Forex Trading

US Dollar: Will Heavy Event Risk Stem the Bleeding?

Fundamental Outlook for US Dollar: Neutral

- Consumer confidence rises to an eight month high; but is this optimism warranted?
- Durable goods orders jump and housing statistics continue their slow improvement
- Despite a positive revision to first quarter growth, the US economy trudged through its worst six months is 50 years

The statistics on the US dollar are ghastly. Through the month of May, the world’s most actively traded currency plunged 547 pips or 6.5 percent on a traded weighted basis to its lowest level this year. With the momentum building, there was no shortage of reason to sell this currency. The 1Q GDP revisions confirmed the country’s worst six month period of economic activity in 51 years. Policy officials warned that a recovery could be pushed back into 2010. Rising national debt levels intensified speculation that the US sovereign debt rating was in jeopardy. And, once again, international calls to abandon the US dollar as a reserve currency were amplified. All of these are legitimate concerns; but none of them are new or immediate problems. This is what is important to remember heading into the coming week. Risk appetite will no doubt has its influence on the greenback; but a dense list of high-level event risk (from the US docket and abroad) will cast the battered currency in a more objective light as we see where the US really stands in the global scale between economic depression and recovery.

Referring to the dollar’s own calendar, fundamental traders will respond to a wide range of proven market movers. The scope of the list will cover nearly every facet of the US economy and will therefore better qualify speculation as to whether the there are signs of ‘green shoots.’ This is a misleading and perhaps overused term that allude to the beginning signs of growth. Like the rest of the world, the United States if far from growth; and what speculators benchmark now is the deceleration in the pace of contraction. Topping the list for potential impact (as it usually does) is the monthly non-farm payrolls report. The consensus from Bloomberg’s survey economists projects another 521,000 jobs lost through May. It is first interesting to note that the spread on expectations has grown to be relatively tight (forecasts range between a 450,000 and 600,000 drop). More important though is the pace of job losses. If this figure prints as expected, it would mark the second month that the rate of payroll reductions slowed and it would be an overall, significant improvement on January’s record breaking 741,000. As the leading indicator for economic health, a steady improvement of this caliber could single-handedly convert a bulk of the market to believers that the world’s largest economy is on track to recovery ahead of its major trade partners.

Nothing to scoff at itself, the rest of the data crossing the wires over the coming week will cover the health of the individual sectors in a little more detail. Consumers – whose spending accounts for 70 percent of the economy – will evaluated through personal income, spending and credit figures. If we are to expect a genuine economic recovery before the end of the year, we should see a turn in these figures relatively soon. From the business side of things, the ISM manufacturing and services sector surveys are due on Monday and Wednesday respectively. The outlook for factory activity has been negative for 15 months now and services seven – though the reversal since the end of 2008 has been relatively aggressive. Finally, the pending home sales figure will be a lagging indicator for the housing market, but consistent improvements from data in this group will eventually pan out to a true revival.

Alone, the round of US data will gauge how the American economy is performing compared to last month, last quarter and last year. However, for currency traders, the Forex market is a relative game in which the pace of US growth and returns must be set against its global counterparts to gauge the strength of the dollar. In this capacity, we must set the dollar against the backdrop of the major releases from other economies next week. The list of notables includes: the RBA, BoC, ECB and BoE rate decisions; Canadian 1Q GDP; Australia 1Q GDP; Swiss 1Q GDP; Canadian employment; and 1Q Japanese capital spending among others.

Euro Outlook to Depend on ECB Rate Decision, S&P 500 Performance

Fundamental Outlook for Euro This Week: Neutral

- Euro Zone inflation registers at 0.0 percent ahead of ECB Rate Decision
- Euro Zone Consumer Confidence bounces, has sentiment truly turned?
- EURUSD defies technical forecasts, where’s the next turning point?

The Euro surged to fresh year-to-date highs against the US dollar, but sharp Greenback declines overshadowed the Euro’s relative underperformance versus the British Pound and other key counterparts. The EUR/GBP exchange rate languished near year-to-date lows despite the surge in the EUR/USD, and the Euro was actually the third-worst performing currency of the G10. Unimpressive European fundamental data certainly did little to bolster the domestic currency’s cause. Negative surprises in German Gross Domestic Product figures and Euro Zone Consumer Price Index data hardly proved constructive ahead of the coming week’s European Central Bank rate decision. Market attention now turns to the flurry of central bank rate announcements in the days ahead. The ECB is widely forecast to leave rates unchanged, but FX traders will pay especially close attention to any noteworthy shifts in rhetoric from the regional central bank.

Market prices and economist forecasts overwhelmingly point to unchanged European interest rates through the coming meeting, but financial markets will listen closely for details on the ECB’s announced €60 billion in covered bond purchases. As central banks around the world have enacted fairly aggressive unconventional measures to boost money supply, many have criticized the ECB as being slow to react to deflationary financial conditions across the Euro area. The €60 billion in bond purchases pales in comparison to the US Federal Reserve’s massive Term Asset-Backed Securities Loan Facility (TALF) program, but it’s at least a start. All the same, the Euro may have actually benefited from the domestic central bank’s relatively muted response to the global financial crisis. Fears of overly-aggressive monetary and fiscal expansion have played a fairly significant part in ongoing US Dollar weakness. If the ECB were to announce similarly aggressive monetary measures (highly unlikely), the Euro could likewise fall against global counterparts.

Euro Zone economic event risk remains otherwise limited, and it will be far more important to watch developments in other economies. Interest rate announcements out of the Bank of England, Reserve Bank of Australia, Bank of Canada, and US Federal Reserve will make for an interesting week in FX Trading markets. Though it is especially difficult to predict what effect these likely varied announcements will have on global economic sentiment, any signs of a turnaround in the recent global equity market rally could have especially noteworthy effects on the US Dollar. The traditionally safe-haven USD has fallen substantially on vast improvements in global risk sentiment, and Friday’s rally in the US S&P 500 left the dollar at the very bottom of its trading range. It will be critical to watch whether such risk-taking trends can be sustained in the face of massive global economic headwinds.

Japanese Yen Loses on Carry Demand, Data to Highlight Economic Downsides

Fundamental Outlook for Japanese Yen: Neutral

- The Bank of Japan upgraded their economic outlook for the first time since 2006
- Japan’s trade deficit shrank in April to 52.2 billion yen from -97.1 billion yen
- Japan’s all-industry index fell yet again in March by 2.4%, following a 2.3 percent drop in February

Unlike the week prior, there weren’t many major economic releases for Japan, and we ultimately saw the Japanese yen fall 0.6 percent against the US dollar, more than 2 percent against the British pound and Swiss franc, roughly 3 percent against the Australian dollar and Canadian dollar, and a whopping 3.9 percent against the New Zealand dollar. The moves were in line with a 3.6 percent drop in the S&P 500, suggesting that risk trends are still dominating Japanese yen price action, for the most part.

That said, there was a bit of optimism stoked about the Japanese economy after the Bank of Japan’s Monthly Report was released, as they upgraded their outlook for the first time since 2006. The report said that “economic conditions have been deteriorating, but exports and production are beginning to level out.” It is clear, though, that the BOJ sees foreign demand as being the only chance for recovery in Japan, as “private demand is likely to continue weakening with corporate profits and firms' funding conditions remaining severe and a worsening employment and income situation.”

This point may be highlighted over the next week, as labor cash earnings are forecasted to contract for the eleventh straight month and by the most in almost seven year during April as the index may post at -4.2 percent. Furthermore, capital spending is projected to have plummeted 27.1 percent in Q1, suggesting that businesses do not expect growth to resume any time soon and adding to evidence that job losses could continue to climb.

That said, traders should keep an eye on major equity indexes like the S&P 500, as a rally above its May 8 high of 930 would suggest that risk appetite may be high enough to lead FX carry trades higher. On the other hand, reversals in risk assets could set the stage for a sharp pullback in the Japanese yen crosses.

British Pound Remains Overbought After Rally Above 1.61

Fundamental Outlook for British Pound: Bearish

- UK mortgage approvals jumped during April, according to British Bankers Association
- A CBI survey showed the UK retail sales tumbled in May
- UK house prices rose by the most since 2006 in May, according to Nationwide Building Society

GBP/USD broke clear above resistance at the 38.2 percent fib of 2.0160-1.3503 at 1.6049 on Friday, as the greenback fell sharply across the majors. However, GBP/USD remains very overbought according to daily RSI, and while extremes can hold for days and weeks, the moves suggest the pair could turn lower at any time, making it dangerous to buy into the trend.

There will be a variety of growth-related indicators released next week, as the Purchasing Managers’ Index (PMI) for the UK manufacturing, construction, and services sectors are due out. All of the indexes are projected to improve, but the big question is if they can breach the 50 mark, which would indicate an expansion in business activity. Services PMI was the closest to this level at 48.7 during April, and thus, a better-than-expected result could boost speculation that the UK economy is in for a consumer-led recovery.

