Contributed By: DailyFx
* Japanese Yen: Advances Against Most Counterparts
* British Pound: BoE Holds Cautious Outlook For Economy
* Euro: ECB Says Bailout Funds Will Be Expanded If Needed
* U.S. Dollar: Extends Rally During Holiday Trade
Mixed comments by the Bank of England pushed the British Pound to a low of 1.5732 during the European trade as the central bank maintained a cautious outlook for the U.K. economy, and speculation for further easing may reemerge as policy makers stand ready to move monetary policy in either direction. BoE Governor Mervyn King said that the economic outlook remains clouded with “considerable uncertainty” while testifying in front of Parliament, and continued to see a risk for inflation as the central bank expects price growth to hold above the 2% target throughout the following year. Mr. King said that taking “strong actions” against inflation could bear down on the recovery given the ongoing weakness within the private sector, but went onto say that monetary policy will have to be normalized at some point as the economic recovery gradually gathers pace. Although, the central bank head stated that he expects the Chancellor of the Exchequer, George Osborne, to approve an expansion in quantitative easing if the central bank sees a need to loosen monetary policy further, and noted that it is imperative for the central bank to meet the 2% target for inflation as it carries out its dual mandate to ensure price stability while fostering full-employment.
During the testimony, MPC board member Andrew Sentance noted that there is a risk for price growth to exceed 4% in the near-term and argued that the board should start normalizing monetary policy sooner rather than later in order to stem the risks for inflation. At the same time, Adam Posen held a “pessimistic” outlook for future consumption as he expects the tightening in fiscal policy to bear down on the recovery, and continued to talk down the risks for inflation as he expects the ongoing slack within the real economy to weigh on price growth. As U.K. policy makers struggle to meet on common ground, there could be a growing split within the MPC as Mr. Sentance continues to push for a rate hike while Mr. Posen sees scope to expand QE further, and speculation surrounding the prospects for monetary policy is likely to play an increased role in driving price action for the British Pound as we head into 2011. As the GBP/USD continues to hold above the 32.8% Fibonacci retracement from the 2009 low to high around 1.5700, we may see the exchange rate consolidate going into December as it breaks out of the upward trend from May, but fears surrounding the European debt crisis could trigger another sharp decline in the pair as policy makers struggle to restore investor confidence.
The Euro held a narrow range during the overnight trade after bouncing back from a low of 1.3285, and the exchange rate is likely to remain relatively flat throughout the day as market liquidity thins during the holiday trade. Meanwhile, European Central Bank board member Axel Weber, who also heads the Bundesbank, said that the EUR 750B bailout fund “should be enough to assure the markets” while speaking in Paris, but went onto say that the scope “will have to be increased” if it fails to lift market sentiment. As the governments operating under the fixed-exchange rate system struggle to manage their public finances, fears surrounding the debt crisis is could intensify in the coming months as market participants speculate Portugal and Spain to seek aid, and the bearish momentum behind the euro could gather pace in December, which could lead the EUR/USD to retrace the advance from September.
The greenback rallied against all of its major counterparts on Thursday, with the USD/JPY rallying to a high of 83.69, but the dollar could face choppy price action going into the end of the week as U.S. traders go offline during the Thanksgiving holiday. As the economic docket remains bare for the remainder of the day, risk trends should dictate price action going into Friday, but the drop in market liquidity could produce difficult trading conditions as the majors hold a narrow range.
Contributed By: DailyFx
* Dollar Lacks Direction On Holiday Trade, Choppy Price Action To Carry Into Friday
* Euro Holds Steady As It Tests the 100-Day SMA For Support
* British Pound To Face Headwinds as Speculation For Further Easing Resurface
Dollar Lacks Direction On Holiday Trade, Choppy Price Action To Carry Into Friday
U.S. dollar price action was mixed throughout the North American trade, with most of the major currencies holding a narrow range during the day, and the greenback may continue to face choppy price action going into Friday as market liquidity thins ahead of the weekend. As European policy makers continue to talk down fears surrounding the debt crisis, the rebound in risk appetite could bear down on the reserve currency, but the rise in market sentiment is likely to be short-lived as market participants speculate the EU to expand the European Financial Stability Facility.
