wednesday. Equity futures are foreshadowing a flat open for the U.S. market even as most of the European indices track slightly lower on the day, but a rise in risk aversion would stoke a rebound in the dollar as the reserve currency continues to benefit from safe-haven flows.

 

[FXCM-PR Rep]

Currencies Less Bid Than to Be Expected Following Stronger Overnight Data

Overall, a very solid round of data overnight has helped to keep USD bulls in check for the time being, with the Euro recouping a good portion of its Asian setbacks, and most other major currencies tracking higher against the Greenback on the day thus far.

FUNDYS

Overall, a very solid round of data overnight has helped to keep USD bulls in check for the time being, with the Euro recouping a good portion of its Asian setbacks, and most other major currencies tracking higher against the Greenback on the day thus far. German producer prices were firmer, Swiss trade data was solid, and UK retail sales were outstanding, to help drive the latest price action.

Relative Performance Versus USD on Thursday (As of 11:20GMT)

1. CAD+0.41%
2. AUSSIE+0.36%
3. SWISSIE +0.32%
4. STERLING+0.30%
5. EURO-0.03%
6. YEN-0.12%
7. KIWI-0.25%

However, despite this latest round of data, the gains in the currency market have been far less impressive than one might think considering the recent propensity and drive to want to sell USDs. Perhaps the marginal gains against the buck suggest that any additional weakness for the US Dollar is now limited with many seeing the buck as an attractive investment at current levels. It is also worth noting that despite the solid round of data overnight, risk trades have not performed well, with then Yen crosses failingto push higher, and the Eur/Chf cross trading lower.

Things have also not been all good, with RBNZ Bollard out with some downbeat comments on the New Zealand economy, while talk of some potential ratings downgrades to France also made the rounds. Right now we are seeing a bit of a divergence between US equity futures, which are looking for a positive risk session, and currencies which don’t appear ready to commit to either direction at this point. Meanwhile, the commodity markets are also providing no clues, as both oil and gold prices are relatively flat.

Looking ahead, US continuing claims (4500k expected) and initial jobless claims (480k expected) are due out at 12:30GMT, along with Canada leading indicators (0.7% expected) and wholesale sales (0.4% expected). US leading indicators (0.1% expected) and the Philly Fed (7.2 expected) are then out at 14:00GMT. On the official circuit, Fed Bullard is slated to speak on the topic of the economy at 16:30GMT.

GRAPHIC REWIND

TECHS

EUR/USD: In the process of consolidating the latest sharp setbacks out from 1.3330, with the market stalling out ahead of 1.2700 for now. The overall structure remains quite bearish however following a bearish weekly reversal formation and any rallies should be well capped ahead of 1.3000 in favor of the next major downside extension below 1.2700 and towards 1.2500 over the coming days.

USD/JPY: Critical support by 84.80 has finally been broken to open some fresh multi-year lows by 84.70 thus far. Next key support comes in by 84.45, with a break below this level exposing the monthly lows from June 1995 further down at 83.50. However, as we have already warned, daily studies are starting to look stretched, and with 84.80 finally broken, any additional declines should be very well supported ahead of 83.50 in favor of a much needed upside reversal. A break and close back above 86.40 will be required at a minimum to relieve downside pressures.

GBP/USD: Setbacks have stalled out for now by some formidable support at 1.5500 in the form of the 200-Day SMA. However, a bearish weekly reversal signal certainly warns of deeper setbacks ahead, and we look for any inter-day rallies to be well capped above 1.5700 in favor of the next major downside extension below 1.5500 and towards 1.5000 over the coming days.

USD/CHF: Continues to chop around after being very well supported on dips in the 1.0300’s. However, the latest recovery is still only classed as corrective within a multi-day range, and a clear break back above 1.0680 will now be required to accelerate gains and mark a shift in the structure. Broader market price action has been net USD supportive of late, so we would not be surprised to see a close above 1.0680 over the coming sessions. Back under 1.0330 negates and exposes a drop towards parity.

FLOWS

Corporate bids in Swissie. Macro names on the offer in Eur/Gbp. Asian central bank and sovereign demand for Eur/Usd. Model funds buying Aussie and Cad. Japanese exporter offers in Usd/Jpy.

TRADE OF THE DAY

USD/CAD: The Canadian Dollar has been very well bid of late and stands out as the outperformer on the day thus far, with the pair dropping back well below 1.0300 over the past few hours. While there is certainly room for additional declines into North American trade, the overall price action over the past several days has been much more choppy and consolidative, to suggest that any additional declines should still be limited. As such, we like the idea of buying into dips and see any additional weakness easily stalling out just below 1.0200 by the 78.6% fib retracement off of the latest Aug5-Aug12 low-high move. The daily average true range of 105 points also lends support to the idea, with a projected daily low coming in somewhere in the 1.0200 area if the markets continues to drop. STRATEGY: BUY @1.0195 FOR OPEN OBJECTIVE; STOP 1.0095. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.