On Thursday, the Bank of England is expected to leave rates unchanged for the third straight month at an all-time low of 0.50 percent. Based on the BOE’s last policy statement and the minutes from the meeting, we know that the central bank expanded their quantitative easing (QE) program by 50 billion pounds to 125 billion pounds (which happened to be by a unanimous vote), that the drop in Q1 GDP of -1.9 percent was worse than expected, and that CPI will likely will be below the BOE’s 2 percent inflation target in the medium term. The minutes also revealed that some members thought that “a case could be made for a larger stimulus,” but the high uncertainty of QE led them to believe that there was “no pressing need for the larger extension” at that point. Ultimately, how the British pound responds will likely depend on the BOE’s QE stance. Signs that the BOE may increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, though the markets are just as likely to show no reaction in this case.



Written by John Kicklighter, David Rodriguez, Terri Belkas, John Rivera and David Song, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 06.01.09

Today, traders are advised to follow constant daily development coming out of the U.S. economy, such as the release of Prelim GDP figure. This indicator might provide for extreme market volatility in the major currency pairs. Traders may find good opportunities to enter the market following this vital announcement at 12:30 GMT.



USD - GDP Report on Tap - Will USD Weakness Continue?

The U.S. Dollar traded weakly in yesterday's session as it witnessed depreciation against all of its currency rivals. Plunging toward the critical levels of 1.4000 against the EUR and 1.6000 against the GBP, the greenback's recent weakness doesn't appear to have an end in sight for today.

With an expectant worry that today's data releases will put investor focus on America's increase in debt issuance, thus resulting in a higher Treasury yield; the market may continue to go bearish on the USD. As expected, higher yielding assets and currencies like the EUR and GBP may then gain significantly from these speculations. Positive economic data in Europe throughout the week has also resulted in dramatic investment shifts towards a diversified portfolio for many traders who wish to increase their risk and pull away from safe-haven investments.

Looking forward to today, forex traders will no doubt be marking the multitude of European data releases as Britain's HPI housing report may show a sudden return to market weakness, and the Euro-Zone's M3 money supply report has the potential of showing a drop in the level of currency available throughout the European forex market. In the United States, the Preliminary GDP report is scheduled to be released at 12:30 GMT and may show the U.S. economy shrinking less than last quarter, a sign that the economy could be entering a solid recovery. With a focus on America's debt issuance, USD weakness is anticipated to continue throughout the end of the week.

EUR - EUR's Recent Gains on Unsteady Ground

The EUR has been the beneficiary of the market's recent increase in risk appetite considering it has appreciated against almost all of its currency rivals over the past week. The 16-nation currency climbed towards the psychological barrier of 1.4000 against the USD, temporarily breaching the resistance line before falling back under the mark. With the recent dash to sell off the JPY, the EUR apparently received the bulk of investor flight, climbing as high as 135.40 against the island currency.

With the surge of consumer confidence in some of Europe's largest economies, there exists a moderate level of hope in a speedy recovery for the Euro-Zone's regional economy. German market data has displayed a wide array of positive results which have helped convince many weary traders that the worst may indeed be over. In a rush to diversify trading portfolios for riskier assets, the EUR appears to have been one of the primary choices for this move. The question remains, however, as to whether this move towards Europe will continue. Some analysts say it marks the beginning of a recovery, but will not sustain itself at this pace in the short-term.

As for today, there are two important data releases which forex traders need to keep an eye on. The first is the Nationwide HPI report in Britain which may show the housing market declining once more. This report is scheduled to be released at 6:00 GMT. The second is the report on the M3 money supply in circulation throughout the Euro-Zone. With a direct correlation to interest rates, the money supply is an important gauge of currency valuation. With negative results, we could see a temporary reversal to the EUR's recent trends through the end of today's trading.

JPY - JPY-Funded Carry Trades Returning?

The Japanese Yen saw one of its most bearish sessions in months. Dropping back towards the 97.00 level against the USD, and the 155.00 level against the GBP, the island currency witnessed a rash sell-off in Thursday's mid-day trading sessions. There was a growing concern that Japanese equities were more resilient than previously forecast which led to an increase in risk appetite for many safe-haven investors. This generated an investment flight towards Europe in search of higher yielding assets. Some analysts believe the JPY-funded carry trade may be on the return, which will eventually push the value of the Yen towards the lows of 2007-2008.

As for today, there aren't many data releases expected from Japan. However, last night's consumer pricing reports indicated a decrease in price for Japanese goods and services, highlighting a weakened demand for these sectors of Japan's economy. This may also have generated a strengthened push to flee from JPY safe-haven investments. Unless news from the Euro-Zone or U.S. comes out highly negative throughout the day, the JPY will likely continue getting weaker.

Crude Oil - Crude Oil Price Meets Little Resistance

After climbing to a record high not seen since November, the price of Crude Oil has stabilized for the moment. With a sudden flight from safe-haven investments such as the JPY and USD, commodity prices appeared to gain a strong boost from the weakness of the Dollar. Crude Oil spiked to the price of $65 a barrel in mid-day trading yesterday. Only in today's early trading hours did the price begin to settle just under this price barrier.

The Organization of Petroleum Exporting Countries (OPEC) agreed not to change production levels for the time being, with the assumption that doing so may destabilize weakened economies. A report showing a sharp decline in oil inventories also supported this move as a boost to demand and consumption is expected in the coming weeks. With this information in mind, forex traders may understand that long-term pressure continues to show upward momentum, meaning the price of oil may continue on up towards $75 a barrel in the coming months.

Article Source - U.S Prelim GDP Figure will Determine Today's Trend

Euro-Zone Consumer Prices might actually come in less than the consensus forecast of 0.2%. A deflationary figure may be a reality after Germany, the 16-nation bloc’s largest economy, saw its own respective consumer price number publish 0.2 percentage points lower than the surveyed expectation. Jeane-Claude Trichet and his European Central Bank may be pressured to act more aggressively if a deflationary figure alerts

Key Overnight Developments

• Japanese Unemployment Hits 5.5 Year High
• Japan’s Industrial Production Jumps By Most in Six Years

Critical Levels



Euro price action traded to pivot resistance before heading back down, but failed to break the 1.39 mark. Sterling confined itself to the upper 1.59 mark, showing topping-out characteristics that could see the Dollar move ahead at the start of next week’s trading.

Asia Session Highlights



The price of Japanese Consumer Goods fell for a third straight month in April, by 0.1%, which was better than economists had forecast. March also saw the figure fell by 0.1%. Retail Sales may have contributed to the fact that the CPI number did not accelerate in a negative direction. In fact, data for April showed that consumer increased their appetite by 0.6% after having plummeted 1.1% in the month prior. This upward pressure on prices might not hold steady in future months if the island economy continues to dwindle.

Japan's Jobless Rate rose by to the highest level since late-2003, by 0.2 percentage points to 5.0% in April. In line with expectations, the figure rose as the economy continued to drag the labor market down. The much watched jobs-applicant ratio tanked to a 10-year low of 0.46 from 0.52. In a sign that workers might be turning a bit optimistic, the number of new applicants as a percentage of the total work force rose a tick to 0.77%. This coincides with the nation's consumer confidence number, which rose to 33.2 in April, from 29.6 in the month prior.

Japan's Industrial Production in April soared by the most in at least six years, when the data first began being compiled. Indeed, the key metric, rose 5.2% in the month after economists had forecast it to rise by only 3.3%. The 12 months through the end of this period saw such production fall 31.2%.

Australia’s Private Sector Credit, the amount that banks loan to business and consumers, rose by 0.1% in April from the month prior. The steady increase may be as a result of a monetary policy reluctant to continue a rate-cutting campaign.

Euro Session: What to Expect



Euro-Zone Consumer Prices are expected to to have risen only 0.2% in the year through the end of May. If Germany, the zone’s largest economy, is of any indication, CPI data might actually come in lower than the surveyed figure. Germany’s inflation rate underscored estimates by 0.2 percentage points and may see its own data heavily weigh on the broader Euro-Zone’s published number. Just yesterday we saw that the Unemployment Change number came in significantly under that which was surveyed. At only 1,000 new jobs created, as opposed to the expected 64,000, the upward pressure that would normally be felt on the price of goods might not actually be completely there. Indeed, as more people are unemployed, the less cash there exists to be spent on various items included in the CPI basket.

Such developments may also lead German Retail Sales to come in largely under that which is expected. The overly optimistic 0.5% expected number might actually continue to be a negative one. But as a recent revision have shown, March’s spending data was actually not as bad as what the government had originally reported.

The Swiss KOF Leading Indicator will likely continue to be in the negative region, but may show signs of relief by reducing the rate of deterioration if not actually showing an upward tick. With the number of exports surging ahead by 8.3% in April alone, and the unemployment level rising in line with expectations by only a 0.1 percentage point we may see the Swiss economy somewhat stabilize.