The Dollar Index edged lower after rising to 80.00 for the first time since September, and the recent rally in the greenback may gather pace in December as the uncertainties surrounding the global economic outlook weighs on market sentiment. Indeed, we saw the EUR/USD bounce back from the 100-Day moving average (1.3303) to hold within the previous day’s range, and the exchange rate may continue to trend sideways going into the end of the week as it continues to search for support. At the same time, the USD/CHF advanced to parity for the first time since September, and the exchange rate may continue to push higher in the days ahead as it breaks out of the narrow range that was carried over from the previous week. As the economic docket for Friday remains fairly light, we should see risk trends dictate price action going into the Asian trade, but the drop in liquidity is likely to produce difficult trading conditions given the shortened U.S. trading session scheduled for tomorrow.
Euro Holds Steady As It Tests the 100-Day SMA For Support
The Euro appears to be carving a bottom around the 100-Day SMA as European leaders talk down the risks for the region, but the current price development could turn out to be a short-term consolidation rather than a reversal as the risks for contagion continues to weigh on the economic outlook. As the EUR/USD pares the rally from September, we could see another break to the downside as market participants speculate Portugal and Spain to seek assistance in the near future, but the pair should be able to find near-term support around the 200-Day SMA at 1.3133, which coincides with the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100-30.
British Pound To Face Headwinds as Speculation For Further Easing Resurface
The mixed testimony by the Bank of England suggests that the central bank may look to expand monetary policy further over the coming months as they expect the tough austerity measures in the U.K. to bear down on the economic recovery, and the British Pound could face increased headwinds in the days ahead as investors weigh the prospects for future policy. However, as the GBP/USD continues to trade above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5690-1.5700, there could be a short-term correction as we head into the following week, but speculation for an expansion in quantitative easing could spur a selloff in the sterling as policy makers maintain a cautious outlook for the economy.
Contributed By: DailyFx
* Japanese Yen: Headline Inflation Advances in October
* British Pound: Weighed by Risk Aversion
* Euro: Debt Fears Continue to Rattle the European Markets
* U.S. Dollar: Rallies Against All Major Currencies
The euro is back under pressure against most of its major counterparts during Friday’s trade amid fears surrounding Europe’s debt contagion. Market participants are now concerned that countries such as Portugal and Spain will require a bailout. In turn, the EURUSD broke below key support at the 100-day moving average, but failure to close below this level keeps the bullish trend dating back to June intact.
Taking a look at the economic docket overnight, the annual M3 money supply in the 16 member euro area rose 1.0 percent in October after climbing a revised 1.1 percent the month prior amid expectations of 1.3 percent. At the same time, money supply on a three month average climbed 1.1 percent, a signal that lending rose but remains subdued. The report is of particular importance due to the fact that a larger money supply reduces the purchasing power of the euro and hints to price inflation, in which fuel’s interest rate expectations. However, the contrary holds true. Today’s figures are likely to come under pressure in the near term as individuals n the region continue to face a high unemployment rate, while declining housing prices are discouraging banks from lending to households. At the same time, the outlook does not bode well for the bloc due to the fact that governments in the region will implement tough austerity measures in the coming months in order to battle their high budget debts. This result will likely weigh on growth, and put downward pressure on the euro. Therefore, the European Central Bank may keep rates unchanged until at least the second quarter of next year. EUR traders will now shift their focus to the ECB rate decision which will be released on Thursday at 12:45 GMT.
Meanwhile, the British pound extended its losses against the greenback and now looks poised to continue its southern journey as technical indicators point to additional downside risks. Thus, traders should not rule out a test towards the 1.55 area in the near term due to the fact that the pair managed to break below its rising trend line, which remained intact for five months. At the same time, the parabolic SAR flipped to the downside earlier this week. Indeed, the Bank of England is in a sticky situation as MPC members debate on another round of quantitative easing due to slack in the economy, while elevated consumer prices warrant higher interest rates. As of late, policy maker Adam Posen has called for an additional 50 billion pounds of asset purchases, but it noteworthy that further purchases by the central bank could cause near-term inflation to push higher and lead corporate borrowers to releverage. As a result, policy makers may wait until the spending cuts take place in 2011 in order to access its affects on the economy.
