The Euro (EUR) broke through 1.4250 in early Asia and the rout continued in Europe with markets turning aggressively bearish on the single currency. Momentum to the downside is accelerating and the major 1.4000 level is on the radar. December German PPI -0.1% vs. 0.2% forecast. Overall the EUR/USD traded with a low of 1.4079 and a high of 1.4291 before closing at 1.4110. Looking ahead, January PMI services forecast at 53.9 vs. 53.6 previously. January PMI manufacturing forecast at 51.8 vs. 51.6.

The Japanese Yen (JPY) was very strong on the crosses as risk aversion spiked higher and EUR/JPY dragged down the rest of the market. USD/JPY remained buoyant however as the Dollar was very strong. AUD/JPY traded at 2 week lows as traders unwound more positions from the recent rally. Overall the USDJPY traded with a low of 90.78 and a high of 91.48 before closing the day around 91.25 in the New York session.

The Sterling (GBP) good economic data helped the GBP continue to outperform the rest of the risk trades. December Claimant Count dropped -15k vs. -3k forecast and the Unemployment Rate dropped to 7.8% vs. 8.0% forecast. EUR/GBP pounced on the Euro weakness to trade at fresh 5 month lows below 0.8700. Overall the GBP/USD traded with a low of 1.6242 and a high of 1.6373 before closing the day at 1.6280 in the New York session. Looking ahead, January CBI Orders forecast at -37 vs. -42.

The Australian Dollar (AUD) was hit hard in Asia as the Euro crumbled and rumors circulated that china was curbing lending by the nations banks. The slide continued in the US session as stock losses mounted and gold crashed. January Consumer Sentiment soared 5.6% m/m. Sentiment is still strong towards the AUD but markets will be looking for the dust to settle before reestablishing longs positions. Overall the AUD/USD traded with a low of 0.9071 and a high of 0.9241 before closing the US session at 0.9100.

Oil & Gold (XAU) crashed through support at $1130 to test $1110. Overall trading with a low of USD$1107 and high of USD$1142 before ending the New York session at USD$1112 an ounce. Crude Oil slumped nearly $2 a barrel on risk reduction. Crude Oil was up -$1.72 ending the New York session at $77.30.

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The Euro (EUR) came under pressure breaking below 1.4450 support in Asia as rumors of Germany’s Merkal losing political support spread throughout the market. A denial as the start of Europe did little to help with technical damage done and risk aversion beginning to tick higher. Overall the EUR/USD traded with a low of 1.4338 and a high of 1.4511 before closing at 1.4375.

The Japanese Yen (JPY) gained across the board as the market fled to the safe haven and heavy longs pared back. EUR/JPY was the worst hit as the single currency came under intense scrutiny and lost some of back up reserve currency status. Also helping the Yen to gain is speculation that the Chinese Yuan may strengthen at some point. Overall the USDJPY traded with a low of 90.61 and a high of 91.32 before closing the day around 90.80 in the New York session. Looking ahead, November Industrial Output previously at 2.6%.

The Sterling (GBP) held up better than most against the USD as the Pound found support on EUR/GBP constant selling. Still Cable fell from the 1.6300 level in the lower 1.62’s before recovering into the US close. GBP/JPY fell to Y148 but the uptrend remains in place. Overall the GBP/USD traded with a low of 1.6212 and a high of 1.6353 before closing the day at 1.6260 in the New York session.

The Australian Dollar (AUD) was hurt by the change in investor appetite as the market was caught long after the good jobs data on Thursday. Falling commodities and a resurgent USD pushed the pair back to lower 0.92 support. AUD/JPY fell heavily as long liquidation accelerated from recent highs. Overall the AUD/USD traded with a low of 0.9214 and a high of 0.9319 before closing the US session at 0.9229.

Oil & Gold (XAU) came under pressure from broad USD strength. Overall trading with a low of USD$1127 and high of USD$1146 before ending the New York session at USD$1132 an ounce. Slipped in the the $78’s as the recent slide continued. Crude Oil was down -$1.44 ending the New York session at $78.10.

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USD/CAD has fallen deeply in the past two weeks. This trend continued this week despite ongoing recession. Apart from GDP, there are 4 more crucial events any loonie trade should carefully look out for this week: Building Permits, Interest Rate decision, Ivey PMI and the Unemployment Rate. Let’s dive into their meaning (and timing) for the loonie.

The US dollar began the first week of June with another downfall. The Canadian dollar is one of the winners: USD/CAD now trades at 1.0857. Earlier, it dropped under 1.08. The fall goes on.

