fx-stat

Vietnam Nears Crisis

2008-07-13T22:50:00.002+03:00

In what some analysts have termed 'an act of desperation,' Vietnam has devalued its currency, the Dong, by .5%. Negative pressure had been building above the Dong for months, due to a burgeoning trade deficit, sagging stock market, and a stratospheric inflation rate, most recently clocked at 23%. Unfortunately for Vietnam's economic planners, the black market exchange rate remains nearly 5% below the official rate. In addition, futures prices reflect the expectation that the Dong will lose 30% of its value over the next twelve months. At this point, Vietnam is simply trying to forestall a full-scale economic crisis. This will probably involve further devaluations of the Dong. The Times Online reports-

Analysts said that the rising risk of a sudden and crippling depreciation comes as the cracks in Vietnam’s vaunted “economic miracle” have grown too large to ignore.

Inflation or Economic Growth?

2008-07-13T22:49:00.002+03:00

Global capital markets remain caught in a tug of war between inflation and economic growth. For most of 2008, the economic growth story prevailed as the Federal Reserve Bank cut interest rates aggressively to cushion the blow from the housing crisis. However, the pendulum soon swung to inflation and the Fed began to worry that perhaps it had lowered rates too far and may in fact need to hike them in response to surging food and fuel prices. In fact, the European Central Bank recently hiked its benchmark interest rates. Now, a slew of negative economic data threatens to shift the rhetoric back to the other corner. Securities and currencies have fluctuated wildly over this period, and investors remain unsure about which side the world's Central Banks will err on. Currency traders need to look no further than credit markets for a snapshot of the current consensus, which often presages changes in currency valuations. A quick and dirty analysis would place American and Euro-zone short-term bonds side by side and compare the yields (or prices), as a proxy for the EUR/USD exchange rate. The Wall Street Journal reports:

Two-year yields in all three markets have been on a wild ride in June, driven up by tough inflation rhetoric from central banks, then down again by renewed worries about the credit crisis and the state of financial markets.

Fed Increases Liquidity

2008-07-13T22:48:00.002+03:00

In a bid designed to placate skittish investors, America's Federal Reserve Bank announced that it will extend the duration of its liquidity facilities at least through 2008 and possible into 2009. It is hoped that the continued enabling (which began several months ago) of certain Wall Street firms to borrow on especially favorable terms will prop up faltering credit markets. Given that both credit conditions and the economy at large continue to flounder, this move seems more symbolic than anything. Analysts are divided about whether this increased liquidity will serve as a complement or a substitute for a near-term interest rate hike. Futures prices had previously reflected a 65% chance that the Fed would hike rates in September, but the bet is now closer to even money. Reuters reports:

Others...think liquidity problems and inflation concerns are two separate issues. [One analyst] believes that the Fed is still on track to raise rates in September.

UK Housing Crisis Could Affect Pound

2008-07-13T22:47:00.001+03:00

When one hears the phrase "housing crisis" uttered, the US immediately comes to mind. Not without reason, of course, since the US housing market is the largest in the world, and the scope of any US housing crisis is sure to dwarf a comparable crisis in any other country, in absolute terms. At the same time, let's not forget that prices in the UK, for example, began to decline earlier than in the US. In addition, as one columnist points out, the impact of the UK housing crisis may be relatively greater on the UK economy. While some of the statistics he quotes are dubious, housing and consumer debt (on a per capita basis) may in fact be larger in the UK than in the US. As a result, the ongoing correction in housing prices would be expected to punish the UK more than the US. The story could be the same for the Pound, vis-a-vis the US Dollar. Money & Markets reports:[One analyst] is...a long-term bear on the British pound and believes any rallies in the currency represent an opportunity to enter short at a better price. Selling the pound against the dollar with a 10-12 month time frame may present one of the best opportunities in the currency markets today.

Emerging Markets: To Hedge or Not to Hedge?

2008-07-13T22:46:00.001+03:00

2008 has witnessed an explosion of volatility in emerging markets, affecting both debt and equity securities. Fluctuations have been especially dramatic in the forex markets, compounding the turmoil and skewing returns for foreign investors. The South African Rand and Brazilian Real, for example, have moved so violently that for both countries, a 10% gap distinguishes the returns earned by local and foreign investors. As a result, some institutional investors are re-examining their hedging strategies with regard to emerging markets. According to experts, currency hedging among equity investors is still rare because it is expensive and often complex. If hedging is undertaken at all, it is usually outsourced to a third-party. Some investors are quite dogmatic in their insistence that hedging is a complete waste of money, and argue instead that diversification (into different countries/currencies) represents a "natural" hedge. Since, the net change in exchange rates must ultimately be zero, a diversified, long-term approach to investing in emerging markets may automatically mitigate against currency risk. The Guardian reports:

"Currency movements tend to be noisy but over the long term they are just reflective of the economy and not the driver of economic performance."

Intervention Drawing Near

2008-06-21T00:03:00.000+03:00

G8 finance ministers met last week to discuss the detrimental effects of rising (commodity) prices on the global economy. Oil prices and commodity prices have in some cases doubled over the last year, contributing to a nasty surge in worldwide inflation rates. While the Dollar was not technically a topic of the discussion at these particular meetings, it was broached tangentially because of the perceived relationship between the weak Dollar and high commodity prices. Accordingly, Central Bank intervention on the Dollar's behalf could theoretically be justified on the basis of both mitigating inflation and facilitating global macroeconomic stability. The "I" word hasn't been mentioned explicitly, but its likelihood increases with every up-tick of inflation and every down-tick of GDP. It is no surprise that in the weeks leading up the actual G8 conference, the Dollar has sustained its strongest rally against the Euro in nearly 3 years. Forbes reports:

Last week Federal Reserve Chairman Ben Bernanke flagged a change in Washington by linking the weaker dollar to inflation and saying he was watching the currency closely with the Treasury. Then U.S. Treasury Secretary Henry Paulson refused last week to rule out direct intervention in currency markets.

Euro Rallied on Trichet Comments

2008-06-16T21:23:00.002+03:00

The euro rallied broadly after ECB President Trichet delivered surprisingly hawkish comments following a widely expected unchanged rate decision.

Trichet indicated that some ECB officials argued for rate hike later this year, and the central bank is in a state of “heightened” alertness” over inflation. His comments added to expectations for a rate move on its July meeting. The euro rose sharply from around 1.54 to as high as1.5562 versus the dollar, and gained more than half a cent to a 9-day high at 0.7956 versus the sterling. Also the euro advanced against the yen to test a key resistance at 165.

As Trichet’s statements dominated the market, other data released today were largely ignored. The Bank of England also left its interest rates unchanged at 5.0%. US weekly jobless claims fell 15k to 357k and continuing jobless claims fell slightly to 3.093m. The dollar edged up initially after the data but the following Trichet’s talk erased its gains quickly.

Dollar Slid after Jump in Unemployment Rate

2008-06-16T21:22:00.002+03:00

The dollar slid across the board after a report showed US unemployment jumped to the highest since 2004. US non-farm payrolls fell 49k in May, in line with the estimate of a 50k loss. However, unemployment rate shot up from 5.1% to 5.5%, the largest month increase since 1986. The report showed the nation’s job market is still very weak and there is no sign that the market will turn in short term. After the report, the euro rose immediately from 1.5580 to 1.57 and extended its gains later. The dollar dropped 1 cent to close to 105.

The euro remained firm on higher expectations for a July rate hike after ECB President Trichet’s ultra hawkish comments yesterday. However, one thing should be aware of is that recent data all pointed to a slowing economy in euro zone. A report released this morning showed Germany industrial output dropped unexpectedly.

Canada job report for May was also released today. Unemployment rate was unchanged at 6.1% and jobs change lowered from 19.2k to 8.4k.

USD Rallies on Jawboning, Housing Data

2008-06-16T21:21:00.002+03:00

The dollar rallied sharply against the majors at the start of the week as traders focused on US economic reports released in the morning, breaking through the 106-level versus the yen. Propping the greenback higher today was an unexpectedly stronger report on pending home sales, prompting speculation that the struggling US housing market may be bottoming. Pending home sales for April surged to 6.3%, far exceeding estimates for an improvement to -0.5% from -1.0% a month earlier.

Key highlights from the US economic calendar include the April trade balance, June consumer sentiment, the Fed’s Beige Book, retail sales, business inventories, and May CPI. Markets will focus closely on the US trade deficit and gauge the impact of soaring energy prices in recent months. Consensus estimates anticipate the deficit to expand to $60.0 billion, up from $58.21 billion from March. Retail sales are seen reversing the 0.2% decline in April, rising by 0.4%. Meanwhile, core retail sales are expected to remain unchanged at 0.5%.

The greenback also found support from US Treasury Secretary Paulson and NY Fed President Geithner, who both left open the option for central bank intervention. Nonetheless, we interpret the risk for government intervention in the currency market to prop up the do

Retail Sales Prop the Dollar

2008-06-16T21:19:00.001+03:00

The greenback extended its gains versus the majors, rallying above the 108-level against the yen and 1.5380 versus the euro. The main catalyst for today’s move was a larger than expected improvement in May retail sales, with the headline reading improving by 1.0%, exceeding calls for a 0.5% increase from a 0.2% decline in April. The excluding autos retail sales jumped to 1.2%, versus estimates for an improvement to 0.7% from 0.5%. Weekly jobless claims crept higher to 384k, versus 357k in the previous week while April business inventories improved to 0.5% from 0.1% a month earlier.

With market sentiment anticipating the FOMC to shift to a tightening bias near the end of the year, traders will continue to closely scrutinize incoming US economic data. Philadelphia Fed President Charles Plosser echoed a similar tone to recent Fed comments, saying the FOMC needs to take preventive measures to ensure that “inflation does not get out of control”. Plosser said the current risk to inflation is serious and the Fed needs to act preemptively to contain it.

Economic data due out on Friday will provide additional clues on how quickly the Fed may need to move to contain inflationary pressures. The May CPI reading is expected to edge up to 0.5% from 0.2% a month earlier, and hold steady at 3.9% from the previous year. Core CPI is forecasted to rise to 0.2% from 0.1% in April and remain unchanged at 2.3% from a year earlier. Traders will also focus on the June University of Michigan consumer sentiment survey, which is expected to slip further to 59.5, versus 59.8 in May – which would be a fresh 18-year low.

Turkish Lira Set for Decline

2008-05-12T01:47:00.002+03:00

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall. In addition, the country is beset by political uncertainty, as the courts determine whether the nation's current government can stay in office. Bloomberg News reports:

"The recent political developments are likely to complicate policy-making and the investment climate. The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda."

Korean Won is Worst in Asia

2008-05-12T01:43:00.001+03:00

In the year-to-date, the Korean Won has recorded the worst performance of any currency in Asia, having recently fallen to a 6-week low. The story is being driven as much by Dollar strength is by Won weakness. US equities have rallied over the last month, as investors may have been overly pessimistic in the previous months regarding near-term US economic prospects. In addition, the Fed has probably lowered interest rates for the last time, whereas the Central Bank of Korea has held its benchmark lending rate at 5% since the summer. This yield differential, which currently favors Korea, may narrow substantially over the coming months, as the Bank of Korea is forced to reckon with slowing growth and rising inflation. Bloomberg News reports:

Growth, at the slowest in more than three years last quarter, is losing momentum, the Bank of Korea said in a report on May 1. Policy makers next meet on May 8 to decide on the benchmark seven-day repurchase rate.

Chinese Exporters Dump Dollar

2008-05-12T01:42:00.001+03:00

The anecdotal evidence that China is diversifying its forex exposure away from the Dollar continues to mount. To date, most of the focus has centered around the Central Bank of China, which is passively diversifying its reserves into European and higher-risk assets. Apparently, Chinese exporters are also getting nervous about the impact of a falling Dollar on their respective bottom lines. The RMB has risen 11% since the beginning of 2007, which means Chinese companies now receive 11% less on sales to destinations abroad than they did for equal-priced goods in 2007. As a result, some companies have taken to quoting prices in Euros or to adjusting Dollar-denominated prices every few months. Other companies are building assumptions of a more valuable RMB into their profit models, and setting prices accordingly. The New York Times reports:

“We are gradually increasing our emphasis on the domestic market until we can forget about the export market, because the profit margins on exports are so thin,” [said one exporter].

New Forex ETFs

2008-05-12T01:39:00.001+03:00

WisdomTree and Dreyfus Funds recently unveiled five new currency ETFs in order to fill a broad gap in the emerging markets category. Previously, investors were limited to such mainstay currencies as the US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc. These new ETFs will expand this list to include the Indian Rupee, Brazilian Real, and the much-anticipated Chinese Yuan. It will also offer products for the Euro and Yen, but these probably won't draw much attention. The RMB ETF, especially, will be pounced on by investors, who have been clamoring for years for a cheap and easy way to capture the upside of the Yuan's inevitable appreciation. In addition, all of the ETFs will also return modest yields based on prevailing interest rates in the representative countries. Reuters reports:

In the case of India, Brazil and China, the yields on the ETFs may differ from yields available locally due to restrictions on foreign investors.

Euro Could Replace Dollar

2008-04-06T20:12:00.001+03:00

Two American economists recently conducted a computer simulation to determine how the role of the US Dollar as the world's reserve currency will evolve over the next decade. Their hypothesis- that the Dollar's preeminence would be maintained- was contradicted by the simulation leading them to conclude that the Euro will overtake the Dollar within the next 10-15 years. This may be hard for many analysts to stomach, since the Dollar's share in global currency reserves is 66%, compared to the Euro's 25%. In addition, the Dollar has held its title for nearly 150 years, and it's difficult to fathom its being replaced.

