Mid-Day Report: Dollar Weakens as Consolidation Continues, FOMC Minutes Next
Dollar is sharply lower against European majors in early US session as consolidation continues. Technically speaking, as discussed in our technical outlook reports, more upside is still expected in EUR/USD and GBP/USD. Meanwhile, USD/CHF retreats sharply after edging higher to 1.2082 earlier today. Dollar index’s dip below 4 hours 55 EMA argues that some more pull back should be seen before resuming recent rally. Elsewhere, Crude oil, rides on dollar’s retreat and rebounds strongly from intraday low of 53.66 to above 55.6. Focus will now turn to FOMC minutes for inspirations on further volatility. Though, ,markets are pricing in 90% chance of another 50bps cut from Fed on Dec 16 and the minutes will likely have little impact to this view based on current economic and inflation outlook. Read the rest of this entry »

The forex markets continue to stay in tight range today despite some big surprises from inflation data from US and UK. US PPI dropped sharply by 2.8% mom in Oct, biggest fall since the series began in 1947. Year over year rate was down from 8.7% to 5.2% versus consensus of 6.2%. Core PPI, though, rose 4.4% with yoy rate up to 4.4%. TIC capital flow rose to 66.2B in Sep. Focus will turn to testimony of Bernanke and Paulson.
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The dollar and yen strengthens mildly across the board today after RBA cut rates more than expected by 75bps. Particular weakness is seen in European majors. Another two central banks, ECB and BoE, will announce rate decisions later this week. In particular, there has been increased speculations that BoE will cut by as much as 100bps on Thursday, doubling original forecast of 50bps. Such speculations increased further after RBA’s larger than expected cut. While Aussie tops the top movers chart today, Sterling is leading the decline from a weekly point of view.

RBA cut overnight cash rate by 75bps to 5.25%, larger than expectation of 50bps cut to 5.50%. In the accompanying statement, Governor Stevens acknowledged turbulence in world financial markets and weakness in major industrial economies around the world. Such “deteriorating international conditions and falling commodity prices” will have a negative dampening influence to the prior rate cuts and stimulus package to boost the economy. Spending and activity in Australia will be “weaker than earlier expected”.

On the economic data front, Swiss CPI moderated less than expected to 2.6% yoy in Oct. UK PMI construction and Eurozone PPI as well as US factory orders will be released later today.

Technically speaking dollar index remains strong today, climbing further to as high as 86.89 so far. Further upside is still expected as long as 84.92 minor support holds. More downside is still expected in both EUR/USD and GBP/USD in near term. USD/CHF’s break of 1.1746 high may be taken as an early indication of resumption of dollar’s up trend. However, we’re still skeptical as outlook in other pairs argues that dollar is in sideway consolidation. Dollar index’s break of 87.87 high is needed to be the confirmation.

BY ActionForex

he week will feature three central banks’ meeting, US presidential election as well as a number of important economic data around the world. RBA, ECB and BOE are expected to cut rates by another 50bps to continue the coordinated global easing cycle. From US, ISM manufacturing and services, factory orders Q3 labor cost and productivity, pending home sales will be featured with the highly anticipated on-farm payroll. Eurozone PPI, manufacturing and services PMI, retail sales will be released. Swiss Oct CPI, SVME PMI, unemployment will be released too. Focus from UK will be on manufacturing and services PMI, nationwide consumer confidence, industrial and manufacturing production. Canadian building permits, Ivey PMI and job report, Australia retail sales, house price index, job report, New Zealand employment report will also be watched.

Technically speaking, as mentioned in various report, dollar and yen should have made a short term top. In most cases, it’s uncertain on whether these are medium term tops. Nevertheless, good range trading opportunities should be presented in most pairs in near term. In short, we’d expect some more choppy consolidation in last week’s range.

