Forex Market Pulse: Euro's Surge, QE2, And the Next Direction of USD

By world market pulse team on November 03,2010

Most of the world currency markets are brimming with speculation over US Congress election results and QE2 grabbing the most attention. While the US dollar was unable to sustain its gains from the previous session Thursday morning, coming under pressure ahead of the latest word on the US jobs market, the euro on the other hand snapped back against the dollar on Thursday, as better-than-forecast economic data from the Euro zone raised speculation that central bankers in Brussels will begin to normalize interest rates rather than ease further. The mid-term election results are likely to be overshadowed by the FOMC where speculation that the Fed will announce USD500bn of asset purchases Wednesday has intensified, but analysts at BNP Paribas believe that with investors increasingly expecting a month-by-month approach to the implementation, a more gradual approach would be consistent with the G20 meeting, where negotiations appear to be ongoing.

Next direction of USD?
USD: The dollar has been unable to sustain its gains from the previous session coming under modest pressure ahead of the latest word on the US jobs market. The Fed meets today, November 3, and is reportedly set to embark on a series of gradual asset purchases totaling a few "hundred billion" dollars. In 2009, the Fed snapped up around $2 trillion in an effort to spur the economy. Still, currency experts feel that the dollar is relatively stable amid growing speculation that the size and scope of the Federal Reserve's anticipated bond purchase program is likely to be smaller than its first round of quantitative easing. Certain analysts and economists believe QE2 may contribute, at the cost of bringing down the USD almost 20% over a period of time, to triggering US exports and helping the economy etc. even though it will cause a disaster to the world currency status of the USD. While this may be gradual, the scene does not look very likely. We believe the USD may remain strong.

US Data Analysis: Initial US jobless claims fell to 434,000 from the previous week's revised figure of 455,000. The decrease surprised economists, who had expected claims to edge up to 458,000 from the 452,000 originally reported for the previous week. While there were no special factors cited for the decline in claims, analysts at Deutsche Bank are hesitant to read too much into the data, and the four-week moving average is still consistent with job growth of around 100k per month. Continuing claims registered a more robust decline of 122k to 4356k for the week of October 16, the lowest since November 22, 2008.

Correlating Currencies and Inflation: Although the Fed appears to have succeeded in stabilizing market implied inflation expectations higher, this has been accompanied by a markedly weaker US dollar in recent times. Faced with a strong disinflationary trend, it seems that the Fed would want to keep inflationary expectations anchored at higher levels, but there are concerns that once deflationary expectations get entrenched, consumers postpone their consumption plans while businesses refrain from investing. Moreover, given the side-effect of the weaker dollar, the Fed’s strategy has run into international resistance with the G20 statement noting “advanced economies with reserve currencies” promoting excessively volatile capital flows.

Meanwhile analysts at BNP Paribas believe that with an arguably stretched short USD position prone to covering, the appropriate strategy would be to shift to funding long Asian FX plays in GBP instead of the USD.

ETFs Investment Options For The US Dollar include:

PowerShares DB USD Index (UDN): The Index is a rules-based index composed solely of short USDX futures contracts. The USDX futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

Expense Ratio: 0.40%

PowerShares DB USD Index Bullish (UUP): The Index is a rules-based index composed solely of long USDX futures contracts. The USDX futures contract is designed to replicate the performance of being long the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

Expense Ratio: 0.50%

EUR: The euro, meanwhile, snapped back against the dollar after better than forecast economic data from the Eurozone raised speculation that central bankers in Brussels will begin to normalize interest rates rather than ease further. Economic confidence in the 16 countries that use the euro rose to its highest level in nearly three years during October, the European Commission said on Thursday. The euro rose to $1.3910 versus the greenback, paring most of this week's losses. With the advance, the euro moved back towards a recent 8-month high near $1.4150.

