Markets focus is mainly on Euro’s strengthen and Sterling’s weakness today after testimonies of the two central bank’s chiefs. EUR/GBP climb sharply high and is set to retest record high of 0.7911. Dollar, on the other hand, remains generally soft after weak durable goods and new home sales report released in US session. The Japanese yen, on the other hand, climbs higher following lower open in the US stock markets.

Released in US session, US durable goods orders unexpectedly dropped for a second month by -1.7% in Feb, much worse than expectation of 0.8% rise. ex-transport orders also dropped more than expected by -2.6%. New home sales dropped -1.8% from upwardly revised 601K to 590K in Feb.

Euro surges against dollar and sterling after better than expected Germany Ifo index and hawkish comments from ECB Trichet. The Germany Ifo business Climate beat expectation again in Mar, rising from 104.1 to 104.8. Both the Current Situation and Business Expectations component showed improvements too. The data suggest that the business confidence largest economy in the Eurozone remains robust and positive growth is anticipated even though global growth would likely decline.

Speaking to European lawmakers, ECB president Trichet said that "the current monetary-policy stance will contribute to achieving our price-stability objective." Also, "In the Governing Council’s view, the risks to the medium-term outlook for inflation are on the upside." Eurozone’s economic fundamentals are still described as "sound". Though Trichet said that they’re concerned about "excessive exchange-rate moves."

Other data from Eurozone saw industrial orders rose strongly by 2.0% yoy, pushing yoy rate from 2.1% to 7.3% in Jan. Current account deficit widened slightly to -10.6b.

The fortune for Sterling is completely different where the pound is sent lower across the board following dovish comments from BoE King. King told lawmakers in UK in his testimony to Parliament’s Treasury Select Committee in London today that economic growth is likely to slow down sharply this year. While inflation is expected to remain elevated above 2% target, it should be dragged down later in the year. Chief economist Bean said that "given the size of the UK current account gap, sterling is likely to move to the downside"

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.9916; (P) 1.9992; (R1) 2.0137; More

Cable’s sharp retreat from 2.0110 suggests that an intraday top is in place. Outlook is turned neutral for the moment. Further break of 1.9900 minor support will confirm that corrective rise from 1.9736 has completed inside mentioned resistance of 38.2% retracement of 2.0389 to 1.9736 at 1.9985 and 61.8% retracement at 2.0140. In such case, further decline should be seen to retest 1.9736 first. Also, as discussed before rise from 1.9360 has completed at 2.0389 which in turn suggest that correction from 1.9337 has completed there too. Below 1.9736 will encourage retest of 1.9360 low first. However, strong break of 2.0140 fibo resistance will dampen this view and turn short term outlook neutral.

In the bigger picture, corrective rebound from 1.9337 was limited at 2.0389 after testing mentioned key resistance zone of 161.8% projection of 1.9337 to 1.9957 from 1.9360 at 2.0363 and 61.8% retracement of 2.1161 to 1.9337 at 2.0464. The three wave structure of such rebound suggest that it’s merely a correction to whole decline from 2.1161. Break of 1.9360 will confirm that such decline has resumed for next target of 1.8565/8619 cluster support (100% projection of 2.1161 to 1.9337 from 2.0389 at 1.8565, 61.8% retracement of 1.7407 to 2.1161 at 1.8619). On the upside, as discussed before, decisive break of 2.0363/0464 will dampen this view and encourage a retest of 2.1161 high.

Forex News Digest

Euro Rises Against Dollar After German Confidence Unexpectedly Increases

Canadian Dollar Advances From 2-Month Low as Export Commodity Prices Surge

Sarkozy Says He Plans to Ask U.K.’s Brown to Cooperate on U.S. Dollar

British Pound Falls Most in Week Against Euro on Policy Makers’ Comments

Durable-Goods Orders in U.S. Unexpectedly Drop as Machinery Demand Slumps

Trichet Says ECB Benchmark Rate at Six-Year High Will Help Curb Inflation

Weak dollar lifts gold and spurs fund buying
Wed, 26 Mar 2008 09:32:00 GMT from Reuters

Oil near $102 as US dollar weakens
Wed, 26 Mar 2008 09:22:00 GMT from AP via MSN Money

