USD/JPY spiraled lower to 93.55 last week but downside momentum was rather unconvincing. So far, the structure of the fall from 100.54 to 93.55 is still looking corrective, arguing that rebound from 90.92 is not over. Anyway, with 4 hours MACD crossed above signal line, initial outlook is neutral this week. Break of 98.18 will favor the case that rise 90.92 is still in progress and another rally could be seen to 100.54 or above before completion. On the downside, though, below 93.55 will indicate that fall from 100.54 is still in progress and will continue to target 90.92 low. Read the rest of this entry »

Action Insight Weekly Review and Outlook
All financial markets around the world were rocked by the financial tsunami last week which started with Lehman Brother announcing bankruptcy and Merrill lynch selling to Bank of America. Panic in the markets reached a climax after AIG’s bailout failed to restore confidence. Dow once had the sharpest fall since 2001 and dived to 11459 level. Yield on three-months US T-bills dropped to near 0% as investors flocked to the safest short-term assets. Dollar yen tumbled to as low as 103.54. Gold, on the other hand, soared to as high as 926 on safe haven buying. Crude oil dropped to near to $90 level. However, markets’ sentiment had a drastic turn following coordinated actions from world’s major central banks to almost quadruple the fund injected to the financial markets from $67b to $247b. Risk appetite came back with the sharpest two days rally in stocks since 1987 following US government’s bank $700b bank rescue bank and rule to limit short selling in financial stocks. Yen crosses were sharply higher as carry trades returned and the greenback was generally lower across the board. Crude oil, on the other hand, bounced back to above 100 on hope of improved economic outlook.

So, after all the events, how’s the forex markets different from a week ago?

Firstly, dollar index’s high of 80.38 made on Sep 11 is confirmed to be a short term top. More pull back is now expected to be seen probably to 75.84 level. That is, the greenback should be generally weak in short term. Such weakness should be apparent against higher yield currencies and commodity currencies, in particular against Aussie, Kiwi, Sterling and also against Euro and probably Canadian dollar too.

Secondly, rebound in yen crosses is expected to extend further after making a short term bottom last week. Further upside are expected to be seen, in particular in AUD/JPY, NZD/JPY and GBP/JPY. USD/JPY and USD/CHF will like remains mixed as weakness on both sides counter each other.

Thirdly, Gold’s strong rebound indicates that medium term correction from 1033 level should have already completed and more upside is expected in gold in short term. This is consistent with the short term dollar bearish view as well as the carry trade return view.

But after all, there is no change in the medium term dollar and yen bullish view yet and markets are expected to resume prior dollar and yen up trend after the current corrections complete. Though, the key factors to pay attention will likely be the development in both the stock markets and oil. DOW’s rebound, though strong, is still limited by 11867 key near term resistance. Meanwhile, crude oil is also limited below 111/122 resistance zone. Markets will likely resume to it’s prior state once rebound in DOW and oil completes. But Dow’s break of 11867 and oil’s break of 122 will serve as important evidence that markets’ sentiment has turned and will dampen the dollar and yen medium term bullish view.
Read the rest of this entry »

Action Insight Mid-Day Report

Carry trades finally make a massive come back on another as stock markets soars for another day. DOW opens sharply higher and reaches as high gain more than 400 pts following announcement of US Government’s market rescue plan and banning of short selling of nearly 800 financial stocks. Yen crosses finally get out of hesitation and surged sharply across the board, confirming a short term reversal. While the greenback maintains strength in USD/JPY, it gives back earlier gains against other majors currencies as Euro, Sterling, Aussie and Canadian dollar are boosted in yen crosses.
Read the rest of this entry »

Since the beginning of the year, we have lost 3 of the largest investment banks on Wall Street and such unprecedented developments have called for unprecedented actions by US government and Wall Street officials. Since the announcement of Lehman Brothers filing for bankruptcy and Bank of America taking over Merrill Lynch, AIG has been given special permission by US authorities to tap into $20bln of its own capital to prevent a liquidity crisis and credit downgrades. The Federal Reserve is also holding a special meeting to discuss possible remedies to AIG’s problems. The ECB and the Bank of England have pumped more liquidity into the financial system while the Federal Reserve made an unusual intervention to drive Fed funds lower.

Why Did Fed Funds Soar to 6 Percent when Futures are Pricing in a Rate Cut?