EUR Data Analysis: The European Central Bank lowered interest rates to a record low one percent during the throes of the worst recession in decades, but has resisted additional rate cuts despite a sluggish economy. Analysts at Deutsche Bank have meanwhile suggested that the euro is still in a correction mode and may remain so while the EU summit is in session. Good support entered yesterday only at 1.3610.

Euro ETFs To Watch Out For:

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

Short Euro ETFs

ProShares UltraShort Euro (EUO): ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.

EUO Tracks: Euro (-200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Short Euro ETN (DRR): As the Index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

DRR Tracks: Double Short Euro Index. Expense Ratio: 0.65%

Long Euro ETFs

ProShares Ultra Euro (ULE): ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. Dollar price of the Euro.

ULE Tracks: Euro (200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Long Euro ETN (URR): As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

URR Tracks: Double Long Euro Index. Expense Ratio: 0.65%

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World Market Forex Pulse: Exploring Dollar's Drop And Euro's Surge

By world market pulse team on October 29,2010


Most of the world currency markets is brimming with activity as speculation over QE2 grabbing most attention. While the US dollar was unable to sustain its gains from the previous session Thursday morning coming under pressure ahead of the latest word on the US jobs market, the euro on the other hand snapped back against the dollar on Thursday, as better-than-forecast economic data from the Euro zone raised speculation that central bankers in Brussels will begin to normalize interest rates rather than ease further.

USD: The dollar has been unable to sustain its gains from the previous session coming under modest pressure ahead of the latest word on the US jobs market. The Fed meets on November 3 and is reportedly set to embark on a series of gradual asset purchases totaling a few hundred billion dollars. In 2009, the Fed snapped up around $2 trillion in an effort to spur the economy. Still currency experts feel that the dollar is relatively stable amid growing speculation that the size and scope of the Federal Reserve's anticipated bond purchase program is likely to be smaller than its first round of quantitative easing.

US Data Analysis: Initial US jobless claims fell to 434,000 from the previous week's revised figure of 455,000. The decrease surprised economists, who had expected claims to edge up to 458,000 from the 452,000 originally reported for the previous week. While there were no special factors cited for the decline in claims, analysts at Deutsche Bank are hesitant to read too much into the data, and the four-week moving average is still consistent with job growth of around 100k per month. Continuing claims registered a more robust decline of 122k to 4356k for the week of October 16, the lowest since November 22, 2008.


EUR: The euro meanwhile snapped back against the dollar after better than forecast economic data from the Euro zone raised speculation that central bankers in Brussels will begin to normalize interest rates rather than ease further. Economic confidence in the 16 countries that use the euro rose to its highest level in nearly three years during October, the European Commission said on Thursday. The euro rose to $1.3910 versus the greenback, paring most of this week's losses. With the advance, the euro moved back towards a recent 8-month high near $1.4150.


EUR Data Analysis: The European Central Bank lowered interest rates to a record low one percent during the throes of the worst recession in decades, but has resisted additional rate cuts despite a sluggish economy. Analysts at Deutsche Bank have meanwhile suggested that the euro is still in a correction mode and may remain so while the EU summit is in session. Good support enters today only at 1.3610.



Euro ETFs To Watch Out For:

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

Short Euro ETFs

ProShares UltraShort Euro (EUO): ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.

EUO Tracks: Euro (-200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Short Euro ETN (DRR): As the Index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

DRR Tracks: Double Short Euro Index. Expense Ratio: 0.65%

Long Euro ETFs

ProShares Ultra Euro (ULE): ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. Dollar price of the Euro.

ULE Tracks: Euro (200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Long Euro ETN (URR): As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

URR Tracks: Double Long Euro Index. Expense Ratio: 0.65%

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Tracing China Rate Hike And Positive Dollar Index Correlation

By world market pulse team on October 20,2010

It’s been a down bound journey for the US Dollar in the distant past. After being under immense pressure in recent times the US Dollar not only witnessed its worst month since May 2009 against a basket of currencies and was caught in the currency war crossfire but an Improved Home Builder Confidence helped the dollar improved across the board following improvement in the housing market survey. All three of the HMI’s components registered gains in October. The index of current sales conditions improved by 3 points to 16, the index for sales expectations for the next 6-months rose 5 points to 23 and the index gauging traffic of prospective buyers rose 2 points to 11. The improved data gave investors an excuse to lay off the buck as it briefly put into question the extent of Fed easing.

