Full Week of Fundamental Data Looks to Provide Volatility

The economic calendar is filled with high impact data this week that threatens to sow large volatility into the market. From the wide range of news reports, ForexYard advises its traders to pay special attention to the U.S Manufacturing PMI, Pending Home Sales, Non-Farm Employment Change and EUR Minimum Bid Rate reports.



USD - Non-Farm Payrolls Week Kicks Off

Last week the Dollar saw mixed results against the major currencies. The USD underwent extremely volatile sessions against the EUR and the Yen, yet the pairs rapidly returned to former rates by Friday's close after the US and Canada released their GDP figures.

It appears that the mixed results which were received from the U.S leading economic indicators were the main reason for the Dollar's harsh volatility, experienced last week. On Monday, the New Home Sales report, which measures the annualized number of new single-family homes that were sold during the previous month, delivered the highest figure in 7 months. In addition, the Core Durable Goods Orders index, a leading indicator of production, delivered the third consecutive positive figure.

However, aside from these positive reports, the Conference Board's Consumer Report, which was released on Tuesday, showed that the U.S consumers are still cautious regarding their expenses. Usually, the more secure the consumers feel, the better the economy is doing. The weekly Unemployment Claims also delivered negative figures, as 584,000 individuals lost their jobs during the past week.

As for this week, an extremely busy trading week is impending. The leading economic publications for the week will be the Manufacturing Purchasing Managers' Index, the Pending Home Sales, the ADP Non-Farm Employment Change, the weekly Unemployment Claims, and of course, the Non-Farm Payrolls on Friday. This week promises to create large volatility for USD pairs, which will provide traders many opportunities to create high profits.

EUR - Euro-Zone Interest Rate Announcement Scheduled This Week

The EUR experienced a rather volatile session during last week's trading. The EUR saw mixed results vs. the Dollar, starting the week with a sharp drop, and correcting it by the weekend. The EUR also saw mixed results against the Yen and slid partially against the Pound.

The indecisive figures from the Euro-Zone's strongest economy, Germany, was the main reason for the EUR's volatility. On one hand, the German Unemployment Change showed that merely 6,000 people lost their jobs during June. This continued the relatively positive employment condition in Germany from the past few months. However, on the other hand, the German Preliminary Consumer Price Index delivered a negative result, showing that the inflation level in Germany is currently the most fragile aspect of its economy, and that concerns for deflation shouldn't be revoked at the moment.

As for the week ahead, traders should once again focus their concentration on the German economy publication. A bundle of data is expected from the German economy, and its results will have a large impact on the EUR. The leading publications are the German Retails Sales, the Factory Orders, and the Industrial Production. Yet on top of that, the European Central Bank (ECB) is scheduled to announce its Interest Rate and monetary policy decisions on Thursday. In case the ECB surprises and manipulates interest rates, the EUR will be strongly impacted, and is likely to influence the major currencies as well.

JPY - Yen's Volatility Continues

The Yen continued with its volatile activity from the past week. The JPY saw frequent ups and downs against the Dollar, closing the week around the 94.50 level. The Yan also underwent a volatile session against the EUR, and dropped against the GBP.

The significant news publications from the Japanese economy delivered mixed results as well. The Japanese Retails Sales dropped for the 10th consecutive month. This demonstrates the poor consuming condition in Japan, which shows that the Japanese still lack the confidence that the recession is a part of the past and not the future. The Preliminary Industrial Production reports, however, showed that the total inflation-adjusted value of output produced by manufacturers in June rose by 2.4%. This shows that although the Japanese are cutting on expenses, the Japanese economy still manages to create large export, and thus the industrial production figures continue to rise despite the recession.

Looking ahead to this week, two indicators seem to be more relevant then the others. Tomorrow night, the Japanese Monetary Base is scheduled. This indicator's result seems to have influence on the Japanese interest rates, and thus investors tend to react to this publication. Also this week, the Leading Indicators index will be published on Thursday. This index is designed to predict the direction of the economy and has the potential to impact the Yen's value.

Crude Oil - Crude Oil Reaches $70 a Barrel

Crude Oil's prices continue to rise, and a barrel of Crude Oil is currently trading near $70 a barrel, a 1-month high.

