02/08/'07 - EUR & GBP Interest Rate Announcement

[B]Economic News

USD [/B]

Yesterday the greenback was on a slippery slope in the currency trading market as a succession of negative data from the US threatened to reverse the dollars recent gains. The first and most significant news of the day was the ADP Nonfarm Employment Change, which measures the number of new jobs created outside of the farming sector, this figure came in at 48K which was well below the expected figure of 103K. This weak ADP release gives a strong indication that the Nonfarm Payrolls Report will release on Friday significantly below its expected figure of 135K. Although the ADP figure has been questioned in the past with regards to its predictive value it still managed to shake up the rallying greenback. To make matters worse for the USD there was more negative news to follow as both the ISM Manufacturing Index and Prices figures came in below expectations at 53.8 and 65.0 respectively. However the greenback has performed solidly amongst the global equity market fall and it recouped after yesterday’s string of negative data and now seems to be preparing itself for another rally.

Today the only significant news to be released from the US will be Unemployment Claims and Factory Orders which are both expected to release stronger than their previous figures. The persistent problems in the US sub-prime mortgages coupled with further reports of hedge fund worries is fuelling the risk aversion sentiment. The USD has performed well amid this safe-haven sentiment and it will continue to show strength today particularly against the high yielding market currencies as this sentiment is showing no imminent signs of letting up. However with yesterdays negative data taming the dollars bullish run traders will exercise caution ahead of Fridays NFP report which has a strong probability of springing a negative surprise.


The EUR is still showing signs of resilience as it traded in a relatively close range yesterday even though there was volatility all across the board. The German Manufacturing PMI figure was released slightly below the expected figure of 57.0 at 56.8. However this soft data did not manage to slowdown the overall European Manufacturing PMI figure which was released stronger than expected at 54.8. The most significant news to be released from the Euro-zone today will be the ECB’s key interest rate announcement which is expected to remain unchanged at 4.00 %. . The EUR should to continue to range trade today but we could see some strong volatility if the ECB hints towards future rate policy. No news conference is expected to follow the interest rate announcement so a surprise conference by the ECB will cause the market to start flapping.

In other news yesterday the GBP had a short-lived bullish burst on the back of the release of the better than expected UK Manufacturing PMI. Today the BoE will announce its benchmark rate which also expected to remain unchanged at 5.75 %. However the current market sentiment seems to be that the ECB and BoE will both hike rates in the near future so it will be crucial for traders to identify how the preceding economic indicators from Europe and the UK will affect the two central banks monetary policy.

[B]JPY [/B]

The JPY has enjoyed a sustained bullish run as a result of the carry trades unwind which is being driven by increased risk aversion. There has been a strong negative correlation between the JPY and US equity markets as a fall in the equity markets has usually sparked a rise in the JPY. This was reiterated yesterday as the JPY had a dip against some of the majors on the back of a short lived Dow rebound. However without any further news releases expected from Japan for the rest of the week the direction of the JPY will heavily depend on the volatility of the equity markets but with the carry trade unwind likely to continue in the near future we should see the JPY extend its gains particularly against the greenback.

[B]Technical News


There is a bearish configuration forming on the 4 Hour chart. The volatility is high and the EUR/USD is not in a consolidation stage, especially after the pair has broken the 1.3700 support level. The price should continue to move downwards in the 1.3700 /1.36050 range. As it seems, the bearish pressure will continue to gather momentum at least until the week ends.


The pair is going through a choppy session in the past few days, and gives mixed signal on the hourly level. The daily chart is showing massive bearish formation, and it looks as if the pair is heading 2.0200 again. a preferable strategy might be to wait for the hourlies to unwind before going short.


The pair is in the middle of a very strong downtrend that started from 124.00. It looks as if the pair is having difficulties breaking the 117.60 level which is now a very strong support. If the support level will be breached it will validate the next move down, to 116.00.


The pair is floating a low range similar to the one in December. The 1.1950 level is established as an almost impossible level to break. The dailies are showing bullish signals, and the dailies support the bullish notion. It might be preferable to buy on dips, as the bullish sentiment is quite strong.