The greenback rallied against all of its major counterparts on Friday, with the Aussie losing the most ground against the buck, falling some 1.72 percent. However, the dollar is likely to face whipsaw price action heading into the North American trade as U.S. traders are offline due to the Thanksgiving holiday. As the economic docket remains bare for the remainder of the day, risk trends will likely dictate price action.
Contributed By: DailyFx
* Dollar Rallies Against All Major Currencies, Advance to Resume Into Next Week’s Trade
* Euro Under Pressure as Fears Surrounding Europe’s Debt Contagion Lingers
* British Pound Price Action To Be Dictated by Market Sentiment
Dollar Rallies Against All Major Currencies, Advance To Resume Into Next Week’s Trade
The U.S. dollar rallied against all of its counterparts during Friday’s trade as market participants continue to seek safety amid uncertainty in the global markets. In Asia, China warned against military acts near its coastline ahead of U.S. South Korean naval exercises that may lead the region toward war. According to Reuters, the U.S. plans to send an aircraft group led by nuclear-powered USS George Washington for military exercises with South Korea on Sunday. This announcement comes on the back of the death of four people on Tuesday amid North Korean Artillery shells. Thus, the greenback could push higher in the case of North Korea taking extreme actions. At the same time, contagion fears in the Euro-Zone could add additional momentum to the buck.
Meanwhile, the dollar index reached its highest level since September 21st, and now looks poised to continue its northern journey as price action recently broke above its descending channel dating back to June. The index is currently testing the38.2 percent Fibonacci retracement level on the June 7th to November 4th downswing. Next week’s scheduled event risks may serve to be the catalyst needed for the greenback to push higher. USD traders will be faced with the consumer confidence report, ISM manufacturing, and Nonfarm payrolls. The latter is of particular importance due to the fact that the labor force in the U.S. remains at depressed levels and was a key driver behind the Fed’s recent announcement of additional asset purchases.
Euro Under Pressure as Fears Surrounding Europe’s Debt Contagion Lingers
The euro remains under pressure as currency traders fear that elevated debt levels will spread throughout the Euro-Zone like Ebola. Market participants will place Portugal in the spotlight as the region struggles to meet its fiscal deficit. In the coming months, the European Commission will release the budget/shortfalls for members in the bloc. In turn, traders are placing added weight onto the euro amid speculation that the report will be released worst than expected. Meanwhile, Spain is forecasted to meet its targets. However, unemployment remains at elevated levels and will likely weigh on economic activity in the near term. All in all, the outlook for the Euro-Zone is blurry as governments plan to implement tough austerity measures in order to battle their high budget debts, and so long as debt contagion fears remain, the euro will likely face further losses.
British Pound Price Action To Be Dictated by Market Sentiment
The British pound pushed 1.08 percent lower against the U.S. dollar to end the week as risk aversion regained its footing. Indeed, the currency looks poised to continue its southern journey as technical indicators point to additional downside risks. The Bank of England is in a sticky situation due to the fact that the split among MPC members will likely widen in the coming months as policy makers access the outlook for growth. Indeed, there is a 3 way split among members, but it noteworthy that further purchases by the central bank could cause near-term inflation to push higher and lead corporate borrowers to releverage. As a result, policy makers may wait until the spending cuts to take place in 2011 in order to access its affects on the economy. All in all, the British pound may witness a lackluster performance during the month of December as the central bank takes a wait and see approached with regards to the effect of spending cuts on growth heading until 2011. Investor sentiment will likely dictate price action during next week’s trade as the economic docket in Great Britain is fairly muted.
Contributed By: DailyFx
Certain deflationists have recently gone on record saying that the increase in the Fed's balance sheet is meaningless with regard to creating inflation because our central bank can't print money, it can only create bank reserves. The problem with their view is that it both disregards the definition of money and ignores the process of creating bank reserves.
