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 »

Daily Report: A Busy Day Featuring BoE and FOMC Minutes

The forex markets are still bounded in tight range in generally as markets are still searching for a theme and direction. Meanwhile, as mentioned before, Swiss Franc remains the weaker one as driven by its pull back in EUR/CHF and GBP/CHF crosses. USD/CHF continues to climb higher. GBP/USD, on the other hand, loses momentum after hitting 1.5080 minor resistance. Dollar index continues to be bounded inside a triangle like consolidation pattern below 87.98. A number important events are scheduled today, including the release of FOMC and BoE minutes as well as US housing and inflation data, which could trigger some volatility in the markets.

BoE MPC minutes are expected to reveal a 9-0 vote for the surprised 150bps cut earlier this month. With core CPI having the steepest drop in at least 11 years and a clear sign of turnaround in inflation trend, markets expect that BoE is now free to have further steep rate cuts from BoE to avoid a prolonged recession in the UK economy. Indeed, markets are pricing in another 100bps cut over the next 12 months. The minutes are expected to affirm this view. But the impact on Sterling might be minimal.

FOMC minutes, on the other hand, is expected to elaborate on the perceived dovish bias of Fed and provide details of the discussions between board members, including those in the intermeeting cut before Oct 29. 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.

Consumer inflation in US has peaked at 5.5% in Jul and is expected to continue the down trend in Oct. Headline CPI in US is expected to moderate drop sharply by -0.8% mom in Oct, with year-over-year rate steeply down from 4.9% to 4.0%. Core CPI is expected to rose 0.2% with year-over-year rate down to 2.4%, after plateau at 2.5% for three consecutive months from Jul to Sep.

NAHB builder confidence surprised the markets yesterday by plummeting sharply from then record low of 14 in Oct to new record low of 9 in Nov. Such pessimism is expected to be reflected in today’s new residential construction data too. Housing starts is expected to continue the down trend and drop from 0.82m to 0.78m annualized rate. Building permits is also expected to drop from 0.81m to 0.78m annualized rate.

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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Mid-Day Report: Dollar Firm Despite Poor Job Data

Overall outlook in the markets remains unchanged in early US session. Dollar is generally firm in tight range despite another week of poor job data from US. Yen retreats mildly on intervention speculations but is still in favor to extend rally. Euro, on the other hand, tries to fight back against dollar and yen with support in EUR/GBP cross which made another record high of 0.8458. Nevertheless, the recovery is not too convincing yet. Commodity currencies and Sterling remain the biggest losers today.
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Mid-Day Report: Markets in Tight Range, EUR/GBP Hit New High Markets remain bounded in tight range without making any progress. Economic data are ignored once again by traders. German ZEW economic sentiment unexpectedly rebounded strongly from -63 to -54.3 in Nov. Eurozone ZEW also improved from -62.7 to -54.0. The improvements could be attributed mainly to policy easing and liquidity injections by ECB as well as government bailouts of financial institutions Weakness in the Euro and improvements in inflation outlook also helped. While Euro stays in tight range against dollar and yen, EUR/GBP edged to new record high of 0.8214. Nevertheless, no follow through action is seen. Read the rest of this entry »

(CEP News) - Oil prices remain the key driver of financial markets as a $6 decline in crude prices pulled down Canadian stocks and boosted the U.S. dollar.The decline in energy prices virtually mirrors the rise a day earlier — and the market reaction was similarly symmetrical with the U.S. dollar strengthening and Canadian stocks declining.

The result was that most markets finished the week precisely where they began, despite a raft of volatility.

“Did we really learn anything new in the week just passed? As for the U.S. market — not really. The price action was characterized by poor liquidity, second tier data, and more dynamics with rumors and speculation about GSEs than with things more specifically germane to generic interest rates,” wrote U.S. government bond strategists at RBS Greenwich Capital in a client note.

Going into the day, most investors were focused on a speech from the Federal Reserve Chairman Ben Bernanke, but his comments didn’t move markets.

Speaking at the annual Federal Reserve retreat in Jackson Hole, Wyoming, the Fed Chair said the inflation outlook is uncertain and that it’s “one of the most challenging economic and policy environments in memory.”