[B]The Wild Card

Crude Oil [/B]

Oil is going through a massive downtrend momentum, and broke the 77.50 level. This provides Forex traders with the opportunity to jump in a good trend and to take some profit on the short rang. Next target price is 75.50.

what currency pairs is to be traded tomorrow and what will be our look out we news trader

  • USD: Payrolls could provide an excuse
  • JPY: Spec flows have driven yen so far
  • GBP: BoE rates unchanged
  • CHF: PMI strong, CPI today
  • SEK: Strong GDP
  • NOK: Disappointing PMI
  • SGD: Potential outperformer if risk aversion spikes
  • KRW: Risk may hurt but fundamentals intact
  • Technical FX - EURJPY remains pressured, scope for 159.60


USD: Payrolls could provide an excuse

High yielding currencies such as the AUD and the NZD outperformed overnight, as risk aversion eased further and stock markets rose. The USD traded lower against EUR, with EUR boosted by a hawkish Trichet, possibly signalling a September rate hike. The S&P500 rose by 0.4%, and unlike on Wednesday, it wasn’t on the back of a last minute surge in purchases by bargain hunters. Meanwhile, 2 and 10-year Treasury yields finished the session down by 2 and 3bp respectively, presumably as safe-haven flows were unwound. While equity markets have managed to rebound, we suspect that it is far too early to close the book on this latest chapter of risk reduction. Our FX Risk Index continues to move towards record risk aversion levels and markets remain very sensitive to adverse headlines relating to hedge fund losses and the health of mortgage lenders, and banking system exposure to those risks. The USD has shown a fairly reliable tendency in recent years to benefit from equity market stress, as US investors cut back on overseas holdings, and we see scope for this to continue. Moreover, with rate markets pricing in quite a bit of rate hike risk for central banks outside the US, the USD now stands to benefit if spreading credit crunch concerns begin to undermine the G10-ex-US rate outlook. Lastly, the recent moderation in crude prices is also potentially supportive for the USD, as diversification flows from energy producers are believed to have played a role in recent USD declines. We remain short EURUSD from 1.3720 as a trade recommendation. Ahead today, non-farm payrolls for July is due at 1230 GMT. The market expects a rise of +130k, roughly unchanged from the
+132k recorded the month prior. ADP data on Wednesday pointed to a weak
number, while jobless released yesterday were better than expected.
Clearly, payrolls could provide an excuse for risk aversion to spike higher again, should it disappoint market expectations.

JPY: Spec flows have driven yen so far

The MoF’s weekly security flow data released yesterday showed very large outflows by foreigners in the week ended July 28. Bond and equity outflows by foreigners totalled Y0.91 tn in the latest week, versus inflows of Y0.72 tn in the week prior. Meanwhile, Japanese cross-border investment flows were very modest, leaving overall net capital flows dominated by the foreigners. The fact that the yen strengthened sharply last week despite the bond and equity outflows suggests that unwind in carry positions was responsible for the move in yen. Indeed, IMM data, released Friday, showed that net speculative yen short positions fell from -121k to -81k in the week ended July 24. Overall, real money flows have probably not yet been behind the stronger yen, although that could change should Japan asset managers choose to lower their exposure to US asset backed securities in the coming months. We target USDJPY at 119 over 1 month and 117 over 3 months based on the view that we are going through a structural pick up in volatility. As such, USDJPY has likely become a sell on rallies rather than a buy on dips.

GBP: BoE rates unchanged

The Bank of England has left rates unchanged as expected. The pound struggled recently as a consequence of the current risk environment and support may continue to drain if rate expectations further suffer as data shows activity moderation. Markets have priced in weaker expectations of BoE hikes while support from sentiment for yields may also continue to wither. Data remains key in the short term and the MPC will still need to see trends in slowing growth before moving towards a more neutral stance. UK Halifax house price inflation came in at 0.7%m/m, above expectations of 0.3%. The underlying q/q rate has however slowed to 1.7% from 2.6%, but going forward the MPC will want to see a discernable sign of slowing to be dissuaded from raising policy rates again. We continue to see the GBP as at risk at current levels but acknowledge it may be too early to begin fading strength while upside BOE risks remain.

CHF: PMI strong, CPI today
Swiss PMI for July came in at 63, above market expectations for 62 and
62.8 last. The slight increase in the headline reading is the result of both higher production and order backlog. On balance our economists believe this is another very strong sign of life for the Swiss business sector at the beginning of H2. With highly volatile global equity markets also triggering further risk aversion, we advise against fading CHF strength. Sentiment tracked by our risk index, has reached levels last seen six years ago and has stayed above the extreme-risk aversion level of 2.0 for consecutive sessions. The current market environment is supportive of CHF strength so far and in the absence of data releases out of Switzerland, risk aversion, especially in the form of global equity performance remains key in assessing the franc. Also key this week will be Friday’s CPI release, and at 0.6% (vs. 0.6% the prior month), we expect further proof that inflation remaining well contained in Switzerland. SNB rate hike expectations have already come off considerably in recent days, and a weak CPI figure should further support the view of the SNB keeping to a more gradual tightening track.
Accordingly we keep the view that EURCHF will reach 1.66 over one month, and 1.65 over three months.