Two weeks ago, I wrote about an important week for the Canadain dollar. After last week’s quiet week, we are loaded with event. Here are the Canadian indicators. Note that 3 of them are on

1. GDP: Canada is unique in providing a monthly GDP figure. GDP for the month of March fell by 0.3% as expected. This sums up to an annualized fall of 5.4% in the first quarter of 2009. Though slightly better than the US, this figure is quite bad. Since this exact result was expected, it only slightly bounced the descent of USD/CAD.
2. Building Permits: Houses are an excellent measure of a country’s economy. Canada’s Building Permits moved like the forex market – wild! Last month, they rose by a whopping 23.5%. This time, they’re expected to drop by 9.2%. Since this number can make a big surprise, it’ll be quite adventurous to be at the market after the release. It’s published on Thursday at 12:30 GMT.
3. Interest Rate decision: The Bank of Canada isn’t expected to raise the Overnight Rate above the bottom. At 0.25%, it can’t go lower. After the BOC exhausted it’s interest rate tools, the focus will be on the BOC Rate Statement. Commodity prices have risen lately. This rise affects Canada’s commodity oriented economy. On the otehr hand, Canada is very dependant on the US. So, will the BOC communicate optimism or pessimism? The wording statement will have a great influence on the USD/CAD. Note the timing: half an hour after the Building Permits.
4. Ivey PMI: Released on Thursday at 14:00 GMT. The Purchasing Managers’ Index supplied by the Richard Ivey School of Business is a highly regarded indicator. Last month, it surprised by scoring above 50 – indicating optimism and economic expansion. This time, it’s predicted to rise from 53.7 to 54.3 – edge higher. If this index will have a different mood than the BOC Rate Statement, the loonie will go quite wild.
5. Unemployment Rate: Canada’s employment market is suffering in this recession. The unemployment rate has risen to 8% from around 6% before the crisis began. It’s predicted to worsen and rise to 8.3%. A worse figure will hurt the Canadian dollar and send USD/CAD upwards. The accompanying figure is the Employment Change, published at the same hour – 11:00 GMT. While it’s not so “famous” as the unemployment rate, it’s no less significant for understanding the job market, and actually the whole economy. After surprising last time and rising by 35.9K, it’s expected to turn negative and fall by about 38K. These figures, released an hour and a half before the American Non-Farm Payrolls, will have a great impact on the loonie.

USD/CAD major tehnical lines

After breaking the big barrier of 1.1470, USD/CAD fell more and more. 1.08 also serves as support line, since it acted as a resistance line in September 2008. Yup, about 9 months ago.

The next line is around 1.04, which served both as a support line and as a resistance line during 2008. And of course, there’s the magical parity number: USD 1: CAD 1.

The Euro dipped to lows around 1.3225 ahead of the US open on Tuesday. Risk appetite remained slightly weaker and this remained a negative factor for the Euro as dollar selling eased. There was, however, a further small decline in 3-month dollar Libor rates which suggests that money-market tensions have not escalated at this stage and this should limit immediate defensive dollar demand.

German February trade surplus 8.9 billion euros versus 6.8 billion in January. Better than median forecast of +7.5 billion. Imports fell sharply, down -4.2% m/m versus median forecast of -2.0%. Exports fell -0.7% m/m versus median forecast of a -3.7% decline.
French February trade deficit  -4.107 billion euros versus median forecast of -4.2 billion euros
Bank of France survey sees Q-1 GDP at -0.8%.  BOF industry business sentiment index up to 73 in March from 71 in February

Total conviction in the Euro-zone economy remains commonly fragile with doubts over the cyclical and structural outlook. GDP for the fourth quarter of 2008 was revised down to show a contraction of 1.6% from 1.5% previously. The Irish government was forced into an additional budget to tackle the severe fiscal deterioration which reinforced fears surrounding the weaker Euro-zone members. There will also be further speculation that the ECB could intervene to weaken the Euro.

Today’s well-publicized event risk will be the G20 meetings though how things are going to turn out there is any bodies guess. One thing that is clear, we will not get the kind of global coordination on stimulus efforts that the Americans prefer, as European delegates are likely to stick to their pop-gun approach than massive spending considering guidelines set by the Euro charter. With governments heavily in debt the west may want to spend its way out of a recession but it takes a bold politician to raise the specter. Meanwhile Asian giants will be joining with hopes of raising their international profiles, though the Japanese are likely to be stymied with their worst recession in decades while China is likely to get more things on its direction as already we hear willingness on further strengthening the IMF. A revival of the SDR’s role in global economics to the extent of immediate post-Bretton Woods era though is unlikely, there will be no free lunches and the Chinese would have to allow market forces to dictate the Yuan’s value and be ready for the responsibility if they seek to supplant the dollar with another as a reserve currency. For the markets then expect an even more jittery trading day though lets not forget that we will also be seeing an ECB rate decision with yesterdays action suggesting we are already pricing in a 50bps cut again considering the slide in EURGBP.

