Forex Daily Analysis - Monday, Aug 20th
USD only Marginally lower after Cut in Discount Rate
Fed surprised the market on Friday by cutting the disount rate 50bp to 5.75 pct. lending a helping hand to the markets.
Overnight News Bullets
- CA Wholesale Sales June, out at 0.2% vs 0.3% exp.
- US University of Michigan Confidence Aug, out at 83.3 vs 88.0 exp.
- US Baker Hughes U.S. Rig Count Aug, out at 1795 vs 1798 exp.
- NZ Visitor Arrivals July, out at -1.8% vs a prior reading of 0.8%.
- US Fed cuts discount rate from 6.25% to 5.75%.
Market
- FX: Carry unwinding continud Friday in early European trading, but rumors of BoJ making calls along with Fed's suprise cut, gave relief to carry and send the dollar lower.
O/N Data Heat map:
| EU | US | JP | UK | SZ | AU | CA | NZ | NO | SE | FR |
| 0 | - | 0 | + | 0 | 0 | - | - | 0 | 0 | 0 |
Calendar
Today's Highlights:
Time (GMT) Region Release Consensus 07:15 SZ Producer and Import Prices MoM/YoY (JUL) 0.3% / 3.0% 08:30 UK Public Finances (PSCNCR) (JUL) -11.0B 08:30 UK Public Sector Net Borrowing (JUL) -6.0B 08:30 UK M4 Money Supply MoM/YoY (JUL) 0.7% / 12.6% 08:30 UK BSA Mortgage Approvals SA (JUL) Prior £3972M 14:00 US Leading Indicators (JUL) 0.4% 23:50 JN All Industry Activity Index (JUN) 0.3%
This and Next Week’s Highlights:
Date Region Release 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 22 Aug AU Westpac Leading Index, DEWR Skilled Vacancies, New Motor Vehicles 22 Aug JN BoJ Monetary Policy Meeting, Supermarket Sales, Net Stocks Investment, Net Bonds Investment 22 Aug SW Unemployment Rate 22 Aug EC Euro-Zone Current Account, Industrial Orders 22 Aug US MBA Mortgage Applications, DOE U.S. Crude Oil Inventories,
What's going on?
- Huge movements following the surprise cut in US discount rates to aid the bleeding markets. The USD fell only marginally, but stocks erased intraday losses and closed higher across the board.
- Interesting week coming up wrt. how markets will respond to the helping hand from the Fed as the credit market turmoil may not be over yet. The act completely alters the Fed statement from Aug. 7 where it still was emphasized that inflation fears were the biggest threat to the economy and the sub prime would not spill over into the entire economy. Several market players now expect Fed to cut rates on the Sep. 18th meeting.
- The JPY went lower once again after strengthening considerably last week due to changes in risk sentiment. Emerging markets currencies also coming back. USDZAR closed Friday in 7.33 after testing 7.60.
FX
MAJOR HEADLINES
- 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.
THEMES TO WATCH – UPCOMING SESSION
The ongoing theme in the structured credit markets are still unfolding, and as we see an intensification of risk aversion, it is difficult to asses the implications for the global economy. A branch of Credit Agricole estimated that the global costs for investors will amount to as much as $150 billion, but central bank officials have several times stated that the problems we are seeing in credit market not will spill over into the economy. It is hard for anyone to asses when the worries are over, but the strong reversal we saw in S&P yesterday and the interaction from the RBA and BoJ overnight could indicate that we have seen some sort of bottom.
Today's big event was the very surprising move by the Fed to cut the discount rate from 6.25 pct. to 5.75 pct., getting closer to Fed funds rate at 5.25 pct. This gives a weaker USD and a weaker JPY. We saw EURJPY rally more than three big figures and EURUSD taking out 1.35 resistance. This cross-selling of JPY helped USDJPY stablizing above 114 in the short term. So - looking at it with intraday/week eyes - certainly it gives carry trades a helping hand. However, we don't think that this is the time to close your eyes and lean back to the much talked-about carry-trades. Instead, we will look at the bigger picture, which tells us that when the Fed start leaving the job-at-hand and start focusing on Wall Streets deterioating bonuses, it can never be a good thing for the US economy going forward...
| EUR | USD | JPY | GBP | CHF | AUD | CAD | NZD | NOK | SEK | PLN |
| + | - | 0 | - | 0 | - | 0 | - | 0 | 0 | 0 |
FX Trading Strategies
| Pair | Supp. | Resis. | Comments |
| YSDCHF | 1.995 | 1.2220 | Markets correcting after the major volatility last week. We have a short-term break-out trade in USDCHF. We prefer the downside, but respect upward move if further sell-off in low-yielding currencies. Sell the break of 1.2041 offer, stop bid at 1.2073. Buy 1.2081 bid, stop offer at 1.2050. |
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