Our analysts at World Market Pulse had already discussed the case of a positive US data triggering the Dollar Index in an earlier article. But more than the US Data, the real thrust in the US Dollar appears to come from least expected quarters after a surprise move by China raised its one year lending and deposit rates by 25 basis points. Despite a number of Fed officials indicating that the US central bank will soon embark upon further monetary stimulus for the US economy it would appear that the Chinese may have done something the Fed had been unable to do and that is to stem the tide of negative sentiment against a rapidly falling greenback. Testimony to the fact is that yesterday’s US dollar rally was the largest one day move up in the US dollar index since the 11th August, and if sustained throughout the remainder of this week could well be the start of a new phase of dollar strength.


Overview Of Chinese Rate Hike: China’s central bank today raised its benchmark interest rates for the first time since December 2007, following signs the China’s economic slowdown is bottoming out in recent months. The interest rate increase comes as the economy has shown signs of rebounding from its slowdown in recent weeks, and ahead of a range of important data later this week. August retail sales quickened to 18.4% y/y, while industrial output quickened to 13.9% year/year, and both are forecast to accelerate further when September
figures are released. Lending has also been strong, with new loans raising some 596B renminbi in September.

China Benchmark Interest Rates




USD-CNY Projections: While Chinese currency appreciation may not quite match the pace of the past month going forward, analysts still forecast a gain of a little more than 1.5% per quarter, targeting a USD/CNY rate of CNY6.25 in a year’s time, or a gain of around 6.5% from current levels. Moreover China’s domestic monetary policy measures (reserve requirement increases or interest rate hike) should act as a constraint on liquidity or offer more attractive returns on renminbi funds, which should both contribute to an upwards bias for the Chinese currency.


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Why Stronger EUR Is Here To Stay

By world market pulse team on October 19,2010

Traders are likely to remain in a Euro Bullish mode despite the firming up of the US dollar amid Improved Home Builder Confidence even as EUR together with Scandinavian currencies under performed the rest of G10 at the start of the week after investors sought to take profit on their USD-short positions. EU’s Economic and Monetary Commissioner Olli Rehn has meanwhile indicated that the currencies will feature prominently on the agenda after Eurogroup’s Chairman Juncker had said that there has been too much volatility between the main global currencies.

According to analysts at CitiFx, ahead of the G20 meetings in Korea, euro area officials should continue to concentrate their efforts on promoting coordinated solution to the ‘currency wars’. In this regard we would expect to see further calls on EM economies to allow more flexibility of their currencies. At the same time there should be still fairly muted critique (if any) of the Fed plans to potentially add to its unconventional monetary policy accommodation. We think that the European officials continue to see the problems of euro area’s fiscally weak members as a far greater threat to its stability and growth outlook than the strong EUR of late.

Possible ECB Intervention: Even though the basic decision to intervene on the FX market lies with the ECOFIN, the economy and finance (and budget) ministers of the euro zone member countries, there is a possibility that the ECB could still take part in the discussions as a consultant. Analysts feel that the ECB is thus much more closer to the decision making process than say the BoJ which acts as an agent of Japan's MoF. On the flip side, the ECB has shown very little desire so far to engage in any interventionist talk or indeed into discussions about the EURUSD level.


EURUSD – Friday’s daily chart posted a significant daily reversal, which could well indicate that a period of consolidation could well now be due. This daily candle is classified as “dark cloud cover” or a weaker form of engulfing pattern and yesterday’s down move stopped short of the 1.3800 levels rebounding from 1.3830. Meanwhile according to Deutsche Bank analysts, investors had no reason to sit on any open positions after the Fed chairman Bernanke's speech on Friday until the central bank begins QE2, as they had already received confirmation and the market had already processed the information. Given that a significant amount of euro-shorts were forced out during the euro-rally last week, the weakness on Friday afternoon is transformed into bull-market exhaustion this morning. Our risk limit was undercut, leaving us with a neutral outlook. Significant corrections will be in order below 1.3850.