However, two factors have emerged within the last 10 years, lending support to the argument. First, the US twin deficits have exploded; the current account deficit approximates $800 Billion and the national debt is estimated at $9.4 Trillion. Second, prior to the inception of the Euro, there didn't exist a credible alternative to the Dollar. The Deutsch Mark and Japanese Yen initially seemed like potential candidates, but the German currency was folded into the Euro, and the Japanese economy has soured and taken over by deflation. Then there are peripheral factors, like US monetary policy, which is facilitating inflation and eroding the Dollar. There are also signs that a neo-imperialist foreign policy has overstretched the US, and foreign Central Banks are becoming nervous. The Financial Times reports:

Many developing countries will find it harder to maintain their dollar pegs. They may be reluctant to drop them now but there will come a point when the rise in inflationary pressures becomes unbearable.

Loonie in Trouble

2008-04-06T20:11:00.000+03:00

In a recent article published in the Toronto Star, a Canadian columnist outlined five reasons why the Canadian economy is in trouble. Only a couple factors are unique to Canada, and several can be subsumed under the credit crunch, but the pessimists are sounding broad alarm bells. First on the list is the looming drop in prices for commodities, the cornerstone of Canada's economy. Oil recently sank below $100/barrel, and gold dropped 5% in one day! In addition, China is threatening to curb demand in order to rein in inflation.

The second and third causes for concern are a decline in bank credit and loss of confidence, respectively. Neither of these factors are endemic to Canada, as banks around the world have suddenly developed an aversion to risk and have tightened lending accordingly. Next, corporate expansion (namely of American companies) is stalling; Home Depot and Proctor & Gamble have already announced a temporary hold on opening new stores in Canada. The final factor(s) are American consumers, which collectively spend $9 Trillion per year. The recent tightening of wallets could spell massive trouble for Canada, since some of its provincial economies are primarily driven by cross-border sales to Americans.

In short, the Canadian economy could actually contract in 2008. But perhaps the resulting decline in Canada's currency, the loonie, would make Canadian exports comparatively more attractive and return the economy to firm footing in 2009.

Dollar Decline: Not a Sure Thing

2008-04-06T20:10:00.004+03:00

Since 2002, the Dollar has lost 70% of its value, relative to the Euro. Meanwhile, the same factors that signaled bearishness in 2002 persist in 2008, or even worsened in some aspects. The twin deficits are still growing, though the current account deficit may be leveling off. The US economy is headed towards recession. Inflation is set to rise due to soaring commodity prices and a loosening of monetary policy. As a result, many investors are betting that the Dollar's slide will continue well into the near future.

However, prudent investors would be wise to "handle with care." While not entirely applicable to forex markets, efficient markets theory dictates that inherent in a security's current valuation is all relevant, publicly available information. Thus, all of the bad news listed above has already been priced into the Dollar, to some degree at least. The rule of diversification is in full effect when betting on forex. Thus, rather then putting all of one's chips directly behind one currency, an investors could buy foreign securities (stocks and bonds) instead, which also capture any currency appreciation (and depreciation). Investors can also purchase Treasury Inflation Protected Securities (TIPS), whose yield is linked to inflation and, thus, acts as a hedge against a declining Dollar. The Wall Street Journal reports:

While some market watchers believe the six-year dollar bear market isn't over yet, investors should recognize that trends in the currency markets are typically marked by volatile ups and downs along the way.

Fundamentals Harm Emerging Market Currencies

2008-04-06T20:10:00.002+03:00

Since the inception of the credit crunch, one of the themes in forex markets has been the surprising strength of the Dollar. Despite growing economic uncertainty, the US is still viewed as a relatively safe place to invest. On the other hand, emerging markets, especially those with current account deficits, have witnessed capital flight and subsequent currency depreciation. The currencies of South Africa and Iceland, for example, have both experienced declines 20% since the start of this year. Risk premiums had fallen to historic lows prior to the credit crunch, and neither country experienced great difficulty financing its respecive deficits. However, investors are growing increasingly nervous and are shifting capital to countries with stable current account balances. The Financial Times reports:

Goldman Sachs says: "We have long argued that in times of global turmoil suppliers of capital are poised to outperform countries in need of capital. However, it is only since January 2008 that we have seen the current account theme really gain momentum in the FX market."

Barclays Introduces Carry Trade ETN

2008-04-06T20:09:00.002+03:00

Through its trademark iPATH line of funds, Barclays Bank recently introduced a new ETN designed to mimic the carry trade. In accordance with this strategy, this note is linked to the performance of the Barclays Intelligent Carry Index, which aims sell low-yielding currencies and use the proceeds to invest in those that offer higher yields. This index holds varying combinations of the so-called G10 currencies, which includes all of the majors as well as the Norwegian Krona and Swedish Krona. Traditionally, carry traders have sold one specific currency (i.e. Japanese Yen) in favor of another currency (i.e. the New Zealand Dollar). By instead purchasing this note, which will trade under the ticker ICI, investors can buy a share of an entire portfolio, optimized expressly for this strategy. Comtex reports:

The index is composed of ten cash-settled currency forward agreements, one for each index constituent currency, as well as a "Hedged USD Overnight Index" which is intended to reflect the performance of a risk-free U.S. dollar-denominated asset.

USD: Worst Quarter in 4 Years

2008-04-06T20:08:00.001+03:00

In the first three months of 2008, the USD notched its worst quarterly performance since 2004, falling over 8%. During the same period, the Dollar lost 10% of its value against the Japanese Yen and 6.4% against a broad basket of currencies. Forex analysts reckon the slide was so steep because investors have taken stock of the US economic situation and have concluded that recession is inevitable. The story is also being driven by interest rates. The Fed has already cut rates by 300 bps in the current cycle of easing, making the benchmark federal funds rate the lowest in the industrialized world, in real terms. Meanwhile, the European Central Bank is giving every indication that it will maintain rates at current levels in order to keep a lid on inflation. As a result, the Dollar could fall further, especially if the Fed continues to hike rates and investors use the currency to fund carry trades. Reuters reports:

[According to one analyst], "And to call a bottom now is still a very risky call. It's too early to say the worst is behind us and the dollar's in for a sharp rebound."

Forex Leads Equities

2008-04-06T20:07:00.001+03:00

In recent months, the credit crunch has ignited a global trend towards risk aversion. As a result, a correlation has developed between equities, which serve as a proxy for risk, and certain currencies. The Forex Blog previously covered the link between the S&P 500 and the Japanese Yen, whereby the Japanese Yen moved inversely with the S&P as a decline in risk appetite led carry traders to unwind their positions. Perhaps, this connection can be seen in other currencies. Since the forex markets are open 24 hours a day and are the most liquid financial markets in the world, macroeconomic events are often priced into currencies before they are priced into equities. In addition, carry trading strategies have expanded beyond the Japanese Yen. In fact, the USD is now a decent candidate as interest rates are negative,when adjusted for inflation. Thus, an increase in risk appetite could simultaneously boost the S&P and punish the Dollar!

How Can An Offshore Company Be Used?

2008-03-23T21:44:00.001+02:00

Listed below are just some of the ways our clients use their Offshore Companies. Intended as no more than a general guide, and avoiding technical terms, it is meant to give you an idea of how versatile offshore companies can be. Naturally, we can give you precise advice on how best to achieve your goals by using an offshore company. All you need to do is ask.

International Trading using an Offshore Company

How to use an offshore company

Import and Export transactions can be made significantly more tax-efficient if they're carried out through offshore companies. Using an offshore company as an intermediary between a seller and a buyer of products or services in different countries allows profits to be accumulated offshore. (This is often called Transfer-Pricing.) Such offshore-companies are generally called marketing or export consultancies, and, with nominees handling all offshore company administration such as phone calls, emails or faxes, the appearance of the company is greatly enhanced.

Although invoicing is invariably carried out via the offshore company, the goods can, nevertheless, normally be delivered direct from seller to buyer.

Such devices can be particularly beneficial for transactions between EU countries, with VAT accounting problems solved by registration in a suitable location, such as the UK or Southern Ireland, the onshore company then working in conjunction with another corporate vehicle, for example a Belize company.

Factoring of debts using an offshore company also offers possibilities to move money from a high-tax to a low-tax area.

Manufacturing

Some countries have a preferential tax-rate for manufacturers, and this can be exploited by establishing a manufacturing company in the appropriate jurisdiction and separating the manufacturing parts of the company's operations from its other functions by basing it in such a free-trade zone. Structured correctly, huge savings can be made.

Offshore Investment companies

An Cloud Worldwide Ltd is often used to make investments and accumulate wealth. Just as an onshore company can invest in stocks, shares, property or commodities, so can an offshore company. The only difference is that the offshore company doesn't have to pay tax on its profits, nor inheritance tax when it is passed on to heirs.

In many jurisdictions, Withholding Tax is levied on income remitted out of the jurisdiction, but the careful use of double-tax treaties can reduce or even eliminate tax on the investment income. This may enable the investor to make investments in high-tax countries from an offshore base with minimal tax liability.

In some countries, interest is paid gross on tax-free bonds or bank deposits and this can be integrated into the client's tax planning. In certain circumstances, interest may be rolled up without income being remitted, and, in some jurisdictions, death duties and capital gains taxes are not levied.

Most importantly, the use of an offshore company also protects the identity of the ultimate beneficial owner. Anonymity comes automatically with offshore companies, and is respected by the law in the offshore world

Offshore Holding companies

Offshore holding companies can handle dividend receipts from a spread of subsidiaries. This allows a group to centralise its resources and maximise tax benefits. Careful use of tax treaties is necessary to obtain the best results.

Various locations, both on and offshore, can be used, with the holding company funding subsidiaries in a tax-efficient manner.

Property-owning Companies Registered Offshore

Placing property into the ownership of an offshore company yields many immediate advantages, including the avoidance of Inheritance Tax and Capital Gains Tax. This is because the anonymously-owned offshore company changes hands in the event of death or re-sale, not the property.

Additionally, any subsequent sale is greatly simplified. In some countries the establishment of title is time-consuming and costly; but once title has been established for a company-owned property it never needs to be dealt with again. This is because the sale can be made by transferring the shares of the company, with title to the property remaining vested in the company. In other words, the company can be sold instead of the property.

Sales by share-transfer almost always save on legal fees, together with any transfer or value-added taxes that are levied in some countries. Government stamp-duties and capital gains taxes can also be avoided.

Probate

The ownership of a portfolio of investments through a single offshore holding company greatly simplifies probate procedures upon the owner's death. It is easy and anonymous to deal with an Offshore Banking in this way. Probate can be applied for in one offshore jurisdiction rather than in several different countries where the assets are located.

Legal fees are often significantly reduced and publicity can be avoided for high-profile individuals and families.

Consultancy and services

Consultants, financial advisors, real estate agents, musicians, security consultants, bodyguards and entertainers often receive much of their income from overseas.

This income can be remitted to an offshore company, which is the individual's employer, and, after paying only a modest amount for expenses, thus retains the bulk of the funds in an offshore account.

Employment overseas is often facilitated by the use of an offshore employment company. This can either employ an individual or a group of individuals working overseas. The employee keeps the bulk of his income outside the country of employment. This type of structure can also reduce currency exchange problems and circumvent a number of employment and residency obstacles. For further information on this, please see our Offshore Payroll section.

Offshore Ship and yacht ownership

It's often advantageous to pass ownership of a vessel to an offshore company. As well as securing significant tax benefits, it can also provide an easy registration procedure for yachts, which in certain countries can only be registered on the major national register with onerous compliance requirements.

We can provide a separate offshore company formation to operate or charter the vessel, thus separating ownership and income for additional tax benefits.

Intellectual property

Patents, copyrights, trade marks, franchises and other rights such as those in music, computer software and technical know-how can all be transferred to the ownership of a licensing company, either offshore or onshore. The licensing company enters into licence or franchise agreements with the original company owner and then receives royalty payments and licence fees.

Insurance companies

Most offshore centres will only accept registration of insurance companies which are subsidiaries of existing insurance groups, or which are very heavily capitalised. Nevertheless, in several first-class jurisdictions it is still surprisingly easy to register an insurance company that would not meet the capitalisation requirements of the UK.

Offshore Internet Trading

One of the fastest growing areas of international trade is the Internet. The international nature of the trade and the potential tax complications of dealing across borders can be solved by the creation of a specialist internet trading company offshore.

To obtain favourable tax treatment, it is best to locate the server physically offshore. However, you can still use a normal domain name.Your customers would not notice any difference, no matter where the server was hosted. We can assist with Web Design and Offshore Hosting or simply give you free advice if you require it.

Though the opinion is often expressed that such operations are 'all in cyberspace' and therefore location is not important, it remains a fact that regulation is increasing and planning should anticipate possible future developments. Although the Americans seem determined to keep the internet tax free, no one really knows how it will turn out long term. True to form, EU legislation concerning the sale of downloadable products and services relating to the payment of VAT is making things more complicated. An example of this is eBay: if you live in the EU you have to pay VAT on your invoices, but if your billing address is outside the EU you don't. This is the result of EU legislation which came into force in July 2003.

Asset Protection using an Offshore Company

An offshore company can be perfect for Asset Protection. Transferring title to assets to an offshore trust means that the settlor (the person who gives up ownership in favour of the trust) no longer visibly controls these assets. This means that they cannot be seized in cases of insolvency, marital proceedings, professional negligence, or by the taxman.

