Forex Trading

There were more signs that the U.S. economy was improving, as a string of positive data was released yesterday from the U.S. the most significant was the Chicago PMI, which printed higher-than- expected figures in the month of August. This indicator is a primary gauge of manufacturing sector, acting as the main driver of the U.S. economy. On top of this good news, a rise in demand for U.S. goods from abroad is also likely to help boost the U.S. economy in the coming months.



USD - Chicago PMI Data Pushes the USD Lower

Evidence is increasing that the worst of the global recession is passed. Business activity in the U.S., the world's biggest economy, rose more than economists forecast in August, the Institute for Supply Management-Chicago Inc. said Monday. The Chicago PMI report is further indication that the U.S. economy is starting to improve; the data eased risk aversion among investors analysts said, with positive data negative for the Dollar and Yen.

The USD fell against a basket of currencies due to the decline in U.S. equities, as fears that the recent rally has overheated. This decline was led by the 7% fall in China's stock market index. As a result, the Dollar was hurt as traders fled to currencies such as the GBP and EUR. The greenback fell by about 50 pips to the 1.4336 level vs. the European currency. Against the British Pound, the Dollar slid by over 50 pips to 1.6283. The USD did make some gains, as the USD/JPY cross rose by 30 pips to the 92.95 level. Note, this is the first time in 3 days that the USD closed higher against the JPY.

Looking ahead to today, there is some pivotal news that is set to be released from the U.S. economy. The ISM Manufacturing PMI and Pending Homes Sales figures are set to be published simultaneously at 14:00 GMT. These results are even more important than usual due to the recent turmoil in equity markets and commodity markets, therefore all eyes are on the Dollar as the U.S. economic situation is set to improve further. It is advised that traders open their USD positions now, as this trading day is set to become very volatile in the coming hours. Furthermore, today's results are set to drive the forex market for the rest of this week.

EUR - EUR Rises as Inflation Eyes Positive Territory

The EUR's experience with negative inflation may be coming to an end very soon, as yesterday's figures showed a smaller-than-forecast yearly fall in prices in the Euro-Zone in August. The CPI Flash Estimate showed that prices were only -0.2% lower than August 2008. However, in July the figure was -0.7%. The deflation in the Euro-Zone has been owed to a drop in consumer goods prices, especially the price of Oil.
Monday's figures indicate that inflation may be positive again by the end of this month.

The European currency rose against most of its major currency crosses in yesterday's trading. Starting with the GBP, it rose only 5 pips to the 0.8802 level. This comes as the pair has started to see more bearishness recently. Yesterday's behavior within the pair may be largely owed to the lack of volume in some GBP pair, due to the bank holiday in Britain. With regards to the EUR/USD pair, the European currency rose 50 pips to the 1.4336 level. The GBP/JPY cross jumped by 100 pips to the 151.50 level.

Today, the news coming from the Euro-Zone is also set to be a driving force in helping determine the EUR's main crosses, as mid-week trading approaches. There is the German Retail Sales at 06:00 GMT and the Unemployment Rate at 09:00 GMT. Data form Britain is also set to help determine the strength of both the EUR and GBP today, such as the Mortgage Approvals and Manufacturing PMI figures. So if you want to make some high returns today, open large positions in EUR and GBP as soon as possible.

JPY - Yen Falls on All Fronts

The Yen slipped on Monday, as a slump in global equities led by the U.S. and China reignited fears about Japan's fragile economy. It seems the recent lift from the landslide election victory of the Democratic Party in Japan's election (DPJ) failed to help the Japanese currency yesterday. The Japanese currency fell against the USD by 30 pips. It also fell vs. the GBP and EUR.

It seems in the longer term, however, the important election of the DPJ may help the JPY if it sticks with its election promise to increase consumer spending, which in turn will push Japan back to positive inflation. Additionally, the Yen could also gain if the DPJ sticks to its other pre-election promises, such as reversing the current purchasing of U.S. Dollar based debt.

OIL - Oil Plummets Amid Global Equity Slump

Crude Oil prices plummeted by nearly $3 to $69.86, which is the biggest drop in 2 weeks. This comes about as a 7% dive in china's main stock index led to a bearish global equity market yesterday. This was initially sparked by concerns about a slowdown in lending that is likely to negatively impact the global economic recovery in China, which is the second largest energy consumer.

Crude's dive was also owed to fears that Japan's economy is destabilizing, as housing and other important data showed that Japan's economy is still very volatile. Therefore, this is important as Japan is the world's second largest Crude Oil consumer. Traders are advised to follow the next OPEC meeting on September 9th, which will be crucial in determining future Crude prices.

Article Source - USD Trades Lower on Market Optimism

The Australian Dollar fell as the Reserve Bank of Australia kept interest rates on hold at 3% and said that accommodative monetary policy remains “appropriate”, upsetting expectations of traders that had been looking for a more hawkish outcome. Swiss GDP, German Retail Sales and Unemployment, as well as UK lending data are on tap ahead.

