Forex Market Pulse: Tracing RBA Rate Hike and AUD Upside

By world market pulse team on November 03,2010

As the world markets including the currency markets eagerly await the Fed's decision on further quantitative easing, the Australia’s central bank unexpectedly raised interest rates yesterday fueling optimism in the global economic recovery. As a result the Australian dollar traded at its highest levels against the US dollar since 1982.

The RBA rate hike and hawkish statement gives some further upside potential for the AUD. Indeed, the RBA hiked by 25bps to 4.75%, which is consistent with the continued strong domestic data coming from Australia. RBA governor Stevens gave the impression that this hike is pre-emptive with modest inflation trends probably about to end.

Meanwhile analysts at BNP Paribas feel that AUD will stay supported from the positive readings of Chinese data. The AUD has been correlated to the Chinese PMI, which has rebounded strongly over the past couple of months, and analysts maintain their bullish AUD positions looking for AUDUSD to sustain a move above parity targeting the 1.02 area. BNP Paribas experts also expect AUDNZD to continue to push higher.

AUDUSD Outlook

AUDUSD gained over a full cent to trade just under parity after the RBA surprised by delivering a 25 bps rate hike to 4.75%. In explanation for the hike, the RBA cited tight labor markets, a likely end to the recent moderation in inflation and, in an echo of Governor Stevens' comments from last month, the large expansionary shock from the high terms of trade. It also said that fears of a larger than expected slowing in Chinese growth have lessened recently.

Yesterday’s rate increases by the Australian and Indian central banks have served to highlight the fact that the Fed is now the only major central bank looking at further easing in the short-term.

Analysts at BNP Paribas have however questioned whether the move will have legs ahead of FOMC's final decision, as Investors are unlikely to add further to AUD risk. Fearing that Fed's decision may just run RBA hike out of steam, as another test of parity analysts expect AUD to struggle to break much beyond the previous highs of 1.0003 – at least until FOMC is out of the way.

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World Market Pulse Forex Update: Measured QE2 And Beyond

By world market pulse team on October 28,2010

Most of the world currency markets is brimming with activity as speculation over QE2, G20, capital controls and inflation continues to be in the limelight today with the BOE and the FED grabbing most attention. Meanwhile Asian news suggesting currency reserves are also on the rise with the EU Head of State meeting where the German Chancellor is expected taking a non-compromising position while the BOJ bringing its policy meeting forward. Markets are generally softer, with the USD biased for strength.

There is also a market sentiment suggesting that China and the US are close to an agreement on current account imbalances pushing markets to curtail their expectation for QE2 as forex experts feel that the logic being that a softening in China’s stance would ease pressure on the US to implement QE2. Analysts at BNP Paribas meanwhile expect USD range trading today, but with US bonds yields staying bid for now USDJPY and EURJPY should rally, while EURUSD’s upside should be limited by 1.3920. GBPUSD remains a clear sell near 1.5800 after Posen's suggesting that QE might come too late and might be not enough.

EUR-USD: The EUR has weakened since yesterdays close, but is still trading within its three-week 1.3698 to 1.4159 range. A break of this range should foreshadow the next move. Today the focus is on the USD rally driven by scaled back expectations of QE. Analysts at Scotia Capital have suggested that this will prove temporary and that the EUR will still face upward pressure into year-end on the back of a weak USD. However, for now the risk is that the market is extremely short the USD and shift in sentiment could see downside pressure on EUR as position squaring takes over.



USD- CAD: CAD is under performing today, having lost 0.4% against the USD and 0.2% against EUR. USDCAD is within a hundred points of the clustering of its 50, 100 and 200-day moving averages (1.0314, 1.0345 and 1.0344, respectively) and the year-to-date average trading level of 1.0345. All in all, USDCAD remains firmly within its year-to-date range, unable to break decidedly on either side of it. The main driver of USDCAD continues to be QE in the US and the odds of a currency agreement. With the PBoC hiking rates ahead of key data releases on Thursday, these odds improved. This thematic has already taken over. USDCAD around 1.0350 continues to offer opportunities to go short.


Asian Currencies: Asian currencies have come in firmer dragging G-10 currencies against the USD with it. Korea doubling its current account surplus from August to September and China allowing USDRMB to fix higher for the 4th consecutive day will bring the theme of Asian currency reserves and the related allocation issues back to the market. Meanwhile, the Bank of Japan is expected to downgrade its forecasts for the country's economic growth and prices at its policy meeting today amid signs that the return of the economy to a path of sustainable expansion will be delayed due to deflation.

AUD-USD: AUD is under performing having lost 1.3% against the USD and 1.1% against EUR. A softer than expected CPI release (coming in at 0.7% q/q and 2.8% y/y) has dampened the expectations for further interest rate increases and weighed on AUD. In some ways, the CPI release has simply offset the positive impact the currency and interest rate outlook received with the above consensus PPI release earlier this week. Governor Stevens recently indicated that monetary policy would have to take into account one off shocks to terms of trade on inflation over and above the regular cyclical factors.

