US Dollar Bound to See Weak ISM, NFP Results - What Impact Will They Have?

Written by Terri Belkas, Currency Strategist

The US dollar generally ended the week lower across the majors, but lacked the momentum to yield the breakouts expected amidst the low volume trading typical of US market holidays.

Fundamental Outlook for US Dollar: Bearish
The US dollar generally ended the week lower across the majors, but lacked the momentum to yield the breakouts expected amidst the low volume trading typical of US market holidays. On Friday during the European trading session, the greenback jumped but lackluster price action during the US session left the major currency pairs within well-defined ranges. In fact, EUR/USD has held firmly between 1.2425 and 1.3075 since late October, GBP/USD has not been able to break above 1.55 since falling below on November 11, and the USD/JPY remains below falling trendline resistance that has held since mid-October.
Looking ahead to this week, event risk will pick up quite a bit for the greenback. On Monday, ISM Manufacturing is forecasted to slip to a fresh 16-year low of 37.5 from 38.9, and would also mark the fourth straight month that the index held below 50, signaling a contraction in business activity. Manufacturers are facing increasingly rocky times in light of slowdowns in the US and abroad, which is impacting both domestic and foreign demand. On Wednesday, ISM Non-Manufacturing is forecasted to drop to a new record low of 42.0 from 44.4, which will only add to speculation that Q4 GDP will be just as disappointing as the Q3 results, if not more. Last, but not least, US non-farm payrolls on Friday are sure to garner significant attention from the media and traders alike as they are forecasted to fall negative for the 11th straight month and by the most since September 2001. Furthermore, the unemployment rate is anticipated to rise to 6.8 percent - the highest since August 1993 - from already lofty levels of 6.5 percent.
It is rather obvious that the markets are expecting a round of pretty disappointing releases, but the big question is: how will the US dollar respond? Last week, the US dollar generally responded to fundamentals reports by falling when data suggested the Federal Reserve would cut rates further. This differs from previous weeks when the greenback responded solely to risk trends, as the currency would rise during times of risk aversion and stock market declines and vice versa. As a result, gauging the impact of risk sentiment on the forex markets will be important at the start of next week since it may determine whether the US dollar will break higher or fall for a deeper retracement. – TB

US Dollar May Finally See Breakouts During Volatile, Holiday Week

Written by John Kicklighter, Currency Strategist

Saturday, 22 November 2008 03:21:43 GMT

The US dollar is at a crossroads this week. On the one hand, congestion has been the rule of thumb for much of the currency market. On the other, fundamentals and underlying volatility suggest stability is waning. With a concentrated shot of event risk, growing threats to the credit and financial markets, and the unusual trading conditions expected to come along with the holiday, the chances for a breakout are intensified.

The US dollar is at a crossroads this week. On the one hand, congestion has been the rule of thumb for much of the currency market. On the other, fundamentals and underlying volatility suggest stability is waning. With a concentrated shot of event risk, growing threats to the credit and financial markets, and the unusual trading conditions expected to come along with the holiday, the chances for a breakout are intensified. First and foremost, it is important to consider what influence the US market holiday (Thanksgiving) will have on price action. One thing is for certain, liquidity will thin out as US banks and exchanges will be close on Thursday, and speculative interest from the country will be depressed through the entire week. Beyond this fact, we can have one of two reactions from the FX market. Either the drop in volume will maintain trends of congestion or its will leverage already extraordinary levels of volatility and potential incite breakouts.
Whichever outcome the market is destined for will likely depend on the influence of broad risk sentiment trends have over FX. We saw a temporary jump in risk aversion this past week, brought on by another series of indicators and reports that suggests the financial crisis could easily take a nasty turn for the worst in the very near futures. In fact, bond default risk hit a new record high, the benchmark Dow 30 tumbled to a new six-and-a-half year low and the dollar and Japanese yen found their way to new highs. And, while some of these moves have since retraced, the symbolic push has already been made. Looking ahead, the most immediate concern regarding the health of the markets is that the three major US auto manufacturers are on the brink of collapse. While we have already seen a few financial institutions go bankrupt, the failure of these American staples would signal the credit crisis has indeed made the jump from Wall Street to Main Street; and further that the second round effects of the crunch will be far more pervasive. Considering officials seem to already be reaching the limitations of the current TARP program (in addition to monetary policy and providing liquidity), a new intensity could spell disaster.
Aside from the constant ebb and flow of risk sentiment, the dollar may also take its cues from the economic calendar. While much of the data scheduled would be considered second tier at this point; the intensified scrutiny over the severity of the oncoming recession will refocus fundamental traders’ interests. The foreshortened trading week concentrates all the data into three days. The greatest threat of event risk lies with the first revision to third quarter GDP. While this is a second reading, there is the probability for a significant change to the headline gauge and component figures. Personal consumption will be particularly important as the failure of this vital sector could extend and intensify the economy’s slump. Further gauging the health of the consumer, personal income, spending and confidence readings will refine expectations of whether they will help or hinder the much-anticipated recovery. - JK
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar.