Fed fund futures are pricing in an 80 percent chance of a 25bp rate cut tomorrow by the Federal Reserve. This is a big change from last week, when the only thing that the market was thinking about was a rate hike. However despite this sharp shift in expectations, Fed funds surged to a high of 6 percent, 400bp above the Fed’s target rate of 2 percent intraday. This jump in the overnight lending rate between banks indicates that no one wants to take on risk. Trust is a commodity these days as the move in Fed fund futures suggests that no one knows if their counterparty will be here to survive another day. Fund funds gave back all of its gains by the end of the US trading session, but that does not mean that risk appetite has returned – quite the contrary. AIG is in big trouble, Washington Mutual is still on our watch list with their bonds now cut to junk status by Moody’s and the worries now turn to Goldman Sachs and Morgan Stanley who will be releasing earnings this week. Large write downs could drive a nail in the coffin for the US stock market and USD/JPY. Of all the pairs in the currency major, USD/JPY and other carry trades will be hit the worst. Over the past 3 years, there has been a 68 percent correlation between the VIX and USD/JPY, so higher volatility means trouble for the currency pair. Although consolidation in the banking sector was something many people expected, no one thought that the consolidation would occur because of Chapter 11 filings.

Will a Fed Rate Cut be Enough to Shore Up Confidence and Trigger a Reversal in the US Dollar?

So far, the efforts of the US government have failed to bring any stability to the financial markets. Stocks dropped more than 500 points today, 2 year bond yields plunged a jaw dropping 40bp while the repatriation has lifted the dollar against everything except for the low yielders until the last hour of trading. The market is now turning to the Federal Reserve for help, but a rate cut, may not be enough to shore up confidence. In addition to balancing growth with inflation, the Federal Reserve is also responsible for maintaining stability in the banking sector and right now, they need to step up to the plate because judging from the price action in the markets today, expanding lending facilities and adding $70 billion of temporary reserves to the banking system is not enough. With oil prices below $100 a barrel, the economy deteriorating, the financial markets in disarray and the Dow Jones Industrial Average down more than 15 percent year to date, there is no reason for the Federal Reserve not to cut interest rates. However, the more important question is whether or not a rate cut will be enough to put an end to the volatility. In our opinion, it is not enough. Even if the Fed cuts interest rates, that may not reduce the true cost of borrowing and relax terms of credit. Default risk is the market’s biggest problem and is the primary reason why reducing risk, dumping exposure and repatriation is the one cohesive theme that we are seeing across the financial markets.

What About SWFs?

This dynamic continues to drive the dollar higher despite the systemic risk and is the reason why it’s performance against the low yielders (yen and Swiss franc) is dramatically worse than its performance against the other majors. However, if the problems exacerbate and the Dow hits 10,000 Sovereign Wealth Funds may start dumping their US investments, which would turn the systemic risks from dollar positive to dollar negative. We began to see this at the end of the US trading session.

With the problems in the financial sector, no one cared about the weaker than expected Empire state manufacturing survey and industrial production report. In addition to the FOMC rate decision, consumer prices, the Treasury International Capital report and the NAHB housing market index are due for release on Tuesday.

Read the rest of this entry »

Daily Pivots: (S1) 107.10; (P) 107.54; (R1) 108.36

USD/JPY gapped lower today and dived further to as low as 105.27 so far. Break of 105.52 low reaffirms the bearish view and indicates that fall from 110.66 has resumed. At this point, further decline is expected to 103.76 support. As discussed before, break of the medium term rising trend line with bearish divergence condition in daily MACD indicates that whole rebound from 95.77 has completed. Break of 103.76 will confirm this case and bring deeper decline.

On the upside, though, above 107.97 resistance will invalidate the bearish view, indicating firstly that correction from 110.66 has completed, secondly, whole medium term rally from 95.77 is still in progress despite the brief break of trend line support. In such case, retest of 110.66 high should be seen first.

In the bigger picture, the break of medium term trendline support (95.77 to 103.76) indicates that whole medium term rebound from 95.77 should have completed with at 110.66 with bearish divergence condition in daily MACD. Further break of 103.76 support will confirm this case. Also, note the three wave structure of the rise from 95.77 to 110.66 argues that it’s merely a correction in the larger down trend. Hence, in such case, deeper medium term decline should be seen to retest this 95.77 low.
Read the rest of this entry »

Yen Could Dominate in a Week of Central Banks and Key US Data

The Japanese yen was the biggest winner last week as seen with yen crosses topping the top movers chart. While most of the moves were done on Friday following the 170pts fall in Dow, such declines did have the significance of indicating that yen is regathering strength for medium term rally. As discussed before, most yen crosses should have topped out in Jul, except USD/JPY. The pair has been steady due to dollar’s strength but upside momentum was seen diminishing after making at high at 110.66. Outlook is mixed in the pair for the moment with possibility of a reversal. And if the last defense is taken down and USD/JPY does reverse, further massive buying could be seen in the yen which pushes other yen crosses further lower. This will probably be the main focus in September.

