5 Key Events for the Forex Market This Week 11-02-08

Monday, 03 November 2008 06:50:33 GMT

Event risk will be spread throughout the forex markets this week, with US manufacturing and services sector data along with US non-farm payrolls likely to add to evidence that the country is facing recession, while rate decisions from the Bank of England and European Central Bank are forecasted to yield rate cuts…

• US ISM Manufacturing – November 3
The Institute for Supply Management is expected to report at 10:00 EDT that their survey of conditions in the manufacturing sector held below 50 - signaling contraction - for the third consecutive month to a seven-year low of 41.5. In fact, data from the Richmond Federal Reserve region and Chicago PMI all showed a continued deterioration during the survey period. That said, these are both very volatile reports, but given broadly weak domestic demand in the US, the risks are tilted to the downside for the ISM manufacturing release. The employment component will also be watched carefully as a gauge for Friday’s Non-farm Payroll report.

• US ISM Non-Manufacturing – November 5
Conditions in US non-manufacturing sector - which accounts for approximately 70 percent of total economic activity in the country and includes retail, services, and finance - are anticipated to worsen in October as the Institute for Supply Management index is estimated to fall to 48.0.0 from 50.2. Indeed, consumer confidence remains exceptionally weak, as the Conference Board’s measure fell to a record low of 38 during the same month. The key thing to watch is to see if ISM Non-Manufacturing falls below the 50 mark - signaling contraction - as the news will only add to bearish sentiment on the US economy following the 0.3 percent contraction in US Q3 GDP.

• Bank of England Rate Decision – November 6
The Bank of England is widely anticipated to follow up their October 8 rate cut with yet another 50bp cut to 4.00 percent on November 6 at 7:00 ET, as the UK economy tips into recession and the financial markets remain unstable. While UK CPI remains well above the BOE’s 2 percent target and 3 percent ceiling at 5.2 percent, weaker commodity prices have led inflation outlooks around the world to drop rapidly. Furthermore, BOE Monetary Policy Committee member David Blanchflower, who has long been the most dovish of all the members since joining the Committee in mid-2006, was staunch in his bias as ever when he noted that he thought deflation was a bigger concern than inflation, and that CPI may fall from the September reading of 5.2 percent down to 1 percent, or could even go negative. Mr. Blanchflower also said that UK interest rates must be lowered significantly and quickly. If the BOE does indeed cut rates, the news will likely weigh on the British pound. However, if the central bank signals that they may leave monetary policy unchanged going forward, GBP/USD could easily surge higher.

• European Central Bank Rate Decision – November 6
A Bloomberg News poll of 50 economists shows that the European Central Bank is very likely to cut rates by 50bps to a nearly 2-year low of 3.25 percent on Thursday at 7:45 ET. Indeed, economic conditions have deteriorated rapidly throughout the region, with the October PMI readings showing that business activity in the Euro-zone’s manufacturing and services sectors has been contracting for five consecutive months. Meanwhile, Eurostat’s estimate of Euro-zone CPI shows that price growth eased to a 3.2 percent pace in October from 3.6 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on the economy and the bank’s participation in the October 8 coordinated rate cuts, the indications of cooler inflation pressures gives the ECB even more room to cut rates on Thursday. The reaction of the euro, however, may depend more on Mr. Trichet’s post-meeting press conference at 8:30 ET as his speeches tend to be very straightforward and biased. If Mr. Trichet suggests that the ECB will cut rates further, the euro is likely to take a hit but if he signals a more neutral stance going forward, the currency could actually rebound.

• Canadian Net Employment Change, US Non-Farm Payrolls – November 6
Though often finding its thunder has stolen been stolen by its US counterpart, history shows that the Canadian employment change is consistently a top market moving indicator. Employment in Canada is a clear sign of economic health and an indicator of expansion going forward. However, the reading for September showed that the Canadian labor markets added on a record 106.9K workers, and there is a chance this will be revised lower or the October reading will show a sharp contraction at 7:00 ET. This will be followed at 8:30 ET by US non-farm payrolls (NFPs), which haven’t consistently produced a strong reaction from the US dollar. Nevertheless, as one of the most watched US economic indicators, the release of the index is worth keeping an eye on. NFPs are forecasted to contract for the 10th consecutive month, by 180K, while the unemployment rate is anticipated to jump to a more than 5-year high of 6.3 percent from 6.1 percent. Overall, both releases present major event risks for the Canadian dollar and US dollar, leaving the USD/CAD pair in particular prone to heavy volatility.