Overall: The reason for the strong sell-off in the last 30 minutes of trading on Wall Street yesterday was made apparent a bit later when the financial press reported that President Obama said that a quick, negotiated bankruptcy is the most likely way for General Motors to restructure and that he was prepared to let Chrysler go bankrupt and be sold off piecemeal. That sent S&P futures sharply lower (off 7 points initially) and prices on the currencies towards the bottom of trader’s computer screens. The trend continued until reports on U.S. pending home sales and manufacturing indicated better-than-expected results.

Signed contracts for existing homes increased by 2.1% in February (Expected 0.2%, Previous -7.7%) according to the National Association of Realtors and the ISM’s index of manufacturing (Actual 36.3, Expected 35.8, Previous 35.8) implied that the steep declines in the sector were abating. Stocks basically rose right from the open and were reaching their highest levels of the day to 14:30 EDT.

The Euro (Eur/Usd) declined about 70 pips to near the 20-day simple moving average as S&P futures declined. Rising U.S. stocks could not however help the single currency in N.Y.as traders speculated that the ECB will make a 50 basis point reduction of its main policy rate to 1.00% and could also announce it will turn to purchasing corporate debt (a form of quantitative easing) as a means to provide additional liquidity into the system.

The unemployment rate in the Euro-area continues to rise. The latest release, for the month of February, shows that the unemployment rate reached 8.5%, more than was expected. The unemployment rate for the month of January was also revised higher, to 8.3%. About 13.486 million persons were unemployed in the Euro-area, up by 319K from one month earlier. The PMI release shows the euro-area manufacturing side of the economy has contracted for ten consecutive months. The release number of 33.9 is slightly smaller than analysts’ expectations of 34.0.

The Pound (Gbp/Usd) tested the low of Tuesday’s trade during the Asian session as S&P futures declined. However, the pair reversed direction and recovered the lost ground during the European trading hours, and the trend continued into N.Y. as stocks advanced. The pound has risen almost 1% against the dollar in the past month after the BoE announced the unprecedented step of printing money to buy government and corporate debt as part of its quantitative easing policy.

The U.K. Manufacturing PMI unexpectedly rose in March, after posting the second weakest read in its recent history, in February. Despite the better than expected read, weaker global demand still outweighs any benefit from sterling’s fall against major currencies, and domestic conditions were especially poor due to the crises affecting car making, construction and retail.

The Aussie (Aud/Usd) traded mixed during the overnight session, near the neutral pivot point (0.6885), after falling 50 pips in the early Asian session. Clear resistance was established in N.Y. at the .6959 level.

Retail sales in Australia have decreased by 2.0 percent in February which is higher than analysts’ forecasts of a -0.5 percent decrease. This is the largest decline seen in the retail sales report in the past 12 months. Over half of the Australian economy is related to consumer spending. The building approvals from Australia rose a seasonally adjusted 7.8 percent, month over month, in February. This is the first increase seen in the index since June 2008

The Cad (Usd/Cad) advanced 100 pips during the Asian session as S&P futures declined, but shed most of the gains during the European trading hours as crude declined in Globex trading. The pair reversed course in N.Y. after the weekly crude inventory report showed stockpiles built by 2.5M (Expected 3.1M, Previous 3.3M), with clear support established at 1.2620.

The Swissy (Usd/Chf) retraced a big part the declines seen in the last day of trading during the overnight session and the trend continued in N.Y. as stocks advanced. Resistance was met at 1.1506 by mid-day.

The Purchasing Managers Index shows the industrial sector contracted in Switzerland for the seventh consecutive month. The PMI number was released at 32.6, as expected. The Swiss PMI confirms that the economy is taking a similar path as the Euro-area and the U.S. economies, which are in recession. The index sits at multi-year lows, showing that inflationary pressures are almost zero.

The Yen (Usd/Yen) started the Asian session in volatile fashion, but soon lost most of its momentum as S&P futures declined. The pair was very up and down in N.Y. as it did battle near the 50% retracement of the August 15, 2008 decline.

The Tankan business confidence survey, which includes some of the largest companies in Japan, has fallen to a new low of -58. This is a sign that the country may be in for an extended recession as companies cut jobs and limit spending. Japans exports plummeted in February by 49.4 percent as consumers worldwide curb spending.

Dollar Index Unmoved By Equity Markets

The markets on Wednesday have put in a strange phase of forex trade and are not in sync with the equity market optimism that has sent Wall Street dramatically higher in morning trade. The moves that have the dollar holding ground on a day of fundamentals, that would generally have seen it getting sold, may be attributable to the Treasury markets absorbing the impact of the Federal Reserve’s open market operations. The result has seen the yen tread water, the euro and swissy lose ground, and aussie, cad, and cable push near-term resistance; none of which have the momentum to actually break through and hold.