Euro ETFs To Watch Out For:

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

Short Euro ETFs

ProShares UltraShort Euro (EUO): ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.

EUO Tracks: Euro (-200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Short Euro ETN (DRR): As the Index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

DRR Tracks: Double Short Euro Index. Expense Ratio: 0.65%

Long Euro ETFs

ProShares Ultra Euro (ULE): ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. Dollar price of the Euro.

ULE Tracks: Euro (200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Long Euro ETN (URR): As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

URR Tracks: Double Long Euro Index. Expense Ratio: 0.65%

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Analysing Us Dollar Rebound Post Bernanke's Speech

By world market pulse team on October 18,2010

The US dollar had its worst month since May 2009 against a basket of currencies. In fact for the last six weeks the US dollar has slid lower relentlessly on speculation that the Federal Reserve has no choice left but to embark on a further stimulus program to liven up the flagging US economy. Forex experts are of the opinion that Fed chairman Bernanke's speech on Friday underlined the inevitability of such a move in the near future with the US dollar index despite making new 8 month lows actually finished the day higher than when it started. Friday’s move off trend line support at 76.10 from the all-time lows in March 2008 at 70.70 in the US dollar index has provoked some short covering beyond 77.00, but it would need a break above 78.00 to really get things going.

Although most experts agree that the drop in the dollar was mainly due to the Federal Reserve’s willingness to continue quantitative easing. An excess supply of dollars obviously leads to a fall in its value. Some traders attribute the dollar’s fall to the increase in risk appetite. This analysis does not ring true as the price of gold is making new highs, which actually signals risk aversion.

The movement in the dollar index has a lot of effect on commodities and other currencies, even if it does not replicate the action of the index but the USD needs some sort of a trigger mechanism to come out of its negative sluggish cycle.

EUR-USD: Friday’s late slide in the single currency and failure to close above 1.4000 suggests that we could well see a correction lower after the gains of recent weeks. A new high at 1.4155, just shy of the 1.4195 resistance soon gave way to a sharp sell-off closing below the 1.4000 level and generating a daily dark cloud cover candlestick reversal.

Some of the other potential catalysts that can act for a positive Dollar Index are dicussed here.
Linking Economic Data Release And USD

According to BNP Economic Research, US economists tend to react quickly to data releases. When data comes in weak, expectations are scaled back lower, increasing the chance of data exceeding expectations. Hence, the surprise indicator becomes very erratic. Hence, months of positive data surprises are often followed by a months with negative data surprises. Only, when there were severe growth deteriorations as in autumn 2006, summer 2008 and the May – July period of this year will the surprise indicator run negative readings for several months. US growth expectations have been scaled down suggesting that it will not take a lot to exceed low expectations.

ETFs Investment Options include

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

PowerShares DB USD Index (UDN): The Index is a rules-based index composed solely of short USDX futures contracts. The USDX futures contract is designed to replicate the performance of being short the US Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

Expense Ratio: 0.40%

iPath GBP/USD Exchange Rate ETN (GBB): The GBP/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the British pound and the U.S. dollar.

Expense Ratio: 0.40%

iPath EUR/USD Exchange Rate ETN (ERO): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

Expense Ratio: 0.40%


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World Market Pulse FX Update: Analyzing SEK Amid Lower Growth Forecast

By world market pulse team on October 16,2010


With the Swedish government revising its growth forecasts for 2011 lower in the budget presented Tuesday, citing the risk of slower growth developing in the eurozone as a result of fiscal austerity, there is a growing concern to see which way the Sweedish currency goes with almost 40% of Sweden’s exports heading to the eurozone is a rising concern. However, despite the prospect of slower exports to the eurozone, the government is still forecasting growth of 3.7% in 2011 and 3.4% in 2012. Although this is a downward revision from the earlier forecast of 4.0% growth for 2011, the pace of growth forecast by the Swedish government would still far outpace the anticipate growth in much of the developed world.