Australian dollar closes firmer
Wed, 26 Mar 2008 09:15:00 GMT from People’s Daily Online

More Forex News

Economic Indicators Update

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Key News

• Orders for U.S. durable goods unexpectedly fell in February, led by the biggest slump ever in demand for machinery. (Bloomberg)
• The euro rallied versus the dollar on Wednesday after a surprise rise in German business sentiment poured cold water on any expectations of near-term euro zone interest rate cuts. (Reuters)
• The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds. (WSJ)

Key Reports Due (WSJ):

• 7:00a.m. MBA Mortgage Refinancing Index. Previous: -4.6%.
• 8:30a.m. Feb Durable Goods Orders. Expected: +0.8%. Previous: -5.1%.
• 10:00a.m. Feb New Home Sales. Expected: -2.2%. Previous: -2.8%.

Quotable

"I heartily accept the motto, ‘That government is best which governs least’…Carried out, it finally amounts to this, which I also believe,–’That government is best which governs not at all."

Henry David Theoreau

FX Trading - Backhand Time for Yen lovers?

The dollar is getting pummeled again today. Good news from Germany helping the euro and bad news on US durable goods orders hurting the buck across the board. The yen is have yet another excellent day. But, just maybe it is overdue for a rest.

Don’t get us wrong, we still like the yen in a world which consists of continuous intermittent bouts of unwinding leverage. But, we do think what the Fed did during the Bear Stearns affair helped bring a modicum of confidence back into the credit market. And we think the Fed’s steps were real and unusually well thought out, given the rather crazy credit-creation-driven monetary system in which we find ourselves. In short, is it time for the carry unwind to take a breather on some risk seeping from the system?

Below is a chart of yen-$ (not the usual $-yen you are used to seeing) comparing its move the last time we saw a significant unwinding of the carry trade, back in 1998, triggered by the Asian Financial Crisis - the yen-$ surged 46.7%. We then looked at where the yen was before the unwinding of the carry trade began in 2007; this time triggered by the Subprime-cum-Credit-Crunch. The point is, if we see a similar move this time, i.e. 46.7%, then yen-$ carries to the 118.00 level; it is now at 101.25.

Sure, it is a bit simplistic to say yen-$ will rise 46.7% this time around. But when you consider the carry trade was estimated to be about seven-times larger in 2007 than it was in 1998, it gives some perspective. And given that the credit crunch, and unwinding of leverage, is more pervasive than the Asian Financial Crisis, we think it increases the probability this simple analysis could play out, and yen-$ can go higher.

That said, another thing you may notice about the chart above - it’s looking parabolic! How much longer can the yen march straight up against the dollar (USDJPY straight down) without a breather? The real answer: No one knows when or if the yen will take a breather, but it may be a time to play for one.

A summary from the Commitment of Traders Report (CME Long Form) showing open interest in the Japanese yen for Non-Commercial speculators:

Now we all know how insidious and sadistically Mr. Market can act at times. This is evidenced in his ability to wait for the maximum amount of players to commit before he delivers an ugly blow. Open interest tends to give us a handle on the level of and depth of commitment to a particular position, and possibly some insight on when Mr. Market is about to deliver a stiff backhand to the jaw of those feeling good about their position. At 76% long, we may be inching ever so closer to backhand time. The headlines will not read: "Punters were slapped by Mr. Market." Instead, we will see something such as: "Profit-taking in the yen."

And if we see "profit taking" in the yen, where might traders move those profits over the near-term? Maybe into a commodity currency with yield and growth - two things valued in a world if credit isn’t frozen solid.

Above is a cross-rate chart of Australian dollar compared to the Japanese yen. It shows the Aussie peaked at around 108 against the yen back in October 2007 and has been losing ground since, now trading near 91. Maybe it’s a decent risk/reward setup. Key word there is, as usual, "maybe."

Jack Crooks
Black Swan Capital
http://www.blackswantrading.com

Currency Currents is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to forex and futures should be strictly the money you can afford to risk. While every effort is made to evaluate the actual experience of subscr ibers, all performance figures must be considered hypothetical, and past results are no guarantee of future performance. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

Export growth in February unexpectedly picked up as weakness in exports to the US was largely offset by continued strong exports to Emerging Markets. In February, export growth in current prices accelerated to 8.7% y/y from 7.7% y/y in January (see chart below). Looking at the most recent trend, export growth has - at least for the moment - stabilised at around 2.5% 3m/3m growth. Exports to the US have plunged in recent months (-5.0% 3m/3m in volume terms) and is currently just as weak as during the last US recession in 2001 (see charts). However, export growth to Emerging Markets has accelerated in recent months, offsetting most of the weakness in US exports. Exports to Asia - more than twice as important as the US market - are growing by close to 5% 3m/3m

The trade balance surplus was less than expected due to continued strong import growth (+10.1%y/y). However, this is mostly the price impact from higher energy and commodity prices as import growth in volume terms has actually declined slightly in recent months (see chart). In volume terms, export growth is still significantly higher than import growth, implying there will continue to be a significant boost to GDP growth in Q1 08.

Implications:

Net exports will most likely continue to contribute 0.3.-0.4%-point to GDP-growth in Q1 08, in our view, and with housing construction recovering there even could be some slight upside on our 0.5%q/q forecast for GDP growth in Q1. That said, we do expect export growth to slow as growth starts to slow outside the US and the stronger JPY starts to impact market shares and profitability in corporate Japan. However this impact will mainly start to hurt in H2 08.

With GDP at least looking OK in the short term, the Bank of Japan (BoJ) will probably continue its wait and see attitude. We expect the BoJ to be on hold. We will not completely rule out the possibility of a rate cut in Japan, but believe it is unlikely to happen in H1 08 as the short term growth outlook at least looks resilient.

Danske Bank
http://www.danskebank.com/danskeresearch

Disclaimer

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets’ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Yield Spread Analysis 03/18 - 03/25

Despite an initial dip following the FOMC’s decision last Tuesday to cut the fed funds rate by 75bp to 2.25 percent, short-term yields have rocketed higher across the G-10 nations - with the exception of Australia and New Zealand - as the financial markets stabilize and risk aversion fades. Indeed, the yield on short-term US debt gained over 13bp, while yields in the UK and Canada are both up over 27bp. At the same time, stock markets around the world have bounced from multi-year lows, though it remains to be seen if these indexes can hold on to their gains. As we’ve seen in the past, it doesn’t take much to trigger sharp sell-offs of risky assets like equities or forex carry trades.

Looking ahead, FOMC members will likely remain mum on the economy, as they slowly put their expansion of lending facilities to work in order to stave off a more pronounced credit crunch. Meanwhile, upcoming economic data out of the US could shake up Treasuries if they prove to be very disappointing. Nevertheless, risk aversion trends remain the primary driver of the markets these days, so fixed income, forex, and equity traders should all keep an eye out for news from the financial sector.

ECB: Hawkish Inflation Bias Will Continue to Support EUR/USD

The European Central Bank has not backed off from their hawkish inflation bias by any means, and with good reason: CPI remains well above their comfort zone and upside inflation risks persist. However, there are mixed views on the impact of a US economic slowdown on the Euro-zone’s economies. Some ECB members remain optimistic, but most are leery of the potential for weak US export demand and a credit crunch to throw a wrench in the Euro-zone growth engine. Nevertheless, until CPI falls back markedly, the ECB will not even consider cutting rates, which should prevent EUR/USD from falling significantly lower in the near-term.

Axel Weber, European Central Bank Governing Council Member

"All financial market players are urged to disclose their risks. Uncertainties can only be removed by disclosing the extent of writedowns." - March 19, 2008

"We expect that inflation rates will return towards our price stability norm in the medium term but risks are to the upside. We will do whatever is necessary and in our power to anchor the inflation rate and thereby inflation expectations below 2 percent in the medium term." - March 19, 2008

Christian Noyer, European Central Bank Governing Council Member

"There is a clear upward bias to risks regarding inflation, which has to be taken into account by economic policy." - March 19, 2008

Yves Mersch, European Central Bank Governing Council Member

"The crisis in the financial markets will certainly last longer than we were expecting. On the economic front, the downturn in the US housing market has provoked a slowing-down which is being felt more seriously than had been expected. From this point of view, the euro zone and the Luxembourgish economic will find it difficult to escape the impact of the easing of US demand." - March 19, 2008

