Month: August 2011

A dramatic decline in US equities led to safe-haven buying of US Treasuries and the USD. A combination of global growth concerns and a lack of confidence in the new European bailout have increased market tensions to their highest levels since the financial crisis of 2008. The USD along with the yen and Swiss franc were well bid with the S&P 500 falling 4.78% yesterday. The yen and franc gains are a surprise given the intervention undertaken over the past 48 hours by the SNB and the BoJ. A tumultuous week will end with the non-farm payrolls report which may highlight a continued weak US macro picture.

Today’s Key Economic Events:

USD – Non-Farm Employment change – 12:30 GMT
Expectations: 89K. Previous: 18K.
Last month’s NFP report came in well below economists’ aggressive forecasts close to 100K. Today’s unemployment data release has more grounded consensus expectations. A strong NFP number may help to shore up deteriorating market sentiment and boost riskier, higher yielding currencies. A disappointing result could see similar trading conditions as yesterday with falling equity prices and a move to the USD. EUR/USD support comes in at 1.4050 at the bottom of the channel line. A break here could test the 200-day moving average at 1.3940 followed by the long term rising trend line from 2010 at 1.3840. Resistance is found at the overnight high of 1.4140 and the top of the channel line on the daily chart at 1.4340.

CAD – Ivey PMI – 14:00 GMT
Expectations: 61.5. Previous: 68.2.
A sharp pullback in the survey underlines a hesitant business climate in Canada. GDP was flat in Q2 and increasing inflation may force the BOC to begin raising interest rates. However, the “risk-off” environment has weighed on the Loonie with the USD/CAD rising to its 200-day moving average at 0.9820, an important technical level that has proven to be resistive in the past. Additional resistance is located at 0.9910 with support at 0.9775 followed by the 100-day moving average at 0.9650. Should today’s economic data be more upbeat the CAD will largely benefit.

Read more forex trading news on our forex blog.

EURUSD continued its downward movement from 1.4535 and the fall extended to as low as 1.4055. Deeper decline is still possible in a couple of days, and next target would be at 1.3950 area. Resistance is at the downtrend line on 4-hour chart, only a clear break above the trend line could indicate that the fall is complete.

Daily Forex Analysis

British consulting firm, the Centre for Economics and Business Research, has released a report finding it unlikely that Italy will be able to avoid defaulting on its debt. In the same report however, the CEBR noted that Spain may yet find a way to avert a similar fate.

According to the CEBR report, the difference between the two situations is the fact that Spain’s debt is much lower than Italy’s. Even in a “worst-case scenario” Spain’s debt ratio should not exceed 75 percent of GDP over the next decade – Italy on the other hand is already near 130 percent of GDP.

Worse still, the CEBR projects that if yields remain above the 6 percent now required to attract investors to the country’s bonds, the country’s debt ratio will exceed 150 percent of GDP by 2017.

At last Thursday’s bond auction, Italy successfully sold 2.7 billion euros (US$3.8 billion) worth of 10-year bonds. The rate to entice investors, however, rose to an eleven year high of 5.77 percent. This is a significant increase over the June 28^th auction where 10-year securities sold at 4.94 percent. This also represents a risk premium of 252 basis points when compared to the benchmark German bunds currently priced at 3.25 percent.

The CEBR gives Italy an outside chance of avoiding a default but only if the economy manages a significant growth increase. The chances of this appear slim indeed when considering the latest figures. For the first three months of 2011, the economy expanded by a miniscule 0.1 percent and indications are the second quarter will return a similar result once the tally is complete.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

Aug. 4 (Bloomberg) — Shaun Cochran, head of Korea research at CLSA Asia-Pacific Markets, talks about his investment strategy for the nation’s equities. Cochrane speaks with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)

Aug. 4 (Bloomberg) — Walter de Wet, head of commodities research at Standard Bank Plc, talks about the outlook for copper prices. He speaks with Francine Lacqua on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

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The Bank of England (BoE) maintained its official Bank Rate, which is paid on commercial bank reserves, steady at 0.50%.  The BoE also made no changes to its 200 billion pound asset purchase program.  The Bank does not supply commentary with its monetary policy decisions, however the minutes of the monetary policy committee meeting will be published at 9.30am on Wednesday the 17th of August 2011, according to the Bank’s announcement.  The Bank will also release inflation and output projections in its Inflation Report at 10:30am on Wednesday the 10th of August 2011.

The Bank also held the official Bank Rate unchanged at 0.50% at its July meeting this year; the rate has remained on hold since March 2009, when the Bank reduced the interest rate by 50 basis points to 0.50%.  The United Kingdom reported annual consumer price inflation of 4.2% in June, compared to 4.50% in May and April, and 4.00% in March, and still above the Bank’s inflation target of 2.00%.  The UK saw quarterly GDP growth of 0.5% in Q1 this year, while annual economic growth was reported at 1.8%.

The Central Bank of the Republic of Turkey cut its benchmark 1-week repo rate by 50 basis points to 5.75% from 6.25% after holding an emergency meeting.  The Bank also moved to increase the overnight borrowing rate to 5.00% from 1.50%, but kept the lending rate unchanged at 9.00%.  The Bank said: “Concerns regarding sovereign debt problems in some European economies and the global growth outlook have continued to intensify, increasing the risks highlighted in the July Committee meeting.”  On the rate cut the bank said it was intended “to reduce the risk of a domestic recession that may be caused by the heightened problems in the global economy.”

The Turkish central bank held its benchmark interest rate unchanged during its July meeting this year, the bank last cut its benchmark interest rate by 25 basis points to 6.25% in January this year.  The Turkish central bank also adjusted required reserves in late July.  Turkey reported annual consumer price inflation of 6.2% in June, off from 7.2% in May, but up from 4.26% in April, and 3.99% in March, and above the Bank’s full year inflation target of 5.5%.  The Turkish Lira dropped over 2 percent following the announcement, and is trading around 1.73 against the US dollar.

www.CentralBankNews.info

Two-year Treasury yields touched a record low of just 0.28 percent today in response to fears that the U.S. economy could be hurtling towards another recession. In New York the S&P 500 was down 2.6 percent in mid-day trading while the Dow shed 2.3 percent. The carnage in Canada’s largest exchange, the Toronto Stock Exchange, pushed the main index down a whopping 372 points for a loss of 2.9 percent with half the trading day remaining.

The day’s events clearly show a significant loss of confidence in equities and the economy in general. Investors are looking for other options in a bid to protect assets and even at barely over a quarter point, the safety of Treasuries is seen as an attractive alternative. Gold will likely continue to find buyers as will assets denominated in the Swiss franc and Australian and Canadian dollars.

Greater Likelihood of QEIII

Today’s events will also contribute to the growing speculation that the Federal Reserve will have no choice but to resort to anther round of quantitative easing. The economy is approaching free-fall with the latest manufacturing data confirming that growth in the sector slowed to its weakest level in two years.

Tomorrow’s Non-Farm Payroll report has the potential to really light the recession fuse if the actual number falls short of the 85,000 new jobs predicted by analysts.

Central Banks Acting

All this comes in the wake of increased activity by the major central banks. The Bank of England today held interest rates steady at 0.5 percent, while the European Central Bank kept rates at 1.5 percent. However, the ECB did confirm that it intended to provide additional loans to the banking system in light of the “very high” degree of economic uncertainty and the ongoing debt crisis.

The Swiss National Bank, in an attempt to devalue its currency, cut interest rates to zero yesterday and sold francs into the money markets. The Bank of Japan also acted to weaken the yen which has climbed steadily against the floundering dollar.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog