The Greenback has slumped about 8.2 percent versus the euro and Japanese yen in 2008 as oil prices rose to an all-time high of $115.54 a barrel compared with $95.98 on Dec. 31. Against the pound, it has dropped 0.2 percent. Interest-rate cuts by the Federal Reserve to keep the U.S. economy out of a recession have also reduced demand for dollar-denominated assets. Barclays Capital forecast the dollar will drop 2.5 percent against the euro in three months as record oil prices increase the U.S. import bill and prevent the European Central Bank from cutting interest rates because of inflation.

The securities unit of Barclays Plc, the U.K.’s third- biggest bank, predicts the dollar will fall to $1.63 per euro, compared with a previous estimate of $1.50, analysts led by David Woo, London-based global head of currency strategy, wrote in a research note yesterday. Against the pound, the U.S. currency will weaken to $2.05 versus $1.97. ‘The U.S. dollar is locked in a vicious circle,’ they wrote. The currency’s drop is causing higher oil prices as oil nations seek to preserve their revenues and ‘this in turn leads to further dollar weakness as the European Central Bank becomes even less likely to follow Federal Reserve easing.’

The U.S. currency traded at $1.5883 per euro as of 7:45 a.m. in London from $1.5908 in New York yesterday, when it reached $1.5983, the lowest level since the European single currency’s debut in 1999. Against the pound, it traded at $1.9896, from $1.9912 yesterday and was at 102.44 versus the yen. Producer prices in Germany rose 0.7 percent in March from February, while increasing 4.2 percent from March last year, the Federal Statistics Office said. The Producer Price Index (PPI) measures the rate of inflation (i.e., the rate of price changes) experienced by manufacturers when purchasing goods and services. A rising trend has a positive effect on the nation’s currency. Germany’s producer price index stood at 123.4 in March compared with 122.6 in February and 118.4 in March 2007, the office said.

Economic Calendar

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All of the Japanese Yen crosses rallied on the back of the 200 point rise in US stocks. 

Risk appetite continues to be the dominant driver of the Yen crosses and will continue to be in the coming week.  Bank of Japan Governor Shirakawa said today that he believes growth will regain momentum after a temporarily slowdown.  The price action in the Yen indicates that the market does not believe him.  Japanese consumer prices are due for release next week and given the recent strength of the Yen, CPI growth is expected to slow.

The Bank of Canada is widely expected to cut rates by 50bps on Tuesday to 3.00 percent, the lowest target rate since October 2005, as inflation pressures subside, credit markets tighten, and a probable recession in the US threatens the Canadian economy. The most recent CPI report showed that the Bank of Canada’s core measure fell to 1.3 percent, which is the lowest reading since July 2005 and well below the Bank’s 2.0 percent target.

What Are The Markets Facing?

The Bank of Canada is widely expected to cut rates by 50bps on Tuesday to 3.00 percent, the lowest target rate since October 2005, as inflation pressures subside, credit markets tighten, and a probable recession in the US threatens the Canadian economy. The most recent CPI report showed that the Bank of Canada’s core measure fell to 1.3 percent, which is the lowest reading since July 2005 and well below the Bank’s 2.0 percent target. During the March meeting, when the Bank cut rates by 50bps to 3.50 percent, the concurrent press release said that “the balance of risks around its January projection for inflation has clearly shifted to the downside…Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 percent inflation target over the medium term.” Furthermore, recent economic indicators including Ivey PMI, employment data, and wholesale sales have pointed toward some slowing in domestic demand, which will give the Bank of Canada the green light to slash rates.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have tested the confluence of trendline and Fibonacci support at 117.00/03 as traders pile into equities. While risk trends will remain the primary driver of CGBs going forward, Tuesday’s Bank of Canada meeting could lead the contract to jump toward a zone of resistance near 118.19 - 118.41. On the other hand, if the Bank cuts rates less than expected, CGBs could test 117.00 once again.

 
FX – USD/CAD

After plunging for much of 2007, USD/CAD has done nothing but consolidate its losses within a nearly 600 point wide channel of 0.9650 – 1.0250. More recently, the pair has bounced from trendline support at the psychologically important 1.00 mark, sparked by the release of surprisingly soft Canadian inflation data. According to Technical Strategist Jamie Saettele, USD/CAD could be setting up for a surge and upcoming event risk could shake up the pair. On Tuesday, the Bank of Canada is forecasted to cut rates, and USD/CAD is likely to show an immediate reaction to the 9:00 EDT announcement. If the Bank cuts rates in line with expectations and suggests that more may be on the way in their press release, USD/CAD could surge higher. On the other hand, if the Bank only cuts rates by 25bp, the Canadian dollar could strengthen significantly across the majors and weigh heavily on USD/CAD

Do you think the USD/CAD will fall below parity? Discuss the topic with other traders in the USD/CAD Forum.