However, if the trust was set up intentionally to avoid a known current or future liability it may be set aside by the courts. Particular care is needed in the US and, since the 2004 budget, the UK is also looking closely at trusts.

Regardless of problems in some countries, trusts, when correctly structured, are excellent asset protection vehicles, and are extremely flexible in times of political and economic instability.

A further advantage of trust formation is that 100% anonymity is still possible and a trust can perform all the functions of a company without some of the restrictions that apply to companies.

Family wealth protection

Trusts are often used to safeguard family wealth by imposing conditions on the use and distribution of money and assets by present and future generations. Such arrangements may also replace a will in certain circumstances. Trusts can be used legitimately to avoid 'forced heirship' provisions affecting inheritance. Inheritance, capital gains and income taxes can all be minimised in this way.

Forex Forecast

2008-02-26T23:49:00.001+02:00

Forex Forecast- try saying that three times fast! The Market Oracle, an online financial publication, has done even better, preparing a one-year forecast for all of the major currencies along with a detailed analysis of the major factors driving each currency in the month of February. The Dollar and Yen are projected to be the strongest performers in this time frame, benefiting from a trend towards risk aversion. It should be noted that this prediction is consistent with news reported by the Forex Blog earlier this week. On the other hand, currencies that have been propped up by the Yen carry trade, namely those of Australia, New Zealand, Canada and South Africa, will face selling pressure. The British Pound is projected to underperform slightly, due to an easing of British monetary policy, which will narrow the interest rate advantage claimed over the US.

Finally, the Euro is something of a wildcard. On the one hand, the EU economy is stagnating, and the ECB has hinted that rate cuts are a possibility. On the other hand, the Euro theoretically stands to inherit a significant amount of risk-averse capital, especially from foreign investors looking for a stable alternative to the Dollar. Accordingly, the Market Oracle forecasts a short-term decline in the value of the Euro but a long-term appreciation.

Israel Considers Intervention

2008-02-26T23:48:00.004+02:00

The Israeli Shekel has surged over 15% against the Dollar in the last six months, and by over 20% in the last two years. Analysts have suggested that the appreciation is due to the strength of Israeli's economy vis-a-vis the US economy, which seems headed for recession. In addition, Israeli citizens have repatriated billions of dollars in capital that had been held overseas and invested it in Israel's financial markets, which in itself, has exerted much of the pressure on the Shekel. There is now a surplus in the balance of payments, which means more capital is coming in to Israel than is being taken out. As a result, Israeli exporters are getting nervous about the perceived consequences of a relatively expensive currency and are pressuring Israeli political leaders to take action. The Central Bank, understandably, is reluctant to do so. Haaretz.org reports:

"Intervening in [the currency] market is risky and inefficient," [said] Bank of Israel Governor Stanley Fischer...earlier this week.

Bernanke Hints Rate Cuts

2008-02-26T23:48:00.003+02:00

In testifying before the Senate Budget Committee, Ben Bernanke, Chairman of America's Federal Reserve Bank, hinted strongly that further rate cuts would be necessary to stabilize the US economy. Last week, the Forex Blog covered an editorial which suggested that Bernanke knew something about the state of the economy that the American public did not, which his testimony seemed to confirm. Bernanke testified that the Fed is also committed to fighting inflation, but the emphasis was clearly on spurring economic growth. As a result, futures markets are pricing in a rate cut of 50 basis points, projected for the next month. The forex markets were unambiguous about the implications of this development for the Dollar. Thomson Financial reports:

'By highlighting the downside risks to growth, Bernanke confirmed prevailing aggressive rate cut speculation, which currently keeps the dollar under broad pressure,' said Antje Praefcke, currency strategist at Commerzbank.

China's Trade Surplus Expands Further

2008-02-26T23:48:00.001+02:00

China's trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%. If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports. Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough. On paper, however, the Yuan has appreciated by 15% since China officially de-pegged it from the Dollar in July 2005. In addition, the G7 failed to scold China in its annual meeting, which suggests that economic policymakers are becoming less concerned with China's forex policy. Ironically, the revaluation of the Yuan is probably boosting the value of of China's exports in the short-term, because other countries are now paying more for the same quantity of imports. AFP reports:

The International Monetary Fund...urged the Chinese government to loosen the reins on the yuan. "We encourage a faster pace of appreciation that would be helpful for addressing China's key economic challenges and would also contribute to preserving global economic stability."

Canadian Loonie Defies Logic

2008-02-26T23:47:00.003+02:00

Over the last few years, commodity prices, equity values, and interest rate differentials all favored Canada. By no coincidence, the Loonie rallied to such an extent that it soon reached parity with the USD. The relationship between these trends and the Canadian Dollar seemed so cut-and-dried that few analysts paid attention to anything else. In the last couple months, however, these relationships seem to have suddenly dissolved. For example, as the price of oil has begun to rise again, the Loonie has unexpectedly lost value. Meanwhile, the inverse correlation between risk aversion and the Loonie has lost all validity, such that if the S&P 500 increases, the odds that the Canadian Dollar will also appreciate is essentially an even money bet. The Canadian Economic Press reports:

"The breakdown is still quiet tentative but it’s weakened in the last few sessions. For Canada in particular there isn’t one story in the market. We have several different stories going on at the same time."

Iran has Forex Reserves?

2008-02-26T23:47:00.001+02:00

Every month seems to witness the induction of a new country into the pantheon of those with burgeoning forex reserves. The new member for the month of February is...Iran? Most of the attention Iran receives is political rather than economic, but with oil prices recently topping $100 a barrel for the second time, you can bet that Iran will start appearing on the radar screens of more and more analysts. Iran's reserves currently total $76 Billion, which is unimpressive in itself, but represents a 30% year-over-year increase. Of more significance, perhaps, is that Iran is leading the charge against the Dollar by actively diversifying its reserves into Euros. It remains to be seen whether any "non-rogue" countries will follow suit. The Economic Times reports:

Iran, the world's fourth largest oil exporter and the second ranking in OPEC, has benefited from record crude prices which have helped it to weather domestic economic problems.

Yuan et al Must AppreciateYuan et al Must Appreciate

2008-02-26T23:08:00.000+02:00

Since the Fed began loosening monetary policy over the last six months, however, many of the emerging economies in Asia, especially China, have been forced into a bind. On the one hand, lowering interest rates is exacerbating the problem of inflation. On the other hand, they want to keep their currencies stable so as not to limit economic growth. In short, Central Banks must determine which is more important: fighting inflation or promoting growth. According to some economists, these economies are so strong, having grown by nearly 10% collectively last year, that they can afford to slow down, if it will result in greater price stability. But the only way to stabilize prices is to drastically raise interest rates, which will put even greater pressure on their currencies to appreciate.

In addition, the Central Banks of Asia have amassed a staggering $4 Trillion in foreign exchange reserves. In the past, this has been a neutral, sometimes profitable activity. Since the Fed began cutting rates, the interest rate differential has been turned upside-down such that Central Banks are now losing money on each unit of local currency they sell in exchange for Dollars. According to one analyst, over $160 Billion has been lost since July 2006, and those losses will mount with each additional intervention.

Yen as Proxy for Risk Aversion

2008-02-13T12:09:00.005+02:00

The US stock market has lost over 10% of its capitalization since reaching an all-time high in October of last year. Meanwhile, the Japanese Yen has climbed at least as much in proportional terms since bottoming out around the same time. Coincidence? At least one analyst doesn't think so. Because of the steadfast popularity of the carry trade, the Japanese Yen appears to have developed an inverse correlation with the US stock markets. The reasoning is actually quite simple. When aversion to risk is low, investors borrow in Japanese Yen and make investments denominated in other currencies, the Dollar for one. When risk-aversion increases, as it has in the current economic environment, investors have been quick to close out their carry trade positions, causing the Yen to rise. Maktoob Business reports:

If the situation of stock markets is improving, the USD/JPY is likely to be increasing. It means that more carry trade transaction are being carried out.

USD May Bottom Out

2008-02-13T12:09:00.003+02:00

As far as Dollar bulls are concerned, all news is bad news. An economic recession seems inevitable. Interest rates are already negative in real terms, and are now the lowest in the industrialized world, save Japan. It's still unclear how much subprime debt will be written down by financial companies before all is said and done. But analysts from Brown Brothers Harriman, an investment bank, think the Dollar's multi-year decline is coming to an end. There are two main reasons underlying their rationale. The first point is purely technical- that the all of the bad news and in fact, the worst possible scenario, has already been priced into the Dollar. The second point is fundamental- that the speculative hot money that has poured into the US as foreign investors take advantage of a weak Dollar and that is sustaining the US current account deficit is now transitioning into long-term foreign direct investment. The Financial Post reports:

In addition, BBH believes that in a weak dollar environment, foreign companies will now start looking to move production and sourcing to the United States, following the successful example of Japanese auto makers.

Kiwi Rises and Falls with Risk Aversion

2008-02-13T12:09:00.001+02:00

Most of the world's major currencies are affected by a variety of technical and fundamental factors, such that only taking into account one factor is tantamount to using P/E multiples as the sole basis for purchasing shares of stock. The New Zealand Dollar, which barely qualifies as a major currency seems to be one of the few exceptions to this common sense rule. The preponderance of carry traders involved in trading the Yen ensures that the NZD inversely tracks the Japanese Yen. In addition, the demand for Kiwi is directly proportional to appetite for risk, such that when risk aversion declines, the Kiwi increases, and vice versa. The reasoning is quite simple: the Kiwi boasts the highest interest rates in the industrialized world. Because the investment climate in New Zealand is less stable than in other industrialized countries, New Zealand often witnesses capital flight during periods of global economic uncertainty. The New Zealand Herald reports:

Gains in equities markets emboldened investors to take chances, prompting use of the low-yielding yen to buy assets in higher-yielding currencies like the kiwi in carry trades.

India Projects Forex Reserve Growth

2008-02-13T12:08:00.003+02:00

Those who make a living tracking and betting on the foreign exchange reserves of Central Banks officially have a new player to keep tabs on: India. Nearly 17 years ago, India's reserves dipped below $1 Billion, and government ministers began sounding the alarm bells. In comparison, fiscal 2007 witnessed a rise of $47 Billion in India's reserves, bringing the total to $280 Billion. The government is projecting an even greater increase in 2008, estimated at $100 Billion. Now, the challenge is what to do with all of the reserves; investors will be tracking developments in this regard because of the implications for the currencies of which the reserves are denominated in. The Dollar and Euro are currently jockeying for position; while the Dollar is way ahead, the Euro is quickly closing in.

Why the Fed Cut Rates

2008-02-13T12:08:00.001+02:00

It seems self-evident that the Fed is easing monetary policy because it is trying to stimulate the economy and shore up confidence in capital markets by making credit less expensive. Dig a little deeper, however, and a more nuanced picture begins to emerge. Conspiracy theorists believe that the Fed knows something that investors don't, perhaps that the subprime mortgage situation is more serious than the public is being led to believe. Accordingly, the theory goes, it is trying to prevent a complete collapse of the financial system. Another theory holds that the Fed is cutting rates because it has nothing to lose by doing so. Inflation is still low, from a historical standpoint, and the Fed may be trying to inject liquidity into the financial markets before it is too late. Yet another theory holds that the Fed is deliberately targeting a weak Dollar and high commodity prices, as the former benefits the US directly by narrowing the trade imbalance, and the latter benefits the US indirectly by helping emerging market economies, which are relatively more dependent on commodities. The Chicago Tribune reports:

An increase in exports was one of the positive features of Wednesday's disappointing fourth-quarter report on U.S. gross domestic product. The cheaper dollar is a major factor in export growth, both in terms of current sales and expansion of overseas market share by U.S. manufacturers.

China is Earning Negative Carry

2008-02-13T12:07:00.000+02:00

China's foreign exchange reserves currently approximate $1.5 Trillion, the majority of which is denominated in USD. Moreover, the Central Bank of China earns interest on every Dollar it adds to its reserves but must also pay interest on every RMB note that it must issue to offset the Dollars. Since the Fed began easing monetary policy, the amount of carry (the difference between what the Central Bank receives on Dollars and pays on RMB) earned by the Central Bank has completely inverted, such that it now loses 250 basis points on average for each Dollar exchanged for RMB.

Based on the rate at which China is currently accumulating reserves, this amounts to between $5 Billion and $10 Billion per month, depending on which method of accounting is utilized. Furthermore, this trend has been exacerbated because China is accumulating reserves at a faster rate than its economy is growing. Some analysts have speculated that this could turn into a major political issue, with important implications for the RMB/Dollar exchange rate. The Financial Times reports:

The renminbi has started to appreciate more rapidly in recent months, rising at an annualised rate of about 20 per cent, compared with 6-7 per cent over the whole of 2007. In the longer-term, say economists, China will have no choice but to allow its currency to appreciate faster, even in the face of entrenched domestic resistance.

Dollar Very Lows

2007-10-09T23:49:00.003+03:00

The dollar continues to reel from last weeks 50-basis point Fed rate cut, falling overnight to a fresh record low against the euro at 1.4129 and stumbling versus the sterling to 2.0316. Renewed fears of a faltering US economy will continue to drive the foreign exchange market this week as concerns of a possible recession weigh on the greenback. However, given the abrupt nature of the Feds aggressive ease, traders must keep a close eye on US inflation data for fear that the 50-basis point rate cut may strengthen inflationary pressure over the coming quarters.