Related Post:

1. Dollar Bearish Against Euro, Possibly The Fed Cut FFR Interest Rate

Source:
DailyFx : by Terri Belkas, Currency Strategist

Dollar Bearish Against Euro, Possibly The Fed Cut FFR Interest Rate

In the exchange rate, today trading dollars decline againts the euro (03/11). The exchange rate is U.S. decline for the first time in three days amid speculation by economic growth in the U.S. will further deteriorate in the medium term despite the current interest rate is 1%.

In the last week the Governor Yellen said the The Fed prepared to cut interest rates Fed Funds Rate (FFR) to 0%, if necessary to back stimulating economic growth in the country. Declining dollar exchange rate also occurred as a result of speculation that the manufacturing sector in the U.S. in November will again experience a contraction. These data will be released today.

U.S. dollar exchange rate experienced a decrease of 1.2772 per euro in trading today. Dollar weakened the position of closing trades last week in the position of 1.2726 per euro. Dollar-sterling also be experiencing a decrease in the position to 1.6113 from 1.6076 last week. Dollar also be weaken the position of the 1.159 Swiss franc from 1.1578 position.

For trade this week, dollar estimated will still be colored by the negative sentiment. The release of the Non-Farm Payrolls (NFP) data, which will be announced on 7 November are expected to decline. If there will be a decline, it will be 10 weeks successivly. Meanwhile, to this day the volume of trade is estimated to be slightly reduced because holiday in Japan Exchange.

Source:
Vibiznews

Yen Bearish : Over Stable Asian Stock Exchanges

The yen fell against the dollar and the euro as a rally in Asian and European stocks encouraged investors to step up purchases of higher-yielding assets financed with the Japanese currency.

Yen bearish on the movement trade today (03/11). The yen weakened condition was caused by the increasing Asia Stock Exchange share price after the plunged sharply in October again attracting investors to invest in the stock market.

Yen carry trade back in line with the fervent Send-stock exchange in Asia today. The Japanese investor commonly do carry trade with and which they borrow in Japan because interest rates in the country is low compared to most other big countries. In the current interest rates in Japan are in the position of 0.3%.

Asian stock markets today has started to show stability after plunged sharply in the month of October. Trade today is estimated yen will still be moving in a negative trend, although the volume of trade will not be too big because holiday in the japanese market.

Yen is in the position of 98.43 per dollar today, from the relatively stable position in New York closing level at 98.46 yen. Meanwhile, the euro against the Japanese currency has experienced decrease of 0.4% to 125.77 from 125.30 yen. Yen also experienced decrease of 0.8% to 66.24 against the Aussie and weakened 0.7% to 57.80 against the kiwi.


Source:

1. Bloomberg : Yen Falls on Speculation Stock Rally to Encourage Carry Trades
2. Vibiznews

Currency Overview : Yen the Strongest Currency

Over recent weeks, extreme currency movements have been the main theme of financial markets. The currencies of the world’s two largest economies, the US dollar and the Japanese Yen, have been beacons of light. In just the last three months or so, every other major currency has declined sharply against the dollar and the yen.

"Deleveraging" is the simple answer to why these two currencies are displaying unparalleled strength. However, we need to go much further back to really understand these recent violent currency moves. Firstly, let’s look at the extent of the dollar and yen’s appreciation against the world’s major currencies.

The dollar has been stronger against everything other than the yen, while the yen has been by far the strongest currency.

Performance of various currencies against the US Dollar over the past three months


Performance of various currencies against the Japanese Yen over the past three months


Clearly, liquidity around the globe is rushing back to the source, and sucking the life out of financial markets in the process. From an economic perspective, we can rationalize these moves on a short term basis but longer term, there does not appear to be any justification to support US dollar strength.

The US and Japan’s modern day economic relationship rose from the ashes of World War Two. The US helped rebuild Japan’s shattered economy and opened its vast consumer market to Japan’s fledging export industry. Over the next few decades, Japan’s economy turned into an industrial and export based powerhouse.

This has seen Japan turn into the largest creditor nation in the world, running massive trade and current account surpluses, year after year. Instead of reinvesting these savings and restructuring its domestic economy the savings have flowed to the US and all around the world.

For example, the Japanese are the largest holders of US treasuries, with investments totaling US$585 billion at the end of August.

Put simply, a lack of productive investment opportunities at home, combined with low interest rates, saw Japan as a nation finance other investment opportunities around the world. Now the risk tide has turned and the Japanese are bringing their funds home at a rate of knots.