Asian stocks sink as layoffs add to global gloom

Asian stocks sink as layoffs add to global gloom
18 Nov 2008, 1835 hrs IST, AP

HONG KONG: Asian stock markets sank on Tuesday after Wall Street retreated and global financial firms announced another round of massive layoffs,
adding to gloom about the world economy. European markets traded lower. Tokyo's Nikkei 225 stock average fell 194.17 points or 2.3% to 8,328.41, a day after confirmation Japan, the world's second largest economy, had slipped into a recession.

Hong Kong's Hang Seng Index shed 4.5% to 13,131.23. Investors were discomforted by news the financial sector, still struggling more than a year after the subprime crisis erupted in the US and spread to Europe, continues to hemorrhage thousands of jobs. Citigroup Inc. announced overnight nearly 53,000 layoffs in the coming quarters amid massive losses from deteriorating debt tied to bad mortgages. HSBC Holdings PLC, Europe's largest bank by market value, said it plans to cut 500 jobs in Asia due to the global economic slump. "The entire world seems to be sinking into recession," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. Everyday there are corporate layoffs and economic bad news. Slowly but surely they are losing hope in markets." The Shanghai Composite index slid 6.3 per cent after advancing four straight days. Australia's main index declined 3.6 per cent and South Korea's Kospi fell 3.9 per cent. Benchmarks in Britain, Germany and France were lower in early trading.

US Producer Prices Fall by Most on Record, US Dollar Slips at Open

Tuesday, 18 November 2008 12:42:22 GMT

Written by Terri Belkas, Currency Strategist

The US dollar initially slipped on the release of the US Producer Price Index this morning, but how the greenback reacts throughout the day should be interesting as this report tells two different stories about the inflation picture in the US.
The headline reading plummeted by the most on record during the month of October, which helped to drag the annual rate to a one-year low of 5.2 percent from 8.7 percent. The bulk of the declines were in crude goods, as the energy component tumbled 24.9 percent while foods slumped 11.1 percent. This is similar to the US import price readings we saw late last week. However, the Federal Reserve may find it somewhat disconcerting that the Producer Price Index excluding food and energy actually rose 0.4 percent during the month and pushed the annual rate to a nearly 20 year high of 4.4 percent from 4.0 percent. While the Fed is likely to keep its focus trained on the downside risks to growth, this rise in costs for less volatile goods at the factory gate may make the central bank nervous. Following the release, US stock market futures have started to turn down a bit, suggesting risk aversion may not be quick to fade.

G20 Speeches Fail To Convince Asian Investors

G20 Speeches Fail To Convince Asian Investors
Forbes.com staff, 11.17.08, 11:59 AM EST

Markets in Hong Kong and South Korea give up gains; Japan manages to hang on to its pared gain, while Australia loses heavily on weak resources.

The G20 countries offered more platitudes than plans at a weekend summit, leading to choppy trading and not much conviction across Asia. Stocks recovered opening losses and then pared or canceled out morning gains, as some investors interpreted data out of Japan and Hong Kong indicative of recession as reason to withdraw, while others picked for bargains among blue chips.
In a turnaround from last week's dismal performance, Japan's Nikkei 225 rose by 0.7% Monday, to 8,522.58 points, and the broader Topix expanded by 0.4%, to 850.49, after the G20, a grouping bringing together developed and major emerging market nations, called Saturday for more progress in global trade talks by the end of 2008 and further stimulus measures and rate cuts by individual governments. They also set a deadline for more concrete proposals by their second summit, in April. Investors looked past data showing that Japan unexpectedly slipped into a recession in the third quarter. The economy shrank by 0.4%, whereas analysts had expected a marginal expansion.

Why did the USD become so strong so fast?