SEK Negatives: The Swedish government's latest budget has proposed SEK13bn of tax cuts and spending, experts feel that it they are in line with expectations and indications given ahead of the elections, but could very well prove insufficient to keep the economy on track if developments fail to meet the governments optimistic assumptions. Although Analysts at BNP Paribas feel that investors would still have to look to the emerging markets in Asia and Latin America to find a faster pace of growth as Swedish government estimates are on the optimistic side with BNP Paribas experts forecasting growth in Sweden of just 2.9% in 2011.


SEK Positives: Swedish data has been robust and better than the market had hoped for and Swedish rate expectations have risen accordingly. Despite the Fed moving towards further policy accommodation there is no concern at the Riksbank. Although there are rising concerns over the international environment and the level of the SEK, on the positive side, Riksbank’s survey of Swedish companies have revealed that that most corporations expect the economic climate to continue to improve over the next six months with a broad up turn in activity expected.

Amid all the negatives, experts continue to believe that there is still plenty of scope for the SEK to rally as Sweden continues to out perform its peers and the Riksbank looks to normalize momentary policy. Testimony to the fact is that the Swedish equity market has continued to outperform with the OMXC up 14.5% year-to-data (eurostox is currently down 6.4% year-to-date).

SEK TWI and Swedish Retail sales


Source: Reuters Ecowin Pro. The SEK is expected to extend gains as the Swedish economy is set to continue to out perform with the Riksbank maintaining its policy of normalizing monetary conditions. The SEK is still a long way from being overvalued on many measures, suggesting that concerns by some members of the Riksbank regarding the level of the SEK are unjustified.


SEK Projections: Analysts at BNP Paribas have recommended using any near-term EURSEK corrective rebound into the 9.32/9.34 area to establish renewed bearish strategies targeting the 8.90 area as NOKSEK is also set to extend the major down trend towards the 1.0970 area.


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Why the Euro Should Remain Bullish Despite Firming U.S. Dollar

By world market pulse team on October 14,2010

Traders are likely to remain in a Euro Bullish mode despite the firming up of the US dollar Tuesday on what market participants describe as a wariness of any further intervention by the BoJ, and the increasing uncertainty over the size and timing of a much anticipated round of stimulus by the Fed.

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USD Recovery: The US dollar had its worst month since May 2009 against a basket of currencies and the slight USD recovery is very welcome news even amongst the euro bulls, as it basically allows them the opportunity to enter their putative strategies at a more advantageous levels. The movement in the dollar index has a lot of affect on commodities and other currencies, even if it does not replicate the action of the index. But the USD needs some sort of a trigger mechanism to come out of its negative sluggish cycle. Some of the points that can trigger the positive spike in the Dollar index are discussed here.

Fed Public Debate Grows: Meanwhile, the Fed’s members continued a very public debate of the central bank’s policy, with Kansas City President Hoenig stating that QE could do more harm than good while the newly appointed Fed Vice President Yellen voiced her concern about extraordinary low rates, saying they may motivate investors to ‘reach for yield’ by engaging in excessive risk-taking. If the public Fed debates are to be considered as the yardstick for future policies, it's gives the impression that the Fed has many options up its sleeve. But there is a growing market view that the Fed would not utilize any other choice and instead hold the rates near zero to try to implement further accommodative measures simultaneously.

In FX markets, the mere thought that the Fed was considering adding more liquidity via QE was sufficient to weaken the dollar by 5.5% from mid-September to early October against its trade weighted currency basket and by over 9% against the euro.

Euro ETFs To Watch Out For:

Rydex CurrencyShares Euro Currency Trust (FXE): The EUR/USD exchange rate is a foreign exchange spot rate that measures the relative values of two currencies, the euro and the U.S. dollar.