Equities – S&P/TSX Composite Index 

The S&P/TSX Composite Index continues to surge led by energy stocks, which received a boost from record oil prices, which rose above $116/bbl. However, the threat of another bout of market-wide risk aversion creates substantial downside potential for Canadian equities, and the S&P/TSX may have trouble breaking above trendline resistance at 14,300 in the near-term.  On Tuesday, the Bank of Canada’s rate decision could shake up stocks, and bearish rhetoric in the concurrent press release could lead the S&P/TSX to fall down toward the 14,000 level.

Written By Terri Belkas, Currency Analyst at DailyFX.com

Over the past 3 trading days, the British pound has rallied over 300 pips on the hope that the Bank of England will come and save the day.  The central bank is expected to officially announce a plan that would allow them to take over mortgages from lenders to increase liquidity.

In return they hope that these mortgage lenders will be more willing to extend new loans to potential homeowners.  This is the only reason why the British pound is higher because the UK economy faces the same risks as the US.  Job losses are continuing to build and many of the layoffs in the financial sector are expected to happen in London.  The housing market is also in trouble.  According to the UK Times, Morgan Stanley predicts that one in ten homeowners will face negative equity.  As house prices continue to fall, the amount of money that homeowners owe on their mortgages could be more than their home is worth.  Looking ahead, it will be a very busy week for the British pound with the minutes from the latest monetary policy meeting due for release along with retail sales and GDP.  As house prices fall and the labor market deteriorates, consumer spending could suffer. 

European Mid Morning Update

Releases from Europe:

There has been a sudden absence of central bank officials commenting that the slowdown will naturally cause inflation to moderate. No doubt they will continue refrain following this week’s CPI figures and also today’s German PPI data which clearly demonstrated yet again that high oil prices are causing an abnormally large impact as more biochemical fuel crops are grown.

This doesn’t seem like an issue that is going to disappear soon either and with OPEC seemingly delighted with their windfall through crude oil prices being higher by 75% over the past year. They may argue that it is down to a lower Dollar but there is still a substantial differential between the rise in oil prices and the Dollar’s losses.

The more this continues the greater the impact on consumer spending which could be the deciding factor between a shorter slowdown and a longer, more sustained slowdown or perhaps recession.

A small snippet from the IMF’s Strauss-Kahn during an interview in which he forecast several quarters of negative growth from the States but which should bottom out by the end of this year or slightly into next. From then he anticipates a return to ‘more or less’ swift growth.

Well, as things stand now, that would appear to be a generally held view. However, there are lots of things that can happen in the meantime to upset the apple cart. Next year I have Dollar cycles turning bearish again - which may imply that something else will raise its head to cause problems…

The following economic releases are due today:

February

Italian Industrial Orders (MoM) - 0.5%
Italian Industrial Orders (YoY) +5.2%
Italian Industrial Sales (MoM) - 1.0%
Italian Industrial Sales (YoY)

March

U.K. PSNCR GBP 18.0bn
U.K. PSNB GBP 7.8bn
U.K. M4 Money Supply (MoM) +0.5%
U.K. M4 Money Supply (YoY) 11.6%
U.K. M4 Sterling Lending GBP 15.0bn

Asian traders looked at the data releases due out today and promptly decided they may as well close their books for the week.

If there is anything really on the slate to note it will be Citibank’s Q1 results. Forecasts center on a figure around $ -5.0bn. Coming after Merrill’s announced a loss of just $1.96bn which was much better than had been feared there are a number of analysts who view better results as a tentative sign that the worst of the credit crisis is over. Merrill’s also announced that they will be slashing 4,000 jobs worldwide to contain costs.

Citibank has been talking the same book though the CEO has said that some savings will come from other areas rather than job cuts. In total Citibank are planning to slash 20% costs. Analysts have been bandying around a figure of 25,000 jobs to be cut.

The other gossip in the market has been the reaction to Juncker’s comments. Some say that it highlights a sterner attitude to the market. However, while the comments suggest he is exceptionally naive to think that the market should bow and follow G7 statements the basic issue is that he has no control over the ECB and it is only the ECB that can decide whether to intervene in the market.

Thus unless Trichet thinks the same his comments are his opinions only and will have no impact on trades placed.

Having said that the resilience of the Dollar against the Swiss Franc and Japanese Yen suggests that the Dollar bearish sentiment is waning anyway and while a new Euro high is probable it probably won’t last for too long.

Note important support and resistance areas:

Ian Copsey
Global Forex Trading
http://www.gftforex.com

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