 

[FXCM-PR Rep]

Canadian Dollar: All Eyes On CPI as Traders Weigh the Currency's Drivers

Canadian Dollar stands at an important crossroads as July’s inflation figures prepare to cross the wires, with traders keen to gauge the outcome’s implications for the balance between the influence of risk and fundamental trends over the exchange rate.


Bank of Canada (BOC)

Weekly Update

Canadian Consumer Price Index figures are in focus into the end of the trading week, with expectations calling for the annual inflation rate snap a two-month losing streak with a print at 1.9 percent in July, the highest since January. This puts price growth just shy of the central bank’s 2 percent target level, with traders on alert about the outcome’s implications for monetary policy as well as the likely drivers of near-term Loonie price action.

Rate hike expectations have withered over recent weeks, with a Credit Suisse gauge of priced-in tightening expectations for the coming year down to the lowest since mid-December of last year, after the unemployment rate unexpectedly rose for the first time in nine months in July. This has coincided with an increasingly weak correlation between USDCAD and overall risk appetite (as tracked by the MSCI World Stock Index). While the link remains significant at -0.71 on 20-day percent change studies, it has lost over a fifth of its potency since the recent peak at 0.88 less than a month ago. The outcome seems reasonable, considering a fading rate hike outlook makes the Canadian Dollar less attractive as a carry currency and divorces it from other yield-seeking plays, most notably its Australian and New Zealand counterparts.

To that effect, the CPI release may prove to be a major turning point in establishing the dominant drivers of Canadian Dollar price action. A print in line with forecasts may underpin rate hike expectations and help secure the Loonie’s place on the risk side of the sentiment spectrum. Alternatively, a disappointing outcome may cement the recent unwinding of the tightening outlook and shift the spotlight toward the fundamentals of the Canadian economy and its inherent dependence on a rebound in the US before a meaningful recovery gets underway. Indeed, Canada relies on its Southern neighbor to absorb over 80 percent of its exports, making it highly sensitive to the US business cycle. From a practical perspective, the implications for USDCAD are simple: if the CAD is being viewed as a pro-risk play, it ought to rise as the US recovery begins to regain traction; if not, the opposite is likely to be the case.

United States Federal Reserve (FED)

Weekly Update

The FOMC kept the benchmark federal funds rate between 0.00% and 0.25% in the policy meeting last week. More importantly, the Fed downgraded its economic assessment, stating that “information received since the FOMC met in June indicates that the pace of recovery in output and employment has slowed in recent months” and that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” Unchanged were the Fed’s inflation outlook, “inflation is likely to be subdued for some time” and the Fed’s pledge to keep rates “exceptionally low…for an extended period.” The most notable component of the statement was the Fed’s intention to purchase small amounts of Treasury securities in what some market observers are terming “quantitiative easing lite.” The Fed’s balance sheet will not be expanding, as the purchases will be funded by reinvesting principal payments from agency debt and agency mortage-backed securities which the central bank already owns.

European Central Bank (ECB)

Weekly Update

ECB government bond purchases remain negligible, with 10 million euros worth of bonds purchased last week, similar to the 9 million euros worth purchased the week before. Over 60 billion euros of purchases have been made in total since the program began in May, and by most measures, the program has been a success. The yield on the 10-year Spanish government bond, a good indication of stress in the Euro-area sovereign debt markets, has plunged since its peak in mid-June. Current yields are near 4.04%, down from 4.88% at the peak.

Bank of England (BOE)

Weekly Update

Interest rate expectations have fallen across all regions, and the UK is no exception. A tame inflation reading for July did not help matters. Core consumer prices increased at a 2.6% year-over-year rate in July versus the 3.0% expectation and 3.1% in June. While inflation is still above the Bank of England’s target range, readings have been trending lower.

Bank of Japan (BOJ)

Weekly Update

The continued appreciation of the Yen has become an issue for the BOJ. With the Japanese currency sitting near 15-year lows versus the US Dollar, central bank officials have begun to express some concern. A strong currency hurts Japanese exports all else equal, and as the country’s economy is heavily dependent on exports, more chatter is likely in the event the Yen continues to appreciate.

Reserve Bank of New Zealand (RBNZ)

Weekly Update

There has been a major shift in interest rate expectations for New Zealand over the past week. Markets are now pricing in no rate hike in the next policy meeting in September, although conviction is low. Recall that during the last policy meeting, the RBNZ sounded a dovish tone and even went as far as to talk down the New Zealand Dollar. Overnight index swaps suggest that benchmark New Zealand interest rates will rise only 50 basis points over the next year, down from 135 basis points a mere three weeks ago.