Crude Oil began last week's trading with a sharp drop in value, mostly as a result of the strengthening Dollar. Later on, the Dollar dropped and the positive global data created a sentiment that the leading economies are pulling out of recession. It is widely thought that a financial improvement will raise energy demand, and thus the prices of oil rose. The positive figures from the global equity markets also contributed to Crude Oil's bullish trend. It still looks that oil's value is strongly correlated with the equity markets, especially in the U.S, and traders are advised to consider this in their Crude Oil positions.

As for the week head, Crude Oil looks to continue with its bullish trend. However, traders should follow the Dollar's value, global equity markets and energy reports this week, as Crude Oil has proven to be a very volatile investment.

Article Source - Full Week of Fundamental Data Looks to Provide Volatility

Stocks Rally is "Excessive", Financial System "Very Damaged" Says Roubini (Euro Open)

The rally in stocks has been “excessive” and the financial system is still “very damaged” according to comments from Nouriel Roubini, the infamous New York University professor that has earned the nickname “Dr. Doom” for predicting the 2008 credit crisis and recession.

Key Overnight Developments

• Australian Manufacturing Sector Shrinks at Slowest Pace in 10 Months
• Japanese Workers’ Earnings Fell The Most in Over 18 Years
• New Zealand Economy Will Shrink in Third Quarter, Says Treasury
• Roubini Says Financial System “Very Damaged”, Stocks Rally “Excessive”

Critical Levels



The Euro tested above 1.43 in overnight trading but failed to break through once again, ticking in a 60-pip band above 1.4240. The British Pound oscillated in a narrowing range around 1.6740.

Asia Session Highlights



Australia’s AiG Performance of Manufacturing Index rose to 44.5 in July, showing the sector was contracting at the slowest pace since September 2008. The rebound likely owes to generous fiscal aid package: Prime Minister Kevin Rudd and company have distributed over A$12 billion in cash handouts this year and set aside A$22 billion for infrastructure projects. AiG chief executive Heather Ridout said that while the result was “encouraging”, the big question going forward “whether these improvements will be sustained once [fiscal] stimulatory forces have abated.”

Japan’s Labor Cash Earnings fell at an annual pace of -7.1% in June, the largest decline since records began in January 1991. Last week, the jobless rate rose to the highest in 6 years as companies cut production capacity amid the downturn in global demand. Earnings are likely to remain stagnant with unemployment to approach 6% by the second half of 2010 according to a survey of economists conducted by Bloomberg, trimming consumer spending and holding back the world’s second-largest economy from staging a meaningful rebound from the worst recession since World War II.

New Zealand’s Treasury Department said the economy will contract for the sixth consecutive time in the third quarter, shedding 0.2%, with positive growth likely to return in the final three months of 2009. GDP is expected to shrink 0.4% in the three months through June. The Treasury added that consumer spending is likely to “remain soft” as unemployment continues to rise. Indeed, economists forecast the jobless rate will hit 6% this year and average a whopping 7.45% in 2010.

Infamous New York University professor Nouriel Roubini that has earned the nickname “Dr. Doom” for predicting the 2008 credit crisis and recession said the US financial system is still “very damaged” and predicted that the economy will grow at a rate of just 1% for the “next couple of years” as weak credit growth restricts economic recovery. Still, Roubini noted the European Union and Japan are experiencing a “more dynamic” slowdown that that seen in the States and said that US interest rates may rise next year. Turning to the global economy, Roubini said lower spending will hold back growth and cautioned that deflation, not inflation, is the biggest threat to a sustained rebound. On the financial markets, Roubini said recent stock gains are “excessive” while current oil prices are “not justified” and driven primarily by “speculation”. On the US Dollar, Roubini said the greenback may fall against Asian currencies.