Economic data slated for release this week will provide further clues on the US outlook, with reports to shed light on growth, the housing market, inflation, manufacturing, and consumer sentiment. On the whole, consensus estimates look for weaker data compared with the previous releases. The housing market slump will continue to lead the deterioration in US fundamentals, with August existing home sales seen falling to 5.49 million units, versus 5.75 million units previously and new home sales forecasted to drop to 830k units compared with 870k units in July. The final reading of Q2 GDP is estimated to be revised lower to 3.9%, from 4.0%, while the Feds preferred gauge on inflation is seen unchanged in Q2 with core PCE standing pat at 1.3%. Additionally, durable goods orders and Chicago PMI will provide more clues on the extent of the slowdown in manufacturing. Although durable goods orders are typically a volatile figure, estimates are calling for the number to fall by 3.1% in August, reversing the previous months 6.0% increase. The excluding transports reading is also seen declining, down by 1% versus a 3.8% gain a month earlier.

USD an economic crisis data

2007-10-09T23:49:00.001+03:00

The data released earlier in the session reinforced the pessimism surrounding the US economy, with consumer confidence and housing reports pointing toward further weakness. The Conference Boards consumer confidence index tumbled to its lowest level in nearly 2-years, at 99.8 for September down sharply from August at 105.6. The dismal confidence figure reflects heightened market volatility, growing uncertainties stemming from the housing market and worries over the prospects of a US recession. There was also renewed evidence of the slumping housing market with existing home sales down 4.3% at 5.49 million units, versus 5.75 million units in July.

Dollar Shrugs off Soft Data

2007-10-09T23:48:00.003+03:00

Traders will turn to several key reports due out in the Thursday session, consisting of Q2 GDP, Q2 PCE, August new home sales, weekly jobless claims and Q2 corporate profits. The final GDP growth figure is seen softer at 3.9%, down from 4.0% in the preliminary reading. The Feds preferred gauge of inflation, the PCE is unchanged from the previous quarter with the headline figure holding steady at 4.2% and the core PCE reading at 1.3%. Weekly jobless claims are seen creeping up slightly to 316k, from 311k last week.

Dollar Mired near Low

2007-10-09T23:48:00.001+03:00

While the barrage of economic data released this morning was mixed, it had little impact in the foreign exchange market. Inflation reports showed the PCE price index softer than expected, with the headline reading at 1.8% y/y and down 0.1% m/m. The core reading edged up by 0.1% m/m, albeit weaker than anticipated while the annualized figure fell to 1.8% from 2.1%. August personal consumption rose by 0.6%, up from 0.3% while personal income drifted to 0.3% from 0.5%. The September NAPM index tumbled to its lowest level since November 2001, falling to 437.6 versus 445.0 from August. However, the Chicago PMI reading exceeded consensus estimates for a decline to 53.3, instead rising to 54.2 from 53.4 a month earlier. The University of Michigan sentiment survey unexpectedly fell to 97.9, coming short of forecasts for 99.0 and down from 98.4 from August. The sentiment survey echoes the Conference Boards dismal consumer confidence survey from earlier this week and is indicative of deteriorating economic fundamentals and recent market volatility.
The dollar sold off across the board to end the week at fresh record lows against the euro at 1.4277 and multi-week lows versus the sterling near 2.0450. Fundamentally, little has changed in the US economic and interest rate outlook but with sentiment biased toward further Fed easing, traders have been given the green light to dump dollars. The economy remains in a precarious state with the housing market yet to reach bottom and burgeoning fears of slipping into recession.

Technical Bounce Props Dollar

2007-10-09T23:47:00.001+03:00

Dollar found some respite in the Tuesday session despite little positive news to alter the US economic outlook. The $ rebounded from an 18-year low against the Aussie and recovered toward the 1.4140 level versus the euro. With another bout of dismal housing data, we perceive todays move as a technical one and a pause to further decline over the coming weeks.

The August pending home sales report showed continued deterioration, falling by greater than consensus forecasts, down 6.5%, albeit an improvement from Julys 12.2% fall. Traders will look to tomorrows August non-manufacturing ISM reading, durable goods orders, jobless claims, and factory orders. We expect continued weakness in the aforementioned figures, deteriorating from the previous reading.

Shockwaves hit financial markets

2007-10-09T23:46:00.000+03:00

News that Northern Rock has had to go to the Bank of England for emergency loan funding sent shockwaves through already nervous financial markets today.Shares in London tumbled by 140 points at one stage, although with signs of resilience on Wall Street this afternoon the FTSE halved earlier losses to close 74.6 points lower at 6289.3, a fall of 1.2%.

On Wall Street, US investors took fright at further signs of the sub-prime contagion spreading to Britain and prices fell throughout the financial sector, including investment bank Bear Stearns, one of the biggest US casualties of the sub-prime crisis, and Countrywide Financial, Americas largest mortgage lender.

Despite weaker than expected retail sales data across the Atlantic, the Dow Jones Industrial Average saw an early fall of 100 points cut to just 4.1 points, and stood at 13,420.82 by the time the London market closed.

The gloom was deepened by official data showing an unexpected drop in US retail sales last month. Analysts said the weaker-than-expected figures will raise the pressure on the US Federal Reserve bank to cut interest rates by 50 basis points when it meets next week.

This growing evidence that the economy is slowing down rather dramatically and is going to conjure up increased fears of the R word, being recession, rather than economic recovery, said Al Goldman, chief strategist at A G Edwards.

Sterling fell to its lowest level against the euro in 14 months, at almost 69 pence, and fell two cents against the dollar to around $2.01.

US sales, excluding cars, fell 0.4% in August, the biggest decline for nearly a year, the Commerce Department said.

The August sales report showed declines from a range of other retailers. Clothing store sales slipped 0.1%, building materials and garden supply store sales fell 1.0%, and department store sales dropped 0.2%.

Meanwhile a Federal Reserve report showed that industrial production rose by a smaller-than-expected 0.2% in August as both manufacturing and mining output fell.

The manufacturing recovery already looks to have been faltering even before the impact of the credit crunch hits, said Jonathan Loynes at Capital Economics. Overall, a disappointing report that adds to the economic reasons for lower interest rates.

By the close, Northern Rock shares were down 31.5% to 438p, wiping ?846m off its stock market value. The shares were already down by 50% this year.

Losses were widespread in the banking sector, with specialist buy-to-let lender Paragon one of the biggest casualties. As its shares tumbled, it attempted to reassure investors, saying it had no need to resort to the Bank of England in order to continue trading.

Dollar Extended Rally

2007-08-23T13:13:00.001+03:00

The dollar extended its rally versus the euro and sterling on concern over European banks¡¯ exposure to US subprime problems. The euro fell off the 1.36 handle versus the dollar and reached as low as 1.3537. The sterling slumped against the dollar and broke through 2 for the first time in six weeks.

The sterling weakened sharply as two UK government reports showed an expected decline in inflation, dampening expectations for another rate hike by the year-end. UK consumer prices index fell from 2.4% to an annual rate of 1.9% in July, below the Bank of England¡¯s target rate of 2% for the first time since March 2006 and worse than the estimate of 2.3%. Another inflation gauge, retail price index, fell to 3.8% in July, also below the forecast of 4.3% and a reading of 4.4% in the previous month.

The euro was hit by soft GDP reports from euro zone and Germany. Euro zone economic growth slowed from an annual rate of 3.1% to 2.5% in the second quarter, below the forecast of 2.7%. Germany GDP also fell to 2.5% in the second quarter, down from a 3.3% growth rate in the prior quarter.

Risk Aversion Lingers in FX

2007-08-23T13:12:00.001+03:00

At 4:30 AM UK August MPC Meeting Minutes (exp 9-0, prev 3-6)
UK June Claimant Count (exp –10.0k, prev –13.8k)
UK June Unemployment Rate (exp 5.4%, prev 5.4%)
At 8:30 AM Canada June Manufacturing Shipments (exp –0.2%, prev –0.1%)
August NY Fed Manufacturing Survey (exp 18.5, prev 26.46)
US July core CPI m/m (exp 0.2%, prev 0.2%)
US July core CPI y/y (exp 2.2%, prev 2.2%)
US July CPI y/y (exp 2.4%, prev 2.7%)
At 9:00 AM US June TICS (exp $65.0 bln, prev $126.1 bln)
At 9:15 AM US July Industrial Production (exp 0.3%, prev 0.5%)
US July Capacity Utilization (exp 81.8%, prev 81.7%)
At 1:00 PM US August NAHB (exp 23.0, prev 24.0)

The dollar continues to firm against the euro and sterling, but drifts further versus the yen. A barrage of US economic data is slated for release in the coming session, including key gauges of inflation and manufacturing. The July core CPI figures are seen unchanged from their prior readings at 0.2% m/m and 2.2% y/y. The annualized headline figure however, is estimated to fall to 2.4% for July, down from 2.7% in the previous year.

Greenback Rose on Heightened Risk Aversion

2007-08-23T13:11:00.004+03:00

The unwinding of carry trades continues to dominate the foreign exchange market. The greenback strengthened as investment capitals flow back to safe haven amid the heightened risk aversion. The euro fell another 100 pips today to as low as 1.3450 versus the dollar.

The market shrugged off economic data as all the eyes were on risk aversion. US CPI rose 0.1% in July, leading to a year-on-year rate down from 2.7% to 2.4% as expected. Excluding food and energy, core CPI rose 0.2% as expected. New York Fed manufacturing survey fell slightly from 26.46 to 25.06 in August, above the estimate of 18.5. US Treasury reported net foreign purchases of long-term securities for June were 120.9 billion, double the forecast of 65 billion. US industrial production increased 0.6% in July, beating the estimate of 0.3% and a reading of 0.5% in the earlier month. US capacity utilization was barely changed at 81.9% in July. The National Association of Home Builders/Wells Fargo sentiment index declined from 24 to 22 in August, the lowest since September 2001.

EURUSD will face interim resistance at 1.3480, followed by 1.35 and 1.3530. Additional ceilings will emerge at 1.3550, backed by 1.3570. Support starts at 1.3450, backed by 1.34, 1.3380 and 1.3350. Subsequent floors are eyed at 1.33.

Volatility Props USD, JPY

2007-08-23T13:11:00.003+03:00

At 2:00 AM Germany July HICP m/m (exp 0.5%, prev 0.1%)
Germany July HICP y/y (exp 2.0%, prev 2.0%)
Germany July CPI m/m (exp 0.4%, prev 0.1%)
Germany July CPI y/y (exp 1.9%, prev 1.8%)
At 4:30 AM UK July Retail Sales m/m (exp 0.2%, prev 0.2%)
UK July Retail Sales y/y (exp 3.4%, prev 3.4%)
At 5:00 AM Eurozone July HICP m/m (exp –0.2%, prev 0.1%)
Eurozone July HICP y/y (exp 1.8%, prev 1.9%)
At 8:30 AM US Weekly Jobless Claims (exp 313.0k, prev 316.0k)
US July Housing Starts (exp 1.405 mln units, prev 1.467 mln units)
US July Building Permits (exp 1.40 mln units, prev 1.413 mln units)
At 12:00 PMAugust Philadelphia Fed Survey (exp 9.0, prev 9.2)

With heightened risk aversion driving markets, the dollar and yen continue to benefit, while the British pound and euro remain laggards. US equities took another hit with the Dow losing over 167-pts on Wednesday as burgeoning fears of spillover from the subprime debacle linger. The increased cautiousness will likely prop the yen higher across the board as heavy unwinding of the carry trades persist.

US data due out today include weekly jobless claims, July housing starts, July building permits and the August Philadelphia Fed survey. Weekly jobless claims are seen slipping slightly to 313k, down from the previous week at 316k. Housing starts and building permits are both forecasted to reflect continued deterioration in the housing market, falling to 1.405 mln units and 1.40 mln units, respectively. Lastly, the August Philadelphia Fed survey is expected to slip to 9.0, down from 9.2 in July.

Markets to Consolidate This Week after Fed's Discount Rate Cut

2007-08-23T13:11:00.001+03:00

Fed's 50 bps discount rate cut on Friday stabilized the markets which was in massive carry trade unwinding as the subprime mortgage crisis spread through global credit markets. But still, the ultimate carry trade pair, NZDJPY tumbled near to 10% while AUD/JPY also dropped close to 9%. High yielding currencies and European majors except the Swissy, were hammered much lower too before late Friday's recovery. Important technical levels were taken out in most pairs that signaled at least a medium term reversal. However, as a short term top/bottom should be in place after Fed stepped in, and with a rather light calendar, more consolidation could be seen this week before extending the reversed trend.

The greenback did ride on carry trade unwinding and surged against most currencies except the yen on flight-to-safety flows. Fed's unexpected discount rate cut from 6.25% to 5.75% has stabilized the financial markets and triggered some retreat in the greenback too. To be clear, the discount rate is the rate that the Fed charges to lend money directly to banks and other lending institutions. Meanwhile, the commonly talked about Fed Funds Rate is that the rate that banks ay to borrow from the marketplace. In addition to lower the rates, the Fed also allow terms of financing to extend to 30 days. Most importantly, in the statement, the Fed acknowledged that "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward". Downside risks to growth have "increased appreciably". Altogether, even though the act did stabilized the markets and suggest that Fed is openings door to turning bias to neutral and even pathing the way to a Fed Fund rate cut, it is taken as a confirmation of the acknowledgement of the seriousness of the subprime problem. In other words, more bad news could still come in the near future and markets will continue to be vulnerable to them. The discount rate cut, and even a Fed Fund rate cut could halt the current liquidation of riskier assets but the trend will likely continue.

