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Longer term view in the $ index remains in place as trade from the March low at 70.70 is seen as a large correction, with eventual new lows below 7070 after. Note that the rangy type trade/potential bearish flag also suggest an eventual resumption of the longer term declines to new lows (see weekly chart below). However, there are still no signs “pattern-wise” that this multi-month correction is complete, leaving open scope for more ranging and possibly temporary gains above the Jun high at 74.30 first. For now, would maintain the long held strategy of trading shorter term ranges (see below)…have to take what the market gives you.

Nearer term, the market is chopping just above support at the base of the multi-month channel (currently at 71.90/05, also a 62% retracement from the March low at 70.70, see daily chart/2nd chart below). Though an eventual downside break is favored, further declines may be limited (at least for the near term), while there is also some chance of more ranging before the new lows are seen. Currently not seen as a good time to just hit bids from a risk/reward standpoint, and instead would wait for a nearby bounce toward 72.50/60 to sell (higher entry, lower risk). Stop on a close above the multi-week bearish trendline (currently at 73.00). Note, if the market does indeed break lower before reaching the short area, would cancel that sell (countertrend bounce likely to be deeper). Only temporary support on the late Jun buy at 73.30 before stopping in a close below the bullish trendline from early Jun just a few days later (then at 73.20, closed at 72.95).

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The financial players generally find it difficult to concentrate on more than one thing at a time. The schism between slowing growth on the one hand and rising inflation on the other was a lot to cope with, and market players concentrated squarely on rising inflation. This change of focus resulted in widespread inflation phobia, which could not but affect the USD/JPY rate. The rate subsequently strengthened nicely in spite of the general rise in risk aversion in the financial markets.

The wider swap spread between the US and Japan was therefore one of the main reasons for the rise in the USD/JPY rate. The rise was regarded by many as ‘unnatural’ given the reawakened risk aversion which is under normal circumstances poison to a funding currency like the yen. The fact that market players have focused squarely on the cocktail of rising inflation/runaway US yields/historically low Japanese yields has caused this yen characteristic to be completely neglected for a time.

That risk aversion has not affected the USD/JPY exchange rate is evident in the current lack of correlation between the VIX Index and the USD/JPY rate. Since we still anticipate general high financial volatility, we expect the correlation to return like a thief in the night and pull down the USD/JPY rate. If the market players change focus to the generally crumbling economic growth, this may spark off the development.

Some of the pressure which the yen has been subjected to recently was caused by capital outflow from Japan, chiefly to the US. Japanese appetite for direct investment in the US has increased lately in line with the weakening of the dollar. If we are right and the dollar strengthens markedly, the incentive will be reduced, though not quite obliterated. Moreover, renewed problems in the domestic economy, which cannot be ruled out under the current circumstances, may temporarily put off Japanese investment in the US, and in that case the sustained Japanese-driven selling pressure against the yen will ease significantly.

From the technical point of view, the USD/JPY rate is still in a long-run downtrend - a downtrend which has lately met challenged sharply. After repeatedly nudging the 200-day moving average, the cross rate has recognised defeat and is falling again. The trend is still alive, although it has been more impressive earlier than it is at the present time. Nevertheless, we expect the downtrend to last a good long time yet thanks to a significant general yen appreciation, which is expected to materialise at the beginning of the holiday season. We recommend investors to wear dark shades to avoid being blinded by the treacherously weak yen. Remember the yen’s history of rising phoenix-like from the ashes. And often when you least expect it!

Rising USD/JPY rate after rise in dollar rates

• Obviously, the wider swap spread between the US and Japan as a result of recent weeks’ rise in US rates has been one of the major reasons for the rise in the USD/JPY rate
• Expecting another two interest rate cuts by the Fed - and resultant lower dollar interest rates - we expect the swap spread between the US and Japan to narrow again
• he swap spread is not expected to support a higher USD/JPY rate in the future.

Turning a blind eye on USD/JPY & VIX

• It is quite odd that the rise in AUD/USD is not on level with the global growth estimates by the IMF
• Expected lower global growth for both 2008 and 2009 should realistically have driven the growth-dependent AUD lower, but this has not been the case yet
• As a commodity currency the correlation between global growth and thus the demand for commodities has been an important parameter for the price development of AUD

Sustained inflow of funds from Japan to the US

• The Japanese capital inflow into the US has increased in line with the weakening of the dollar
• Also, Japanese direct investment in the US is rising • This means that it is the Japanese themselves that help to keep JPY weak against USD

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank’s customers and may not be copied.

Today’s Comment

Majors & Scandies

It was a rather downbeat beginning to the month yesterday as stock markets tumbled (again…) and risk aversion weighed heavily on both EURCHF and EURJPY. However sentiment improved a little as the US ISM index for the manufacturing sector was released. For the first time since January the index rose above the magic 50 (50.2 to be exact) which points towards an expansion in the sector.