Euro Session: What to Expect



German Retail Sales are set to grow 0.9% in the year to June, the first time annualized growth turns positive in five months. The improvement likely owes to the government’s 85 billion euro stimulus plan, which includes spending, tax breaks, and a 2500 euro payment to consumers who trade in their old car and buy a new one. Seasonal forces are also likely to have helped the metric higher, with many German stores running discounting campaigns during the summer. Markit, leading provider of financial information services, said last week that the recent rebound in retail activity was “generally attributed [to] promotional activity.” Looking ahead, weakness in the labor market is likely to keep underlying consumer demand lackluster as the effects of fiscal policy fade and stores run out of room to mark down prices as profit margins narrow. The jobless rate held at a 19-month high of 8.3% in July and the OECD has forecast it will top 11% next year, weighing on disposable incomes and discouraging spending.

Switzerland’s SVME-Purchasing Managers Index is expected to tick higher to 43.6 in July from 41.8 in the previous month, showing that manufacturing is contracting at the slowest pace since October 2008. Most of the sector’s output is exported for sale in the European Union, where ample government spending plans and efforts to top up depleted inventories have slowed the drop in demand brought on by the global economic crisis. Things do not look particularly rosy in the months to come, however, with most industrial countries struggling to find catalysts for continued growth after the flow of stimulus cash dries up.

The UK Manufacturing Purchasing Manager Index is set to follow the same trajectory as its Swiss counterpart: the metric is set to rise for the fifth consecutive month to register at 47.8 in July, driven by stimulus-fueled demand and restocking.

Written by Ilya Spivak, Currency Analyst
Article Source - Stocks Rally is "Excessive", Financial System "Very Damaged" Says Roubini (Euro Open)

Forex Weekly Trading Forecast - 08.03.09

US Dollar Reversal and Breakout a Matter of Time – But When?

Fundamental Outlook for US Dollar: Neutral

- US Gross Domestic Product numbers show worst drop in 27 years
- Dollar slipped on S&P rallies through earlier-week trading
- Months of consolidation could foreshadow US Dollar breakdown

The US Dollar finished the week lower against foreign counterparts, but it failed to break below key range-lows despite sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the second quarter of the year, but noteworthy downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower rate of contraction in Q2 may have calmed some nerves, but truly dismal Personal Consumption figures underlined that consumers—the engine of earlier economic growth—remains heavily subdued. The upcoming week brings infamous Non Farm Payrolls data to the fore, and it will be critical to watch for any signs that the US Dollar could finally break its range versus major forex counterparts.

Week in and week out we have discussed potential scenarios for a US Dollar breakout, but FX markets have shown little willingness to push the USD beyond its trading channel through directionless summer trade. Of course, forex market volatility tends to be mean-reverting over the medium-to-long run. Lengthy periods of consolidation most often lead to sharp breakouts, but the timing of said shift remains anything but clear. Forex options markets volatility expectations are near their lowest levels since August, 2008. Anecdotal evidence tells us that trading volumes have fallen sharply through the summer—theoretically making it easier for a big traders to force volatility. Yet few have shown the appetite for moving markets, and we anxiously await signs that the US dollar may finally break out of its consolidative range.

Can the US Non Farm Payrolls report and other key data releases finally break us from our recent range? We will certainly know the answer to this question once the coming week is through, but it is worthwhile to discuss possible scenarios in which the US Dollar could finally move sustainably higher or lower against the Euro and other key counterparts. Consensus forecasts imply that markets expect broad improvements in key NFP and similarly market-moving ISM Manufacturing and Services results. Given the general uptrend in equity markets and general economic mood, such predictions come of little surprise. Yet lofty expectations leave significant room for disappointment, and the very fact that the S&P 500 has rallied so substantially through recent weeks leaves it at risk for a noteworthy correction.

Forex futures and options data shows that traders remain extremely net-short the US Dollar, and our bias remains bullish as a result. The key difficulty remains the timing of any such correction, as market sentiment can remain at extremes for extended stretches. In other words, we know it’s all a matter of time. Given enough of it, we may expect the Greenback to finally break above the Euro 1.4350 mark or below 1.3800. Given enough time, traders will unwind extremely one-sided US Dollar short positions and bring a noteworthy correction. Whether that may be in the week ahead is anyone’s guess, however, and it will be critical to watch for signs of a sustained reversal. Said signal could come from the S&P 500 and other key financial market risk barometers.