Dollar Fell after Fed Cut Discount Rate

2007-08-23T13:10:00.003+03:00

The dollar fell after the Federal Reserve cut the discount rate by 50 percent to 5.75 percent and said that downside risks are on the rise. The euro rose as high as 1.3550 versus the dollar, while the sterling pared its earlier loss and climbed back to above 1.98 level against the dollar.

The Fed said in the statement that it is ¡°prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.¡± The dollar rallied after the Fed cut window rates to increase liquidity in the market. The Dow Jones Industrial Average opened 300 points higher under the stimulus of the Fed¡¯s action.

Stocks pared half of its earlier gains as investors took a cautious stance and took profits before a US consumer sentiment report. The University of Michigan consumer sentiment fell from 90.4 in 83.3 in August, below the estimate of 88. The dollar edged down slightly after the below-the-expectation data.

Yen Soars Most in 9 Years

2007-08-23T13:10:00.001+03:00

The yen had its biggest one-day gain against the dollar since 1998 as investors rushed out of carry trades amid credit market panic.

Global stocks tumbled today on fears of a funding crisis. The Dow Jones Industrial Averages were down more than 340 points in intraday trading, but rebounded at closing with a loss of just 13. The Fed injected 517 billion to banking system to ease liquidity needs. Short yen carry trades positions were unwounded as investors avoid risky investment in today¡¯s financial market turmoil.

As a result, high-yielding currencies, such as the Australian dollar, New Zealand dollar, and sterling, suffered steep losses. The Australian dollar fell from 0.82 to near 0.78 in intraday trading, the biggest drop in 21 years.

Dollar Slipped after FOMC

2007-08-12T00:14:00.001+03:00

The Fed kept interest rates at 5.25% unchanged as widely expected. The Fed acknowledged tightening credit conditions and slowing economy, but maintained its bias against inflationary pressure for fear that inflation may not moderate as expected. The dollar fell slightly against the euro and sterling after the post-meeting statement.
The euro will face resistance at 1.3750, followed by 1.3780 and 1.38. Additional gains will target 1.3830 and 1.3850. Meanwhile, on the downside the pair will encounter support at 1.3720 followed by 1.37 and 1.3680. Subsequent floors will emerge at 1.3650, backed by 1.3620 and 1.36.

Rate Sentiment Drives FX

2007-08-12T00:12:00.002+03:00

The dollar was mixed in the Wednesday session amid a dearth of fresh US economic news, climbing higher against the yen but falling sharply versus the sterling. The data release was limited to June wholesale inventories, which was slightly higher than expected at 0.5%, unchanged from the previous month. Interest rate expectations continue to play a key role in the FX market, with the Aussie and sterling regaining its footing on hawkish sentiment from both respective central banks.

Sterling Shines
The sterling rallied sharply against the dollar and yen overnight, climbing just shy of the 2.04-level and slightly above 244, respectively. The strength was predominantly triggered the Bank of England’s Quarterly Inflation Report, which revealed expectations for CPI inflation to be slightly above the 2% target in two years with market rates, and clearly above target based on constant rates. The BoE said that risks to inflation remained skewed to the upside but with growth now forecasted to be softer over the next two years.

Yen Rallied after BNP Froze Funds

2007-08-12T00:12:00.001+03:00

The yen rose sharply BNP Paribas, France’s biggest bank, froze three investment funds worth 1.6 billion euros, raising concern the US subprime mortgage sector woes is spreading worldwide. The ECB today injected 94.8 billion euros into the region’s banking market to meet the sudden liquidity demand. The US subprime worries prompted investors to unwind carry trades, driving the yen higher against high-yielding currencies.
The euro slumped from 165 to 161.55 versus the yen, while the sterling slid from 244 to test the 239 level. The yen strengthened from 119.75 to as low as 118.20 versus the dollar.
As a safe haven currency, the dollar also benefited from anti-risk trades. The euro fell off the 1.38 handle and was supported by the 1.3650 level versus the dollar. The sterling dipped from 2.04 to as low as 2.0212.

Yen Crosses Could Stabilize ,Short Term Risk Remains on Downside

2007-08-12T00:11:00.001+03:00

Euro and Sterling stabilize a bit against dollar today as the greenback is dragged further down by selling in USD/JPY. Though, the high yielding commodities are still the biggest victims of the current carry trade unwinding. Fed fund rate surged to as high as 6%, well above Fed's target rate of 5.25% earlier today and triggered the Fed to add another $19 b in temporary funds to the banking system through the purchase of mortgage-backed securities to help meet demand for cash. On the other hand, ECB also loaned another 61.05b euros into the banking system. Sentiments in the markets remains fragile as US stocks are set to open lower, following yesterday's sharp sell off and today's fall in Asian and European markets.
However, note the deeply oversold yen crosses are showing signs of stabilizing in intraday terms as US session approaches. We could see some sideway trading and recovery in yen crosses in the US sessions, provided that the stock markets also stabilize after initial fall. But still, the short term outlook in yen remains bullish, and any recovery in the yen crosses will be treated as 'recovery' only, and more downside is still expected to come next week.

Euro/Dollar

2007-08-12T00:10:00.001+03:00

EUR/USD edges further lower to 1.3643 today but stabilizes as no follow through selling is seen yet. Though, intraday bias will remain on the downside as long as 1.3713 minor resistance holds. Further decline is still in favor. As discussed before, EUR/USD should still be bounded in consolidation that started at 1.3851 and hence, another test of 1.3567/3658 support zone is expected to be seen before completing such consolidation. However, downside is also expected to be contained there.
Above 1.3713 minor resistance resistance will turn intraday outlook neutral and probably bring stronger recovery. But firm break of 1.3839 resistance is needed to confirm rise from 1.3262 has resumed. Otherwise, choppy sideway trading is still in progress.
In the bigger picture, firstly, the momentum of the rise from 1.3262 is seen stronger than the prior rally from 1.2865 to 1.3681. Secondly, the falling trend line in both daily MACD and RSI were broken, negating the bearish divergence conditions. In other words, the underlying bullishness in EUR/USD could be much stronger than we originally thought and the rise from 1.3262 could be part of another set of medium term rally instead of the last advance of a 5 wave rally from 1.2483 that we originally thought.
Focus remains on 1.3822/3851 resistance (100% projection of 1.1639 to 1.2978 from 1.2483 at 1.3822). Sustained trading above this level will add much weight to the case that whole medium term rally from 1.1639 is indeed resumption of multi-year up trend from 0.8223 (00 low). That is, further rise should be seen in medium term towards 95 high of 1.4523 with much chance to extend further to 61.8% projection of 0.8223 to 1.3668 from 1.1639 at 1.5004.
On the downside, break of 1.3481 will warn that 1.3851 could indeed be an important medium term top. 1.3262 low will be back into focus and break will indicate that medium term rally from 1.1639 has likely completed after being limited by 1.3822 resistance as originally expected.

GBP/Dollar

2007-08-12T00:09:00.000+03:00

Cable edges further lower to 2.2154, breaking marginally below 2.0156 low but lacks follow through selling so far. As this point, further downside is still in favor as long as 2.0242 resistance holds. As discussed before, cable's correction from 2.0652 is still in progress and is expected to further test 2.0086/2.0206 support zone before completion. However as we'd expect such consolidation to be contained by this support zone, focus will be on reversal signal as the current fall proceeds.
Above 2.0242 will turn intraday outlook neutral first and probably bring strong recovery. But still, break of 2.0462 cluster resistance (61.8% retracement of 2.0652 to 2.0156 at 2.0463) is needed to confirm correction from 2.0652 has completed and bring retest of key medium term resistance of 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677. Otherwise, further downside is still in favor.
In the bigger picture, regardless of the internal structure, the whole rally from 1.7047 represents resumption of the long term up trend from 1.3680 and has almost met it's initial target of 2.0677 already. Even though a short term top is in place at 2.0652 the whole set of rally from 1.7047 should still be in good shape as long as 1.9621 support remains intact. Consolidation from 2.0652 should be relatively brief in medium term and further upside is still expected. Sustained trading above 2.0677 will target 2.1 psychological resistance first.
However, break of medium term rising trend line (now at 1.9916) will warn that the medium term rally has already topped out at 2.0652 after failing the 2.0677 target. Further break of 1.9621 support will encourage much deeper correction could be seen to 1.9183 support first and with prospect of further decline to long term rising trend line support (now at 1.8327).

Dollar/JPY

2007-08-12T00:07:00.000+03:00

USD/JPY's fall from 119.80 extends further to as low as 117.20 today, inches above prior low of 117.15. At this point, further decline is expected to follow as long as 118.87 resistance holds. Break of 117.15 low will confirm recent sharp decline from 124.13 has resumed for 114.41/115.13 support zone. Above 118.22 will turn intraday outlook neutral and indicates that price actions from 117.15 is developing into further consolidation with another test of 119.81/89 cluster resistance (100% projection of 117.15 to 119.07 from 117.97 at 119.89 and 38.2% retracement of 124.13 to 117.15 at 119.81) before completion.
In the bigger picture, break of 118.35/57 cluster support zone (38.2% retracement of 108.99 to 124.13 at 118.35 and 61.8% retracement of 115.13 to 124.13 at 118.57) has also had medium term rising trend line (108.99 to 155.13, now at 118.39) taken out. Sustained trading below these levels argues that whole rise from 108.99 has completed. In such case, much deeper decline should then be seen to long term rising trend line support (now at 115.70) and then further to next important support zone of 114.41 and 115.13 (61.8% retracement of 108.99 to 124.13 at 114.77).
Sustained break of 114.41/115.13 support zone will strongly suggest that the whole multi year up trend from 101.65 is already completed and much stronger and sustainable rally in the Japanese yen should then be seen in medium term. However, note that strong rebound above 114.41/115.13 support zone or a break above 122.40 will save the case that long term up trend from 101.65 is still in force for another test of 124.13 high at least before completion.

Yen Buoyed, Traders Await Data

2007-08-04T17:43:00.001+03:00

At 3:55 AM Germany July Manufacturing PMI (exp 56.8, prev 57.3)
At 4:00 AM Eurozone July Manufacturing PMI (exp 54.8, prev 55.6)
At 4:30 AM UK July Manufacturing CIPS/PMI (exp 54.0, prev 54.3)
At 8:15 AM US July ADP Employment (exp 100.0k, prev 150.0k)
At 10:00 AM US June Pending Home Sales (exp –0.6%, prev –3.5%)
US July Manufacturing ISM (exp 55.5, prev 56.0)

Heightened risk aversion continues to dictate the direction in the major currency pairs, with the yen reaping the benefits from safe haven flows as speculators scale back their carry trades. Meanwhile, the dollar also remains buoyed against the majors heading into the Wednesday session, hovering around 1.3660 versus the euro and 2.0282 against the sterling.

Economic data from the US continues to be patchy at best, with housing leading the declines, while the labor market and consumer confidence remain firm. The key highlight will be Friday’s July jobs report. Traders will look at the July ADP employment report as a proxy to this week’s non-farm payrolls data. The ADP private sector payrolls reading is seen dropping to 100k, down considerably from June at 150k jobs created. June pending home sales are forecasted to decline by 0.6%, which marks an improvement from the 3.5% drop in May. Lastly, the July manufacturing ISM reading is expected to fall to 55.5, versus 56.0 from June.

Central Bank Decisions Eyed

2007-08-04T17:42:00.002+03:00

At 5:00 AM Eurozone June PPI m/m (exp 0.3%, prev 0.3%)
Eurozone June PPI y/y (exp 2.3%, prev 2.3%)
At 7:00 AM BoE Monetary Policy Decision (exp 5.75%, prev 5.75%)
At 7:45 AM ECB Monetary Policy Decision (exp 4.0%, prev 4.0%)
At 8:30 AM ECB President Trichet Press Conference
US Weekly Jobless Claims (exp 310k, prev 301k)
At 10:00 AM US June Durable Goods Orders (exp 1.4%, prev 1.4%)
US June Factory Orders (exp 1.0%, prev –0.5%)

The major currencies are little changed heading into Thursday, with the dollar and yen maintaining their buoyant tone. US equities rebounded late in the session, briefly sending the yen lower toward the 119-level against the dollar and 163 versus the euro. Currencies will continue to be dictated by moves in the global equity bourses as fears of the subprime debacle fester in the background – prompting heightened risk aversion among traders.

In addition to closely monitoring equity performance, markets will look ahead to US weekly jobless claims, June durable goods orders and factory orders. Weekly jobless claims are seen creeping higher to 310k, up from 301k in the prior week. Durable goods orders, typically a volatile number, is seen unchanged in June at 1.4%, while factory orders are expected to reverse last month’s 0.5% decline, rising by 1.0% in June.

USD Drifted Higher, Moving with Equities

2007-08-04T17:42:00.001+03:00

The dollar still moves with the volatile stock market today as risk aversion drives the direction of carry trades, which dominates the currency market since last week. The dollar drifted slightly higher against the euro and yen.

In early US session, the dollar fell modestly after US ADP report showed only 48,000 jobs were added in private sector in July, far below the forecast of 100,000 and a 150,000 reading in the previous month. The euro tested the 1.37 handle against the dollar and dipped back to around 1.3670 later. There is no direct relationship between this private sector employment report and the non-farm payrolls. The market will focus on the key job report from US Labor Department this Friday for more clues on the broad labor market.

Besides, the other two US data did little to the market. US pending home sales rose 0.5% in June, beating the estimate of a 0.6% decline and a –3.5% reading in the previous month. However, it is the fact that the nation’s housing market is facing serious credit problems and a major downturn. A single second-tier housing report is not sufficient to change the evaluation of US housing market. US manufacturing ISM came out at 53.8, below the expectation of 55.5 and 56 in the earlier month.