Reserve Bank of Australia (RBA)

Weekly Update

The minutes to the August RBA meeting supported the market’s flat interest rate expectations. Expressing optimism, the central bank said that “the global economy was continuing to expand…” With regard to inflation, the RBA said that “underlying inflation had continued to fall, in line with the Bank’s expectations, and was now below 3 per cent.” Notably, the central bank expects that growth will strengthen in 2011 and 2012 to above-average rates. Overall, the RBA sees the “existing level of the cash rate as still appropriate…for the time being, pending further information.”

Swiss National Bank (SNB)

Weekly Update

The EUR/CHF exchange rate has plunged over the last two weeks after rallying as high as 1.3923. The pair is now approaching the all-time lows set in early July at 1.3072. The Swiss National Bank is unlikely to be happy about the latest development, as the central bank views an appreciating currency as a de facto tightening of monetary conditions. Talk of intervention may once again arise if the EUR/CHF exchange rate falls to new lows.

 

[FXCM-PR Rep]

Forex Weekly Trading Forecast - 08-23-10

US Dollar on the Verge of Rally as Sentiment Threatens Collapse

Euro Forecast Remains Bearish – Watch for Test of Key Support

Japanese Yen to Extend Five-Week Rally as Risk Aversion Continues

British Pound Directionless as Traders Digest Recent Developments

Canadian Dollar To Succumb To Risk Trends, Interest Rate Expectations

Australian Dollar Vulnerable As Double Dip Talk Surfaces

New Zealand Dollar Holds above .7000, but Break May be Imminent

Gold’s Steady Three-Week Rally May Find Some Volatility

 

[FXCM-PR Rep]

Germany Confirms Breathtaking Growth; Can It Be Maintained?

Second quarter growth in Germany was confirmed at 2.2% this morning as exports and investment fueled Germany’s record breaking economic growth.

A breakdown of the data showed that exports rose 8.2% from the first quarter, however this record growth may be hard to maintain when so reliant on exports as slowdowns in China and US economies are likely to weigh on demand for foreign products.

Growth should remain strong in the second half of 2010 but we are unlikely to see a similar pace as dark clouds gather on the horizon. Also worthy of note was the weaker than expected domestic demand release, indicating that Germany cannot rely on its own people to continue to buy its products as they continue to be uber-conservative and save greater portions of their income. While private consumption in the second quarter reported its first gain since Q2 2009, we believe that domestic demand still remains tepid and needs to be boosted over the medium-term. As such Germany leaves itself vulnerable to global fluctuations rather than having solid domestic demand which can help the economy weather volatile periods in the global economy.

Still, the central bank last week raised its growth forecast for Germany this year from 1.9% to 3% calling growth in the second quarter “extraordinarily dynamic”. Bundesbank President Weber also added that “an upward revision of the forecast of 2011 is not excluded”.

On balance Germany’s second quarter growth is very impressive and should propel EMU figures for the period higher and we expect Germany to continue to grow throughout the rest of the year, albeit at a slower pace. Our concerns are based on possible double-dip scenarios in the US and further slowing in Chinese growth which could seriously affect German exports, and growth. Other concerns for German growth come closer to home; the EMU, Germany’s biggest trade partner, has many countries who are slashing budgets to tackle deficits and are likely to trim their demand for German produced goods which is likely to affect German growth in H2 2010.

 

[FXCM-PR Rep]

Euro Falls Back as S&P Cuts Ireland’s Credit Rating, British Pound Maintains Narrow

Euro pared the overnight advance to 1.2725 as Standard & Poor’s lowered its credit rating for Ireland, and the single-currency may continue to trend lower over the remainder of the week as price action continues to trade below the 100-Day SMA at 1.2743.

Talking Points

* Japanese Yen: Pares The Sharp Rally From Previous Day
* Pound: Fails To Trade Above 200-Day SMA
* Euro: German Business Confidence Unexpectedly Improves For Second Month
* U.S. Dollar: Durable Goods Orders, New Home Sales on Tap

S&P cut Ireland’s sovereign credit rating to AA- as the ratings agency projects the region will now need as much as EUR 50B to recapitalize its banking system amid an initial forecast of EUR 35B in funds, and the group went onto say that “a further downgrade is possible if the fiscal cost of supporting the banking sector rises further.”

In response, Ireland’s National Treasury Management Agency said that the negative outlook paired with the downgrade was “flawed” as “investors continue to show strong demand for Irish government debt,” but the region continues to face an uphill battle as the government struggles to manage its public finances and copes with higher borrowing costs. As a result, the European Central Bank is widely expected to maintain the expansion in monetary policy and may look to support the real economy going into the following year, and President Jean-Claude is likely to hold a dovish outlook over the medium-term as he expects to see subdued price growth going forward. Nevertheless, the economic docket showed business confidence in Germany unexpectedly increased for the second consecutive month in August, with the IFO survey increasing to a three-year high of 106.7 from 106.2 in the previous month amid projections for a 105.7 print, while the gauge for future expectations slipped to 105.2 from a revised 105.6 in July.