Jose Manuel Barroso, European Commission President

"From a European point of view, the euro zone economy is maintaining its extremely solid macro-economic basis. But it is not completely immune. We support all the efforts of the ECB and are watching how it is managing the situation, but we stress that it is completely independent in its decisions." - March 18, 2008

BOE: Another Round of Rate Cuts May Loom for the UK in April

While inflation pressures are uncomfortably high for the Bank of England, the UK is facing a few conditions reminiscent of that of the US: the housing sector is slowing, consumer spending is deteriorating, and credit markets remain very tight. In fact, two Monetary Policy Committee (MPC) members voted for a 25bp rate cut at the BOE’s last meeting. If credit markets worsen ahead of the next MPC meeting in April, or if economic data signals that conditions are weakening more than expected, the BOE doves may not have trouble garnering a few more votes for a 25bp reduction to 5.00 percent in April.

Bank of England MPC Meeting Minutes

"Back-to-back reductions might lead observers to think that the Committee was focusing on downside risks to demand at the expense of the medium-term outlook for inflation… that in turn could lead to an exaggerated response of the market yield curve to a rate reduction." - Released on March 19, 2008

Kate Barker, Bank of England Monetary Policy Committee Member

"We may see prices fall this year, but because of credit conditions, affordability will probably not improve at all… We’ll see residential construction fall this year, possibly quite significantly." - March 21, 2008

Gordon Brown, UK Prime Minister

"We will maintain a policy that will keep inflation low and keep interest rates down. We’ve got a problem because we’ve seen oil, gas, and coal prices go up. We’ve also seen bad harvests in places put pressure on food prices. We’re not complacent." - March 25, 2008

Alistair Darling, UK Chancellor of the Exchequer

"Our economy remains fundamentally strong." - March 19, 2008

DailyFX

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Referring to Technical Strategist Jamie Saettele’s previous analysis, we don’t believe the picture has changed and that the EURGBP is nearing the end of a 5 wave rally that began back in January 2007.  When wave 3 is extended (as it clearly is here), waves 1 and 5 tend towards equality.  In this case, wave 5 (from .7391) would equal wave 1 (.6535-.6867) at .7723, however, the pair blew by .7723 and shot up to .7910.  The next measured objective is where wave 5 is equal to 61.8% of waves 1 through 3.  That level is at .8057.  It does appear that additional gains are needed in order to complete 5 waves from.7391.  Support remains strong in the Fibonacci support zone of .7791 / .7717.     

Referring to Technical Strategist Jamie Saettele’s previous analysis, we don’t believe the picture has changed and that the EURGBP is nearing the end of a 5 wave rally that began back in January 2007.  When wave 3 is extended (as it clearly is here), waves 1 and 5 tend towards equality.  In this case, wave 5 (from .7391) would equal wave 1 (.6535-.6867) at .7723, however, the pair blew by .7723 and shot up to .7910.  The next measured objective is where wave 5 is equal to 61.8% of waves 1 through 3.  That level is at .8057.  It does appear that additional gains are needed in order to complete 5 waves from.7391.  Support remains strong in the Fibonacci support zone of .7791 / .7717.

Since the decline of EURCHF stabilized above the 76.4% fib of 1.5041 – 1.6825 at 1.5466, the pair has since recovered quite a bit. Daily oscillators are starting to bullish, and if price can push above the 61.8% fib of the noted rally at 1.5727, EURCHF will likely target a cluster of Fibonacci resistance at 1.5903/35. On the other hand, a failure to break above near-term resistance will likely find the pair pulling back toward 1.5600.

Jamie’s initial objective of 1.5906 for EURCAD has been met this past week and resistance found in the form of a minor 138.2% fib extension of the 1.3287-1.5198 (11/07 to 1/16) advance has set up a technical barrier to further advances. On the other hand, momentum is still firmly with bulls; so any pullbacks from 1.5900/25 will be seen as corrections in the larger trend until 1.5200 falls. A medium-term objective is for further upside potential and a test of the 150% and 161.8% extensions of the aforementioned wave at 1.6148 and 1.6373 respectively.