Euro May Cash in on its Anti-Dollar Role Before the ECB Decision

Fundamental Forecast for Euro: Bullish

- German unemployment falls for the first time; but this improvement is a result of seasonal adjustments
- German consumer confidence rises for a third month
- What does the technical outlook for the euro look like?

The dollar is near collapse; and its liquid counterparts stand to reap the benefits of the potential cross-currency winds. However, from a fundamental standpoint who stands to benefit the most? Those pairs that have pressed all the way to the edge of their recent historical highs against the ailing reserve currency (the British pound or Aussie dollar) are heavily dependent upon unpredictable risk appetite. The stalwart among the group is the euro. Liquidity, a steady yield, bullish growth forecasts and a policy authority that is confident financial conditions are sound make for an appealing alternative for the most actively traded currency in the market. However, is the outlook truly as bright as the market is pricing in? More importantly; do speculators even care?

In trying to approach the first question, it is important to remember that valuing a currency is always done on a relative basis. For example, the euro could still rise against one of its major counterparts even when the economy is sinking as long as the Euro Zone is contracting at a slower pace. That being said, the objective answer is that the economy is not as stable as the strength of the currency would suggest. We will not see the first round of the German and Euro Zone second quarter GDP figures until August 13th. Nonetheless, expectations will readily discount each indicator that crosses the wires until then. This past week’s data further exposed a significant discrepancy between expectations and actual data. Surveys for consumer, business and economic sentiment all reported improvements in their July readings (though they were mostly still below the net expansion/contraction line). In contrast, the German unemployment rate has held at its highest level since December of 2007. Consumers are the foundation for economic health and will determine whether the Euro Zone will struggle to recovery or truly return to growth. Retail sales, factory orders and industrial production will all factor in to this outlook.

Each of these indicators will feed into the market’s unobserved and dynamic growth forecasting model; but the true benchmarks for economic activity will come from the ECB. The central bank is scheduled to announce rates on Thursday and both the market and economists suspect the benchmark will be left unchanged at 1.00 percent. The real value from the event comes from the statement that accompanies the announcement and President Jean Claude Trichet’s forum with the press shortly after the official release. Political pressure has intensified from some of the region’s largest economies to reign in stimulus to avoid stoking inflation. What’s more, the RBA has set a precedence in suggesting it was taking a cautious, hawkish turn; and the ECB no longer carries the burden to be the first. These factors aside though, the economy is certainly not stable enough to take such a passive (much less hawkish) approach. There are still economies suffering severe recessions; and even those that are considered relatively strong are still contraction. Should the group remove the safety net too soon, they run the risk of exacerbating a pull back that develops later.

Another generally accepted truism that has worked in the euro’s favor is that the region has remained otherwise financial sound while the UK and US were nearing structural collapse. However, many of the biggest risks to the broader markets going forward come from the Euro Zone. A premature draining of financial aid threatens to choke the economy, regional banks have yet to write off their losses (they will) and Eastern Europe threatens to default on its loans to the EZ in masse. All of these are considerations to keep in mind.

Japanese Yen May Trade Heavy If Risk Appetite Continues

Fundamental Forecast for Japanese Yen: Neutral

- Retail Sales fell 0.3% in June and 3.0% from a year ago, declining for the 10th straight month
- Japanese industrial production rose 2.4%, the fourth straight improvement, PMI Moves to expansion at 50.4
- Unemployment rose to a six year high of 5.4%in June
- Consumer Prices fell at a record pace in June to -1.8% from -1.1%

The Yen was mixed to end the week as it rallied against the dollar on the better than expected GDP figures and braid based greenback weakness. However, it would end the week unchanged against the Euro and weaker against the pound as risk appetite continues to weigh it against riskier currencies. Equity markets have show no signs of abating but they are near significant resistance levels and with the U.S. employment report scheduled next week a pull back is possible. Meanwhile, Japanese fundamental data continues to point toward a slow recovery as unemployment rose to a six year high of 5.4% signaling that gains in domestic growth will be challenging going forward. Consumer prices falling at a record pace of -1.8% will continue to squeeze corporate profits and limit the potential for a Japanese recovery. Optimism from the economy can be derived from industrial production rising for a fourth month by 2.4% and PMI returning to expansion levels, which could be a sign that global demand is improving. There were some signs of hope domestically with improvements in small business confidence and household spending.

BoJ member Tadoa Noda stated this week that central bank shouldn’t end their emergency credit programs prematurely as it could limit the scope of a recovery. The central bank this month extended the credit-support programs of buying corporate debt from banks and providing them with unlimited loans to Dec. 31 from Sept. 30 as lending conditions remain frozen. The upcoming economic docket is relatively light with labor cash earnings and leading and coincident reading. The forward looking gauge for the economy is expected to rise to its highest level since November as the outlook continues to improve for the economy. However, price action will most likely be dependent again on risk sentiment which could be limited with US NFP’s looming. The USDJPY has been in a downward trending channel and which was kept intact with Friday’s sell off. Trend line resistance is near 96.15 which is being reinforced by the 38.2% Fibo of 110.69- 87.14. Support may be found at the 20-Day SMA at 94.19 and 93.09-the 7/22 low.

British Pound Volatility Ahead on BOE Rate Decision, Equities Reversal

Fundamental Forecast for British Pound: Neutral

- Buyers Returning to UK Housing Market, Says Hometrack
- GfK Says UK Consumer Confidence Unchanged in July
- UK Mortgage Approvals Rise to Highest in 14 Months

The British Pound is all but guaranteed a week of heavy volatility as the busy economic calendar headlined by a pivotal interest rate announcement from the Bank of England is compounded by hints of a downward reversal in risk appetite. An actual change in benchmark borrowing costs is effectively off the table for the central bank, but traders will be closely watching to see if policymakers choose to ramp up quantitative easing measures after promising to “review the scale” of the program for the August rate decision in conjunction with the release of their quarterly inflation report. Despite the BOE’s apparent optimism and signs of stabilization in some leading indicators, economic growth disappointed in the second quarter, bolstering dovish arguments from the likes of the British Chamber of Commerce and the Shadow Monetary Policy Committee (a group of independent economists that meet at the London-based Institute of Economic Affairs). A timely GDP estimate tracking the pace of economic growth in the three months through July from the National Institute of Economic and Social Research (NIESR) will help set the tone for the monetary policy announcement: while usually quite good at estimating official economic growth figures, NIESR missed the mark in the second quarter having called for output to shrink just -0.4% only to be faced with a -0.8% result; this time around, the prestigious think tank will have likely identified the reason for their previously over-optimistic reading and may offer valuable insight on potentially overlooked weaknesses in the UK economy.

The remainder of the economic calendar is comparatively considering the themes behind further marginal improvements in PMI and Industrial Production are likely to have already been priced into the exchange rate while signs of moderating turmoil in the property market expected to be reported by Halifax have been adequately telegraphed by the latest Hometrack Housing Survey and the Rightmove House Prices report. Indeed, only a meaningful downside surprise in these metrics is likely to prove particularly market-moving, as the trajectory of stock prices and 12-month interest rate expectations (derived from trading in overnight index swaps) over recent months suggest traders are surely looking for the recession to begin to bottom.

Turning to risk sentiment, technical positioning is hinting that the equities rally that began in March is starting to run out of momentum and may be on track to putting in a double top at the October 2008 swing high, with volumes steadily declining since early May and clear negative divergence between rising prices and stalling relative strength studies. A trade-weighted average of the Pound’s value against a basket of major currencies is now over 83% correlated with the MSCI World Stock Index, suggesting sterling will be dragged along if stock markets do indeed turn lower. That said, US news has been the key fundamental catalyst in setting the trajectory of risk-related assets, and expectations of modest improvements for nearly all of the scheduled releases on the US calendar point to smooth sailing for equity markets (barring any significant downside surprises on key metrics or a particularly disappointing second-quarter earnings outcome from a major company).



Written by David Rodriguez, John Kicklighter, Ilya Spivak, John Rivera and David Song, Currency Analysts
Article Source - Forex Weekly Trading Forecast - 08.03.09