Given Japan’s creditor nation status, we believe a strong yen makes sense. This is the natural force of the market trying to push for an overhaul of the Japanese economy. Domestic consumption should rise and saving rates should fall. Cheaper imports will encourage this change in trend.

Yen strength will see the export sector go into a sharp downturn, which should discourage further investment and additions to export based capacity.

While US dollar strength is another matter entirely. US dollar strength is understandable in the short term, and we will explain why. But longer term, we doubt that such strength can be maintained.

The chart below shows the recent extraordinary strength of the greenback as measured by the US dollar index. The index measures the performance of the US dollar against a range of other currencies (see below).

Euro 57.6% of the index
Japanese Yen 13.6%
British Pound 11.9%
Canadian Dollar 9.1%
Swedish Krona 4.2%
Swiss Franc 3.6%



What has caused this huge rally in the face of negative real interest rates and an economy in recession traditionally reasons to SELL a currency, not to buy?

In addition, strong US consumption in recent years has also been a source of US dollar liquidity (supply). The US household sector borrowed heavily against appreciating house prices to artificially boost consumption. This led to a rise in imports, or put another way, an increase in the supply of US dollars that were then sold to buy imported goods.

These two dollar liquidity dynamics are now unwinding at a rapid pace. But of the two, we believe the former is the primary driver of recent US dollar strength.

Both Japan and Europe (with Germany being the strongest European economy) were rebuilt with American capital. With the US dollar established as the world’s reserve currency via the Bretton Woods Agreement of 1944, the long term structure of these respective economies was established. That is, Japan and Europe produced and saved, while the US consumed, courtesy of its huge reserves of capital (net creditor to the world) and newly installed issuer of the world’s reserve currency.

The US abandoned Bretton Woods in 1971 by going off the gold standard. At the time the US dollar was pegged to gold at US$35 an ounce and Europe was draining US gold reserves as the system swelled with excess dollars.

It is widely known that the US government will need to spend a huge amount of money over the next few years to offset the slowdown now occurring in the US. Estimates for next year’s budget deficit start at the trillion dollar mark. Can we really continue to expect Japan, China, Europe and the rest of Asia to go on financing this spending at low rates of interest? Our guess is that they will not.

The chart below shows the 10-year US Treasury bond yield. In mid-October the yield spiked to over 4%, meaning bond prices fell. Prices then rallied but in recent days have eased back. The yield currently trades around 3.70%. We believe the bond market will be the next bubble to burst, the first leg of which will be signified by yields rising over 4.25%.



In summary, we are seeing major upheavals in the currency markets as a result of an unbalanced global economic system. The strength of the US dollar is signaling deflation, loud and clear. But we do not believe this will persist. After all, the process has only been in play for about three months. The Fed has an unlimited balance sheet with which to fight the forces of deflation.


Source:

• IStockAnalyst

Intermarket Analysis

What is intermarket analysis and why will it work for us in our trading? To see this clearly, we have to understand two things.

1. The purpose of analyzing markets is to forecast market direction—more simply,to identify trends.
2. The traditional market approach in forecasting trends is single-market analysis, which is divided into two analytic viewpoints—fundamental and technical.
   

Fundamental analysis forecasts market direction based on economic factors affecting a market. Technical analysis bases its forecasts of market direction on the idea that all of the internal and external factors affecting a market, at a given point in time, are factored into that market’s price.

The problem with the single-market analytic approach is that it is archaic. Single-market analysis, the predominant approach to analyzing U.S. markets for more than 100 years, works on the assumption that markets trade independently of one another. Although this was true for financial markets, it is no longer the case.

The rise of the Internet (instantaneous information transmission), computerized trading (trading simultaneous markets immediately), software market analysis (the ability to analyze multiple markets immediately), and, most important, the interconnectedness of global markets (the threaded influence of market upon market in all parts of the world) all make single-market analysis alone a less effective tool for forecasting trends. Particularly, single-market technical analysis is less effective because it relies on lagging indicators that view a market retrospectively to identify re-occurring patterns that then form trends. To be clear, single-market analysis is not wrong, nor is it irrelevant for identifying trends; alone, it is simply insufficient.

Intermarket analysis empowers traders to make more effective trading decisions based upon the linkages between related financial markets. By incorporating intermarket analysis into your trading strategies, rather than limiting your scope to each individual market, these relationships and interconnections between markets will work for you rather than against you.

Source:

• (www.intermarketprofit.com)