Written by Luis Gil, DailyFX Research
Article Source - Deflation, Not Inflation, Might Dominate Headlines Tomorrow (Euro Open)

• Market Sentiment and Carry Interest Will Have To Find Its Bearings Soon
• US and New Zealand Credit Ratings Shirk Dour Forecasts
• A Round of Rate Decisions and Growth Reports Gauge Risk/Reward

Risk appetite across the markets has maintained the bullish trajectory cultivated since the beginning of March; but momentum has clearly drained over the past few weeks. The hesitation develops as market participants debate the merits of forecasting a genuine market recovery on the basis of what is so far early signs of a moderating recession and the promise such tentative progress holds for bolstering yields. This wavering is a sign that skepticism is on the rise with traders having already spent much of the fuel a speculative rebound could afford the market after a lengthy period of caution and deleveraging. However, looking at the Carry Trade Index, it is clear that this congestion will come to a breaking point soon. Looking beyond the congestion of the past month, there is still a steady bullish bias behind risk appetite since February. The same can be seen in the benchmarks for the various markets: the S&P 500 has advanced eight out of the past 10 weeks; the benchmark 10-year Treasury note is off nearly 9 percent from its record highs set in December; and AUDJPY has climbed 12 of the past 16 weeks to a current perch of 33.5 percent off its recent record lows. Clearly, the momentum of these past few months would support a continued rise in sentiment. However, putting this advance into perspective, the Carry index is still more than 26 percent off its 2006 highs and equities are more than 40 percent from their respective record highs.

When will the struggle between speculation and fundamentals balance out; and what will happen when the market shifts back to this equilibrium? As the market’s appetite for risk rises, we have to consider what can fuel the advance through the coming days, weeks and months on to a genuine recovery – if this is indeed a genuine recovery. Here we see objective fundamentals are still sketchy in their support for a rise in optimism. Taking the basic ‘risk-versus-reward’ analysis approach, there is reason to be concerned over further financial troubles later down the line and certainly grounds to doubt a rise in returns beyond what volatile speculative gains can achieve. Separating capital returns and yield income is essential. Capital gains can be driven by normal market forces like a rebound from oversold conditions and temporary momentum to sustain a rally as investors return to the market. This could essentially be the foundation for the progress we have seen the markets make over the past three to four months. However, to turn a reversal into a recovery, there needs to be the hope of higher yield income to attractive deeper pools of money to the more established carry trade interests. Next week’s RBA, ECB, BoE and BoC rate decisions will help on this front. Should they all hold as expected and note improvements seen in the distance, we will be one step closer to a return to carry. In the meantime, safety is still the greater unknown. While the US and New Zealand debt ratings were recently secured, we still have not seen a clear turn in global recession readings.

Written by John Kicklighter, Currency Strategist
Article Source - Market Sentiment and Carry Interest Will Have To Find Its Bearings Soon

The U.S. Dollar and Crude Oil experienced much bullishness in yesterday's trading. The Dollar reacted positively to decent existing Home Sales data and Timothy Geithner's optimistic speech regarding the U.S. economy. This helped the Dollar record a correction against most of its major currency pairs. Crude Oil also reacted positively to the news, helping the "black gold" extend its bullish run.



USD - Dollar Rises on Positive Economic Data

The Dollar rallied yesterday against most of its major counterparts after data suggesting the slowdown in the U.S. housing market has bottomed out gave support to the U.S. currency as a safe-haven. The Dollar has been sold off recently partially due to growing optimism about the outlook for the U.S. economy. The USD finished yesterday's trading session 150 pips higher against the EUR at the1.3819 level.

The major economic event that came out of the U.S yesterday was the Existing Home Sales data release. Home resales in the U.S. probably rose in April as foreclosure auctions and improved affordability spurred bargain hunters. Moreover, record-low mortgage rates, tax credits and falling prices may keep boost demand of unsold homes. In turn, a pickup in sales may help stem the slump in property values, which is key to shoring up household finances and construction as the economy begins to emerge from the recession.

The Dollar also extended its gains against the EUR yesterday after an auction of fresh five-year Treasury debt attracted solid demand, easing fears that U.S. deficits have soured foreigner's appetite for U.S. assets.

USD trading will be interesting today as important economic data is expected to be released. From 12:30 GMT a series of economic indicators will be released, starting with Core Durable Goods figures, Unemployment Claims and the New Home Sales. Surprisingly, almost all of these releases are expected to be higher than their previous figures, meaning the USD could continue to show further bullishness today. Traders should stay close to the market today, as there is a strong chance to capitalize on the fluctuations which will likely follow these releases.

EUR - The EUR Loses Momentum

The EUR lost momentum during yesterday's trading session, correcting the sharp gains against the Dollar and JPY seen last week. This was following comments by a European Central Bank policymaker suggesting further Interest Rate cuts could not be ruled out, and profit-taking after a rally last week hurt the European currency. By yesterday's close, the 16 nation currency fell sharply against the USD, pushing the oft-traded currency pair to 1.3819. The EUR experienced similar behavior against the JPY and closed at 1.3300.

However, the Pound Sterling was the biggest mover amongst the majors, propelled higher by receding pessimism about the UK economy and financial sector. This was boosted by a general move into riskier assets as equity markets rose after a pick-up in U.S. consumer confidence. The Pound outperformed the EUR, hitting $1.60 for the first time in almost seven months as investors continued to pare back the large bets against the currency built up after the collapse of Lehman Brothers last year.

Looking ahead to today, the most important economic indicator scheduled to be released from the Euro-Zone is the German Unemployment Change at 8:00 GMT. Analysts are forecasting this figure to slightly increase from its previous reading. Traders will be paying close attention to today's announcement as a stronger than expected result may boost the EUR in the short-term. Traders are also advised to follow the CBI Realized Sales figures coming out of Britain at 10:00 GMT, and the Unemployment Claims figures coming out of the U.S. at 12:30 GMT as these results may set the EUR's main currency crosses going into next week.

JPY - Yen Experiences Mixed Results against the Majors

The Yen completed yesterday's trading session with mixed results versus its major currency pairs as investors chose the Dollar over the Yen for a safe-haven trade. The JPY fell against the USD and closed around 95.25. However, the Japanese Yen rose almost 40 pips versus the EUR, closing at 133.00.

The major economic event that came out of Japan yesterday was the Retail Sales figures. Retail Sales fell for an eighth month in April as worsening job prospects and declining wages deterred shoppers. The deep recession is spreading to households, whose outlays account for more than half of the economy. Japan will struggle to return to a sustainable growth path as long as companies from Toyota Company keep cutting jobs to minimize losses.

Crude Oil - Crude Oil Approaches the $63 Price Level

Crude Oil prices experienced another day of appreciation as the oft-traded commodity nearly hit $63 during yesterday's trading session. This has been compounded by a weaker Dollar in recent weeks, causing investors to flee to commodities such as Crude Oil. Furthermore, if the U.S. continues to publish more positive economic news, and if the American government continues to be aggressive in tackling the current financial crisis, then Crude prices may hit $75 by the 4th quarter of 2009.

Expectations that consumers may once again want more Oil when the recession bottoms out have also fueled the rally, with traders watching the stock market for economic telltales. There is a reasonable possibility that Oil prices will continue to be bullish going into next week, providing that the economic situation of the leading economies continues to rapidly improve.

Article Source - Positive Economic Data from the U.S. Pushes Up Dollar and Oil

Germany’s ILO Unemployment estimate will be watched tomorrow, but may surprise to the upside as the country unexpectedly returned to a deflationary stage during this month. Sentiment data will be released tomorrow for a month in which an easing surge in global equities saw stocks teeter in a ranging environment.

Key Overnight Developments

• Pound Fails to Sustain 1.60 Break
• Japanese Retail Sales Advance For A First Time Since August
• New Zealand Fiscal Budget Reveals Record Deficit

Critical Levels



The British Pound sold-off by as much as 150 pips after breaking through the key 1.60 mark, failing to sustain a perceived break-out rally. Euro continued to add to its losses against the U.S. Dollar after inflation data showed that Germany suffered from deflation during May, adding to expectations that the European Central Bank may be required to act more aggressively in stimulating the economy.

Asia Session Highlights



Japan's Retail Trade data advanced for the first time since August during April, a period which saw Consumer Confidence among Japanese consumers rise by the largest amount since July 2004. Indeed, the figure rose 0.6%, ahead of expectations calling for the number to rise just a tick lower than the realized figure. The broader total store sales jumped by 5.9%, the most since October 2007. Surprisingly, Motor Vehicle sales was one of the strongest performing sub-sectors of the metric, advancing 7.4%. These stunning developments lead one to wonder what it is that may be driving such renewed spending habits. Japan currently suffers from continued economic deterioration and advancing labor market weakness. But as noted above, Consumer Confidence advanced by the most since July 2004, a move which may have come on the back of surging global equities.