The improvement in sentiment caused EURJPY and EURCHF to rise from recent lows but the rest of the week offers plenty of opportunity for volatility as the monetary policy meeting in the European Central Bank and the release of the all important job report from the US awaits on Thursday. Thus so far we think it is too early to rejoice and for the time being we maintain that risiks are primarily on the downside on the currency crosses in question.

Overnight retail sales data from Australia was released. The number showed that the Australian consumers had spent a bit more than anticipated in May. The AUD jumped as the data was released and thus 96.50 on AUDUSD remains within reach. Currently we expect this level to provide a fair amount of resistance and looking at market sentiment in general we do not find that a buying recommendation can be justified at this point.

On the macro economic front today doesn’t offer too much excitement compared to the events that are on the agenda tomorrow. However Trichet is bound to receive a certain amount as he takes stage this morning. Overall though, we expect a slightly negative day where market participants will start preparing themselves for the busy day that lies ahead

Emerging Markets

TRY fell to the lowest level against EUR since mid-June and Turkish stocks dropped the most since March after police yesterday arrested 24 people suspected links to a group allegedly plotting a coup. TRY decreased more than 2 % against EUR after the news came out. The arrests heighten concern about the political situation. Yesterday was also the day when prosecutors presented an indictment to the Constitutional Court to close down the Justice and development party (AK Party). There is a mounting uncertainty and the tensions between the secular and the religious seems to increase day by day. However we expect a day where markets in general will adopt a waitand- see attitude before ECB meeting and US job data tomorrow and have chosen to stick to our recommendations.

Today’s key events

• N/A Monetary policy meeting in Riksbanken (SEK)
• N/A Fed’s Mishkin speaks (USD)
• 09:15 ECB’s Trichet speaks (EUR)
• 11:00 Producer prices (EUR)
• 13:00 MBA Mortgage applications (USD)
• 14:15 ADP Employment (USD)
• 16:00 Factory orders (USD)
• 03:30 Trade balance

Jyske Core Positions - Recommendations

Jyske Markets - FX Research
http://www.jyskebank.dk/finansnyt

The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice. The analysis is for personal use of Jyske Bank’s customers and may not be copied.

Talking Points

• Japanese Yen: Above 106.00 on firmer US rate expectations
• Australian Dollar: Retail Sales rise to fastest pace in 6 months
• Euro: EZ PPI much hotter than expected
• British Pound: PMI Construction awful at
• US Dollar: ADP on tap

Pound Crushed By Weak Construction PMI; Euro Remains Bid

Pound lost more than 100 points in early London trade today after the construction PMI data showed a marked decline printing at 38.9 versus 43.1 forecast. The reading was the lowest value in years suggesting that the UK housing sector is now mired in a deep recession that will likely have negative impact on overall UK economic growth going forward.

Coming on the heels of surprisingly bad PMI Manufacturing readings last night, the latest data out of UK indicates that the British economy may be in worse shape than consensus expectations. Sterling recovered some its vigor over the past several weeks on the assumption that BoE will maintain rates at 5% for the rest of 2008 in order to control rising price pressures caused by skyrocketing energy prices. However, given the fact that both manufacturing and construction sectors are now well below the 50 boom/bust line, UK growth could contract sharply within the next few months forcing the BoE to adopt a much more dovish posture before the year end. Thus, concerns about interest rate cuts which have dogged sterling over the past several months could come back to weigh on the unit once again.

In the EZ meanwhile PPI jumped to 1.2% from 0.9% projected reaching a level of 7.1% on a year over year basis. The news kept the EURUSD bid above the 1.5800 figure as traders now almost universally expect the ECB to hike rates by 25bp tomorrow. As a result of divergent rate expectations EURGBP surged to 7970 and may make another run at the 8000 level as the monetary policies of the two European central banks continue to move in the opposite directions.

In North America today, market participants will get another read on the health of the labor market with the release of the ADP report. The ADP numbers have been wildly inaccurate in predicting NFPs and therefore traders typically pay them little attention. However, if the ADP data confirms the deterioration in labor conditions signaled by yesterday ISM Manufacturing survey, the greenback could come under more selling pressure in New York trade. For now 1.5850 appears to be solid resistance as markets prepare themselves for the fireworks tomorrow

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

The U.S. dollar reached its lowest value against the European currency in more than two months today as the traders are waiting ADP report on the June jobs dynamics and expect it to show a first decline in four months.

Automatic Data Processing, Inc. reports on the employment in the non-farm private business sector each month, relying on the private data of its business clients. June report will be released today at 12:15 GMT and the median analysts’ forecast is a decline by 20k after 40k gain in May.

The dollar also declined against the Australian currency today as the macroeconomic statistics there pushed the AUD rate higher against almost all other currencies. Despite loses against euro, Australian and New Zealand dollars, USD managed to grow against the Great Britain pound today as the Bank of England will probably abstain from increasing the rates and may even cut the interest rate during its next meeting on July 10.