SEK: Strong GDP

Sweden’s Q2 GDP preliminary estimate surprised markets to the upside at 1% q/q and 3.6% y/y. The release followed last month’s stronger than expected CPI (1.9% y/y versus expected 1.7%) and retail sales readings, and this week’s Swedbank’s PMI survey. Household consumption and gross fixed capital formation were responsible for the highest contributions to growth, while exports and imports enjoyed a further increase.
Consumer and manufacturing confidence received a boost from the planned wealth tax abolition. Therefore, the outcome is consistent with our call for two more rate hikes in September and December, taking rates to 4.00% by year end. The risks to Riksbank policy remain to the upside if data continues to exceed expectations. We remain cautious on SEK strength and target EURSEK at 9.20 and 9.25 in 1m and 3m, respectively.

NOK: Disappointing PMI

July PMI was much weaker than expected at 47, down from 60.9 in June.
Historical data shows such downside surprises to be frequent during the summer months. As such, reaction was muted. Also, the unemployment rate showed the labour market easing, with the rate increasing from 1.8% in June to 2.1% in July. We note, however, that the data is not seasonally adjusted. The AKU unemployment rate for May, due Monday, will be a more telling print. We and the consensus still look for Norges Bank to deliver three more rate hikes this year, starting with a 25bp rate hike on August 15. We are cautious on entering fresh long NOKSEK positions before Norwegian fundamentals rebound to support such trade. Our 1- and 3-month EURNOK forecasts are unchanged at 7.90 and 7.85, respectively.

Emerging FX

SGD: Potential outperformer if risk aversion spikes Despite higher risk aversion and a rout in global EM assets in recent sessions, the SGD NEER has been resilient over the last month and managed to hold at levels slightly above the NEER policy midpoint according to our model. This reflects Singapore’s relative safe-haven appeal during times of heightened uncertainty and makes the SGD a potential long play in constructing a protection trade against a further spike in risk aversion. While the SGD has a historically small absolute correlation to the VIX index, this correlation tends to move into positive territory at times of heightened risk, implying that the SGD tends to appreciate against the currencies in the NEER policy basket when risk aversion increases. The SGD is also well supported by improving fundamentals. The
Q2 GDP numbers released in July showed an estimated annualized rate of 12.8% growth in the second quarter - the fastest pace in two years. The manufacturing sector is also showing signs of recovery to complement the services and construction sectors, which both look set to remain strong throughout this year. The reacceleration of the economy, with the lowest unemployment rate in six years and strong domestic demand, points to further monetary tightening via a higher SGD NEER within to the current policy band. Our NEER model suggests that the SGD is currently around 0.25% above the policy midpoint, implying ample room for the SGD to outperform the policy basket. Given current fundamentals, we expect a gradual appreciation of the SGD back to around 1% above the NEER policy midpoint by the end of the year. We maintain 1.5050 and 1.4900 USDSGD forecasts over 1 month and 3 months respectively.

KRW: Risk may hurt but fundamentals intact

The KRW has come under some pressure in recent sessions, hampered by risk aversion. But unless global risk aversion takes a sharper, more sustained upturn, which would threaten most EM currencies, we continue to like the won based on solid domestic fundamentals. Shipbuilders are still raking in global orders while exporters show no sign of being bothered by the won’s strength, reflecting that Korean exports have moved up the value chain and are no longer competing on price.
Exporters’ reduced sensitivity to the won’s strength against the yen has become more obvious in the last 12-18 months. The JPYKRW rate has fallen to its lowest since the 1997/98 Asian financial crisis in recent weeks, but Korean exports have remained very strong, growing at an average rate of 15.6% over the last 12 months. And the pace of growth is not showing any sign of deceleration as exports have grown at the same pace over the last 3 months to July. We also do not subscribe to the view that the won’s appreciation against the USD has been excessive compared to other major currencies since USDKRW began a sustained downward trend from the start of 2002. Indeed, indexing the two from Jan 2002 would show that the fall in USDKRW has lagged the fall in the USD Index over the last five years. We expect portfolio and FDI inflows to underpin the KRW even if the JPYKRW eases below the psychological 7.50 level. We maintain our view that USDKRW should end the year at or below the 900 mark. We have recommended including the KRW as part of a long Asia currency basket against the USD.