Weekly Review and Outlook
Dollar and Yen Pulled Back as Another Round of Rate Cuts Began
Dollar and yen gave pulled back sharply last week on the back of strong rebound in the stock markets. MSCI World index jumped as much as 9.8%. Both DOW and S&P 500 had the largest rally since 1974 by more than 10% during the week. Europe’s Stoxx 600 rose 12%, the biggest rally since 2001. MSCI Asia Pacific Index rose 6.9% with Nikkei. Commodity currencies were the biggest winner with AUD/JPY jumping more than 10% while CAD/JPY and NZD/JPY rose over 8% during the week. Dollar index was down to as low as 83.11 before rebound.
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Mid-Day Report: Markets Consolidate in Tight Range
The forex markets are basically staying in tight range in early US session. Rally in dollar and yen lost some steam after European stock markets recover some of the earlier losses. US stocks are mixed at open as market digests yesterday’s losses. Some more consolidation is expected generally in financial markets. US CPI was unexpectedly flat in Sep with yoy rate moderated more than expected to 4.9%. Core CPI was unchanged at 2.5% yoy as expected. Industrial production dropped sharply by -2.8% mom in Sep, largest fall since 1974, while capacity utilization dropped more than expected to 76.4%. TIC capital flow dropped to 14b. Jobless claims dropped to 461k. Philly Fed index dropped sharply to -37.5 in Oct.

SNB said that it will extend a maximum of $54b in loans to take over illiquid assets fro UBS so that Switzerland will be able to “weather the economic difficulties” as a result of global economic slowdown. Swiss retail sales was flat yoy in Aug. ZEW economic expectation deteriorated sharply to record low of -91.1 in Oct.

BoE announced to implement three major reforms to improved market operations. Standing Facilities will be replaced by Operational Standing Facilities starting Oct 20 to “absorb technical problems and imbalances” in money market operations. There will be a discount window facility established that would allow banks to borrow from the government to improve liquidity to commercial banks. A permanent long-term refi open market operations against a wider range of collateral classes will be introduced.
By ActionForex

Action Insight Daily Report
While the stock market crash continues all over the world, the forex markets are relatively steady so far. Yen edges higher against dollar, euro and sterling but remains in range so far. Dollar continues to retreat against most major currencies. The biggest loser today is indeed the Aussie which dives to as low as 0.6746 against dollar and 67.26 against the yen. The weakness in the Aussie is some what a delayed reaction to yesterday’s unexpected 100bps rate cut from RBA as well as carry trade unwinding. The Aussie is additionally pressured after data showed consumer confidence plummeted by -11% in Oct.

Both Bernanke’s speech and FOMC minutes yesterday hinted that Fed is ready to cut rates. Interest rates futures continue to show full probability of 50bps cut from Fed on Oct 29. Though the odds for 75bps cut was down slightly from 40% to 32%. Nevertheless, the firm expectation for rate cut provided no support to US stock markets. Down recovered briefly to above 10,000 level but reversed and extended decline to close over 500pts down to 9,447. Fed’s new measure to buy commercial paper to help corporations offered little relief to investor confidence.

Nikkei was also hit hard today, dropping over 9% and hit the lowest intraday level of 9,159 in five years. Research report showed the number of corporate defaults in Japan accelerated in Sep. Bankruptcies rate rose sharply to 34.4% annualized rate. Total debt from bankruptcies in Japan grew to 5.36T yen.

UK government announced a plan to invest about 50b pounds to prevent collapse of the UK banking system. The government will buy preference shares and BoE will make 200b or above available for banks to borrow under the special liquidity plan. UK government will also provide a guarantee of 250b pounds to help refinance debts.

On the data front, Nationwide consumer confidence in UK dropped less than expected to 50 in Sep. Japanese Economic watch DI dropped slightly to 28 in Sep. Eurozone Q2 GDP final, Germany industrial production, Canadian housing starts and US pending home sales will be released later today.

By ActionForex

Yen gives back much of yesterday’s gain in Asian session today following surprised 100bps rate cut from RBA. Dow’s strong late recovery towards the end of the US session also limited some yen buying. Major currencies are lifted by yen crosses and recover against dollar too. The situation is, with deepening global financial market crisis, markets are intensely expecting some coordinated central bank actions. RBA took the lead today by cutting 100bps. It won’t be a surprise for BoE to surprise the markets later this week by cutting more than 25bps. Interest rates futures are pricing in full probability for Fed to cut by 50bps on Oct 29 with 40% odds for a 75bps cut. The implied yield on the March 2009 Euribor futures contract dropped to 3.70 percent, the lowest since March 19, from 3.815% yesterday, suggesting ECB is closer to policy easing too.