$ Slid after Payrolls

2007-08-04T17:41:00.001+03:00

The dollar slid broadly after US Labor Department July employment report showed new added jobs were less than expected, squeezing out the possibility of a rate hike by the Fed this year and raising speculation of a rate cut.

US non-farm payrolls came out at 92k, far below the estimate of 130k and a reading of 132k in the previous month. Unemployment rate increased from 4.5% to 4.6% in July. The labor market, one of the few fundamentals that always support the dollar in the past, turned from robust to modest, adding to the bearish sentiment on the dollar.

Besides, US non-manufacturing ISM fell from 60.7 to 55.8 in July, below the estimate of 59. The dollar extended its loss against the euro, sterling and yen.

Dollar Down Slightly, Awaits US Payrolls

2007-08-04T17:38:00.000+03:00

The dollar fell slightly against the euro and sterling as traders adjusted positions to wait for tomorrow’s US non-farm payrolls report, which will be a major market mover. The euro climbed 50 pips to test 1.37 level against the dollar, and the sterling rose from 2.0300 to as high as 2.0377 versus the dollar.

The euro and sterling was little changed after the European Central Bank and the Bank of England left interest rates on hold as expected at 4.00% and 5.75% respectively. ECB President Trichet said at the post-meeting press conference that “strong vigilance” is needed to contain inflation, signaling a possible rate hike in September.

The dollar was flat after Today’s data as traders keep cautious before Friday morning’s key job report. US jobless claims for the week ended on July 28 came out at 307k, in line with the expectation of 310k. Factory orders rose 0.6% in June, reversing a 0.5% decline in the earlier month but below the estimate of 1.0%. Durable goods orders came out at 1.3%, slightly below the forecast and the previous reading of 1.4%.

FX Sideways Ahead of BoC

2007-08-02T15:50:00.001+03:00

At 2:00 AM Germany June WPI m/m (exp 0.3%, prev 0.3%)
Germany June WPI y/y (exp 2.1%, prev 2.4%)
At 8:15 AM Canada June Housing Starts (exp 216.5k, prev 229.7k)
At 9:00 AM Bank of Canada Monetary Policy Decision (exp 4.5%, prev 4.25%)
At 10:00 AM US May Wholesale Inventories (exp 0.4%, prev 0.3%)

The major currency pairs are little changed in early Tuesday trading amid a dearth of fresh news. The dollar continues to hover near 1.3620 against the euro and 2.0156 versus the sterling.

The US economic calendar will see US May wholesale inventories at 10:00 AM, forecasted to edge up marginally to 0.4% from 0.3% in April. However, the key point of focus among traders in the Tuesday session will be Fed Chairman Bernanke’s speech on inflation to the NBER.

USD Mired Near Lows

2007-08-02T15:49:00.002+03:00

The dollar’s woes were exacerbated as more evidence of problems in the subprime mortgage market were revealed yesterday – triggering a sharp sell-off to record lows against the euro at 1.3786 and a new 26-year low versus the sterling at 2.0285. The heightened risk aversion also prompted speculators to scale back carry trade positions, sending the yen sharply higher – climbing to 120.96 versus the greenback and recovered from all-time lows against the euro.

The main catalyst was attributed to S&P’s announcement that it would possibly downgrade nearly $12 billion in subprime mortgage-backed US bonds. The move could potentially add more instability to financial markets and raising warning flags of spillover effects to other sectors of the economy. Also boding poorly for the housing market and consequently, the US economy were earnings reports – in which Home Depot signaled further weakness ahead by issuing profit warnings due to the housing slump.

Dollar Fell on Subprime Worries

2007-08-02T15:49:00.001+03:00

The greenback suffered further losses on Tuesday as more negative news related to the deteriorating subprime mortgage market was reported.

Two world’s largest credit rating agencies, Standard & Poor’s and Moody’s, today warned of ratings cut on over $17 billion risky mortgages debt, most of which are subprime loans. Coupled with profit warnings from homebuilder and home appliance retailers, subprime debt rating downgrading lead investors highly worried about the subprime issue in US housing market and the severe impact it may spread into the broader economy. The euro formed a base at 1.3730 and refreshed record high to 1.3783 versus the dollar. Following yesterday’s rally, the British pound gained another 1 cent to as high as 2.0361 against the dollar.

The euro was also boosted by hawkish comments from the European Central Bank officials. ECB President Trichet reiterated that the bank’s monetary policy remained accommodative, signaling further interest rate increases. ECB executive board member, Jurgen Stark, said today that euro appreciation reflected the strength of economic growth in Europe.

Dollar Weak on Subprime Concern

2007-08-02T15:48:00.000+03:00

The dollar remains under pressure from the deteriorating subprime mortgage market. The euro set a record high at 1.3797 versus the dollar and the sterling hovers around high levels 2.03.

The market was shocked by continuous warnings on the housing sector this week. Large home appliances retailers lowered profit forecasts, and Standard & Poor’s and Moody’s may downgrade credit rating of over $17 billion debt backed mostly by subprime mortgage. According to Bloomberg, mortgage foreclosures rose 56% year on year to 926k in the first half of this year, in June the rise is a scary 87%. This underlines the fact that the US housing market is melting down and the impact may spread into the broader economy.

Economic data from US today came out in line with expectations and did not impact the dollar much. Trade deficit rose from 58.5 billion to 60 billion in May as expected. Weekly jobless claims came out at 308k, better than the estimate of 315k and the prior reading of 318k.

Dollar Slumped vs Euro, Sterling

2007-08-02T15:47:00.000+03:00

The dollar fell sharply against the euro and sterling on the disparity between the Fed and the other two central banks in monetary policy outlook.

The Fed yesterday left its interest rate unchanged at 5.25% as expected. The post-meeting statement pointed out that the inflation is still the Fed¡¯s predominant concern, reinforcing the expectations that the Fed would not cut rate within the year. While on the other side of the world, the European Central Bank and the Bank of England are widely anticipated to lift interest rates at least one more time this year. The euro rose above the 1.35 level versus the dollar, the first time in three weeks. Should the pair stand firmly above the 1.3460-80 support area, further rally may extend to 1.3660 with a near target at 1.3550.

After breaking through the key psychological level at 2 yesterday, the sterling extended its gains to as high as 2.0073 against the dollar on Friday. The currency is supported by the speculation that the Bank of England may raise rates as early as July.

PCE, GDP, Consumer Confidence

2007-08-01T21:05:00.000+03:00

4X Quiet, Awaits ECB, BoE

2007-08-01T20:50:00.001+03:00

At 1:00 AM Japan May Leading Indicator (exp n/f, prev 18.2)
Japan May Coincident Indicator (exp n/f, prev 65.0)
At 4:30 AM UK May Manufacturing Production m/m (exp 0.3%, prev 0.3%)
UK May Manufacturing Production y/y (exp 0.9%, prev 1.3%)
UK May Industrial Production m/m (exp 0.3%, prev 0.3%)
UK May Industrial Production y/y (exp 0.3%, prev 0.4%)
At 6:00 AM Germany May Industrial Production m/m (exp 0.5%, prev –1.2%)
At 7:00 AM Bank of England Monetary Policy Decision (exp 5.75%, prev 5.5%)
At 7:45 AM ECB Monetary Policy Decision (exp 4.25%, prev 4.0%)
At 8:15 AM US June ADP Payrolls (exp 100k, prev 97k)
At 8:30 AM Canada Building Permits (exp 5.6%, prev –8.4%)
ECB President Trichet’s Press Conference

The dollar continues to trade on weak footing versus the majors, mired near 26-year lows against the sterling and around the 1.36-level against the euro. Central Bank monetary policy announcements will garner the lion’s share of market attention in the coming session, as traders eagerly await the rate decisions from the European Central Bank and the Bank of England. The sterling remains favored, hovering near its highest level in 26-years as markets anticipate further tightening from the BoE over the coming months to combat lingering inflationary pressure in the economy.

The US economic calendar for Thursday is light, seeing only the release of the June ADP payrolls report – which is forecasted to remain largely unchanged up 3k to 100k. Traders will also analyze the ADP payrolls as a proxy to Friday’s more important US jobs report. The June non-farm payrolls figure is expected to decline to 120k, from 157k in May. Meanwhile, the unemployment rate is forecasted to remain unchanged at 4.5%.

Dollar Rebounded on Robust ISM

2007-08-01T17:03:00.002+03:00

The dollar climbed up from lows versus the euro and sterling and stabilized after mixed data from US today. The euro stepped back to below 1.38 area after reaching all-time high at 1.3813 versus the dollar. The sterling hovers above the 2.03 level against the dollar.

Early in the morning, a surprisingly disappointing retail sales report pushed the dollar to fresh all-time low versus the euro. US retail sales fell 0.9% in June, far below the estimate of a 0.1% increase. Excluding autos, core retail sales dropped 0.4%, also falling short of a call for a 0.2% rise.

The dollar was steady after robust consumer sentiment released later in the trading session. University of Michigan sentiment index rose to 92.4 in June, up from 85.3 in the prior month. Besides, US business inventories for June came out at 0.5%, beating the estimate of 0.3%.

$ Steady on Mixed Data

2007-08-01T17:03:00.001+03:00

USD Mixed, Awaits Fed Speak

2007-08-01T17:02:00.002+03:00

At 1:00 AM Japan June Economy Watchers Diffusion Index (exp n/f, prev 46.8)
At 2:00 AM Germany May Trade Balance (exp 16.0 bln euros, prev 15.8 bln euros)
At 4:30 AM UK June core PPI m/m (exp 0.3%, prev 0.2%)
UK June core PPI y/y (exp 2.3%, prev 2.3%)
At 6:00 AM UK May Total Industrial Production m/m (exp 1.8%, prev –2.3%)
At 3:00 PM US May Consumer Credit (exp $6.0 bln, prev $2.6 bln)

The dollar is mixed against the majors at the start of the week, higher against the yen but mired near its lows versus the euro and sterling. The key driver in currency moves continues to be sentiment over the outlook for global interest rates, with the euro reaping the rewards for expectations of continued tightening from the ECB – propping the currency to near record highs against the dollar and yen.

The US economic calendar for the week ahead is light, consisting of wholesale inventories, business inventories, retail sales, trade balance, and the University of Michigan consumer sentiment survey. The key highlights will be speeches from Fed officials, including Chairman Bernanke, who discusses inflation with the NBER, Board member Plosser, who speaks about housing prices and policy, as well as from Board members Yellen and Kroszner. Markets will gauge the prospects for shift in Fed stance over the coming months. However, given the combination of recent economic data and commentary from Fed officials, the most likely scenario to materialize over the coming months will be an unchanged stance from the FOMC.

FX Sideways, Awaits Data

2007-08-01T17:02:00.001+03:00

At 12:30 AM Japan May Capacity Utilization (exp n/f, prev –1.6%)
Japan May Industrial Production (exp n/f, prev –0.4%)
At 2:00 AM Bank of Japan July Report
At 5:00 AM Eurozone May Industrial Production m/m (exp 1.0%, prev –0.8%)
Eurozone May Industrial Production y/y (exp 3.0%, prev 3.3%)
Eurozone Q1 GDP q/q (exp 0.6%, prev 0.9%)
Eurozone Q1 GDP y/y (exp 3.0%, prev 3.3%)
At 8:30 AM US Weekly Jobless Claims (exp 315k, prev 318k)
US May Trade Deficit (exp $60.0 bln, prev $58.5 bln)
Canada May Trade Balance (exp C$5.5bln, prev C$5.76bln)

The greenback continues to reel from burgeoning fears that the subprime mortgage debacle will extend into other sectors, aggravating the already slowing
US economy. The currency remains mired near all-time lows against the euro near 1.3750, while the sterling hovers around 26-year highs at 2.0316. The possible downgrades from S&P’s and Moody’s reinforce qualms that the implications of further deterioration in subprime mortgages may have been initially underestimated, with the impact reverberating throughout the financial markets.

US economic data slated for release on Thursday include weekly jobless claims and the May trade deficit. Initial jobless claims are largely unchanged, down marginally to 315k versus 318k from the previous week. Meanwhile, the May US trade deficit is forecasted to edge higher following April’s smaller-than-expected deficit – back up to $60 billion from $58.5 billion. The April report, however, revealed a burgeoning deficit with China at $19.5 billion, and given China’s recent record surplus – we expect the US-China trade gap to expand further and prompting renewed political jawboning for yuan revaluation.

Dollar Slumped on Housing Warnings

2007-08-01T17:01:00.002+03:00

The dollar fell sharply across the board as news about the subprime sector raised worries over the nation’s housing market and the whole economy. US stock market and bond yields were also hit by the housing warnings.

Two large home appliance retailers, Home Depot and Sears, both lowered their sales and earnings forecasts due to weak housing market. The nation’s second largest homebuilder, DR Horton, reported its third quarter orders dropped 40%.

The euro rose 1 cent to an all-time high at 1.3739 versus the dollar. The British pound also strengthened sharply against the dollar, to as high as 2.0273. The yen rebounded against the ailing dollar, down from above 123 to test the 122 level. Should the yen break the key support at 121.80, the correction may extend further to 120.