Technical FX - EURJPY remains pressured, scope for 159.60

EURUSD NEUTRAL Likely to remain heavy near-term below 1.3771, key
support 1.3608
USDJPY BEARISH Holds 117.60 key support, needs break of 119.51 to
trigger gains
GBPUSD NEUTRAL 2.0180 marks bear trigger, heavy below 2.0495
USDCHF BEARISH Choppy price action defines 1.2166 and 1.1961 as key
directional triggers
AUDUSD NEUTRAL Break of 0.8459 would open 0.8354/31 solid support zone.
0.8616 resists
USDCAD BEARISH 1.0702 break would trigger fresh strength, support at
EURCHF NEUTRAL Bull trend on hold, 1.6347 likely to come under
pressure. Resistance 1.6527
EURGBP NEUTRAL Pullback opens 0.6704. Topside, break of 0.6770 will
trigger fresh strength
EURJPY BEARISH To remain under pressure with scope for 159.60.
Resistance at 163.95

Good day,

Europe Ranges

AUDUSD 0.8553 0.8602
EURCHF 1.6427 1.6535
EURGBP 0.6722 0.6752
EURJPY 162.73 163.44
EURUSD 1.3684 1.3780
GBPUSD 2.0337 2.0417
NZDUSD 0.7636 0.7688
USDCAD 1.05 1.0578
USDCHF 1.1927 1.2072
USDJPY 118.16 119.26

NY Ranges

AUDUSD 0.8536 0.8603
EURCHF 1.6383 1.6505
EURGBP 0.6726 0.6757
EURJPY 162.50 163.74
EURUSD 1.3690 1.3820
GBPUSD 2.0337 2.0461
USDCAD 1.05 1.0574
USDCHF 1.1867 1.2056
USDJPY 117.95 119.28

This may just have been a pivotal week, when all the elements the Fed may need to consider easing policy presented themselves. The dollar, perhaps belatedly coming to terms with this, turned tail and fell more than a big figure against the euro, Swiss franc and yen alike.

First, there was a deepening of the credit crisis, with a third Bear Stearns fund shutting off withdrawals, Bear Stearns itself being placed on negative watch by S&P, American Home Mortgage closing down, and a number of other lenders tightening standards or closing taps.

Then there were fundamentals. The CaseShiller home price index dropped further into the red, Chicago PMI slowed sharply and there were deteriorations in both the manufacturing and service components of the ISM index. Finally, July’s payrolls growth slowed to just 92k, its lowest rate since February and only its second drop below 100k since January 2005.

As a result, the market has moved all the way through to pricing a chance of 50bp worth of Fed cuts by year-end - that is, it is now more than 100% priced for 25bp by end 2007.

EURUSD, which had been trading south of 1.3700 for most of the European day, rallied to take out stops through 1.3720 in the immediate wake of the payrolls number, and the CME saw through some aggressive selling out of eastern Europe to ht more stops at 1.3730 and, after a disappointing ISM non-manufacturing release, 1.3760, to an eventual high of 1.3794. There will now be offers at 1.3790-1.3800, but dips to 1.3750 should be bought.


  • USD: Payrolls provided the excuse
  • JPY: Some flak over the weak yen
  • Europe: BoE inflation report, Eurozone IP due this week
  • Commodity Bloc: RBA to hike this week
  • ZAR: Rhetoric from behind the curve


USD: Payrolls provided the excuse

The market remains in risk aversion mode with the JPY and the CHF the strongest currencies while the risk-averse AUD and NZD have been sold off heavily. The US dollar was also broadly weaker due to a softer payrolls release. The S&P500 fell by 2.8% on Friday, the Vix index closed at 25.16, while 2-year Treasury yields collapsed by 16bp and are now down 58bp on the month. Non-farm payrolls for July rose by just 92k, less than market expectations of 127k and down from 126k in June (which was also revised lower from 132k). However, most of the disappointment was in government jobs - private sector jobs created in July actually exceeded the number created in June. From that perspective then, the market was already prepared to sell equities and buy bonds and the softer-than-expected payrolls provided the appropriate excuse. The market also reacted strongly to comments from the CFO of a large investment bank, who said that credit markets were in their worst shape in two decades. All eyes will be on the FOMC statement due on Tuesday this week. Markets will be looking for any evidence of rising Fed concern with respect to credit availability or reduced concern with inflation pressures. We expect the FOMC to maintain their forecast for moderate growth, while acknowledging that distressed credit markets imply less stimulative financial conditions. Our economists continue to forecast 50bp of easing before year-end, with 25bp on Oct 31 and 25bp on Dec 11. We think risk aversion will remain a theme and hence the JPY and the CHF will remain firm. The USD should benefit from repatriation flows but clearly cyclical concerns may keep it from rebounding. We were already short EURUSD as a trade recommendation and will respect our stop at 1.3875. There are no major data releases due today.