Dollar enjoyed a strong broad based rally in August, in particular against Aussie and Sterling. Though, the greenback consolidated against most currencies last week together with choppy consolidation in oil and gold. Dollar index was basically bounded in tight range of 76.55 and 77.61 last week. In particular, oil was lifted by the worry of Hurricane Gustav, however, such impact could temporary. Some more consolidate may be seen in the greenback in near term, with risk of pulling back further against euro and Aussie, but more medium term strength is still in favor after the hurricane passes.

Euro did have the biggest monthly fall since 1999 in Aug. Though, the common currency was the relatively steady currency against dollar and in general last week. While data from Eurozone were generally weak, the common currency was supported by comments from ECB Weber that the discussion of a rate cut is premature. Such comment could be echoed by ECB Trichet this week and may give the Euro a boost but after all, the case of a medium term reversal in EUR/USD will likely continue to develop, in particular if Euro continues to be dragged down in EUR/JPY cross.

Sterling remained the weakest one among the majors along with the Aussie. GBP/USD has already taken out important support at 1.83 level which added more credence to the case that multi year long term up trend that started in 2001 has reversed. GBP/JPY also showed further sign that medium term down trend from 251.09 is ready to resume. More importantly, the pound was starting to display resumed weakness in EUR/GBP and GBPCHF crosses, with EUR/GBP set to resume medium term up trend while GBP/CHF could also be resuming medium term down trend. Such weakness will likely continue and even accelerate in September.

Looking ahead, the week will start slightly with market holiday in US on Monday. However, volatility will continue to increase with a number of key events scheduled. Four central banks will meet this week including RBA, BoC, ECB and BoE. In addition, ISM manufacturing, Services as well as Non-Farm payroll from US will be released. Main focus will be on extension of strength in yen, weakness in Sterling, with uncertainty on whether dollar will resume rally.

Currency Heat Map Weekly View

FOMC minutes didn’t revealed much new information. Members generally agree that the economy will remain weak and are generally concerned the possibility that core inflation will moderate as growth slows. The next move from Fed is still likely a hike but the opinion on the timing is rather divided.

Housing data were generally better than expected. Existing home sales rebounded strongly by 3.1% to 5.0m annualized rate in Jul, above expectation of 4.9M. New home sales climbed 2.4% from downwardly revised 0.503m to 0.515m annualized rate in Jul. S&P/CS Composite-20 HPI showed -15.9% fall in Jun, above expectation of -16.2%.

Headline durables jumped 1.3% in Jul versus consensus of 0%. This is the third consecutive months of expansion. Ex-transport orders rose 0.7% versus consensus of -0.5% fall. Ex-defense orders also rose 2.8% versus expectation of 0.2%. The data argued that business spending and confidence are continuing to recover in the US. Conference board consumer confidence improved more than expected to 56.9 in Aug. Jobless claims dropped slightly but remains elevated at 425k.

Preliminary Q2 GDP annualized growth rate was revised higher from 1.9% to 3.3% versus expectation of 2.7%. Record exports and the smallest trade deficit in eight years were the biggest driver in the upward revision. Personal consumption was revised up to 1.7% versus expectation of 1.6%.

Person income dropped more than expected by -0.7% in Jul, spending rose 0.2%. Headline PCE jumped to 4.5% yoy, highest in 17 years while core PCE rose 2.4%. Chicago PMI improved to 57.9 in Aug, much stronger than expectation of 50.0. Finalized reading of Aug U of Michigan consumer sentiment came in better than expected at 63.0.

Data from Eurozone were mixed. Germany Ifo Business climate index dropped sharply from 97.5 to 94.8 in Aug, hitting a three year low. Expectation index also dropped sharply from 90 to 87.0. Gfk consumer confidence dropped more than expected to 1.5. Eurozone HICP flash moderated more than expected to 3.8% yoy in Aug. However, M3 money supply slowed less than expected to 9.3% yoy in Jul. Unemployment rate was unchanged at 7.3% in Jul.

UK data were generally disappointing. Nationwide house prices fell for the ninth month by -1.9% mom in Aug, dragging yoy rate to -10.5%. CBI distributive trades dropped to -46 in Aug. Though, Gfk consumer confidence unexpectedly improved from -39 to -36 in Aug.

Swiss KOF dropped more than expected to 0.68.