“The euro may be holding things back in regard to ease of the market being able to break the dollar lower, and that may be due to positioning ahead of the ECB rate decision due on Thursday” said TheLFB-Forex.com Trade Team members, “The expectation is for a 50 basis point cut in rates, something that built dramatically over the last week in response to jawboning from ECB officials who have reversed completely their public outlook on rates not moving after their March meeting. The euro makes up 60% of the dollar index and as such the short positions being built into on Eur/Usd may be impeding the other pairs ability to break near-term resistance”.

It is unusual to see triple digit Dow Jones gains and not to see a reaction in forex valuations, but today the push-me pull-you moves in the equity/Treasury/euro markets have contained things. Market participants may now be looking for break-outs of the daily ranges as the Nymex oil markets close at 14:30 EDT, and also looking for price action in the Asian markets overnight.

“The Australian Trade Balance numbers are released overnight, and that sets up Thursday’s U.K. House Price Index, the start of the G20 meeting, and then the 07:45 EDT ECB rate decision” the Trade Team said. “Friday gets wrapped up in the Non-farm payroll circus that is coming to town, with ring-master Mr. Bernanke speaking to the masses soon after. Things may get to trend after the upcoming week of data, and the signals are there that the status quo may not last too much longer, and with the Fed’s determination to de-value the Usd it may be that the dollar index tests support at the 80.00 area”.

“A dollar index move to support would equate to an average of 400 pips of gains on each of the major pairs, something that right now looks unlikely to easily happen; but we have to always respect the market’s ability to move at the most unlikely and unexpected of times. We have been banking short-term moves so as not to get caught on the bigger break-out that looks as though is not whether it comes, just when. Nobody really needs to get in front of the Fed at this point in time, not when they have all guns blazing”.

Price Points: Cable Long 1.4450. Euro Long 1.3250, or Short 1.3190. Swissy Long 1.1520, or Short 1.1450. Aussie Long from 0.6970. We have no bias on cad or yen at the moment.

Financial Sector: Greenspan Debates

The long-held view of former Fed Chairman Allan Greenspan regarding the Fed’s inability to deflate an asset bubble has always been open to debate, and no more so than since the bursting of this latest one. The problem is that the economic system’s procyclical tendencies where not directly under the control of the Fed, mainly because the Central Bank exerts its greatest influence on the shorter end of the yield curve.

“There has never been an instance, of which I’m aware, that leaning against the wind was successfully done,” Greenspan, 83, said in a Feb. 27 telephone interview.

Procyclicality has to do with the ability of financial institutions to lower the cost and expand the amount of credit available as the economy is overheating, the exact opposite of what a Central Bank would like to see happen. In this last instance, the explosive growth of securitization had the effect of lowering long-term interest rates as asset prices were bubbling, a situation which was, according to Mr. Greenspan, out of the Fed’s control.

One reason the Fed lacked the ability to control the situation was because regulators did not have the authority to require banks to take increased reserves (in percentage terms) against the loans they were writing beyond what the normal requirements were. Forcing banks to hold a higher percentage of capital in reserve would have naturally had the effect of making less cash available. For example, the Basel II requirement is only an 8% reserve against loans and there are no provisions in the agreement to raise the percentage as the portfolio of loans increases.

“It has always bothered me that our capital requirements are so low,” Greenspan said. “We do not have an adequate cushion.”

But it wasn’t only the large commercial banks which were providing the capital this decade. Mark Gertler, a New York University economics professor who has collaborated on research with Fed Chairman Ben Bernanke, points out that leaving investment banks essentially unregulated even as they held mortgages and issued short-term liabilities like commercial banks was a big part of the problem. Once the ability to roll-over short-term debt ended as housing prices started to decline, the game was essentially over.

“The first-order cause of this crisis was the regulatory system was way out of whack,” Gertler said. “It’s not the case that you can get at this alone with interest-rate policy; it really requires smart regulatory policy.”

If you really want to trace the cause of the crisis, one needs to look at the massive current account imbalances which built up this decade as huge exporters such as OPEC and the Chinese sold their goods to voracious U.S. consumers. A current account surplus is a form of national savings, because it represents that the population of the surplus country isn’t consuming anywhere near what consumers in the current account deficit nation are.

This “savings glut” was a key for the asset bubble in the U.S. and elsewhere as China parked their enormous holdings of foreign reserves, which were and are held mostly in dollars, back into the U.S. in the form of Treasury purchases. Their holdings in U.S. debt helped to keep long-term interest rates low and flooded the market with cash, exactly at the time that demand for credit was soaring.

In essence, the supply-demand equation was skewed. The price of money (interest rates) declined and the availability (supply) of it went up as demand increased. This is procyclicality in action.

The situation we have now in the recession is the exact opposite; counter cyclicality. The supply of credit has decreased and the cost of credit (at least until the Fed really got into the situation) increased as demand waned.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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