Central bankers throughout the world are extremely aware of acting too slowly to curb "extraordinary" liquidity-easing measures, said the Reserve Bank of Australia's Deputy Governor Ric Battellino in Sydney today. Indeed "the high state of awareness that currently exists about the risk of being too slow to reverse recent exceptional measures" is likely to "limit the probability of such a mistake being made," Battellino said. Despite these cautious warnings, it's still too early to decide whether aggressive policy measures have been effective.

New Zealand Minister of Finance Bill English unveiled that the National Party's first fiscal budget since taking power last year. English revealed a 2009-2010 budget deficit of NZ$11.87 billion ($7.3 billion), more than that which was expected. In his accompanying statement, the finance minister revealed a set of forecasts. The economy will fall by 1.7% in the year through March 2010, but will expand 1.8% in the 12 months through 2011. To finance many of the projects announced, the treasury will sell NZ$50 billion in bonds over the next four years. Negative and slowing growth, accompanied by expansive spending, will see the debt-to-GDP ratio rise by as much as 43% by 2017. These measures are a massive effort to "keep the economy going through the recession" by "supporting jobs, safeguarding entitlements, improving public services and building more infrastructure," English's plan said. Moments after the speech, Moody’s Investor Service said that the island nation’s debt load is of some concern, but that their Aaa credit rating would continue to remain stable.

Euro Session: What to Expect



Germany’s ILO Unemployment Rate estimate for April is expected to rise for the fifth straight month. The forecast 0.1 percentage point uptick in the figure may be understating the potentially weak start that the German economy has had for the second quarter. Just yesterday we saw consumer price data unexpectedly revert to a deflationary phase. These developments may have come as layoffs in the world’s fourth-largest economy took an unprecedented toll in the month. Despite this decline inflation the Unemployment Change estimate predicts that an additional 64,000 jobs were created in May.

Switzerland’s Trade Balance may fall into deficit territory in April after two-consecutive months of inching toward the area where imports exceed exports. Unexpected labor market strength during the first quarter may contribute to increased consumption from abroad. Estimates had forecast the level of employed to have fallen by 0.1% in the first three months of the year when in reality, the level actually increased by 0.8%. As such, the current surplus in foreign trade may actually turn to a deficit.

Euro-Zone Consumer Confidence is expected to rise for a second straight period after having fallen six consecutive months prior. The minuscule surveyed uptick may fall short of that. At least, on the business front, we saw that enterprise managers saw the current assessment of the economy as being worse in May than they did in the month prior.

Written by Luis Gil, DailyFX Research
Article Source - German Unemployment Estimates May Come Out Worse Than Expected (Euro Open)

The U.S Consumer Confidence report which was released yesterday, gave a surprisingly positive result, suggesting that the public is retaining its faith in the North-American economy. In today's trading, traders should pay special attention to the Existing Home Sales indicator scheduled for 14:00 GMT, as another positive figure could further strengthen the USD.



USD - Dollar Pairs Gains On Positive Consumer Confidence

The greenback advanced versus all of its major counterparts as signs of improving consumer confidence in the United States combined with worries about Germany's banks hurt the European currency after a rally last week. The Conference Board's U.S. consumer confidence index rose in May to 54.9 from an upwardly revised 40.8 in April. The U.S currency strengthened after a media report questioning the health of the German banking system prompted traders to trim back bets against the Dollar.

In trading just before midday in New York, the Dollar was up 0.2% versus the EUR to $1.3893, after touching a session low of $1.3859. The Dollar also rose against the Japanese Yen, trading at 95.10 Yen compared with 94.77 Yen late Friday. But after the release of the U.S. confidence numbers, the EUR also regained some ground against the Dollar, and was at $1.3984 in late New York trade.

The Dollar traded at 5 month lows last week, pushed lower in part by concerns that soaring deficits may threaten the United States' 'AAA' sovereign debt rating. However, the Dollar would likely hold its value even if the U.S. lost its AAA credit rating, because demand for government securities among foreign central banks is unlikely to wane, according to analysts.

Another round of important economic data from U.S is ahead, the Existing Home Sales. The indicator will be published on Wednesday at 14:00 GMT, and is expected to rise from 4.57 million to 4.65 million. A good figure could help the Dollar with retracting its last month's falls against the EUR.

EUR - EUR Hit by Concerns over German banking sector

The European currency depreciated for the first time in 7 days, eroding advances that pushed it last week to the highest level in 4 months. The 16-nation currency fell against the Dollar on speculation last week's gain was too large to sustain, reducing the currency's appeal. The EUR dropped 0.2% to $1.3982 from $1.4017 yesterday. It touched $1.4051 on May 22, the highest level since Jan. 2. Against the Yen, the EUR traded at 132.87, compared with 132.92 yesterday.

The Euro-Zone currency was hurt by plummeting share prices and weak economic data. A media report questioning the health of the German banking system also prompted traders to cash in on the EUR's recent rally. EUR's depreciation versus the Dollar came after the report over Germany's debt situation. Although not new, the report warned that German banks have bad assets of around 200 billion euros ($280 billion).
However, according to technical analysis the EUR may advance further versus the Dollar after the 50-day moving average rose above the 200- day average for the first time since September. The EUR 50-day moving average, currently at $1.3409, surpassed the 200-day moving average at $1.3385 today. Both are good bullish signals analysts say.

JPY - Yen Down Versus the U.S Dollar

The Japanese yen weakened as U.S. economic reports added to evidence the start of a recovery is near, reducing demand for safety. The JPY fell against 15 of the 16 most-active currencies after data showed U.S. consumer confidence climbed this month to the highest since September.
The JPY held declines against the Dollar after a government report showed the world's second-largest economy unexpectedly posted a trade surplus in April. The Yen bought 95.36 versus the dollar from 95.03. The Yen declined to 133.34 per EUR from 132.90 yesterday.

Oil - Crude Rallies on U.S Consumer Confidence

Crude Oil prices rose as much as 0.8%, to $62.35 a barrel, its highest settlement in more than 6 months in New York yesterday as U.S. benchmark stock indexes climbed for the first time in 5 sessions. Crude extended its gains after rising yesterday as a report showing a jump in U.S. consumer confidence triggered an advance in equities. The biggest gain in consumer confidence since 2003 spurred optimism the worst of the recession is over in the world's largest oil-consuming nation.
Oil was falling earlier in the session on expectations that the Organization of Petroleum Exporting Countries (OPEC) won't cut production quotas at a Thursday meeting. OPEC raised its oil production in April for the first month since September, as some member countries took advantage of a recent rally in oil prices, data from the International Energy Agency showed.
OPEC, responsible for 40% of global crude supply, is likely to keep output quotas unchanged for a second time this year as recovering oil prices forestall the need for new cuts, according to analysts.

Article Source - USD Regains Value Against the Majors

Overnight price action saw Dollar pairs slide to lows last seen in early November. Sterling rose to a high of 1.5979 while its Canadian counterpart rose to 1.1124 in mid-Asian trading. The Euro was confined to a tight 50 pip range as traders awaited the release of tomorrow’s German Consumer Price data. Many may be looking toward the downside of the surveyed figure after import prices unexpectedly fell in the month prior.

Key Overnight Developments

• Dollar Pairs Hit Seven-Month Lows
• Japanese Merchandise Trade Deficit Shrinks by 46%
• Hong Kong Stocks Surge 4.30%

Critical Levels



Sterling hit a seven month high against the U.S. Dollar as stocks in Hong Kong surged 4.30%, allowing a reversion to risk-appetite that has continued to hurt the greenback. The Euro lost a bit of traction against it’s American counterpart, allowing scalpers to have swings in price action that were confined to a 50 pip range.

Asia Session Highlights



Japan's Adjusted Merchandise Trade Deficit shrank in the 12 months through the end of April, contracting from -97.1 billion Yen to -52.2 billion Yen as yearly exports fell at a slower pace. In fact, exports to Asia fell at the slowest pace since November, falling by 28.7%. The published figures come just hours after Nippon Steel, Japan's largest producer of the metal, agreed to cut the price of the material that it sells to Toyota Motor by 10%. Such price negotiations could bode well for the country's suffering export sector. Cuts in production costs may be able to spark vehicle sales, which have plummet 28.6% in the 12 months through April.

Minutes of the Bank of Japan's Apr 30 meeting revealed a board that is starting to think of once unfathomable ideas. One member stated that the bank ought to begin discussing plans to exit the program to ease liquidity once the economic recovery occurs. Another member said that monetary policy should have a long-term view. Overall, the temper of the central bank was cautious. For now, no new policies are needed. "A few members said that, although it would take some time for Japan's economy to achieve a full-fledged recovery, it was likely to recover gradually," minutes show. Just after the release, Bank of Japan Governor Masaaki Shirakawa said central banks throughout the world should ensure that their balance sheets stay within a reasonable health level. "In times of crisis, a central bank attempts to provide liquidity aggressively sometimes with taking some credit risk," Shirakawa said in a speech given in Tokyo today. Despite such emergency measures "a central bank should be cautious about the risk of undermining its credibility."