Note that Dow was once down over 800 pts during yesterday’s session but recovered to close 370 pts lower only. Even though it is still the first close below 10000 in four years, the strong late recovery argues that investors are probably cautious on selling further because of the increased chance of coordinated central bank actions. Thus, the world’s financial markets could stabilize a bit after yesterday’s spike low and another round of panic selling would probably be delayed after the rumors of rate cuts became news. Having said that, from short term angle, any dive in yen crosses could be taken at profiting opportunity in short positions while recoveries are treated as selling opportunities. The same applies to dollar majors.

RBA surprised the markets by cutting one full percent point, the most since 1992, to bring Overnight Cash Rate down to 6.00%, doubling expectation of 50bps cut. Governor Stevens said that “conditions in international financial markets took a significant turn for the worse in September.” “Demand and output could be significantly weaker than earlier expected” due to deterioration in global growth prospects and difficult credit market conditions. Hence, “an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.”

BoJ left rates unchanged at 0.50% as widely expected. Japanese leading indicators dropped more than expected by -2.1% in Aug.

Looking ahead, UK industrial and manufacturing production and Germany factory orders will be released in European session. ECB Trichet and Fed Bernanke are both scheduled to speak today. FOMC minutes of Sep meeting will also be released.

By ActionForex

Action Insight Weekly Review and Outlook
After a week of drama, the $700b bailout plan was finally approved by House on Friday. With Senate already approve the modified plan on Wednesday, US President Bush signed off the plan to ease the credit crunch that’s now “threatening” the US economy. However, the markets are rather not convinced that this is the solution. Dow ended up 7.3%% lower to close the week. The news was clearly not enough to boost investors confidence. Dow indeed closed lower than Monday’s low, where the historical 777 points fall occurred after House initially rejected the plan. S&P 500 also had it’s worst weekly decline since Sep 01 and fell 9.4%.

The impact on the forex markets can seen clearly on massive yen buying on risk aversion. Dollar also benefited with most major currencies dragged down in yen crosses. Note that Aussie remains the weakest currency on falling commodity prices and dovish rate outlook. Euro caught up on the weakness after four major financial institutions in Europe were bailed out. Comments from Trichet after ECB meeting suggest the bank is close to cutting rates added further pressure to the common currency. Crude oil followed stocks and tumbled to as low as 91.3 and dragged Canadian dollar down sharply.

Looking ahead, development of the credit market crisis remains key to all financial markets. An important point to pay attention is whether DOW will be supported by the psychologically important level of 10,000 which will trigger volatile movements in yen crosses. In addition, BoE and RBA are both scheduled to meet this week. Both central banks are expected to cut rates this time. In particular, Sterling is the relatively better performing major currency last week but it could catch up again should BoE cuts more than expected or sounds they’re more policy easing to come.
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As mentioned above, markets reaction to US Treasury Paulson to take control of Fannie Mae and Freddie Mac will be the main focus initially this week, in particular on whether yen will extend it’s recent rally or correct on the news. Also, focus will be on whether dollar index will take out 79/80 level which overlaps with a medium term fibonacci retracement level or correct from the current level.

Focus in US will mainly be on Friday’s retail sales which is expected to recover mildly by 0.1% in Aug. Other data from US include pending homes sales, wholesale inventories, trade balance, import prices, PPI, U of Michigan consumer sentiments and business inventories.

From Eurozone, main focus will be on Q2 employment report.

UK PPI inflation data will be paid closely attention and could prompt some speculation of rate cut from BoE if it moderates more than expected in Aug. Other data from UK include industrial production and manufacturing production, trade balance.

A number of economic data will be released from Japan but focus will mainly on Q2 GDP which i expected to show -1.0% Q/Q growth and -4.0% annualized growth.

Big week ahead for the Aussie, the weakest currency last week. Markets will listen to RBA governor’s testimony on Monday for hints on the chance of further rate cut in near term, in particular in Oct. Jul retail sales and Aug job report will also be closely watched.

RBNZ will meet this week and is expected to cut rates by another 25bps to 7.75%. Retail sales will also be featured.