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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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World Market Pulse FX Update: Dollar Drive Amid Housing Data And Geithner Remarks

By world market pulse team on October 19,2010


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 would embark on a further stimulus program to liven up the flagging US economy. In fact the US dollar index despite making new 8 month lows actually finished the day higher than when it started after the Fed chairman Bernanke's speech on Friday underlined the inevitability of such a move in the near future. The Dollar index however lost some ground towards the end of the day as doubts remained about the scale and the extent of any easing at next months Fed meeting. The US dollar did however gain some late support from some comments by US Treasury Secretary Tim Geithner, who stated in Paolo Alto that the US would not seek to devalue the dollar saying, "It is not a viable, feasible strategy and we will not engage in it.”

Low US Industrial Production: Meanwhile a worse then expected US industrial production figures for September at -0.2% against an expectation of a 0.2% gain, seems to reinforce the case for additional stimulus measures and saw the US dollar slide back from the highs of the day, especially against the euro as 10 year bond yields closed in the single currency’s favor for the first time in 10 months

Improved Home Builder Confidence: The dollar improved across the board following today’s 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.

Some of the other potential catalysts that can act for a positive Dollar Index are discussed here.

A Case For A Positive US Data Triggering Dollar Index:

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%

For More World Market Pulse ETFs stocks futures commodities forex indicators forecast http://worldmarketpulse.com/

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%


For More World Market Pulse ETFs stocks futures commodities forex indicators forecast http://worldmarketpulse.com/

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.

For more Forex Currency Trends and research articles visit http://Worldmarketpulse.com

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.

For more Forex Currency Trends and research articles visit http://Worldmarketpulse.com

Is Global Currency War A Clear Advantage To The Chinese Yuan?

By world market pulse team on October 09,2010

As the global economies, business and market trends change momentum towards the east, the relationship between a country's economy and its currency is getting much more complicated as governments across the globe are assuming a bigger role in propping up the financial system and encouraging economic growth. What started as a small echo with allegations on China to knowingly undervalue its currency has now grown into a currency war after the Japanese government's intervention in the currency markets by weakening the Yen for the first time in six years while the counter strike from the Dollar came when the FED announced the readiness to introduce a new round of quantitative easing to boost the economy. Such has been the impact of the recent currency games that IMF chief Dominique Strauss-Kahn has now joined those warning that governments are risking a currency war if they try to manipulate exchange rates to solve domestic problems.

Experts meanwhile feel that if the currency games continue for a long term, investor confidence in international currencies could break down to such an extent that it could lead to sharp changes in the near future. A few forex experts and analysts have expressed concern that Chinese Yuan could very well emerge as the next preferred currency of global trade as and when the dust settles down from the current tit for tat mechanism. If investor confidence is shaken up badly by the prolonged currency tug of war, the absence of any other credible alternative to the US dollar as the reserve currency of choice might just work in favor of the Chinese Yuan.

According to Joseph Yam, a former chief executive of the Hong Kong Monetary Authority, the yuan should become fully convertible, the domestic debt market in China should acquire depth, and a robust financial infrastructure should be put in place if the Chinese Yuan has to emerge as the preferred choice of the investors in the near future.

China and Hong Kong had earlier agreed to loosen rules regulating trading of the yuan in the territory in July, tweaking rules to allow the sale of yuan-denominated financial products and giving companies greater access to yuan funds. Much of the trade settlement business came from companies looking to re-denominate to yuan away from the US dollar, which most companies operating in China use to pay and issue invoices.


Although skeptics have questioned an such possibility because China as of now runs a balance-of-payment surplus by keeping its currency artificially pegged might find it extremely difficult to take the yuan global without changing its export focus but Guonan Ma, senior economist at the Bank for International Settlements believes that it isn’t entirely necessary for the yuan to become fully convertible for it to be gradually internationalized. There is another argument saying that if China can work its way around the problem by building good institutions, established rule of law, property rights, good corporate governance with long-term bond markets and stringent regulations

Meanwhile China’s central bank, the People’s Bank of China, has already been trying to do by establishing currency swap agreements with central banks around the world.

The depreciation of the Yuan compared to the Dollar has already caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.

Reality Of The Chinese Currency Drama: China, from its earliest civilizations has always been a clever economy and it's certain that it would not enter into an economic suicide by blindly imitating the west. It is also quite clear that the Chinese government would not allow their currency to go down with the dollar ship as most of the export dependent companies of China which form big chunk of current Chinese economy may lose steam as most of them work on very thin margins. Although economists continue to be skeptical about the goodness of the Chinese currency moves, there is no doubt that China is ready to resume greater flexibility with its yuan.

Political Complications: Although financial analysts are divided over the issue, most political observers have been quite unanimous in saying that whether the yuan becomes more international if at all, politicians and Chinese policymakers are likely to loose their degree of freedom, as there would be deep international repercussions of their policy measures.

Whatever might be the case, most economists are of the view that the rise of the Yuan or renminbi is desperately needed as a multipolar system actually helps in stabilizing the international monetary system.

For more Forex Currency Trends and research articles visit http://Worldmarketpulse.com