Japanese unemployment rate dropped from 4.1% to 4.0% in Jul. Retail sales jumped more than expected by 1.9%. Housing starts rise further to 19% yoy. Industrial production unexpected posted 0.9% mom gain in Jul, with yoy rate at 2.0%. Manufacturing PMI dropped less than expected to 46.9. More importantly, national CPI climbed to decades high of 2.3% yoy in Jul.

Canadian Jun GDP rose 0.1% mom. More importantly, Q2 GDP was weaker than expected by rising 0.3% only, below expectation of 0.7%. PPI rose 0.4% mom, 6.8% yoy in Jul.

Today’s Biggest Percentage Movers

NZD/USD ( - 118 pips or 1.64%)
AUD/USD( - 137 pips or 1.55%)
USD/JPY( + 160 pips or 1.48%)

The Stories in the Currency Market

US Dollar: Don’t Dismiss the Possibility of Pre-Labor Day Volatility

Over the past 2 days, volatility has ripped through the currency markets.On Thursday, we saw the biggest decline in the US dollar against the Japanese Yen since the beginning of the month and today, we saw strongest rally.What are the culprits?The financials and oil. The health of Lehman Brothers has been a big story this week and the speculation today that they may be acquired by a Korean bank has sent stocks through the roof.Not only would this M&A deal be positive for the US dollar, but it would also help to eradicate one of the market’s biggest fears.This of course is only speculation as there has been no official announcement from Lehman. There are still problems with Fannie Mae and Freddie Mac. As we suspected, in his speech today at Jackson Hole, Bernanke strayed away from talking tough on inflation given the problems in the financials.In the current environment of financial market instability, traders needed Bernanke to reassure them that he will take care of the financials first and worry about inflation later - which was exactly what was delivered. However don’t be mistaken, the Fed is still looking to raise interest rates in 2009.This morning, the Fed chief said that interest rates are “relatively low” and as a result, we expect at least 1 rate hike next year.Oil prices on the other hand have erased all of yesterday’s gains on a pipeline restart.Going into the new week, everyone expects trading to be light given the upcoming Labor Day Holiday in the US. However, with a lot of US economic releases on the calendar and a possible announcement from Lehman Brothers, we caution against dismissing the possibility of pre-Labor Day volatility.In 2007 and 2006, the EUR/USD consolidated within a tight range in the week before Labor Day, but in 2005, the EUR/USD surged to a new 3 month high.As for economic data, we are keeping a close eye on the existing and new home sales reports as well as durable goods, second quarter GDP and consumer confidence.

Stagnant Growth Drives British Pound to a 2 Year Low

The British pound dropped to a 2 year low against the US dollar as growth stagnated in the second quarter.Even though retail sales surged in July, that number will be included in the third and not second quarter data.Consumer spending in the second quarter was actually weaker than the first, which is part of the reason why annualized GDP growth was the slowest in 16 years.We strongly believe that the UK economy is in trouble and as long as oil prices remain at current levels or lower, the Bank of England could be one of the first central banks to cut interest rates.The market has already priced in at least 50bp of easing by the BoE over the next year and it should only be a matter of time before the central bank Governor King acknowledges it.The volatility in oil prices over the past 2 trading days has certainly made it difficult for central bankers to determine whether the drop in commodity prices is here to stay. In the week ahead, the UK economic calendar is light with only Nationwide House prices and the CBI Distributive Trades Survey due for release.As a result, we expect the near term fate of the British Pound to be determined by the US dollar.

Euro: Vulnerable to Weaker Economic Data

This week, the Euro was driven primarily by dollar sentiment and even though this relationship could continue in the coming week, there are few pieces of Eurozone economic data that could shake things up for the currency. The primary releases that we are watching for from the Eurozone are the German IFO and employment reports.Given the problems in the financial markets and the deterioration in the Eurozone economy, we expect German business confidence to remain weak.The same is true for the German employment report.According to the latest manufacturing and service sector PMI numbers, the labor market deteriorated this month.We agree with the recent comments by ECB member Liebscher who said that Eurozone growth will be low this year but a recession is unlikely.Meanwhile Switzerland will be releasing their employment report, UBS Consumption index and the KoF Leading Indicators report next week.We continue to expect steady numbers which will keep the Swiss National Bank on hold at their next monetary policy meeting.

Will the Liquidation out of Commodity Currencies Continue?