Money is commonly defined as "a medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coin or note, or a deposit in a checking account or other readily liquefiable account." The Fed creates a "readily liquefiable account" when creating excess bank reserves, so it is also creating money. Since inflation is properly defined as an increase in the money supply, the Fed unquestionably creates both money and inflation when it creates reserves.
The deflationists' error is to suppose that because the amount of currency has not grown, the money supply hasn't grown. But the Fed never creates currency - all the printing is handled by Treasury; instead, it creates bank deposits which are held at the Fed. In ignoring this "base money," the deflationists make no distinction between having the Fed's balance sheet at $800 billion or $3 trillion. Doing so is a huge mistake for both making investment decisions and predicting asset price levels.
In short, for deflationists to be correct, they must contend that only money which is currently in circulation can be considered inflationary, i.e. lead to rising prices. Therefore, they must also believe that all increases in demand and time deposits should not be included in the money supply and should not be considered inflationary. This isn't just wrong, it's grossly wrong.
Not only do the Fed's monetary additions increase the money supply, but the effect can be vastly multiplied through the fractional reserve system.
Also, the process of creating bank reserves always first involves the purchase of an asset by the central bank. The Fed issues electronic credits to banks in exchange for bank assets, including Treasuries. Its purchases drive up the demand for those assets, bringing about rising prices. In fact, Bernanke has clearly stated that the purpose of his "quantitative easing" program is to raise the rate of inflation, which in his mind is too low.
What the Fed is accomplishing is a reduction in the purchasing power of the US dollar. It creates inflation by vastly increasing the money supply, and thus lowers the confidence of those holding the greenback. If international confidence in the dollar is shaken, most dollar-based asset prices will increase - with the exception of US debt.
Deflationists also ignore the rise in prices that is occurring because of the potential insolvency of the US government. It is not dissimilar to what happened to Enron shares. Once the accounting scandal broke, the purchasing power of Enron shares plummeted. It was not because of an increase in the number of shares outstanding, but because of an epiphany on the part of investors that the company was totally bankrupt. Logically, shares representing a stake in a doomed company lost all of their value. Likewise, aggregate prices will soar if global investors lose confidence in the dollar due to the realization that the US is incapable of servicing its debt.
Whatever the deflationists may claim about the money supply, the objective indicators are not looking good for Uncle Sam. The dollar's decline is abundantly evident when compared to gold, commodity prices, other currencies, real estate, and the list goes on. The national debt now stands at over $13.7 trillion, some 94% of GDP. Either due to an insolvent currency backed by a bankrupt nation or because of the Federal Reserve's endless money printing, I have no doubt that the deflationists have it completely wrong.
Contributed By: DailyFx
* Japanese Yen: Benefits From Risk Aversion
* British Pound: Mortgage Lending Weakens
* Euro: Manufacturing, Services Expand At Faster Pace
* U.S. Dollar: Preliminary 3Q GDP, Existing Home Sales on Tap
Concerns surrounding European debt crisis continued to weigh on the single-currency, with the EUR/USD slipping to a low of 1.3492 during the overnight trade, and the exchange rate may continue to push lower going into the North American session as market sentiment falters. Indeed, European policy makers made another attempt to talk down the risks for contagion, with European Central Bank board member Governor Miguel Angel Fernandez Ordonez, who also heads the Bank of Spain, stating that the region’s banking sector remains “strong”, but market participants are certainly showing little reaction to the claims as they continue to scale back their appetite for risk. At the same time, Mr. Ordonez said that the bailout package for Ireland “has nothing to do with” the central bank’s exit strategy, and encouraged the governments operating the fixed-exchange rate system to carry out their austerity measures as the Governing Council prepares to normalize monetary policy in the following year.
The economic docket for the Euro-Zone showed manufacturing and service-based activity unexpectedly expanded at a faster pace in November, with the composite index advancing to 55.4 from 53.6 in the previous month to mark the highest reading since August, while the final GDP reading for Germany showed economic activity expanded 0.7% in the third-quarter, which was largely in-line with forecasts. As the data reinforces an improved outlook for the region, the ECB may look to gradually withdraw its emergency measures going into 2011, but the dovish outlook held by the majority of the Governing Council could lead the central bank to support the real economy throughout the beginning of the following year as policy makers expect the austerity measures to bear down on the recovery. As the EUR/USD falls back towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3490-1.3500, we may see the pair find near-term support around the lower bounds of its recent range later today, but the rise in risk aversion could trigger increased selling pressures on the single-currency and lead the exchange rate to test of the August high at 1.3333.