The pullback in EURAUD last week was short lived. What’s more, this short-term reversal has produced an asymmetrical triangle that is supported by the bullish momentum established in the steady uptrend since the beginning of the month. As such, any moves to the downside will likely be moderate and our ultimate objective will remain to the upside, which further holds to Jamie’s analysis that we are working through a larger 3 wave. A break of above 1.7255 would see the next target at the 12/10/04 swing high at 1.7685. Support through the medium term is seen at the 38.2% retracement of the 2/19 to 3/17 uptrend at 1.6742.

EURNZD is building up to a breakout from a technical formation within a technical formation. The immediate barrier for the pair is a range that has developed between 1.8190/215 to 1.9860/75. Spot has reversed after testing the top of this range, but the bullish push has not yet broken. The near-term target is the range top, but a break out of this congestion formation would then look for the larger technical formation – a descending wedge that has developed through the life of the euro and now falls around 2.0480. To call an end to this uptrend, we would need to see a reversal past the 50% retracement of the 1.8193-1.9859 (2/26 to 3/17) rally at 1.9026.

Written by Terri Belkas and John Kicklighter, Currency Analysts for DailyFX.com

Send Terri or John questions or comments about this article at tbelkas@dailyfx.com or jkicklighter@dailyfx.com.

The Japanese yen reverses earlier losses following lower opens in the US stock markets. The US equity markets opens lower today following a weak house price report is then sent further lower after much worse than expected consumer confidence report. The S&P/Case-Shiller home-price index dropped for the 13 consecutive months to 10.7% in Jan, the most steepest fall on record. The report indicates that housing recession is probably continuing to deepen and is having no sign of stabilization yet. Conference board consumer confidence in US dropped sharply from revised 76.4 to 64.5 in Mar versus consensus of 74.0. The reading is the second worst since Oct 93.

On the other hand, the greenback remains pressured against Euro and Sterling. Though, traders are cautious on Euro ahead of the highly anticipated Germany Ifo as well as ECB Trichet’s testimony to European Parliament’s economic and monetary affairs committee tomorrow.

Canadian dollar has practically no reaction to better than expected retail sales report which showed 1.5% mom growth in headline sales and 1.3% mom in ex-auto sales versus consensus of 0.9% and 0.5% respectively. The Loonie remains generally pressured across the board on concern that further slowdown in US will continue to drag on the Canadian economy.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 99.73; (P) 100.31; (R1) 101.30; More.

USD/JPY weakens in early US session and touching of 99.59 minor support indicates an intraday top is in place at 101.03. Intraday outlook is turned neutral for the moment. But further decline and break of 07.65 support will indicate that corrective rebound form 95.77 has completed below mentioned 101.23 resistance as expected. In such case, retest of 95.77 low should be seen.

In the bigger picture, as discussed before, USD/JPY has just broken out of multi-year triangle consolidation pattern that started in 98 at 147.68. The decline from 124.13 has met 76.4% retracement of 79.75 to 147.68 at 95.78 so far. Some support is seen at this level. But still, there is no sign of reversal yet. Also, the structure, of the current fall from 124.13 argues that USD/JPY is just in the middle of a larger down trend only.

Medium term outlook remains bearish as long as 103.59 cluster resistance (61.8% retracement of 108.59 to 95.77 at 103.69) holds. Sustained trading below 95.78 will encourage further fall to next important psychological level at 90 first. However, firm break of 103.59 cluster resistance will argue that a medium term bottom is already in place. In such case, stronger medium term rebound should be seen to correct the whole fall from 124.13.

Forex News Digest

Dollar Drops Against Euro on Bets Fed Will Make Deeper Interest-Rate Cuts

Canadian Dollar Declines as Slowdown in U.S. Threatens to Damage Economy

Home Price Index in U.S. Fell Record 10.7% in January, Shiller Survey Says

Bernanke Takes `Bit in His Teeth,’ Expands Fed Role in JPMorgan-Bear Deal

Australian, New Zealand Dollars Advance Versus Yen on Demand for Yield

Dollar Sinks Ahead of Housing Report
Tue, 25 Mar 2008 10:57:00 GMT from Yahoo! Canada

FOREX-Dollar falls as jitters on U.S. economy persist
Tue, 25 Mar 2008 10:51:00 GMT from Forbes.com

Dollar Falls in Europe Ahead of Reports on US Housing and German Investor Settlement
Tue, 25 Mar 2008 10:50:00 GMT from Canadian Business Magazine

More Forex News

Economic Indicators Update

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