Key Overnight Developments

• Australia: Current Account Deficit Soars on Exports, Manufacturing Expands
• RBA Keeps Interest Rates Unchanged, Says Loose Monetary Stance “Appropriate”

Critical Levels



The Euro and the British Pound traded in well-defined ranges in the overnight session, with the former moving sideways in a 40-pip band above 1.4315 while the latter oscillated within 50 pips below the 1.63 mark.

Asia Session Highlights



Australia’s AiG Performance of Manufacturing Index rose to 51.7 in August, showing the sector expanded for the first time in 14 months. Still, AiG chief executive officer Heather Ridout struck a cautious tone, saying that although “manufacturing activity has been improving…conditions are uneven and pressures remain on employment.” Indeed, looking at the components of the metric reveals that the rate of contraction in Employment accelerated for the first time since February. Ridout added that “There is a risk, particularly if interest rates are raised too early in the recovery phase, that as the effect of stimulus measures wane, the nascent recovery will fail to get traction.” The government of Prime Minister Kevin Rudd has distributed over A$12 billion in cash handouts this year and set aside A$22 billion for infrastructure projects.

Meanwhile, the Current Account Balance deficit widened more than economists expected in the second quarter, revealing a shortfall of –A$13.4 billion, shaving 0.2% off GDP in the three months to June. Preliminary forecasts had called for a –A$10.7 billion result. Exports dropped by a whopping 14.9%, more than doubling the -7.16% contraction in imports, with overseas shipments of gold (-40.1%), transport equipment (-35.9%), coal (-25.5%) and metal ores (-20.5%) leading the decline. This offered a counter-balance to the encouraging manufacturing PMI result, bolstering the argument that firms will be faced with sharp declines in sales as absent private demand is unable to replace the stimulative effects of the government’s fiscal measures.

The Reserve Bank of Australia kept interest rates unchanged at 3%, as expected. Bank Governor Glenn Stevens sounded broadly optimistic, saying “consumer spending, exports and business investment [are] notable for their resilience” while “Unemployment has not, to this point, risen as far as had been expected.” On inflation, Stevens noted that lower labor demand and commodity prices are likely to see prices continue to decline in the near term but “the likelihood of inflation being persistently below the target now looks low.” Such rosy comments notwithstanding, however, the bottom line is that Stevens and company judged that the “the present accommodative setting of monetary policy remains appropriate for the time being,” a disappointing outcome considering the hawkish tone of the RBA chief’s semi-annual testimony before the Parliament’s finance committee. The Australian Dollar sold off on the release, testing as low as 0.8407 to the US Dollar.

Euro Session: What to Expect



Switzerland’s Gross Domestic Product is expected to shrink 1% in the three months to June, marking the fourth consecutive quarter in negative territory and revealing the economy is now contracting at an annual pace of 3%, the fastest in at least 34 years. Looking ahead, a survey of economists conducted by Bloomberg expects output will continue to shrink though the end of this year and begin a modest recovery in the first quarter of 2010. However, this may prove too rosy: exports of goods and services account for a whopping 51.6% of the overall economy, an overwhelming majority of which are headed for markets in the European Union. Indeed, Germany, France and Italy alone make up a whopping 37.3% of foreign demand. Continental European economic growth is expected to trail sharply behind that of most other developed economies (with the notable exclusion of Japan) through the end of next year, suggesting overseas sales and with them overall performance may remain under water for substantially longer than consensus forecasts would have us believe. Deflation adds to the downside risks for the economy: annual inflation is expected to shrink for the fifth consecutive month in August; if this translates into expectations of lower prices in the future, consumers and businesses will perpetually delay spending and investment as they wait for the best possible bargain, bringing economic growth to a virtual standstill.

Turning to the Euro Zone, German Retail Sales are expected to grow for the first in three months, adding 0.7% in July, while the annual pace of decline moderates to -1.2% . The government’s 85 billion euro spending plan (including a “cash-for-clunkers” program to boost auto sales) is the likely catalyst behind the improvement. However, labor market data to be released later in the session is set to show that the German economy shed 30,000 jobs in August, bringing the Unemployment Rate to 8.4%, the highest since November 2007. Job losses will weigh on incomes and weigh on consumption, suggesting the economy will have a hard time building positive momentum after the flow of stimulus cash dries up. The broader Euro Zone Unemployment Rate result will probably follow higher, with forecasts calling for the metric to tick up to a decade high of 9.5% in July, mimicking the dynamics seen in the region’s top economy.

In the UK, the August edition of the Purchasing Manager Index is set to show that the manufacturing sector expanded for the second consecutive month. However, more attention is likely to be given to Net Consumer Credit, which is expected to remain flat at 0.1 billion pounds in July, a hair above the record low posted in March. This will serve to keep pressure on the Bank of England to press on with quantitative easing measures as banks fail to pass on lower interbank borrowing costs to the broader economy. Indeed, the market the BOE’s dovish posture seems to be the driving force behind sterling price action despite surface-level improvements in economic data: a trade-weighted index of the Pound’s average value topped out on 08/05, the day before the last rate decision, and has been trending lower ever since; a Credit Suisse index gauging traders' 1-year BOE rate hike expectations (as derived from overnight index swaps) topped out on the very same day.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia Keeps Rates on Hold, Says Loose Monetary Policy ''Appropriate'' (Euro Open)