Forex Fundamental Trends Monitor 09.06.2010

Major Currencies vs. US Dollar (% change)

30Aug 2010 – 03Sep 2010

General Comment:

Risk appetite staged an impressive comeback as US economic data surprised sharply to the upside throughout last week, starting with a outperformance on the consumer confidence reading, followed by an unexpected pickup in manufacturing growth, and closing out with a much stronger than expected jobs report. Equity markets responded accordingly as traders continued to look to the health of the world’s largest consumer market as the bellwether for the global recovery at large, with the MSCI World Stock Index snapping three consecutive weeks of losses to add 3.7 percent, the most in two months. The docket of US event risk pales by comparison in the week ahead, seemingly suggesting that little stands in the way established pro-risk momentum and promising continued gains for stocks and related currencies.

That said, the week ahead marks an important seasonal turning point – the US Labor Day holiday – which typically serves as the line in the sand between the “summer doldrums” period when most traders are on vacation (usually marked off starting with the US Memorial Day holiday at the end of May) and the time when they return to the markets. Equity markets crept higher to add 4.8 percent between the Memorial and Labor Day holidays this year, thoroughly outdoing the historical average of less than 1 percent over the same period, but trading volumes plunged by a hefty 31.4 percent. This seems to undermine the conviction behind recent gains, hinting at the possibility that last week’s performance may have been the last gasp of a move soon to be reversed as investors put the summer behind them, leaving the door open for renewed risk aversion.

EURUSD:

The correlation between the Euro and the MSCI World Stock Index has firmed from last week, anchoring the single currency to broad trends in risk appetite once again. German Factory Orders, Industrial Production, and Trade Balance figures are of top significance on the homegrown economic calendar as traders look to gauge the demand outlook for the world’s second-largest exporter as a proxy for the global recovery at large.

Source: Bloomberg

GBPUSD:

British Pound 1-monthvolatility fell 6.2 percent last week, making for the most sluggish price action among the majors. As with the Euro however, the correlation between sterling and the MSCI World Stock Index has strengthened, pointing to the possibility for more active trade ahead as the risk sentiment landscape remains in flux. An interest rate decision from the Bank of England highlights the domestic economic calendar, but the outcome may not prove market-moving with policymakers unlikely to offer anything that has not been priced in for some time already. Expectations call for both key elements of monetary policy – benchmark borrowing costs and the QE asset purchase target – to remain unchanged at 0.5 percent and £200 billion, respectively. The central bank has argued for some time that the upswing in prices since the beginning of 2010 owes to temporary factors, with the annualizedinflation rate set to fall back below 2 percent by 2012.Given such a prolonged time frame, Mervyn King and company are surely going nowhere fast despite a promise to shift policy “in either direction” as needed, a likely nod toward the threat of headwinds from the government’s austerity program. Indeed, a Credit Suisse gauge of priced in rate hike expectations hints traders are betting on no changes in benchmark borrowing costs at least until the second half of 2011, a view in place since early August.

Source: Bloomberg

USDJPY:

Prices continue tracking closely with US Treasury yields, but a tame US economic calendar may shift the spotlight to the domestic economic calendar. The monetary policy announcement from the Bank of Japan is likely to be a non-event after last week’s emergency meeting, but July’s Machine Orders and Current Account figures as well as the third-quarter BSI Large Industry business confidence survey may prove of interest as traders size up the prospects of the export-led recovery amid fears of cooling global demand. Revised second-quarter Gross Domestic Product figures and Augusts’ Corporate Goods Price Index reading round out scheduled event risk, with markets expected to be faced with an upward revision on the headline growth figure but deepening wholesale deflation.

Source: Bloomberg

USDCAD, AUDUSD, NZDUSD:

The commodity bloc remains closely tied to risk sentiment, with prices continuing to show significant correlations to the MSCI World Stock Index (CAD: 0.87, AUD: 0.86 and NZD: 0.86). Monetary policy announcements from the Reserve Bank of Australia and the Bank of Canada as well as employment reports from both Canada and Australia headline the economic calendar.

In Australia, the RBA is expected to keep borrowing costs unchanged at 4.5 percent for the fifth consecutive month, with a Credit Suisse gauge of priced-in expectations pointing to no further tightening in the coming year. Meanwhile, the jobs report is expected to show the economy added 25,000 jobs in August, pushing the Unemployment Rate to 5.2 percent, the lowest in two months.

Turning to Canada, economists expect the BOC to push borrowing costs higher by another 25bps to 1 percent. However, the priced-in probability of an increase (as derived from trading in overnight indexed swaps) at the September meeting has averaged at 54 percent over the past four weeks, hinting that volatility is likely to surround the announcement as the even split in expectations invariably assures a large share of traders will end up the wrong side of the market regardless of the outcome. As for the labor market figures, the economy is expected to add 30,000 jobs in August – the most in six months – while the jobless rate holds unchanged from July at 8 percent.

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

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