Markets Await US Jobs Data

2007-08-01T17:01:00.001+03:00

At 4:30 AM UK May Industrial Production m/m (exp 0.3%, prev 0.3%)
UK May Industrial Production y/y (exp 0.3%, prev 0.4%)
UK May Manufacturing Production m/m (exp 0.3%, prev 0.3%)
At 7:00 AM Canada June Unemployment Rate (exp 6.1%, prev 6.1%)
Canada June Jobs-Change (exp 17.0k, prev 9.3k)
At 8:30 AM US June Unemployment Rate (exp 4.5%, prev 4.5%)
US June non-farm payrolls (exp 120k, prev 157k)
US June Avg Earnings (exp 0.3%, prev 0.3%)

Correction: UK industrial & manufacturing production were included in yesterday’s preview but are scheduled for release today.

The major currency pairs consolidated in a narrow range during the quiet Asian session, with the dollar mired near its lows across the board. The greenback continues to struggle near 26-year lows versus the sterling around 2.0124 and creeps closer toward its all-time low against the euro near the 1.36-level.

Dollar Eased as Stocks Rebound

2007-08-01T17:00:00.002+03:00

The dollar gave back some of last week’s gains as investors risk aversion eased after global stock market rebounded today. The euro tested the 1.37 handle against the dollar, while the sterling remained above the 2.02 support level.

After the huge decline in last week, the Standard & Poor’s 500 index today surged 1.15% to 1475.70. The Dow Jones industrial average roses more than 100 points. The rebound in equities reduced risk aversion towards risky investments. As a result, the safe haven currency, the US dollar, lost its lust and fell slightly.

This week’s calendar is heavy with two central bank policy decision announcements on Thursday and US payroll report due Friday. The European Central Bank and Bank of England are widely expected to maintain interest rates unchanged at 4.00% and 5.75% respectively. We will focus on the central bank post-meeting statements for clues on future interest rate hike schedule. Both of the two banks are anticipated to raise rates at least one more time in the second half of the year.

FX Awaits Barrage of Data

2007-08-01T17:00:00.001+03:00

At 1:00 AM Japan June Housing Starts y/y (exp –3.2%, prev –10.7%)
At 2:00 AM Germany June Retail Sales m/m (exp 1.0%, prev –1.8%)
Germany June Retail Sales y/y (exp –1.7%, prev –3.7%)
At 4:00 AM Germany July Unemployment Rate (exp 9.0%, prev 9.1%)
At 5:00 AM Eurozone July Business Climate (exp 1.46, prev 1.54)
Eurozone July HICP flash y/y (exp 1.9%, prev 1.9%)
Eurozone June Unemployment Rate (exp 7.0%, prev 7.0%)
At 5:30 AM UK July GfK Survey (exp –4.0, prev –3.0)
At 8:30 AM US June core PCE m/m (exp 0.2%, prev 0.1%)
US June core PCE y/y (exp n/f, prev 1.9%)
US June PCE index m/m (exp n/f, prev 0.5%)
US June PCE index y/y (exp n/f, prev 2.3%)
US June Consumption (exp 0.2%, prev 0.5%)
US June Personal Income (exp 0.5%, prev 0.4%)
US Q2 Employment Cost Index (exp 0.9%, prev 0.8%)
Canada May GDP m/m (exp 0.4%, prev 0.3%)
At 9:45 AM US July Chicago PMI (exp 58.0, prev 60.2)
At 10:00 AM US July Consumer Confidence (exp 105.0, prev 103.9)

The dollar continued to give back gains in early Tuesday trading, slipping through 1.37 against the euro and falling beneath 2.03 versus the sterling. The coming session will see a barrage of economic reports for traders to assess the strength of the economies in the Eurozone, US and Canada. The greenback’s rebound from last week may be coming to an end, as traders are poised to resume the currency’s downtrend against the majors.

US economic reports due out include the Fed’s preferred gauge of inflation, the PCE index, June consumption, personal income, Q2 employment cost index, July Chicago PMI and July consumer confidence. The monthly core PCE figure is seen edging up slightly to 0.2% from 0.1%. Consumption for June is forecasted to slip to 0.2%, down from 0.5%, while personal income is expected to edge up slightly to 0.5% versus 0.4%. The Chicago PMI report is seen falling to 58.0, down from June at 60.2. Meanwhile, the Conference Board’s index of consumer confidence is expected to improve to 105.0, down from 103.9.

FX Follows Stock Market

2007-08-01T16:59:00.003+03:00

The dollar moves in the opposite direction with global stock market since last week as the extent of investors risk aversion directs the flow of money.

The dollar weakened against the euro and sterling in early Tuesday when rising Asia and European equities eased concern over credit market. However, US stocks dipped near the closing bell today, raising the attractiveness of safe heaven, the US dollar. The euro is trading in narrow range between 1.3680 and 1.3726 against the dollar on Tuesday. The sterling climbed more than 100 pips to as high as 2.0377 versus the dollar, catching up yesterday¡¯s lag with the euro strength.

The dollar was little changed after a run of mixed US data this morning as there is some caution after last week¡¯s huge correction in the dollar. US PCE index rose 0.1% in June, compared with a 0.5% reading in the prior month. Core PCE index came out at 0.1%, below the estimate of 0.2%. US personal income maintained a growth rate of 0.4% in June, falling short of a call for 0.5%. US personal spending only rose by 0.1% in June, far below the forecast of 0.2% and a previous reading of 0.5%. Besides, Chicago PMI fell from 60.2 to 53.4 in July, worse than the expectation of 58. US consumer confidence index increased from 103.9 to 112.6, beating the consensus of 105.

Dollar Steadies after Robust GDP

2007-08-01T16:59:00.001+03:00

The dollar rallied broadly as investors cut risk exposures in global equity market and convert assets to safe haven, the US dollar.
The Dow Jones Industrial Average yesterday posted the biggest decline in five months. The S&P 500 market share shrank 30 billion yesterday. Japan and European stock markets also suffered losses in the global equity sell-off. Besides, credit spread between junk bonds and risk-free US treasury bonds widened.
The euro fell to test the long-term support at 1.3630 versus the dollar, while sterling slumped rapidly from 2.05 to as low as 2.0250.

USD Mired Near Lows

2007-07-31T11:20:00.001+03:00

At 2:00 AM Germany June HICP m/m (exp 0.1%, prev 0.2%)
Germany June HICP y/y (exp 2.0%, prev 2.0%)
Germany June CPI m/m (exp 0.1%, prev 0.2%)
Germany June CPI y/y (exp 1.8%, prev 1.9%)
At 5:00 AM Eurozone CPI m/m (exp 0.1%, prev 0.2%)
Eurozone CPI y/y (exp 1.9%, prev 1.9%)
Eurozone CPI ex-F&E m/m (exp 0.1%, prev 0.2%)
Eurozone CPI ex-F&E y/y (exp 1.9%, prev 1.9%)
At 8:30 AM US July NY Fed Manufacturing Survey (exp 18.0, prev 25.75)
Canada May Manufacturing Shipments (exp 0.5%, prev –0.6%)

The dollar continued to struggle in a holiday-thinned Asian session, remaining mired near all-time lows against the euro shy of the 1.38-mark and 26-year lows versus the sterling. Lingering uncertainties stemming from the subprime mortgage market and potential spillover to the overall economy are the catalyst for the latest sell-off in the greenback. Although the FOMC has offered little hints of a possible shift to an easing stance, traders’ anticipation for a rate cut either later this year or in early 2008 has compounded the dollar’s woes.

Data Barrage to Set Tone in FX

2007-07-31T02:42:00.001+03:00

At 3:15 AM Swiss May Retail Sales (exp 4.8%, prev 3.2%)
At 4:30 AM UK June RPI m/m (exp 0.3%, prev 0.4%)
UK June RPI y/y (exp 4.2%, prev 4.3%)
UK June CPI m/m (exp 0.1%, prev 0.3%)
UK June CPI y/y (exp 2.4%, prev 2.5%)
At 5:00 AM Germany July ZEW current conditions (exp 88.0, prev 88.7)
Germany July ZEW economic sentiment (exp 19.0, prev 20.3)
At 8:30 AM US June PPI m/m (exp 0.2%, prev 0.9%)
US June PPI y/y (exp n/f, prev 4.1%)
US June core PPI m/m (exp 0.2%, prev 0.2%)
US June core PPI y/y (exp n/f, prev 1.6%)
At 9:00 AM US May Net TICS (exp $70.0 bln, prev $84.1 bln)
At 9:15 AM US June Capacity Utilization (exp 81.5%, prev 81.3%)
US June Industrial Production (exp 0.4%, prev 0.0%)
At 1:00 PM US July NAHB Housing Market Index (exp 27, prev 28)

A flurry of economic data slated for release in the Tuesday session will set the tone for the currency market and determine whether the dollar’s woes will continue. Already mired near record lows against the euro and 26-year lows versus the sterling, traders will analyze the inflation and manufacturing outlook for the US economy to gauge the likelihood for a Fed rate cut this year, which consequently, would likely prompt further declines for the greenback.

US reports set for release include June producer price index, May Net TICS, June industrial production, capacity utilization and the July NAHB housing market index. The combination of inflation, manufacturing and housing reports will provide greater insight into the health of the US economy – given fears that the slowdown in housing has continued to drag manufacturing lower while lingering inflation keeps the FOMC on hold. We anticipate headline PPI falling in July to 0.2% from 0.9%, while the core reading is unchanged at 0.2%. Industrial production for June is expected to improve to 0.4% from a flat reading in May and capacity utilization is forecasted to edge higher to 81.5% from 81.3%. The July NAHB housing market index is seen slipping to 27 from June at 28.

Dollar Extended Loss, Awaits PPI

2007-07-31T02:41:00.000+03:00

The dollar extended loss against its major rivals as the market has not got rid of the scare that the subprime sector meltdown may spill over into the broader economy especially after last Friday’s surprisingly weak retail sales data. The euro hovers under 1.38 versus the dollar, while the sterling strengthened to test the 2.04 level for the first time in 26 years.

Though a report showed manufacturing activity quickened in New York State, the dollar remained under pressure as inflation and housing data to be released this week are expected to be weak. The Empire Fed manufacturing index for July rose from 25.75 to 26.46, beating the estimate of 18.

A bunch of economic reports from US are due tomorrow. PPI, a key inflation gauge, is expected to fall from 0.9% to 0.2% in June. Excluding food and energy, core index is estimated to remain at 0.2% unchanged. US net TICS is seen to decrease from 84.1 billion to 70.0 billion. Capacity utilization is forecasted to barely changed from prior month’s reading of 81.3%. Besides, industrial production may increase 0.4% in June.

Sterling Gained on CPI

2007-07-31T02:40:00.001+03:00

The sterling jumped above 2.04 versus the dollar after a report showed inflation deceleration was not as fast as expected.

UK CPI headline for June fell from 2.5% to 2.4% as expected. Excluding volatile components, food and energy, the core index rose at a rate of 2% in the year to June, the fastest pace since March 1997. Another inflation gauge, RPI came out at 4.4%, up from a reading of 4.3% in the previous month. The Bank of England may need to lift rates once more in September to curb inflation.

The sterling rallied across the board following the inflation reports. It broke through the 2.04 handle against the dollar and rose to a fresh 26-year high at 2.0474.

USD Slumps Ahead of CPI, Bernanke

2007-07-31T02:39:00.000+03:00

At 1:00 AM Japan May Leading Index (exp n/f, prev 30.0)
At 4:30 AM UK May ILO Unemployment Rate (exp 5.5%, prev 5.5%)
UK May Claimant Count (exp –8.0k, prev –9.3k)
UK May Avg Earnings 3-mth (exp 3.6%, prev 4.0%)
UK July MPC Meeting Minutes (exp 6-3, prev 4-5)
At 5:00 AM Eurozone May Foreign Trade (exp 2.1 bln euros, prev 1.8 bln euros)
At 7:00 AM Canada June CPI m/m (exp 0.1%, prev 0.4%)
Canada June CPI y/y (exp 2.4%, prev 2.2%)
Canada June core CPI m/m (exp 0.1%, prev 0.3%)
Canada June core CPI y/y (exp 2.6%, prev 2.2%)
At 8:30 AM Canada June Leading Indicator (exp 0.4%, prev 0.5%)
US June CPI m/m (exp 0.1%, prev 0.7%)
US June CPI y/y (exp 2.6%, prev 2.7%)
US June core CPI m/m (exp 0.2%, prev 0.1%)
US June core CPI y/y (exp 2.2%, prev 2.2%)
US June Housing Starts (exp 1.45-mln units, prev 1.474-mln units)
US June Building Permits (exp 1.48-mln units, prev 1.52-mln units)
At 10:00 AM Fed Chairman Bernanke’s Congressional Testimony

The greenback continued to slide in early Asian trading, falling to a fresh all-time low against the euro at 1.3822 and a new 26-year low versus the sterling just shy of the 2.05-level. It’s worth noting that the trade-weighted dollar index is resting on a key support region not seen since 1992 around the 80.40-mark. A breach of this level could open up the floodgates for further losses in the currency, potentially paving the way for a move in the euro toward the 1.40-level.

Market attention will shift to Wednesday’s all-important US inflation data and Fed Chairman Ben Bernanke’s testimony before Congress. The FOMC has maintained its unchanged stance citing that the balance of risks remains skewed toward inflation despite deteriorating fundamentals in the US economy. While there is little doubt the woes in the housing market have remained on the backburner for the Fed, the extent of the downturn has been inconsistent with the jobs market remaining firm and inflationary pressure lingering – thereby keeping its hand in check. We expect the FOMC will ease rates by 25-basis points by December, on a combination of further declines in economic activity and easing of inflation.

Dollar Dipped on Bernanke Testimony

2007-07-30T21:48:00.002+03:00

The dollar fell modestly across the board as the Fed Chairman Ben Bernanke addressed ongoing housing problem in congressional testimony. The euro rose from around 1.3775 against the dollar to above 1.38 handle, while the sterling bounced back to near 2.0550.