Euro Session: What to Expect



German Consumer Prices will make headlines tomorrow as traders will be using this figure to gauge how the European Central Bank might react at its June 04 meeting. Expectations call for a subdued, yet still positive, outcome that will plummet to a level last seen over ten years ago. The 0.3% expected EU Harmonised number might actually post slightly lower. In fact, import prices in April significantly undershot forecasts by unexpectedly falling by 0.8%. Estimates called for the figure to actually rise by 0.1%. As a result of the lag between the prices that the producers pay and that which is seen on the shelves, the April import price metric may actually materialize via consumer prices in the month of May. Should the yearly inflation figure post to the nearly-flat side, the ECB may be pressured to act accordingly by taking on additional and more aggressive stimulative measures.

French Business Confidence is expected to have risen in May for the second consecutive month after 12 months of seeing such sentiment plummet. Business managers are likely to feel more optimistic about their outlook after Consumer Spending in the European country rose unexpectedly by 0.7% in April despite estimates predicting a decline in sales of 0.3%. Italian Hourly Wages are expected to increase on an annual basis for the first time since December. Such a development would be interesting considering the broader labor situation, which has seen the rate of unemployed in a given quarter drop only once since the summer of 2006.

Written by Luis Gil, DailyFX Research
Article Source - Dollar Plummets to Seven-Month Lows as Asian Equities Rally (Euro Open)

• A Heavy Round of Data Doesn’t Support a Tempered Pace of Recession for the Euro
• Is the Yen Truly a Safe Haven And New Zealand Dollar a Source for Yield?

US Dollar Suffers a Sharp Reversal Despite Positive Confidence Report

Up until the open of the US session, it seemed as if the dollar was going to find significant reprieve to last week’s selling. However, when US-based liquidity filled out, the steady appreciation behind the world’s most liquid currency was quickly reversed in a matter of hours. If that wasn’t a clear enough sign that underlying risk trends are still holding their sway over investors’ appetites, the same bias was reflected in the broad pull back in the Japanese yen and the aggressive, 2.6 percent from the S&P 500 Index.

And, though the initial drive against the dollar may have grown out of the market’s efforts to diversify and re-invest into higher yielding assets; there is growing evidence that speculation and sentiment are perhaps playing a larger role in extending the currency’s losses. In turn, we have to determine whether this is grounds for a fundamentally based reversal in the greenbacks favor. One of the most palpable reports of sentiment for dollar interest (and it is accessible to those outside of Forex to boot) are the levels measured through the CFTC’s Commitment of Traders (COT) data. Released each Tuesday, this morning’s report indicated net short interest in the US dollar was at its most extreme since last July – around the same time that EURUSD failed a second time to surmount 1.60 and subsequently fell over 3,600 pips in the following three months. Does this mean that there is an imminent reversal or that the world’s most liquid currency pair will mark an equivalent decline as the one between July and October? In a one word answer: no. Sentiment is prone to extremes; and these acute shifts from equilibrium can last a long time. However, fundamentals may inadvertently be building a case in the dollar’s favor.

It is hard to remember a time when the US dollar was not highly correlated to risk trends; but that was the case just six to eight months ago. The currency’s rivalry with the Japanese yen as a top safe haven was born out panic and the need for liquidity that developed during the worst of the financial crisis in September and October of last year. It is only natural that the greenback should lose some of the premium that was built up during this period; but as long as speculation’s sway over the broader markets moderates, so too will its influence on the dollar. Looking beyond to objective fundamentals, it is looking more and more like the US economy is pulling out of its decline as fast as its strongest economic competitors. This is not to mean that readings for economic activity are positive; but rather, they are closer to signaling growth than the Euro Zone and UK figures for example. For traditional event risk this morning, the most market-moving piece of event risk was the Conference Board’s consumer confidence survey. The May reading did improve for the third consecutive month as expected; but the pickup was far more aggressive than the consensus was calling for. At 54.9 (anything above 50.0 signals net optimism) the gauge was at its highest level since September and logged its largest jump in six years. A breakdown of this report shows that this largely the reflection of expectations (which surged 21.3 points to 72.3), while the ‘Present Situation’ measure printed a tepid 28.9. This reflects a lot of optimism in the government’s ability to carry the economy back into to positive growth, which many feel is ill-advised; but confidence does have a direct correlation to spending nonetheless. In other news both the Richmond and Dallas regional manufacturing activity indexes printed better than expected results for May; while the lagging S&P Case-Shiller home housing index reported a deteriorating pace. We will see whether tomorrows existing home sales data and the quarterly House Price Purchase Index from the Federal Housing Finance Agency reports the same.

A Heavy Round of Data Doesn’t Support a Tempered Pace of Recession for the Euro

While the dollar was no doubt the most active currency for the day, the euro would be the most fundamentally interesting. A mixture of leading and lagging indicators added to the fundamental argument as to whether the ECB should extend its rate cut region and expand its dalliance into quantitative easing or not. Carry the most weight – but ultimately lacking the volatility punch that a first round reading would have garnered – was the final measurements of 1Q German GDP. A superficial look at the headline numbers would have garnered little of additional value beyond confirmation that the economy shrank 3.8 percent in the first three months of the year – the steepest decline since these records began nearly 40 years ago. However, there was real surprise in the fact that capital investment plunged 7.9 percent (much more than the 4.5 percent expected) and exports dropped 9.7 percent (though that was lighter than the consensus projection). It is details like these that will push back the viable recovery time for the economy and thereby tax the central bank’s efforts to taking a more neutral pace with monetary policy.

The other indicators for the day were more timely, but less market-moving. The German GfK Consumer Confidence reading for June held at 2.5 for the second month. From the breakdown, the economic outlook edged closer to a positive reading, while income expectations offset the gain. For the Euro Zone the volatile current account balance for March was still firmly planted in deficit, but moderately better than the previous month. On the other hand, the industrial new orders contracted for an eighth consecutive month. Looking ahead to tomorrow, the discussion on interest rates may intensify thanks to the release of the preliminary German CPI figures for May. However, there is no hard release time given.

Is the Yen Truly a Safe Haven And New Zealand Dollar a Source for Yield?

Risk appetite has been the primary fundamental driver for the markets since April; and though volatility has backed off over the past week, it remains so today. However, the generally accepted risk-philic and risk-free currencies that the market has grown so used to over the past six to twelve months are not guaranteed. When sentiment is at an extreme, the panicked or greedy flock to the same currency; but when conditions settle, the fundamental are read for what they are. Looking at the disputed top and bottom of the risk spectrum; we have seen the support for the Japanese yen and New Zealand dollar in their respective roles shift. Japan recently reported its worst recession on record - even if the Bank of Japan and Cabinet office lifted their outlook for the ‘tempo’ of deterioration for the first time since 2006. How safe can an economy that has struggled for more than a decade with inflation, capital investment and growth really be? On the other side, will economic instability and a tumbling yield undermine the kiwi’s appeal as a high return currency? The government is expected to report its annual budget soon and the economy is considered at risk of another credit rating downgrade.

Written by John Kicklighter, Currency Strategist
Article Source - US Dollar Suffers a Sharp Reversal Despite a Positive Confidence Report

Traders witnessed one of the first vital pieces of information from the Euro-Zone which actually put a dent in the plans of the EUR. The German Ifo Business Climate report failed to meet expectations and slightly lowered investor confidence in the 16-nation currency. As a result, traders may indeed see a reversal in the making for the EUR/USD unless today's news puts a halt to the correction. Sticking close to the calendar today and betting on news releases would be a wise move for the weary trader today as the movements of the forex market are not yet stabilized.



USD - Is a USD Rally in the Making?

The Dollar rose marginally against the European currency as the economic calendar in the U.S. was blank due to a bank holiday. The knock-on effect of this was a forex market with less volatility than usual. In reality this translated into little fluctuations in the USD and its main crosses.

Many analysts have been worried about the greenback's rapid deterioration in value in the past several weeks. They are beginning to ask themselves, "Is a reversal in the making?" In Monday's trading, the EUR/USD rate reached as high as 1.4028. However, the pair ended up lower by 15 pips for the day at 1.3974. Against the Pound, the USD was unchanged at 1.5877. The Dollar gained versus the JPY by 10 pips to close at 94.73.

This behavior shows that in late trading hours, the Dollar reversed some of its losses, and started gaining against the major currencies. This may be due to 2 main factors. Firstly, the Dollar has been over-sold lately, and is under-valued. Secondly, the bank holiday in the U.S. made the forex market more flat than it would have been under normal market conditions. The slightly negative German Ifo Business Climate news release from Germany may have also helped weaken the EUR in late trading. This is compounded with the fact that other major economies are in even more dire straits than the U.S.

Looking ahead to today's news, the most important economic news release coming out of the U.S. is the CB consumer confidence figures at 14:00 GMT. The release is a top measure of U.S. consumer spending. Therefore, the results are likely to be pivotal in driving the direction of the market both before and after the data release. Traders are advised to take-up positions in the majors, while volatility is still low, in order to make some profits in the USD and its dominant crosses.