JPY: Some flak over the weak yen

Japan’s faced some flak at the APEC meeting last week over the yen-funded carry trade. The South Korean Finance Minister said that global policymakers need to send a strong message to curb the carry trade, which he said can distort markets and nation’s macroeconomic policies. In a similar vein, South Korea announced today that it will impose limits on Korean banks from obtaining funding offshore via their offshore banking operations. A contributing factor to KRW strength has been ready access to yen-denominated loans. However, we are skeptical on policymaker influence over the yen carry trade. The only policymaker response that would markedly impact the yen carry trade would be if the BoJ were to begin tightening much more than the market expected, which seems unlikely at this point. Political uncertainty in Japan looks set to increase as the opposition DPJ seeks to flex its new found powers in Japan’s upper house. The DPJ reportedly plans to introduce bills to the upper house first and then submit them to the lower house. If the lower house then fails to endorse the measures, the DPJ can then accuse the LDP of being out of touch and call for a lower house election.
Ironically the political distractions could allow the BoJ to operate monetary policy more independently of the LDP. We still think though the BoJ will hold off from lifting rates until September, so that it can wait for the political dust to settle. We target USDJPY at 119 over 1 month, and 117 over 3 months. We think the volatility associated with the US subprime woes should help the yen strengthen and frustrate carry traders. The key level on the downside for the Japanese margin traders is 117.

Europe: BoE inflation report, Eurozone IP due this week

The Bank of England’s quarterly inflation report due on Wednesday will be key as markets ponder prospects for more hikes. Our economists expect inflation projections in the report to support market expectations for one more hike, but caution that downside risks to activity could emerge if financial market stress continues. In the Eurozone, industrial production data for June due on Tuesday will be in focus, and we expect Italian and German numbers to show signs of slowing after strong May numbers, consistent with recent softer survey data. We will also get first indications on Q2 GDP from Italy. ECB President Trichet’s use of the “strong vigilance” phrase following last week’s meeting boosted expectations for a September rate hike, in line with our view, but the EUR is somewhat vulnerable to a reduction in expectations for tightening further ahead if numbers begin to disappoint.

Commodity Bloc: RBA to hike this week

Australia is on holiday today for a bank holiday. Otherwise the focus will be on the RBA’s rate decision due out on Wednesday morning. We and the consensus forecast a 25bp hike to 6.50% due to higher than expected core CPI and strong domestic data. Australian employment for July is also due on Thursday and we and the market expect a rise of around 25-30k, versus the 2.3k jobs created in June. Rate markets are pricing in 80% odds of a RBA hike. In New Zealand, we look for softening in the labour market to be revealed in the Q2 employment report, in contrast to another month of solid jobs growth expected in Australia jobs numbers.
The outlook for both currencies will be very much dependent on the overall climate for carry trades. Canada’s July employment report is expected to show a moderation of employment gains versus June. Numbers in line with our projections could see Bank of Canada expectations scaled back, placing the CAD at risk.

Emerging FX

ZAR: Rhetoric from behind the curve

In a briefing to the parliamentary committee on Friday, SARB Governor TiTo Mboweni expressed his concern on inflation as “more worrying”, hinting at rate hikes. He stressed that inflationary pressures were becoming more broad-based with credit-driven consumer spending uncomfortably high. He noted that despite the drivers of CPIX being largely confined to food and fuel price increases, core inflation has also been trending higher. He commented on an appropriate monetary policy response to an oil price shock, stating that policy must be set on the best assessment of the second round impact of such a shock, particularly on the cost of production and wages. High money supply and credit growth continue to pose upside risks to inflation. Our economist expects a 50bp hike in mid-August, bringing the repo rate to 10%. We think higher interest rates hurt the ZAR due to portfolio outflows that are sensitive to higher rates. We continue to advise hedging against downside risk in the ZAR.

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