30th October 2008

US Dollar

In my previous reports I have mentioned time and again that I expect EURO/USD to reach 1.75 by December 2008. Then in July and onwards the rise of the USD was much stronger then I anticipated (though I correctly pointed out the strengthening of the USD before the Euros Fall in July), and hence I felt that 1.75 will not be achievable in December 2008, but rather in Jan or Feb 2009.

I feel the best approach would be if I provide scenarios:

Scenario 1: Euro falls to 1.1800 in November 2008.
Scenario 2: Euro falls to 1.2300 in November 2008.
Scenario 3: Euro does not come down to 1.2300 again but keeps drifting higher.

As of now Probabilities of the above scenarios is:
Scenario 1: 80%
Scenario 2: 20%
Scenario 3: 5%

The above probabilities have to be revised each week, as new data becomes available.

• One must make a distinction between the real economy and the paper economy or asset based economy. For example when you have a house which is worth 200,000 USD and then its value falls to 50,000 USD, You still have your house and that is real. The paper value has come down. The value could come down due to collapse of the property prices or due to loss of value of the currency in which the property is priced. In US the paper economy will collapse but real economy will continue though slowly.
• There are various assets in the world, stocks, mutual funds, property, bonds, T-Bills, gold, silver, Soft commodities and oil. The paper value of all these assets is coming down. Eventually investment grade assets will come down in value, like stocks, bonds, etc and will take long time (4-7 years) to go up. Real assets (particularly those that are life essential (like food and safe haven) will go up in value. Real assets include agricultural commodities and gold and silver.

Why did the USD become so strong so fast?

1. Money is being pulled out of emerging markets, because of which currencies of those emerging markets are getting weaker and USD is getting stronger. Example India.
2. There is a general flight to cash during market liquidations and the USD assumes status of safe haven currency. Gold, Oil, stocks, everything is being sold. This is called deleveraging of markets.
3. Cash hoarding – as businesses cant rollover credit and a general tendency now to hold money.
4. Year End is also approaching so closing of books is to be done.
5. Certain market manipulation can’t be ruled out. Of course Central Banks call it supporting the system.

Madan Sharma

USD/CHF – The CHF traded in a relatively tight range.
USD/CHF – 1.1768 – 1.1657 (Sell )

GBP/USD - had a rather wild session on Friday starting the Asian session around the 1.5620 level before dropping to a low of 1.5535 and then powering to an o/n high of 1.5880 during the NY session on the back of a worst than expected US jobs data before ending in NY below the 1.5700 handle.

On GBP/USD we can see some strong movement today as we are waiting for PPI (OCT) from UK. Down side move has two level 1.568 (70.0%) and 1.5576 (78.6%).
GBP has done his 70% retracemnet for his last up side move from 1.3682 (2001) to 2.1160 (2007), next level is 1.5282 (78.6%).

GBP/USD – 1.5576 – 1.6094 1st level, 2nd level is 1.6094 (Buy )

Euro Forecast Remains Dim on Euro Zone Recession Concerns

Euro forecasts against the US Dollar took a turn for the worse on the week, as generally dismal European economic data and further losses in the US Dow Jones Industrials Average led to similar Euro/US Dollar weakness. Official confirmation that the German economy entered a technical recession through the third quarter suggested that the broader Euro Zone finds itself in a similarly weak position—forcing further deterioration in euro fundamental forecasts. Whether or not the Euro may recover against the stubbornly resurgent US Dollar will largely depend on whether global financial market conditions will improve through upcoming trade. The Euro and US Dollar find themselves inextricably linked to broader developments in risky asset classes.

US Dollar Strength May Be Tempered By Near-Term Resistance

For weeks we’ve been discussing how risk appetite, or the lack of it, has been driving price action throughout the forex markets to the benefit of the lowest yielding major currencies: the US dollar and Japanese yen. The strength of the greenback has been all the more surprising given the dismal status of the US economy, but since the currency has managed to hold on to its status as a “safe haven” asset, fundamentals frankly do not matter at this juncture.

globeandmail.com: Leaders gird for battle over global financial crisis

'We want to change the rules of the game in the financial world,' French President Nicolas Sarkozy vowed as the Group of 20 industrialized and emerging economies began its two-day summit with dinner at the White House.
'There is a need for urgency,' added British Prime Minister Gordon Brown, who is calling for a 'college of supervisors' to oversee the world's 30 largest banks.
The summit was optimistically conceived as a latter-day Bretton Woods, the 1944 wartime gathering of dozens of countries that produced much of the architecture of the modern financial system.