Forex Daily Analysis - Friday, Aug 17th

Massive Unwinding of Carry Trades
Carry trades and risky assets taking big hits as investors cut positions and flee into more secure instruments. Fed's Poole said overnight that only a 'Calamity' would justify an interest cut now.

Overnight News Bullets

• GE CPI MoM/YoY (Jul F) out at 0.4%/1.9% as expected.
• SW Industrial Production MoM/YoY (Jun) out at 0.7%/5.0% vs. 0.8%/5.5% expected.
• UK Retail Sales MoM/YoY (Jul) out at 0.7%/4.4% vs. 0.1%/3.4% expected.
• E-Z CPI MoM/YoY (Jul) out at -0.2%/1.8% as expected. Core CPI YoY out at 1.9% as expected.
• CA Int’l Securities Transactions (Jun) out at –C$4.521 vs. C$1.250 expected.
• US Housing Starts (Jul) out at 1381K vs. 1400K expected. Building Permits (Jul) out at 1373K vs. 1400K expected.
• US Initial/Jobless Claims out at 322K/2567K vs. 315K/2550K expected.
• US EIA Natural Gas Storage out at 21 vs. 25 expected.
• US Philly Fed out at 0.0 vs. 8.6 expected.
• JN Leading Economic Index (Jul F) out at 72.7% vs. 80.0% expected. Coincident Index out at 80.0% vs. 77.8% prior.

Market

• FX: Continued ongoing sell-off in carry trades in the entire sessions. USDJPY enroute for 110.

O/N Data Heat map:

EU	US	JP	UK	SZ	AU	CA	NZ	NO	SE	FR
0	-	-	+	0	0	-	0	0	-	0

---

Calendar

Today's Highlights:

Time (GMT)	Region	Release	Consensus
12:30	CA	Wholesale Sales MoM (JUN)	0.3%
13:00	US	FED’s Poole speaks on U.S. exports
14:00	US	University of Michigan Confidence (AUG)	88.0
17:00	US	Baker Hughes U.S. Rig Count (AUG)	Prior 1798

This and Next Week’s Highlights:

Date	Region	Release
20 Aug	SZ	Producer and Import Prices
20 Aug	UK	Public Finances, Public Sector Net Borrowing, M4 Money Supply, BSA Mortgage Approvals
20 Aug	US	Leading Indicators
20 Aug	JN	All Industry Activity Index
21 Aug	NZ	Credit Card Spending
21 Aug	JN	Machine Tool Orders, Merchands Trade Balance, Adjusted Merchands Trade Balance
21 Aug	GE	ZEW Survey (Econ. Sentiment), ZEW Survey (Current Situation)
21 Aug	EC	Euro-Zone Trade Balance, Euro-Zone Construction Output
21 Aug	CA	A string of CPI’s, Retail Sales
21 Aug	US	ABC Consumer Confidence

---

What's going on?

• Huge movements in all asset classes on back of the ongoing worries in credit markets. The VIX is at its highest level since 2003. Major reduction of carry trades – USDJPY is currently down 4.9% since Monday and downside still looks attractive.
• We completely write off any rumors towards a cut in the Fed rate, but we expect the current risk aversion to continue if the demand for USD liquidity intensifies.
• Australian Central Bank bought the AUD for the first time in six years to cope with the biggest drop in AUD since 1983. AUDUSD dropped 3.52 pct. yesterday.

---

FX

• We have the following signals from our intra-day BO-model this morning (can be found in FX Trading Strats):
  Sell USDJPY @ 111.99 offer, stop bid @ 112.41, targeting 110.33.
  Sell EURJPY @ 150 offer, stop bid @ 150.41, targeting 148.50.
  Sell CHFJPY @ 92.23 offer, stop bid @ 92.51, targeting 91.00.

• We recommend reducing your position sizes and keep a close eye on the positions as intraday swings have widened considerably due to the changes in psychology.
  

EUR	USD	JPY	GBP	CHF	AUD	CAD	NZD	NOK	SEK	PLN
+	+	+	-	0	-	-	-	-	-	0

MAJOR HEADLINES – PREVIOUS SESSION

• SZ Retail Sales YoY (Jun) out at 1.0% vs. 4.9% expected.
• NO Trade Balance (Jul) out at 26.1B vs. 28.7B expected. Prior at 25.3B.
• UK Claimant Count Rate (Jul) out at 2.6% vs. 2.7% expected.
• UK Jobless Claims Change (Jul) out at -8.5K vs. -10K expected. Prior at -14.1K.
• UK ILO Unemployment (Jun) out at 5.4% as expected.
• US MBA Mortgage Applications out at 3.4% vs. 8.1% prior.
• Norwegian Central Bank Raises rates 25bp to 4.75% as expected.
• US CPI MoM/YoY (Jul) out at 0.1%/2.4% as expected. Core CPI out at 0.2%/2.2% as expected.
• US CPI Index NSA (Jul) out at 208.299 vs. 208.387 expected.
• US Empire Manufacturing (Aug) out at 25.1 vs. 18.0 expected.
• CA Manufacturing Shipments (Jul) out at -1.8% vs. -0.2% expected.
• US Industrial Production (Jul) out at 0.3% as expected.
• US Capacity Utilization (Jul) out at 81.9% vs. 81.7% expected.
• US DOE Inventories: Crude at -5167K vs. -2500K expected, Gasoline at -1057K vs. -750K expected, Distillate at 153K vs. 1250K expected., Refinery at 0.58% vs. 0.50% expected.
• US NAHB Housing Market Index (Aug) out at 22 vs. 23 expected.
• NZ ANZ-Business PMI (Jul) out at 54.6 vs. 50.6 prior.
• AU Average Weekly Wages (May) out at 1.7%/4.6% vs. 1.2%/3.5% prior.

---

THEMES TO WATCH – UPCOMING SESSION

The GBP continued its slide from yesterday when the BoE voted unanimously to keep rates fixed at 5.75 pct. The GBP only experienced a short-term relief when the Retail Sales came out at 0.7% - beating expectations at 0.1%. At the same time, the previous figures were revised higher. Britain's pound dropped for a sixth day as investors, who had been lured by the highest benchmark rate in the G7-nations, unwound trades funded by borrowing in Japan more cheaply.

USDJPY fell to the lowest since 2006 due to a major retreat from carry trades. The pair broke trend support at 115.55 from January 2005 and fell to as low as 113.60, taking all JPY-related crosses lower. Also GBPJPY took a massive hit against the dollar as investors fled carry trades after global stocks fell and companies in Australia and Canada sought emergency funds because they were unable to refinance debt. The yen rose against all currencies and reached the strongest since March versus the euro as traders repaid loans in Japan used to buy higher-yielding assets elsewhere.

As demand for USD still is high, EURUSD continued lower - support is currently seen at 1.3370 and resistance at 1.3480. The subprime worries are still overshadwing fundamentals which is why we have seen USD strength the last couple of days as the demand for USD has increased. Today the US Housing Starts and Building Permits both fell below expectations, but the prior figures were revised higher. There has been rumours in the market that the Fed would make an emergency cut as early as today, but we do not see this as a likely scenario.

Risk warning : ForexWebTrader shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Forexwebtrader that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.