FXE Tracks: Euro Index. Expense Ratio: 0.40%

Short Euro ETFs

ProShares UltraShort Euro (EUO): ProShares UltraShort Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the U.S. Dollar price of the Euro.

EUO Tracks: Euro (-200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Short Euro ETN (DRR): As the Index is two-times leveraged, for every 1% weakening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% strengthening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

DRR Tracks: Double Short Euro Index. Expense Ratio: 0.65%

Long Euro ETFs

ProShares Ultra Euro (ULE): ProShares Ultra Euro seeks daily investment results, before fees and expenses, that correspond to twice (200%) the U.S. Dollar price of the Euro.

ULE Tracks: Euro (200%) Index. Expense Ratio: 0.95%

Market Vectors-Double Long Euro ETN (URR): As the Index is two-times leveraged, for every 1% strengthening of the euro relative to the U.S. dollar, the level of the Index will generally increase by 2%, while for every 1% weakening of the euro relative to the U.S. dollar, the Index will generally decrease by 2%.

URR Tracks: Double Long Euro Index. Expense Ratio: 0.65%

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Can GBP Beat The Double Dip To Stay Positive?

By world market pulse team on October 13,2010

Sterling traders have been worried over the news about falling house prices in the UK with the release of the RICS House price survey for September which indicated that the number of surveyors reporting falling home prices increased relative to those reporting increases. The release not only corroborated the view that the UK housing market continued cooling recently and weighed on sterling sentiment but is also one of main reasons why ‘double-dip’ is starting to reappear in market discussions after the pound lost a little ground yesterday.


Inflation Report Supporting GBP: Despite data pointing to weakening demand and a cooling housing market, the CPI data release out of the UK corroborates the view that QE2 is still only a distant prospect. The CPI release indicates that inflation remains well above inflation targets with headline CPI at 3.1%, core CPI at 2.7% and RPI at 4.6% (all year over year figures). The CPI figures were almost exactly in line with expectations although the RPI came in slightly higher than the expected 4.4%. Positive inflation surprises last month triggered a temporary correction higher in market inflation expectations as proxied by the implied rate of the UK 5y Inflation swap.

Analysts at World Market Pulse expect that the inflation support is likely to continue adding to the GBP strength in the short term despite the release of the RICS House price survey; while analysts at the Deutsche Bank believe the door to further near-term gains to 1.6090/110 remains open as long as support at 1.5800 is unbroken. Indeed, an early dip to 1.5860 would create the necessary risk-reward conditions for a new bullish

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Britain Economic Overview: The Bank of England has reported a decline in services output in both June and July. Consumer confidence deteriorated more than expected last month. Industrial output is off 11% from pre-recession levels and has been flat since February. Retail sales seem to be holding up pretty well but consumer credit was up a meager 0.2% y/y. Business lending has fallen for five consecutive months. The government feels the Bank of England can come to the rescue if the economy does show serious signs of faltering as cuts and tax hikes hit home. Maybe yes maybe no; the BoE interest rates remain at record lows but QE remains an option. However, with the planned deficit reduction it seems unlikely that economic growth can do anything other than head south over 2011.

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Tracing Job Data's Impact On Dollar Index And Forex Trends

By world market pulse team on October 09,2010

As if the business services firm ADP's latest installment of its National Employment Report, indicating that the situation for private employment in the U.S. took a turn for the worse in September was not bad enough, the dollar fell across the board as investors dumped the dollar for higher yielding and more lucrative currencies.

The ADP reported a loss of 39,000 jobs in the private sector against expectations of new job creation of 50,000. Although most optimists were surprised by the results, ADP said there was no clear momentum in employment as of now. Although its hard to please everyone, most analysts agree that ADP numbers are one of the best single predictors of the official payrolls number, even if there have been a handful of bad misses.