EUR - EUR Declines against Greenback

The EUR slipped slightly against the Dollar as the markets failed to take a clear direction yesterday. It can be said that speculation alone cannot drive the EUR higher due to some of the recent data releases. This was shown when the German Ifo Business Climate report put some downward pressure on the EUR as investors realized that the Euro-Zone currency may be slightly overvalued against the USD, and other major currencies.

The Dollar gained 15 pips against the EUR, reversing a near-2-week trend to close at 1.3974. The EUR/GBP cross finished yesterday's trading to close marginally lower at 0.8799. The EUR/JPY pair was virtually unchanged at 132.36. The question now is can the EUR return to its bullish run against the greenback? It is valid to say that there is more to back the EUR in theory than the USD or the GBP. Both the U.S. and Britain have lower Interest Rates than the Euro-Zone. Additionally, Europe has been more conservative than her 2 economic rivals in printing money. Furthermore, Britain and the U.S. have mounting deficits, whereas the Euro-Zone doesn't. It seems reasonable to say that the long term bullishness may belong to the EUR, rather than to her main currency rivals.

Today, there are plenty of economic indicators from the Euro-Zone that are likely to help determine the EUR's main crosses going into mid-week trading. The Current Account and Industrial New Orders are set to be published at 8:00 and 9:00 GMT respectively. The impact of these releases will show forex traders the health of the Euro-Zone economy. This could signal if the European currency is overvalued, and if it can uphold its bullish run against the Dollar. The impact of this will be increasingly felt, especially as the markets moved little in yesterday's trading due to British and American bank holidays. Traders are advised to open positions now, in order to make profits when volatility kicks in.

JPY - JPY Strength Uncertain, Heavy News Week may Help

The Yen failed to topple the Dollar yesterday, despite a bearish Dollar in the last few weeks. The pair actually closed up 10 pips at 94.73. The release of the worse-than-forecasted CSPI figures in late trading helped prevent the JPY from gaining bullish momentum against its major currency pairs.

There was very little movement in the EUR/JPY pair as it closed at 132.36. However, the Yen lost a bit of ground against the British currency to finish trading at 150.45. These small forex market currency fluctuations were largely owed to the British and American bank holidays yesterday. Nevertheless, markets are set to be much more volatile today, as forex market volatility returns to more normal conditions in the coming hours.

The short-term future of the JPY depends on the speed of the global economic recovery. If things do improve quicker than many analysts anticipate then the Yen may start to go bearish. This is increasingly the case if the U.S. raises Interest Rates before all of the other industrialized countries. Today, in late trading the Monetary Policy Meeting Minutes and Trade Balance figures at 23:50 GMT are likely to help determine the JPY's strength going into mid-week trading. A 95.50 USD/JPY rate may be a possible by tomorrow's close. However, it is wise to open positions in the JPY now as news from the Euro-Zone and U.S. is published.

Crude Oil - Crude Oil Prices Decline 1%

The price of Crude Oil tumbled 1% in yesterday's trading to $60.90. This comes despite increased optimism from the Organization of Petroleum Exporting Countries (OPEC) recently. However, many analysts expect the price of Oil to climb through the long-term as market conditions return to normal. Many analysts believe that the long-term prospects for Crude Oil are between $75-80.

In the meantime, the price of Crude Oil may only start going bullish again when the Dollar continues its decline, and if OPEC makes no output increases in their next meeting in Vienna, Austria on the 28th of May. In today's trading, the economic figures coming out of the U.S. and Euro-Zone are likely to impact the volatility of oil prices and traders would be wise to enter the market before this volatility kicks off.

Article Source - Can German Ifo Data Reverse EUR Trends?

A third straight quarterly contraction in the German economy is expected to be confirmed tomorrow with the release of the final Gross Domestic Product estimate for the first quarter of 2009. It is likely that the number will further vindicate Chancellor Angela Merkel’s forecast of a 6% decline in aggregate output for the world’s fourth-largest economy in 2009.

Key Overnight Developments

• New Zealand’s Trade Deficit Shrank a Fifth Straight Month
• RBA Director McKibbin Doubts Stimulus Power

Critical Levels



Forex markets were slightly more volatile than in the previous day as market participants returned from their respective holidays to offer and bid their way through Euro selling. Indeed, the 16-nation currency faltered slightly against the Dollar in mid-session trading. Price action on the British Pound continued to mimic much of the Euro’s movements.

Asia Session Highlights



New Zealand’s Trade Deficit shrank for a fifth straight month in April as the demand for goods produced abroad continued to dwindle. The gap between imports and exports shrank to NZ$4.1 after demand from Asia dropped nearly 10% and imports from Europe fell NZ$176 million. Declining imports might have come on the back of a deflationary environment which saw producer prices decline by 2.5% in the first quarter. As the price of raw materials from abroad declined, the import metric would have naturally followed suit.

The debt generated by stimulative government measures will hamper the economy’s ability to grow, says Reserve Bank of Australia director Warwick McKibbin. In statements to The Australian, the board member also said that the country should look toward China as a reliable fuel for growth. Demand for Australia’s minerals and natural resources from the Asian country will act as a natural driver of export led growth for his country, McKibbin said. Running large deficits would reduce the availability of private funds to finance new investments, he stated. "The danger is you add too much fiscal deficit," he added. Indeed, "most fiscal policy doesn't do anything except switch spending from one period to another," the RBA director said. "When you change fiscal policy, all you do is stimulate the economy today out of future possible growth," he added.

McKibbin's statements deviate from the general consensus of the the board, which feels that the combined effect of both monetary easing and fiscal stimulus has began propping the economy. In fact, April saw some of these positive signs. The unemployment shocked many people after it unexpectedly dropped by 0.3 percentage points. Spending got a huge boost as retail sales rose more than four times larger than that which was expected.

Euro Session: What to Expect



Germany’s final Gross Domestic Product estimate is expected to confirm the country’s steepest plunge since the government began recording this statistic in 1970. The world’s fourth-largest economy most likely contracted for the fourth consecutive quarter in the first three months of 2009. The final estimate,comes two weeks after the preliminary one saw the non-seasonally adjusted figure display a bleeding German economy that shrank -6.7% in the 12 months through the end of March. When taking into consideration periodic events that occur on a seasonal basis, the figure is expected to come to a more optimistic, albeit still dreaded, -3.8%. This key data directly aligns itself with Chancellor Angela Merkel’s forecasts calling for a 6% contraction in her country’s economy this year. Recent comments by Jochen Sanio, Germany’s chief financial regulator, painted a possibly gloomier picture. In them, he said that the toxic debts on the balance sheets of many of his nation’s banks are “like a grenade” which are ready to explode if a series of “brutal” downgrades of mortgage backed securities by the rating agencies occurs. Perhaps these recent developments may spook consumers enough to reduce the GfK Consumer Confidence survey downward rather than allowing it to remain flat.

Euro-Zone Current Account data for March will likely continue to remain in negative territory. It may, however, gain a bit of strength as trade data showed an improved balance between exports and imports during the month. Income from abroad may have significantly toned itself due to the surge in emerging market equities in March. Much of this may have bode well for European income generation from abroad.

Switzerland’s Employment Level in the year through the first quarter of 2009 is expected to have declined for the first time in nearly six years during a trend in which the nation’s unemployment rate either rose or stood steady for nine consecutive months. This three month lag in the data may, however, not necessarily be indicative of the near-term outlook. April saw Switzerland’s consumer prices rise by the largest amount in nearly two years. The realized number beat expectations by 0.3 percentage points. Some of this inflationary increase may have been due to the slowing rate of labor market weakness; afterall, March’s rate of unemployed remained even.

Written by Luis Gil, DailyFX Research
Article Source - Merkel's Forecast to be Further Realized With Finalized GDP Estimate (Euro Open)

Many forex traders witnessing the strong bearish trends across the USD pairs and crosses have been wondering when it will come to an end. As last week's U.S. housing market data and unemployment figures proved worse than forecast, mixed with a boom in confidence for Euro-Zone economies such as Germany, the USD went negative. However, this week's data forecasts could create the rumblings of a reversal for the greenback. This exciting volatility is where money is made in the forex world; don't miss out.



USD - Dollar Drops on Poor Data

The American Dollar saw an extremely bearish session during last week's trading as it dropped in value against all the major currencies. The EUR/USD actually rose to the 1.4000 level for the first time in 5 months!

It appears that two main economic indicators have initiated the USD's downfall on all fronts throughout last week. For starters, the U.S Building Permits report revealed that hopes for an improvement in the U.S housing sector are currently unrealistic, as only 490,000 new residential building permits were issued during April. Many analysts have assumed that the first significant step in pulling out of the recession will be shown from the housing sector. The reason is very simple, it was the mortgages crisis that caused this gloomy economic condition, and a real improvement in the housing sector would have shown that both investors and the major banks have regained confidence in American real-estate, which should be a sign for all others that the economy is recuperating.