The drop in oil and gold prices has hit the Canadian, Australian and New Zealand hard. The AUD/USD and the NZD/USD are the day’s biggest percentage movers with the former dropping 1.50 percent and the latter falling 1.68 percent.Interestingly enough, there was no economic data released from Australia or New Zealand which indicates that commodity prices and the US dollar are behind the move. The rally in stocks also confirms that risk aversion is not the problem.The economic calendar for Australia continues to be devoid of any significant data.New Zealand on the other hand will be releasing its trade balance on Monday evening while Canada has their GDP report scheduled for Friday.Whether the liquidation out of commodity currencies continue will be determined by the sustainability of the current sell-off in oil. In addition to the Caspian Sea pipeline reopening which triggered today’s reversal, OPEC oil production is expected to rise in August while Labor Day travel is expected to drop to an 8 year low.

Japanese Yen: Busy Economic Calendar

The US dollar staged an impressive recovery against the Japanese Yen, but unfortunately that move has not translated into strength for all carry trade currencies.The sharp selloff in the AUD/USD and NZD/USD prevented meaningful gains for AUD/JPY and NZD/JPY.Like the rest of the world, the Bank of Japan is worried about inflation according to the minutes from their July 14-15 monetary policy meeting but unfortunately for the time being, they face the same problems that everyone else does – which is the inability to respond to rising inflationary pressures through monetary policy.The Japanese economy has suffered greatly from the slowdown in global growth and the rise in commodity prices.The economic calendar for Japan next week is extremely heavy as they will be releasing their employment, consumer spending and inflation reports.Unfortunately, we expected the data, which are all expected on Thursday evening to have a limited impact on the Japanese Yen.

USD/JPY:Currency Pair in Play Over the Next 24 Hours

The most potentially market moving piece of economic data due on Monday is the US Existing Home Sales Report (12:30 AM GMT)

The currency pair that we are keeping an eye on is the USD/JPY. It has entered our “Buy Zone” which is established using Bollinger Bands.On a weekly chart, we also see that the currency pair has closed above the 50 percent Fibonacci Retracement of the 124.15 to 95.83 sell-off that lasted from June 2007 to March 2008.At this point, we expect further gains. The levels to watch are 110.67, the August 15 high and 109.50, which is shorter term support.A close below that level negates the uptrend.

Kathy Lien

FXCM 2008: Even Lower Spreads

FXCM’s (www.fxcm.com) No Dealing Desk trading platform recently added an additional bank as a price provider, bringing the total to seven global banks that compete to provide pricing for FXCM’s Trading Station. Over the last three months, typical spreads have already tightened.

Watch closely for lower spreads in the following currency pairs:

Currency Pair
Typical Spread
As Low As

EUR/USD
2.3
0.9

USD/JPY
2.9
0.5

GBP/USD
3.7
0.8

USD/CHF
3.8
1

EUR/CHF
2
0.1

AUD/USD
3.7
1

USD/CAD
4.8
1

NZD/USD
4
0.8

EUR/GBP
2.4
0.6

EUR/JPY
3.9
0.6

GBP/JPY
5.3
3

CHF/JPY
3.5
1

"FXCM’s No Dealing Desk trading platform aims to provide transparent and fair execution. Every trade is executed back to back with one of the world’s premier banks, or financial institutions, which compete to provide FXCM with bid and ask prices," said Drew Niv CEO of FXCM. "The best spreads available to FXCM are streamed to you with a small mark-up, which is generally one pip or less for major currency pairs."

For a complete list of currency pairs and their new tighter spreads, please go to www.fxcm.com

If you have any questions, please call one of our currency specialists, who are available 24 hours a day, at 888-503-6739, or email us at info@fxcm.comThis email address is being protected from spam bots, you need Javascript enabled to view it .

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FXCM Facts
Forex Capital Markets LLC is one the Largest Forex Dealer Members
More than 100,000 live accounts are traded on FXCM trading platforms
Over $200 billion in notional volume is traded each month on FXCM trading platforms
As of January 2008, there is in excess of $700 million in customer funds trading on platforms offered by FXCM.
FXCM provides customer support with native speakers in more than a dozen languages in 6 offices around the world
Registered with the CFTC as a Futures Commission Merchant, FXCM (Forex Capital Markets LLC) has received numerous awards from the investment community, including Best Currency Broker from Shares, Best Retail Foreign Exchange Platform from FX Week and Best Foreign Exchange Specialist from Technical Analysis of Stocks & Commodities. In addition to currency trading, FXCM offers educational courses on forex trading, and provides research through DailyFX.com.
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Leveraged foreign exchange trading carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

More Information:
Jaclyn Sales
Public Relations Coordinator
FXCM
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New York, NY 10005
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Tel (212) 897-7660