Most analysts believe that it would take a payrolls reading bigger than +150k to get the market to think the Fed would reconsider QE2 and even with neutral numbers, it is likely the market will hold and the USD is most likely to continue breaking through to new levels of weakness like 1.40 or higher in EURUSD. With a negative ADP outlook, the dollar index fell to its lowest levels since January at 77.619 from 77.811 while the euro hit a fresh 8-month high at 1.3918. Despite concerns over the Eurozone sovereign debt re- igniting, most analysts believe that the dollar might just continue its ongoing fall against the Euro.

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US Policy And The Weakening USD:

Given the recent USD weakening and unilateral actions on exchange rates, discussions between the G20 Deputy Finance Ministers and G7 Finance Ministers/Central Bank Governors are likely to feature currency games much more prominently than in the past couple of years. There is a deep concern that the US is likely to receive a strong degree of criticism for effectively ‘debasing’ the dollar via extremely accommodative monetary policy. Experts also feel that despite the criticism, the US government or Fed will not change course and if comments on the sidelines of the meetings foster expectation for action, eventual disappointment should only reinforce downward pressure upon USD.


Forex Trends Update: Goldman Sachs Global Economic report has meanwhile revised the majority of its FX forecasts to reflect broad dollar depreciation and it revised its euro forecasts to hit a whopping $1.55 in the next 12-months. Meanwhile, the pound hit a new 2-month high at 1.5938, while the CAD breached a new 5-month high at 1.0083, as it nears dollar parity. The riskier currencies also took advantage over its higher yields over the plummeting buck as the Australian Dollar hit a fresh 2-year high at 0.9781 while the New Zealand Dollar also hit a new 1-year high at 0.7537.

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World Market Pulse Forex Update: Analyzing G20 Sound Bites

World currency markets have been largely sluggish in the past week. As the November date of the FOMC draws ever nearer, there has been a wait and watch situation developing especially about the level of any stimulus especially in light of some of US Treasury Secretary Tim Geithner’s recent comments with respect to the major currency pairs.

Meanwhile the market sentiment turned out to be correct regarding the G20 finance ministers and central bankers meeting in South Korea as the meet failed to achieve anything of note apart from a few sound bites about monitoring the situation, and urging countries not to use their currencies as weapons of devaluation. Although the G20 meet made all the sound notes, analysts feel that it is unlikely to reverse the overall pressure on the US dollar as it continues to remain under pressure.

USD and Q3 GDP:

After the G20 meet failed to set any market tone, all eyes are now focussed on the coming week which can is a critical week for both the dollar as well as the pound as traders are keeping a close watch over the release of Q3 GDP figures for evidence of economic deterioration and the increased likelihood of further stimulus. Meanwhile the US dollar is continuing to show signs of a possible rebound as it continues to hold above key trend line support. The release of Q3 GDP on Friday where a figure of 2.2% is expected will in all likelihood be a key indicator of what sort of measures the Fed may embark on at the conclusion of its next meeting on November 3rd.

GBP: The pound is also set for a key week with the release on Tuesday of Q3 GDP where expectations are for a slip back to a figure of 0.4% which would be a shot in the arm for the dovish camp in the Bank of England’s monetary policy committee (MPC) for a further round of quantitative easing (QE) into the UK economy, and send the pound lower. The pound is currently trading near trend line support at 77.80 from its all-time lows on its trade weighted index at 73.05, set in early 2009. A break below this level could well target further sterling weakness in the near term. A break of this trend line could well target further sterling weakness towards this years low’s at 76.10.

World Market Pulse Euro Update: Traders are likely to remain in a euro bullish mode despite the firming up of the US dollar amid Improved Home Builder Confidence even as EUR together with Scandinavian currencies under performed the rest of G10 at the start of the week after investors sought to take profit on their USD-short positions. EU’s Economic and Monetary Commissioner Olli Rehn has meanwhile indicated that the currencies will feature prominently on the agenda after Eurogroup’s Chairman Juncker had said that there has been too much volatility between the main global currencies.