In addition, on Thursday, the weekly Unemployment Claims showed that 631,000 individuals have filed for unemployment insurance for the first time, making it the 16th week in a row on which over 600K people have done so. The combination of these two publications had a very clear effect on the Dollar, and its drop in value was only a matter of time.

As for the week ahead, a bundle of data is expected from the U.S economy, and traders should take notice of all of the major indicators. The Consumer Confidence report is expected on Tuesday, and analysts predict that the best result in six months may be published. This has the potential effect of reversing trends in the forex market, as it will show that people are regaining their confidence in the US economy, and in their government to improve the situation in the near future. The New Home Sales on Thursday will probably steal all of the attention on a busy news day, as the housing sector seems to have the biggest impact on the USD for the moment.

EUR - The EUR Soars amid Positive German Data

Last week the EUR saw bullish trends against most of its major currency counterparts, as its most significant appreciation was against the USD. The EUR/USD rose to over 1.4000, marking a 5-month record.

Last week's trading was highly impacted by the positive signals from the German economy. Germany is the biggest and strongest economy in the Euro-Zone, and thus has the most influence on the region's currency. On Tuesday, the German ZEW Economic Sentiment report was published with an amazing 31.1 mark. The Economic Sentiment is a diffusion index based on surveyed institutional investors and analysts. The 31.1 figure was the most positive figure seen since June 2007. What was so incredible about this result was that it followed a series of negative publications and was really "out of the blue." This had an immediate reaction on the EUR and a strong bullish trend, especially against the USD, took place. Later on last week, the German Manufacturing Purchasing Managers' Indices were release, both with better than expected figures, further strengthening the EUR.

Looking ahead to this week, the most important data expected from the Euro-Zone will be published later on today, at 08:00 GMT. The German Ifo Business Climate, which is derived from about 7,000 businessman who are asked to rate the level of current business conditions, has proven before to have a significant impact over the EUR, especially when analysts forecast that the positive signs from Germany will continue with a 85.1 figure. If the real result will be similar, another bullish trend might take place for the EUR, and the EUR/USD may hit as high as 1.4200 this week.

JPY - JPY Provides Mixed Results against the Majors

The Yen saw mixed results during last week's trading. While rising sharply against the USD, the JPY dropped against the EUR and underwent a volatile session against the GBP.

It seems that the negative results coming from the Japanese economy are the main reason for the Yen's volatile behavior. Last week it was released that the Japanese Preliminary Gross Domestic Product (GDP) had dropped by 4.0% in March, making it 4 consecutive months on which the value of all goods and services produced by the Japanese economy dropped. The Tertiary Industry Activity, which measures the change in the total value of services purchased by businessman, has also decreased by 4.0% in March. In addition, the Bank of Japan (BoJ) has decided to leave Interest Rates at 0.10% as it cannot drop it farther and is unwilling to raise it at the moment. On normal conditions, all this should have led to a significant drop for the JPY against every major currency; however, the bearishness of the Dollar was the leading force in the forex market last week, and thus even the weak Yen rose against the USD.

As for the week ahead, a batch of data is expected from the Japanese economy. The Trade Balance scheduled for Tuesday will be one of the most impacting publications as the Japanese economy relies greatly on its exports, and this report is one of the best ways to estimate this nation's economic condition. Traders should also consider the Retails Sales and the Household Spending indicators which could possibly dictate the Yen's movements later this week.

Crude Oil - $60 a Barrel Might Be a Solid Price for Crude Oil

Last week was a relatively calm week for Crude Oil. A barrel of oil was traded within the $59 to $62 price range, and wasn't too affected from the large fluctuations of the leading currencies.

Recent Notifications suggest that the Organization of Petroleum Exporting Countries (OPEC) desires to see Crude Oil reaching $70 a barrel; however, it is currently reluctant to cut supplies as demand for oil still hasn't shown real signs of recovery from the current world-wide economic crisis. In spite of OPEC's will, it appears that investors are pretty cautious on putting their faith in Crude Oil. Even in a week like the last one, on which the Dollar dropped on all fronts, Crude Oil barely rose by $2 a barrel. This could be interpreted as a clear sign of investors that for now the price around $60 a barrel correctly reflects the market value.

Article Source - USD-Negative Market Reversal Due this Week?

European markets tomorrow may be looking toward the release of the German IFO series of sentiment surveys. The outlook is expected to be positive for a second straight month after global stock markets erased losses seen in early-2009. As an indicator that leads overall growth by nine-twelve months, IFO's outcome may be heavily favored if it does indeed post an upward move.

Key Overnight Developments

• North Korea Tests Nuclear Weapon, South Korea Reports
• Japan’s All Industry Activity Index Fell in March

Critical Levels



Euro traders saw the the currency gap upward 14 pips against the Dollar to reach a high of 1.4044 before pressure forced the pair down to levels last seen during the second half of Friday’s session. Sterling exhibited similar characteristics despite lacking a gap. Both pairs ultimately established downward trends in the early hours of this week’s trading session.

Asia Session Highlights



Geopolitical tension may have rocked markets in Japan after South Korea’s office of the president reported that North Korea had tested a nuclear weapon. The U.S. Geological Survey reported a 4.7 magnitude earthquake 230 miles north-east of Pyongyang, the North Korean capital. Intraday Japanese stock trading saw the Nikkei fall from a high of 9402.76 to a low of 9331.74 in the 30 minutes following the release of the news.

Japan’s All Industry Activity Index fell 2.4% in March. The figure, which has declined on all but one occasion dating back to October, might not necessarily be indicative of the current economic environment in Japan because of the three month lag between the month’s empirics and its release. In fact, the previous week saw an analyst at Merrill Lynch upgrade the share price outlook for IHI Corp., Japan’s second-largest manufacturer of heavy-machinery, to “buy” from “underperform,” citing an increased demand for such equipment from emerging markets. If such a prediction comes into fruition the Asian country may benefit from a boost in its export sector, which has been battered over the year as a result of dying demand for electronics and vehicles from abroad.

Euro Session: What to Expect



A series of German sentiment survey’s will be released tomorrow. The IFO Business Climate survey is expected to increase for a second consecutive month after having fallen eight of nine sessions prior. A move upward here would be a sign of relaxed pessimism coming off of a stock market rally which saw global equities erase losses seen in the first two months of the year. Because business and investor sentiment generally lead the real economy by at least nine-twelve months, the IFO surveys are seen as a key point of interest for those looking to estimate prospects for growth.

As the largest economy in the Euro-Zone, Germany’s outlook is of utmost importance for the region. With nearly a quarter of all Euro-Zone external exports coming from Germany, the world’s third largest economy, improving sentiment among German business managers may provide foreigners a larger sentiment to invest in the European economy.

Written by Ilya Spivak, Currency Analyst
Article Source - Sentiment May Save Europe as Business Managers Foresee Better Times (Euro Open)

US Dollar Plunges Into Oversold Levels, Signals Potential for Reversal

Fundamental Outlook for US Dollar: Neutral

- US homebuilder confidence rose to the highest levels since September, according to the NAHB
- On the other hand, US housing starts and building permits plummeted to new record lows
- The Federal Reserve’s outlook for growth and unemployment has deteriorated, according to the latest FOMC minutes

The US dollar was easily the weakest of the majors last week, which was interesting in light of the fact that US equities and the CBOE’s VIX volatility index ended virtually unchanged, albeit with some rocky price action in between. Indeed, if there were any signs that US assets were losing their status of “safe havens,” it was this: After Standard & Poor’s downgraded the outlook for the UK from “stable” to “negative” due to their “deteriorating public finances,” ballooning national debt in the US spurred speculation that the same could happen to their economic outlook, if not their long-term credit rating altogether. In fact, the US dollar decline was in lockstep with a plunge in Treasury prices, highlighting a drop in demand for all things dollar-related. However, given the extent of the greenback’s decline, this coming week should be very interesting. Will the US dollar go back to trading in line with risk trends, gaining with other low-yielding currencies, or will it trade as the one of the “riskiest” assets out there? Since the DXY index is well into oversold levels, technical factors suggest that the dollar could bottom in the near-term. As they say though, “the trend is your friend,” so traders should be cautious.

This week’s US economic calendar is chocked full of releases. On Tuesday, the Conference Board’s consumer confidence index for the month of May is forecasted to continue rising from its record low of 25.3 reached in February up to 43.0. With record keeping having begun in 1967, the steady plunge in sentiment from the 2007 highs of 111.90 makes the extent of the recession especially clear.

On Wednesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose 2.0 percent in April to an annual pace of 4.66 million from 4.57 million. However, there are indications that the results could prove to be disappointing as the Commerce Department reported on May 19 that housing starts plunged by 12.8 percent during the month of April, and a whopping 54.2 percent from a year earlier, to a record low annual pace of 458,000.

