Thursday, September 17, 2009

Forex Daily Analysis 09/17/09

By Chief Analyst Cliff Wachtel, CPA

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General: Bias to risk currencies, USD becoming carry trade funding currency, all commodity currencies and USD GBPUSD trade of the day

USD The dollar traded near a one-year low against the euro before reports that may show Europe’s trade surplus is growing and the U.S. housing market is improving. It's at a 13 month low against the AUD and USD.

The broad gauge for the dollar declined after the London interbank offered rate, or Libor, for three-month dollar loans fell to a record low of 0.292 percent yesterday. It was as high as 4.82 percent in October 2008, following the collapse of Lehman Brothers Holdings Inc. the month before.

“Given the fragility of the U.S. economy, the Fed can’t normalize credit and monetary easing policies,” said Mitsuru Saito, chief economist in Tokyo at Tokai Tokyo Securities Co. “The bulk of highly liquid dollar assets will continue to flow into other currencies or commodities, putting downward pressure on the dollar.”

According to the July Treasury International Capital flow report, foreign investors cut their purchases of U.S. dollars significantly last month, adding pressure on the U.S. dollar.

What could reverse the USD slide: Hawkish indications from the Fed if there is enough recovery, especially in jobs and spending, or dovish actions from other central banks, especially the ECB, BoE, or BoJ. Together their currencies paired against the USD comprise almost 60% of all FX trade.

EUR - The euro rose to a four-month high against the pound before a report forecast to show Europe’s trade surplus widened to the most in more than a year, adding to evidence the region’s recession is abating.

The 16-nation euro area’s trade surplus widened to 1.2 billion euros ($1.8 billion) in July, the most since February 2008, from 1 billion euros in June, a Bloomberg survey of economists showed. The European Union’s statistics office will release the report in Luxembourg today. The Dutch central bank said yesterday a “slight improvement” is visible in the global economy.

“Europe is fundamentally on a sound footing,” said Adam Carr, a senior economist in Sydney in a Reuters report. Among the Group- of-Three currencies from the U.S., Germany and Japan, “the euro is my favorite,” he said.

Traders increased bets the European Central Bank will raise its 1 percent benchmark interest rate by the middle of next year. The implied yield on the three-month Euribor futures contract for June 2010 delivery rose to 1.255 percent today from 1.225 percent yesterday.

JPY - The yen weakened after data showed Japanese purchases of foreign bonds reached a four-year high. Gaining against USD due to Fuji's anticipated stronger yen policy (LT trade opportunity, would hurt Japanese profits, Nikkei).

The yen fell for a fourth day versus the euro as Japanese investors bought a net 1.66 trillion yen ($18.2 billion) in overseas bonds and notes in the week ended Sept. 12, the most since June 2005, the Ministry of Finance said today.

“Risk-taking sentiment is improving amid signs of a global recovery,” said Akifumi Uchida, deputy general manager of the marketing unit at Sumitomo Trust & Banking Corp. in Tokyo. “Local investors are probably sending their money overseas into countries such as Brazil, Australia and New Zealand.”

These Yen developments and a steady drop in Treasury yields in the past few weeks have surprised many and triggered speculation that the U.S. dollar was also fast becoming the preferred funding currency for carry trades.

GBP – Benefitting least from USD travails, falling against the EUR. Like the US, unemployment remains a growing problem: The Claimant Count rate reached 5.0%, up from last month’s 4.9%. The number of people claiming jobless benefits rose by 24.4k, essentially matching last month’s 25.2K rise. The ILO Unemployment Rate beat estimates for a rise to 8.0% but still managed to hit the worst levels since 1996. Further concern comes into play when examining Average Earnings which rose at the slowest pace on record. The jobless data did not provide any added optimism for the pound and continues to foster a bleak economic outlook.

AUD – Holding near highs, gaining in Asia on the USD despite recent disappointing AUD news, cautious RBA statements, and positive USD news

NZD –holding near highs against USD and other safer currencies

CAD – Moving with risk appetite, commodity prices, weak USD. Threat of intervention if USDCAD drops too low is expected to keep a floor on the USDCAD. Canada reported a 5.5 percent rise in Manufacturing Shipments, the best reading in more than a decade. Inventories sank for the sixth straight month, but New Orders plunged 3.7 percent. On tap for tomorrow will be Canadian Consumer Prices which will surely warrant broad market attention

CHF –Retail sales up 1% better than the expected 0.7% y/y, slightly weaker than the 0.9% seen in June. We expect no change in policy at Thursday's meeting and look for the SNB to begin hikes in H2 2010, CHF hits annual high against USD for 7th straight day, SNB may at least begin verbal intervention if not actual CHF sales

May see heavy volatility ahead of SNB monetary policy announcement, which may provide hints concerning SNB intervention. The currency pair is now trading within intervention territory and we believe that the risk is high for the SNB to sell Francs or at bare minimum talk down the currency this week. Swiss Producer Prices were release this morning and inflationary pressures have increased modestly. Industrial production is due for release tomorrow.

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