Although the dollar is trading quite low this week and is experiencing a downside daily trend against euro since June 16, in a longer term period the EUR/USD pair is still going sideways. The approach of the period’s maximum levels may trigger the sell-out on the pair by the range speculators.

EUR/USD went up today from 1.5793 to 1.5813 as of 8:26 GMT with a maximum at 1.5849 (the highest level since April 24). GBP/USD dropped 1.9953 to 1.9894, while AUD/USD rose from 0.9551 to 0.9608.

Australian Retail Sales overshot expectations, expanding by 0.7% in May versus 0.1% expected. The rise was fueled by a 2.2% jump in sales of recreational goods and marks the fastest increase in 6 months. Perversely, the rise in retail activity comes in the same month that economy lost -19.7k jobs. While some may interpret this as indicative of Australians’ confidence in finding new employment and thereby make a statement about the resilience of the labor market, it should be noted that some lag is to be expected before job losses translate into reduced disposable income expectations and depress consumption. For their part, currency traders bought the Australian dollar following the announcement, expecting firm consumption to bid up the price level and force the RBA to hike interest rates at their September meeting. RBA Governor Glenn Stevens held rates steady at a 12-year high of 7.25% yesterday, noting that "While the inflation outlook remains concerning, the board’s assessment continues to be that demand growth will moderate this year."

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.

Price growth at the factory gate in the Euro-zone is anticipated to accelerate even faster in May, as Eurostat is anticipated to report a 0.9 percent rise in the producer price index (PPI). Furthermore, PPI is forecasted to surge 6.7 percent in May from a year earlier, the sharpest increase on record.

 What Are The Markets Facing?

 Price growth at the factory gate in the Euro-zone is anticipated to accelerate even faster in May, as Eurostat is anticipated to report a 0.9 percent rise in the producer price index (PPI). Furthermore, PPI is forecasted to surge 6.7 percent in May from a year earlier, the sharpest increase on record. Indeed, we’ve already seen PPI in Germany (the Euro-zone’s largest economy) jump on the back of record energy costs, and the news will only add to European Central Bank President Jean-Claude Trichet’s already-hawkish tone. Indeed, estimates for Euro-zone CPI have rocketed to a fresh 16-year high of 4.0%, and as a result, the markets are widely expecting the ECB to increase interest rates by 25bps to 4.25 percent on Thursday. This move would mark the first hike since last summer, but given recent commentary, there are indications that this may be a one-and-done deal. Nevertheless, European leaders such as French President Nicolas Sarkozy and German Finance Minister Peer Steinbrueck are staunchly against any sort of rate increase, as restrictive monetary policy threatens to slow expansion in their respective economies to a crawl.

 What else could move the markets this week? Find out the Top 5 Events you should be watching.

 
Bonds – 10-Year German Bund Futures

German Bunds continue to consolidate above the one-year lows at 109.66 ahead of Thursday’s ECB rate decision, when the bank is widely expected to hike by 25bps to 4.25 percent. Indeed, the contract pulled back sharply from resistance at 111.54 on Tuesday, despite hefty declines in the German equity markets. Upcoming Euro-zone data may only send Bunds down toward the one-year lows on Wednesday, as the producer price index (PPI) is anticipated to reflect building inflation pressures. However, if PPI is actually softer-than-expected or if risk aversion takes a hold of the markets and sparks flight-to-safety into government debt, Bunds could climb toward 111.

 
FX – EUR/USD

EUR/USD continues to trade within a wide range of 1.5350 – 1.5800, as the US dollar consolidates across the majors. However there remains potential for an upward swing above near-term resistance at 1.5800 as Euro-zone PPI is scheduled to be released. If figures exceed expectations, the EUR/USD could rally as indications of rising inflation risks would lead the markets to become more aggressive in pricing in a rate hike by the European Central Bank on Thursday. However, if PPI does not rise as quickly as anticipated, EUR/USD could pull back sharply, especially since 1.5800 has proven to be formidable resistance.  

 Where will the euro go next? Discuss the topic with other traders in the EUR/USD Forum.

 
Equities – Xetra DAX Index

Germany’s Xetra DAX index shed a whopping 2.2 percent on Tuesday as financials continue to weigh heavily on the market, after Merrill Lynch removed UBS from a list of preferred stocks. Looking ahead, the release of Euro-zone PPI figures has the potential to be market moving. The index is expected to indicate additional upside inflation risks in the Euro-zone, which could weigh the DAX down below near-term support at 6,300 toward 6,250, though sharper declines could target the March lows at 6,168. On the other hand, a weaker than expected PPI reading could help give the DAX a boost toward 6,400.

Written by Terri Belkas, Currency Analyst and Abhigyan Chakraborty

 Questions? Comments? E-mail tbelkas@dailyfx.com