The British Pound bounced back from a low of 1.5892 during the European trade, and the GBP/USD may continue to retrace the overnight decline as it maintains the upward trend from May. As the pound-dollar continues to find support around the 50-Day SMA at 1.5882, we could see a short reversal emerge later this week, which should lead the pair to retrace the decline from the previous week and lead the exchange rate to work its way back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.6220-40. However, as U.K. policy makers remain committed to aiding Ireland, the Bank of England may look to hold a neutral policy throughout the beginning of 2011, but there could be a growing split within the MPC as the economic outlook remains clouded with uncertainties. A report by the British Bankers’ Association showed loans for home purchases slipped to 30,766 in October from a revised 31,058 in the month prior, and the ongoing weakness in the real economy could renew speculation for further easing as the new coalition in the U.K. withdraws fiscal support and targets the budget deficit.
The greenback rallied against most of its major counterparts on Tuesday, with the USD/JPY advancing to a high of 83.83, and the dollar may continue to gain ground throughout the day as it benefits from the flight to safety. However, the reserve currency is likely to face increased volatility later today as the economic docket is expected to show an upward revision to the 3Q GDP reading, while existing home sales in the U.S. are forecasted to contract 1.1% in October to an annualize pace of 4.48M from 4.53M in the previous month. In addition, the Federal Reserve is scheduled to release its policy meeting minutes at 19:00 GMT and we are likely to hear the central bank maintain a cautious outlook for the world’s largest economy given the substantial amount of slack within the private sector.
Contributed By: DailyFx
Any risk rally on the back of the announcement of an Irish bailout has been totally negated and then some, with market fears of contagion and warnings from Moody’s that it may issue a multi-notch downgrade of Ireland proving too tough to ignore. Also seen weighing on sentiment have been escalating pressures on Irish PM Cowen as the government comes under intense pressure. These developments have infected the market’s sense of security and many now look to funding pressures in Portugal and the threat of additional tightening in China as an added source for worry.
ECB Liikanen has been on the wires into the European open stressing that the Euro will survive through the current crisis, while also reassuring market participants that it would be impossible for the Eurozone to breakup. Meanwhile the Yen has come under some pressure with the single currency selling off sharply across the board on rising geopolitical tensions as news gets out the North Korea has fired dozens of artillery at a South Korean island. Elsewhere, the New Zealand Dollar has been making up some lost ground on the crosses after getting hit hard on Monday following the S&P downgrade, with Moody’s coming out on Tuesday and offering a more stable outlook for the country and reaffirming its ratings.
Looking ahead, there is a batch of German data due at 7:00GMT, with some more German data in the form of PMIs at 8:30GMT. Eurozone PMIs are then released at 9:00GMT, with UK BBA loans for house purchases capping things off at 9:30GMT. US equity futures and commodity prices are well offered on the day thus far.
Contributed By: DailyFx
The USDCAD has traded sideways for the last 14 months. A move above 10375 would trigger a more immediate bullish count. A positive 10, 20 day SMA cross is in the works and the 60 day average has served as resistance since mid October.
Contributed By: DailyFx
After exceeding its 11/1 peak, the USDCHF has completed a monthly reversal (which is significant). The decline from the 2008 high of 12300 consists of 2 equal legs and may be wave B of a multi-year flat. The implications are for a powerful rally over the next several months that ends above 12300. I favor buying dips. Support is at 9825, 9775 and 9720.
Contributed By: DailyFx
I ended last week’s commentary with “the larger EURUSD trend is down and I favor selling rallies. Forget trying to count every single market squiggle and instead focus on the fact that the EURUSD has reversed in the face of extreme sentiment.” Risk on shorts can be moved to Monday’s high and focus is on 13350 (former resistance) and 12950 (100% extension).