Bernanke said housing will remain a drag on economic growth over coming quarters. The Fed expected housing foreclosures may get worse before improving. His comments increased market worries over the collapse of subprime mortgage sector and pushed the dollar lower.

With regard to inflation, Bernanke said the Fed is still very much concerned. He said recent inflation is clearly too high but core inflation should ease as commodity prices flatten. He added it is more difficult to maintain price stability if inflation expectations rise. The Fed is more likely to keep interest rates unchanged instead of cutting rates this year.

Greenback Consolidates Near Lows

2007-07-30T21:48:00.001+03:00

At 2:00 AM June Germany PPI m/m (exp 0.2%, prev 0.3%)
June Germany PPI y/y (exp 1.8%, prev 1.9%)
At 4:30 AM UK June Retail Sales m/m (exp 0.3%, prev 0.4%)
UK June Retail Sales y/y (exp 3.5%, prev 3.9%)
At 8:30 AM Canada May Wholesale Trade m/m (exp 0.5%, prev –3.1%)
US Weekly Jobless Claims (exp 311k, prev 308k)
At 9:00 AM US June Leading Indicators (exp 0.0%, prev 0.3%)
At 12:00 PMUS July Philadelphia Fed Survey (exp 13.3, prev 18.0)

The dollar is little changed in early Thursday trading as it continues to struggle near its lows against the euro and sterling. Yesterday’s US CPI report and Congressional testimony from Fed Chairman Bernanke garnered a muted response in the currency market – as it seems clear the FOMC is at a stalemate with lingering inflationary pressure and moderating growth. As mentioned in yesterday’s preview, the trade-weighted dollar index now rests on a key multi-year support level – which could prompt some consolidation but likely prove insufficient in holding back the dollar bears.

US economic data set for release include June leading indicators and the July Philadelphia Fed survey, which are both expected to reaffirm slowing conditions in the economy. The June leading indicators are seen flat, down from 0.3% in May. Meanwhile, the July Philadelphia Fed Survey is expected to fall to 13.3 down from 18.0 from June. Also on the schedule will be Chairman Bernanke’s testimony before the Senate Banking Committee, in which he will likely reiterate yesterday’s comments.

Sterling Fell on Tame Retail Sales

2007-07-30T21:47:00.004+03:00

The sterling following a weaker-than-expected UK retail sales report, dampening expectations for one more rate hike by the Bank of England within this year. The currency fell off a fresh 26-year high at 2.0546 against the dollar set yesterday to below 2.05 level. UK retail sales fell from 0.4% to 0.2% in June, falling short of a call for a 0.3% growth. The year on year retail sales growth rate was down from 3.9% to 3.4%.

The dollar remained under pressure after Fed Chairman Ben Bernanke stated the negative impact of housing issues may get worse and last longer than expected in the testimony yesterday. He today said yen weakness largely reflects Japan low interest rates. He added that he does not advocate any policy change by the Bank of Japan. Carry trades will continue to be favored as the BOJ keep its interest rates at the lowest level among all industrial countries.

Like yesterday, the dollar was little impacted by any single economic data. US weekly jobless claims fell 7k to 301k, slightly better than the estimate of 311k. US leading indicators unexpectedly rose 0.3%, versus a forecast of 0.0%. Philadelphia Fed business activity index came out at 9.2, below the estimate of 13.3.

Dollar Slid Across the Board

2007-07-30T21:47:00.003+03:00

The dollar slid across the board during the US morning session in a technical move. After the sterling broke 2.0550 against the dollar, the rally accelerated to reach as high as 2.0585. The euro rose to a fresh all-time high at 1.3842 versus the dollar.

The sterling rebounded following a stronger-than-expected UK second quarter GDP report, bolstering odds that the Bank of England may raise rates once more this year. UK economy grew by 0.8% on a quarter on quarter basis, beating the estimate of 0.7% and faster than a 0.7% growth rate in the previous quarter.

As housing issues remain the major concern especially after Fed Chairman Bernanke’s testimony, the overall sentiment over the greenback is still bearish.

GBPUSD encounters interim resistance at 2.0580, backed by 2.0600 and 2.0630. Subsequent ceilings will emerge at 2.0650, followed by 2.0680 and 2.0700. On the downside, support begins at 2.0520, followed by 2.0500 and 2.0480. Additional floors are eyed at 2.0450, backed by 2.0420 and 2.0400.

JPY Climbs Higher

2007-07-30T21:47:00.001+03:00

The greenback kicks off trading mired near its lows as traders posture for several key US economic reports due out this week. Given the increased scrutiny over recent data for spillover effects from the subprime meltdown, traders will carefully analyze housing reports, Q2 GDP, PCE, and the University of Michigan consumer sentiment survey. US growth in the second quarter is seen rebounding sharply from a lackluster Q1, with the preliminary figure set to reveal robust 3.2% GDP versus a measly 0.7% from the previous quarter.

Sentiment over global interest rate differentials will continue to be a key driver in FX movements. In light of last week’s Congressional testimony from Fed Chairman Bernanke, the FOMC remains poised to leave policy unchanged with a bias against inflation. Nevertheless, with the BoE and ECB both set to maintain its tightening stance – we anticipate further losses in the dollar in the coming months as a result of yield disparities.

Dollar Rebounded vs Euro

2007-07-30T21:46:00.003+03:00

The dollar rebounded against the euro slightly as a corrective move following recent sharp decline. The euro fell from 1.3850 to test 1.38 handle versus the dollar. With no economic data release, most major currencies trade in narrow ranges. Should the euro break 1.38, the dollar correction may extend to 1.37 before further euro rally to 1.39.

The sterling climbed to a fresh 26-year high at 2.0602 versus the dollar on expectations that the Bank of England will raise interest rates at least one more time in the second half of this year.

Commodity currencies gained as copper surged and oil prices hovered at high level. The Australian dollar rose to as high as 0.8842 versus the dollar, while the Canadian dollar stood firm below the 1.05 level against the dollar.

Dollar Struggles, Mired Near Lows

2007-07-30T21:46:00.001+03:00

At 4:00 AM May Eurozone Current Account Balance (exp –1.2 bln euros, prev –4.0 bln euros)
July Eurozone Service PMI (exp 58.0, prev 58.3)
July Eurozone Manufacturing PMI (exp 55.5, prev 55.6)
At 5:00 AM May Eurozone Industrial Orders m/m (exp 1.1%, prev –0.4%)
May Eurozone Industrial Orders y/y (exp 7.8%, prev 12.2%)
At 8:30 AM Canada May Retail Sales m/m (exp 0.5%, prev 0.4%)
Canada May Retail Sales ex-autos m/m (exp 0.6%, prev 0.0%)
At 10:00 AM US July Richmond Fed Survey (exp 5, prev 4)

The beleaguered dollar found no reprieve in the early Tokyo session, dropping to fresh 18-year lows versus the Aussie at 0.8847 and falling to a new 26-year low against the sterling at 2.0640. We continue to monitor the trade-weighted dollar index, which trades just above the key 80-level. Traders will closely assess this week’s US economic reports to discern the trend for the greenback over the coming months – with overwhelming sentiment biased toward further declines as a result of expectations for global interest rate differentials.

The economic calendar from the US for Tuesday is light, consisting of only the July Richmond Fed manufacturing survey – seen improving to 5, up from 4 in the previous month. Traders will also continue to analyze earnings releases and monitor US equity performance. There are also Fed officials scheduled to speak, including Mishkin and Poole.

Greenback Fell on Housing Fears

2007-07-30T21:45:00.003+03:00

The greenback fell across the board as US housing concerns remains a big problem and it may spread into the broader economy. The euro touched the 1.3850 resistance level versus the dollar before easing back to around 1.3820. The sterling climbed to a fresh 26-year high at 2.0652 against the dollar and then retraced back to 2.0610.

The dollar index fell to a 15-year low of 80.016, near the psychological support at 80. A break of this level may trigger another round of sharp dollar sell-off.

Several manufacturing reports from the Eurozone were mixed and did little to the market. The market will focus on US June existing home sales due 10AM EST tomorrow for more clues on the nation’s housing market conditions. The report is expected to show a –1.8% decline to an annual rate of 5.87 million units, which may weigh on the dollar.

JPY Strength Dictates FX

2007-07-30T21:45:00.001+03:00

At 10:00 AM US June Existing Home Sales (exp –1.8%, prev –0.3%)
US June Existing Home Sales (exp 5.87 mln units, prev 5.99 mln units)

The yen strengthened across the board in early Tokyo trading, pushing through the 120-level against the dollar and climbing to 246.34 versus the sterling. Meanwhile, the greenback rode the coattails of yen strength and recovered toward the 1.38-mark versus the euro. Traders will analyze US existing home sales to further assess housing market activity, with home sales forecasted to fall by 1.8% to 5.87 million units in June.

Dollar Rose Across the Board

2007-07-30T21:44:00.001+03:00

The dollar rallied sharply across the board, recovering after recent rapid decline. After breaking the 1.38 handle, the euro accelerated its decline versus the dollar, heading towards next key level at 1.37. The sterling fell off the 26-year high set yesterday to as low as 2.0488 against the dollar.

The dollar correction is due partly to technical factors and partly to temporary passing of subprime fears. However, it should be noted that US housing issues are still existing and will nudge the market once a while in future.

US existing home sales dropped 3.8% in June to an annual rate of 5.75 million units, below the estimate of 5.87 million. The market will look into the new home sales report due tomorrow for more clues on housing market. New home sales are expected to fall from 915k units to 895k in June. Other economic data to be released on Thursday include Germany IFO survey for July, US weekly jobless claims, US durable goods orders, and Japan CPI and retail sales reports.

USD Buoyed Ahead of Data

2007-07-30T21:43:00.000+03:00

At 2:00 AM UK July Nationwide House Prices (exp 10.6%, prev 11.1%)
At 4:00 AM Eurozone June M3 Money Supply (exp 10.7%, prev 10.7%)
Germany July Ifo Expectations (exp 102.0, prev 102.8)
Germany July Ifo Current Conditions (exp 111.0, prev 111.4)
At 8:30 AM US June New Home Sales (exp 895k units, prev 915k units)
US Weekly Jobless Claims (exp 310.0k, prev 301.0k)
US June Durable Goods Orders (exp 1.8%, prev –2.4%)

The dollar remains firm against the majors, holding onto yesterday’s gains as traders posture for strong US economic data over the next few sessions. The trade-weighted dollar index managed to bounce off the key 80-level, finding reprieve from aggressive selling over recent weeks. The greenback’s recovery was in large part due to unwinding in the carry trades, dragging the euro and sterling lower across the board.

In the coming session, markets will digest US weekly jobless claims, June new home sales, and durable goods orders. Weekly jobless claims are seen edging up slightly to 310k, from 301k a week earlier. Although the dollar was resilient to yesterday’s disappointing existing home sales, which tumbled to its lowest level since 2002 – it reminds traders of the precarious state of the US economy. Attention will shift to today’s new home sales that are expected to decline to 895k units in June versus 915k units a month earlier. Meanwhile, boding well for the greenback are forecasts for a sharp reversal in June durable goods orders from May’s 2.4% decline, jumping by 1.8%.

USD Edges Higher Ahead of GDP

2007-07-30T21:41:00.000+03:00

At 8:30 AM US Q2 GDP y/y (exp 3.2%, prev 0.7%)
US Q2 PCE y/y (exp 3.6%, prev 3.5%)
US Q2 core PCE (exp 2.0%, prev 2.4%)
At 10:00 AM US July University of Michigan Sentiment Survey (exp 91.2, prev 85.3)

The greenback remains buoyed in early Friday trading, holding onto its previous session’s gains against the euro and sterling. The yen also continues to trade near its highs against the majors following the steep sell-off in the global equity bourses from the previous session, as heightened risk aversion remains a prime catalyst in carry trade unwinding. Lingering fears of a credit crunch and its detrimental impact on global financial markets have prompted investors to dump equities in favor of US Treasuries.

The economic calendar is poised to provide further support for the greenback, with markets looking ahead to second quarter GDP and the July University of Michigan sentiment survey. US growth in Q2 is forecasted to post a robust 3.2% gain, up sharply from a paltry first quarter reading of 0.7%. An upbeat GDP figure bodes well for the dollar and reinforces the case for the FOMC to remain unchanged over the remainder of this year, instead focusing on inflationary pressure. Accordingly, the Fed’s preferred inflation-measure, the PCE, is seen edging up in Q2 to 3.6% from a year earlier at 3.5%. The core PCE reading, however, is estimated to slip to 2.0%, down from 2.4%. Meanwhile, consumer sentiment is seen firming in July as the University of Michigan sentiment survey is forecasted to creep higher to 91.2 versus 85.3 from a month earlier. Overall, we expect the greenback to maintain its upbeat tone throughout the session, supported by data revealing improving US fundamentals.

Dollar Steadies after Robust GDP

2007-07-30T21:40:00.001+03:00

The dollar rallied broadly as investors cut risk exposures in global equity market and convert assets to safe haven, the US dollar.

The Dow Jones Industrial Average yesterday posted the biggest decline in five months. The S&P 500 market share shrank 30 billion yesterday. Japan and European stock markets also suffered losses in the global equity sell-off. Besides, credit spread between junk bonds and risk-free US treasury bonds widened.

The euro fell to test the long-term support at 1.3630 versus the dollar, while sterling slumped rapidly from 2.05 to as low as 2.0250.