The British Pound halted the three-day decline and pushed to a high of 1.5461 during the European trade, but the lack of momentum to push back above the 200-Day SMA at 1.5468 may keep the GBP/USD within a narrow range throughout the day as price action holds above the 50-Day at 1.5366. Meanwhile, U.K. Treasury Minister Mark Hoban defended the government’s austerity measures during an interview with BBC Radio and said that the challenges are “very clear,” and went onto say that the new coalition has “gone through the most detailed and rigorous assessment of the distributional impact of this budget on families” as it aims to tackle the budget deficit. As the government withdraws fiscal support and cuts public spending, the Bank of England may have to support the real economy throughout the second-half of the year given the ongoing slack within the private sector, and Governor Mervyn King may continue to talk down the risks for inflation as he expects price growth to fall back towards the 2% target over the next two-years.

The U.S. dollar bounced back against most of its major currency counterparts ahead of the North American trade as investors scaled back their appetite for risk, and the greenback may appreciate further throughout the day as equity futures foreshadow a lower open for the U.S. market. Nevertheless, the economic docket is expected to show a 3.0% jump in orders for U.S. durable goods for the month of July after contracting 1.0% in the previous month, while new home sales in the world’s largest economy is projected to hold flat at an annualized pace of 330K for the same period, but the ongoing weakness in the private sector could lead to a dismal release, which could drag on the dollar as investors weigh the prospects for a sustainable recovery.

 

[FXCM-PR Rep]

Rebound in Risk Sentiment Weighs on U.S. Dollar, Japanese Yen

A rebound in risk sentiment pushed the euro higher for the second day, with the exchange rate advancing to a high of 1.2745 during the overnight trade, but the lack of momentum to retrace the decline from the previous week is likely to keep the EUR/USD within a narrow range throughout the day as price action continues to hold below the 50-Day SMA at 1.2757.

Talking Points

* Japanese Yen: Weakens Against Most of the Majors
* Pound: Retail Spending Improves
* Euro: Ireland’s Borrowing Costs Fall Despite S&P Downgrade
* U.S. Dollar: Jobless Claims, Mortgage Delinquencies on Tap

Meanwhile, Ireland’s National Treasury Management Agency sold EUR 200M of debt due on February 14, 2001, with an average yield of 1.978%, which is 48bp lower than the rate offered at the August 12th auction, along with another EUR 400M bonds due on April 18, 2011, yielding 2.348%.

The bond auction suggests investors are turning increasingly optimistic towards the region as the government takes unprecedented steps to manage its public finances, but the ongoing weakness in the banking system may continue to drag on the economic outlook as policy makers expect to see an “uneven” recovery going forward. As a result, the European Central Bank is likely to maintain a dovish tone over the coming months and is widely expected to keep the benchmark interest rate at 1.00% over the coming months as President Jean-Claude Trichet sees subdued price growth over the near-term, but the Governing Council may see scope to raise its growth forecast as the recovery gathers pace. Nevertheless, the economic docket the M3 money supply grew 0.1% during the three-months through July, which was largely in-line with expectations, while the annualized rate increased 0.2% from the previous year amid forecasts for a 0.3% expansion.

The British Pound rallied for the second-day and pushed above the 200-Day SMA (1.5462) to reach a high of 1.5588, and the GBP/USD may continue to pare the decline from the previous week as it remains supported by the 50-Day SMA at 1.5380. Meanwhile, a report by the Confederation of British Industry showed its retail spending in the U.K. unexpectedly expanded at a faster pace in August, with its gauge for sales advancing to 35 from 33 in the previous month, and the data encourages an improved outlook for the region as private sector spending remains one of the leading drivers of growth. As the recovery gathers pace, the Bank of England may drop its dovish tone and see scope to start normalizing monetary policy towards the end of the year, and we are likely to see board member Andrew Sentance continue to push for a 25bp rate hike as the central bank expects inflation to hold above the 2% in 2011.

The greenback weakened across the board on Thursday, with the USD/JPY paring the overnight advance to reach a low of 84.47, and the rebound in market sentiment may continue to weigh on the dollar throughout the day as risk trends dictate price action in the currency market. Nevertheless, the economic docket is expected to show initial jobless claims slip to 490K in the week ending August 21 from 500K in the week prior, while continuing claims is forecasted to increase to 4495K in the week ending August 14 from 4478K in the previous month. At the same time, the gauge for 2Q mortgage delinquencies is scheduled to cross the wires at 14:00 GMT, along with the MBA’s index of mortgage foreclosures, and the event risks scheduled for later today could stoke increased volatility in the foreign exchange market as investors weigh the outlook for future growth.