On Thursday, the release of US durable goods orders are projected to show that domestic demand may have increased slightly at the start of Q2, as they are forecasted to have risen 0.5 percent in April, but excluding transportation the index is anticipated to fall 0.3 percent. While the headline result will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The three-month annualized figures remain deeply negative, but the monthly component has improved over the past two months and a continuation of this dynamic would be supportive of outlooks for a slow recovery in the US economy.

Finally, on Friday, the second round of US Q1 GDP estimates are due to hit the wires, and the results could be market-moving. The preliminary reading is forecasted to be revised up to -5.5 percent from -6.1 percent, which also marks an improvement when compared to the Q4 2008 result of -6.3 percent. There is some evidence that revisions will be to the downside, though. First, the US trade deficit widened for the first time in eight months during March by 5.5 percent to $27.6 billion. A breakdown of the report showed that exports slumped 2.4 percent to a more than two-year low of $123.62 billion while imports fell 1.0 percent to $151.196 billion. According to Bloomberg News, the Commerce Department used a much larger increase in exports when calculating Q1 GDP, suggesting that initial estimates of a 6.1 percent annual contraction may have been optimistic. Also, personal consumption is forecasted to be adjusted to 2.0 percent from 2.2 percent after March advance retail sales were revised down to -1.3 percent from -1.1 percent.

What Happens to the Euro Rally When Risk Appetite Settles?

Fundamental Outlook for Euro This Week: Neutral

- Euro Zone factory and service sectors contract at the slowest pace in 8 months
- German investors lament current conditions but growing more optimistic over the future
- Is the EURUSD breakout just beginning or is this the last gasp? Read the weekly technical outlook

The euro was set on a steady and aggressive rally against its primary counterpart - the dollar – this past week. The drive for this rally evolved with time: from scheduled event risk to general market sentiment to speculation over national credit health. However, when the dollar is subtracted from the equation, is the euro really as strong as the EURUSD advance would suggest? Looking over the crosses, the single currency was eking gains against those economies that are struggling to maintain stability and depreciating when measured up to the high yielders. This should be considered a reminder that there are general market themes and euro-centric fundamentals; and the market will follow whichever has the greater influence at the time. Looking ahead to next week, there are a number of factors that could come into play including monetary policy speculation, growth forecasts and the permanence of sovereign credit ratings. Which will take responsibility for the guiding the euro?

Considering the market’s reaction to Standard & Poor’s downgraded forecast for the UK’s credit rating this past week, this has the greatest potential for market impact going forward. The pound immediately dropped when the news crossed the wires; but the real reaction came from the dollar as rating concerns spread to the United States as budget deficits and bank rescues swell debt levels. For the world’s largest economy, even a passive threat of a credit downgrade is substantial (as its assets are the benchmark for risk-free); but what is the danger to the Euro Zone? Speculation is a tricky thing to gauge; but under the right conditions, a threat to the European regional credit rating could certainly undermine the currency. With the US losing its safe haven status, UK considered financially unsound and Japan suffering from a record-breaking recession; the Euro Zone is considered one of the most secure, developed economies. Invalidating this perception could quickly undermine confidence in the economy and its assets. However, we have to consider how real a threat this is. According to Eurostat numbers, the government debt to GDP ratio through the end of the year was at 69.3 percent. What’s more, we have already seen Greece, Spain, Ireland and Portugal downgraded individually. With the global policy makers trying to stabilize a global recession and stamp out the lingering effects of a financial crisis; all major economies are at risk.

Another potentially, potent fundamental driver for the euro going forward is monetary policy. While its benchmark lending rate is well below the Australian and New Zealand targets, the Euro Zone rate advantage was considered relatively stable – until recently. At the authority’s last policy meeting, officials cut rates once again to 1.00 percent and relented in taking the first step into un-conventional territory by announcing their intentions to purchase covered bonds. Forecasts among policy officials vary widely as to whether the central bank has done enough or if they are lagging the potential for crisis. Divergent commentary will continue to split the market and bolster volatility; and the louder the call is for additional cuts and expanding quantitative easing, the heavier the euro will become.

The third potential driver for the euro next week is scheduled event risk. A prominent list of economic indicators, the docket may not only trigger short-term volatility; but it will also feed into the aforementioned themes. The offerings are substantial. Sentiment is covered by the IFO business and GfK consumer numbers. Growth forecasts will follow German employment and retail PMI figures. And, though its influence is likely dampened German and Euro Zone consumer-inflation data could still contribute to rate forecasts.

Japanese Yen Bounces Despite Record GDP Contraction – What Gives?

Fundamental Outlook for Japanese Yen: Neutral

- Japanese Yen rallies as Finance Minister says Ministry of Finance has no planes to intervene in forex market
- Yen bounces on better-than-expected GDP, but economy nonetheless contracts a whopping 4 percent in Q1
- Is the Japanese Yen-funded carry trade recovering?

The Japanese Yen scarcely survived a week of truly dismal economic data, squeezing out a marginal gain against the downtrodden US Dollar but falling sharply against every other major counterpart. Japanese government officials reported the worst Gross Domestic Product contraction in the survey’s 50+ year record, and weak economic fundamentals limited trader demand for the low-yielding Yen. That being said, the currency actually saw a marginal bounce following the GDP news release; forecasters had anticipated an even worse economic contraction. A modestly positive week for the US S&P 500 and other global equity indices only compounded the risk-sensitive Japanese Yen’s woes, and broader JPY momentum remains to the downside.

The USD/JPY finished below the psychologically significant 95.00 marker for the first time since March, and traders expected the Japanese Ministry of Finance to express concern at relative JPY strength. Yet Finance Minister Kaoru Yosano effectively ruled out forex intervention—removing a key source of USD/JPY support. It seems that the days of a highly vocal Ministry of Finance are long gone; current officials are taking a much more hands-off approach to the Japanese Yen exchange rate. We question whether such a laissez-faire stance is truly sustainable, however. Japanese exports have effectively crashed due to the combination of weak global consumption and a stronger Japanese Yen.

Subsequent outlook for the recently-downtrodden Yen is somewhat unclear, but momentum plainly remains to the downside against all except the US Dollar. An ostensibly busy week of economic event risk is unlikely to have a major effect on the Yen. We will instead monitor any and all developments in global risk sentiment—especially as seen through major global equity indices. The correlation between the USD/JPY and the US S&P 500 may have weakened through recent trade, but the equivalent S&P link to the EURJPY and GBPJPY remains near record-highs. In other words, the EUR/JPY and GBP/JPY are likely to take their cues from developments in risky asset classes. The US Dollar’s fate may depend on global investor sentiment towards USD-denominated asset classes.

British Pound Likely to Look Past Economic Data, Continue Higher

Fundamental Outlook for British Pound: Bearish

- Consumer Prices Fall to Lowest in 15 Months in April
- GDP Data Confirms Economy Shrank At Record Pace in First Quarter
- S&P Downgrades UK Outlook to ‘Negative’ on Growing Budget Deficit

The British Pound could continue to rise next week as an uneventful economic calendar offers little event risk to slow the currency’s momentum. Last week, the sterling showed surprising resilience in the face of a record drop in gross domestic product, a weak CPI report , and news that rating agency S&P downgraded their UK outlook from “stable” to “negative”. It seems traders heard everything they needed to about the economy’s prospects a week earlier when the Bank of England’s quarterly inflation report revealed expectations inflation will remain below the target 2% until 2012 as the economy takes a slower path to recovery, taking the punch out of subsequent releases along the same theme. The lack of potency in negative economic data suggests that the Pound remains at levels that are too low to attract new sellers all the while those that are already short become increasingly anxious about overextending their exposure, quickly rushing to cover their positions at the slightest hint of a reversal. Put simply, the British Pound seems heavily oversold and likely needs to correct still higher before it becomes attractive to sell once again.

Little stands in the way of the Pound’s momentum in the week ahead: Nationwide House Prices are set to drop -1% in May to bring the annual pace of decline to -13.7%, a reading well within the range of values that has been seen since the free-fall in property values moderated towards the end of 2008; GfK Consumer Confidence is seen rising to -25 in May from -27 in the preceding month, the seventh consecutive time that the rate of contraction in sentiment has slowed (likely owing to the government’s stimulus measures). While neither release speaks of a robust economy (albeit they do hint at one that is shrinking at a slowing rate), the trends behind these indicators have long been priced in and are unlikely to make or break the current bullish upswing in a meaningful way.

Turning to risk sentiment, short-term studies reveal a declining link between the MSCI World Stock Index and the trade-weighted average value of the British Pound. Indeed, 30-day correlation studies reveal the link now stands at 56% having printed as high as 86% as recently as late April. This suggests that the currency may not suffer a setback even if risky assets confirm a double top at resistance marked by the high from early January’s, a scenario that could well materialize in the near term.



Written by Terri Belkas, John Kicklighter, David Rodriguez, Ilya Spivak and John Rivera, Currency Analysts
Article Source - Forex Trading Weekly Forecast - 05.25.09