Analysts said Bernanke’s comments hint that the Fed will likely remain on the sidelines through the end of the year, something markets had already been anticipating. Fed funds futures price a 64.8% likelihood of no change this year.

“Our reading of this speech is that Bernanke is dovish and has no intention of raising rates in the near term. Inflation, in the Fed’s view, is to be held in check by lower commodity prices and rising slack and the Fed is facing a challenging environment on the financial stability front,” said economists from RDQ Economics in a client note.

U.S. two-year yields were up 9.7 bps to 2.40%, with five-year yields up 7.8 bps to 3.14%, 10-year yields up 4.1 bps to 3.87% and 30-year yields flat at 4.47%. The Eurodollar March 09 contract was down 13.0 ticks to 96.92. The yield curve was flatter, with the 10/2-year spread down 5.5 bps to 146.62 bps.

U.S. equity markets were boosted by the decline in crude, but also by a story suggesting a foreign government-owned bank may take a stake in Lehman Brothers.

“U.S. equities were charmed into a better tone after the Korean Development Bank said it was ‘open’ to the purchase of a troubled U.S. investment bank,” said Charmaine Buskas, senior economics strategist at TD Securities.

Equities got a momentary scare in the middle of the day when Moody’s lowered the credit ratings on the preferred stock of Fannie Mae and Freddie Mac by five levels to Baa3.

“We believe that there’s an increased probability of actual support coming from the U.S. Treasury,” Moody’s said in a press release.

The Dow Jones industrial average closed up 198 points to 11628, the S&P 500 closed up 14 points to 1292 and the Nasdaq closed up 34 points to 2415. Shares of Fannie Mae were up 3%, those of Freddie Mac were down 11% and those of Lehman Brothers were up 5%.

Canadian equity markets reacted primarily to changes in commodity prices. WTI crude oil was down $6.59 to $114.59 and the front month gold contract at the Chicago Board of Trade was down $7.00 to $832.50 per ounce.

Toronto’s S&P/TSX composite index closed down 92 points to 13447. European stock markets closed in positive territory with the Eurostoxx up 50 points to 2869, the UK FTSE 100 up 135 points to 5506 and the German DAX up 105 points to 6342.

Although most markets finished the week relatively unchanged, an exception was Canadian interest rate markets. Investors aggressively sold off short-term fixed income, suggesting a diminished chance the Bank of Canada will cut the overnight target rate by the end of the year.

The December 08 BAX contract closed down 5.0 ticks to 96.930, a rate that suggests a 92% chance of a quarter-point rate reduction before the end of the year. A week ago, the same contract priced an 84% chance of two cuts by year end.

Yields on two-year Canadian government bonds were up 8.2 bps to 2.94%, with five-year yields up 5.3 bps to 3.18%, 10-year yields up 2.2 bps to 3.62% and 30-year yields up 0.8 bps to 4.05%.

The Canadian dollar also benefitted from changing interest rate expectations as it was the best performing G10 currency on the week.

The Canadian dollar was down 0.0041 to 0.9551 against the U.S. dollar (1.0470 USD/CAD) and up 1.20 to 105.17 against the yen.

The U.S. dollar was up 1.64 to 110.08 against the yen and the Dollar Index was up 0.538 to 76.734.

The euro was down 0.0108 to 1.4792 against the U.S. dollar, down 0.0051 to 1.5489 against the Canadian dollar, up 0.0052 to 0.7984 against the pound sterling and was higher by 1.27 to 162.83 against the yen.

The pound sterling was down 0.0255 to 1.8528 against the U.S. dollar and down 0.0192 to 1.9397 against the Canadian dollar.

Elsewhere, returns on two-year German bonds were up 5.2 bps to 4.13%, with five-year yields up 6.8 bps to 4.11%, 10-year yields up 4.4 bps to 4.22% and 30-year yields flat at 4.63%.

Yields on UK two-year bonds were up 2.7 bps to 4.61%, with five-year yields up 2.9 bps to 4.54%, 10-year yields up 3.0 bps to 4.60% and 30-year yields up 3.1 bps to 4.46%.

All data taken at 5:27 p.m. EDT.

By Adam Button,

(CEP News) - It was a relatively light day for scheduled economic releases, though a more than $6 drop in crude oil kept markets occupied. Earlier in the day, Fed chairmen Ben Bernanke delivered comments on economic growth and inflation, which some economists characterized as dovish. In Canada, the federal government announced a $1.7 billion surplus in June. Commodities were in full selloff mode Friday, led by crude oil, which fell more than $6 per barrel. Gold was down more than $7 to $832.50 an ounce.

Speaking at the Federal Reserve’s annual retreat, Chairman Bernanke said the inflation outlook is uncertain, but that the Fed will act as needed to ensure “medium term” price stability. “Although we have seen improved functioning in some markets, the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided,” Bernanke said. “Its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment.”

Bernanke added that the higher U.S. dollar will help moderate inflation for this year and the next, but that he expects growth to fall short this year.

“Our reading of this speech is that Bernanke is dovish and has no intention of raising rates in the near term. Inflation, in the Fed’s view, is to be held in check by lower commodity prices and rising slack and the Fed is facing a challenging environment on the financial stability front,” economists from RDQ Economics noted in a client note.

Moody’s lowered the credit ratings on Fannie Mae and Freddie Mac on Friday, saying there is a growing likelihood the U.S. Treasury will need to directly support the companies. The ratings agency downgraded the preferred stock ratings of the government-sponsored entities to Baa3 from A1. Their subordinated debt ratings were affirmed, but the outlook was changed to negative from stable. “Given recent market movement, Moody’s believes these firms currently have limited access to common and preferred equity capital at economically attractive terms,” Moody’s said in a press release.

U.S. mass layoff actions, involving 50 or more employees from a single firm, came in at a seasonally adjusted 1,512 reading in July, a slower pace of layoffs than the previous months 1,643 actions, the U.S. Bureau of Labor Statistics reported Friday. The total number of workers involved was 151,171 in July, below the previous month’s 165,697, which was the highest number of layoff actions since 2003.

Appearing on CNBC Friday morning, billionaire investor Warren Buffet said the U.S. economy is in recession and will continue to be for some time. He said the economy may be even worse off five months from now, but that he’s confident the U.S. will be in better shape five years from now. The chairman and chief executive of Berkshire Hathaway Inc. also said mortgage finance firms Fannie Mae and Freddie Mac are too big to fail, although that doesn’t mean shareholder equity can’t be wiped out.

The Canadian government announced Friday it posted a $1.7 billion budgetary surplus in June due to rising income tax revenues and shrinking debt charges, though it was still short of the $2.8 billion recorded in the same month of 2007. In its monthly fiscal monitor, the Department of Finance reported that budgetary revenue in June was up 2.4% year-over-year to almost $21.2 billion, while total expenses came in at $19.4 billion, 8.9% higher than in June of last year.

In a letter to securities regulators, Bank of Canada governor Mark Carney said he wants the derivatives industry to be regulated by principles, not “prescriptive rules.” “Given the rapid pace of financial innovation and the increasing complexity of markets our regulatory framework should be based, to the greatest extent possible, on principles that do not require prescriptive rules for sound implementation,” Carney wrote in a letter to the Expert Panel on Securities Regulation.

Statistics Canada reported Friday that Prairie farmers expect to produce 10.4 million tonnes of canola in 2008, up from the previous high of 9.4 million tonnes in 2007. In Ontario and Quebec, farmers expected a new high of 3.2 million tonnes of soybeans.

In overnight news, the UK economy stagnated in the second quarter of 2008 against expectations of a quarterly growth rate of 0.1%, according to preliminary estimates from the Office for National Statistics (ONS). The previous quarter had seen a growth rate of 0.3%.

The euro zone current account deficit rose to €8.2 billion in seasonally adjusted terms in August, up from the previous month’s deficit level of €5.5 billion. July’s figure was revised down from an initial deficit figure of €7.3 billion.

By Stephen Huebl,