Forex News Update 14-09-07

Dollar Little Changed After Consumer Confidence Rises in U.S.

By Min Zeng

Sept. 14 (Bloomberg) -- The dollar pared its loss versus the yen and was little changed after a report showed consumer confidence in the U.S. strengthened.

The Reuters/University of Michigan index of consumer confidence rose to 83.8 for September, from 83.4 last month. The median forecast of 66 economists surveyed by Bloomberg News was for a reading of 83.5

The dollar was little changed at $1.3881 per euro at 10:06 a.m. in New York, from $1.3885 yesterday, when the U.S. currency declined to an all-time low of $1.3927 per euro. The dollar bought 115.02 yen, from 115.08 yesterday.

US Dollar Recovers on Improving Sentiment, Can the Greenback Hold on to Gains?

Written by David Rodriguez, Currency Analyst

The US dollar showed signs of life through end-of-week trade, as the greenback shrugged off mediocre Advance Retail Sales data to rally on improved consumer confidence figures. A subsequent jump in Treasury bond yields likewise improved the currency’s interest rate differential against major trading counterparts, leaving scope for a continued short term bounce.

The euro pulled back from yesterday’s record-highs, dropping $0.0030 to trade at $1.3854 on the New York afternoon. This paled in comparison to British Pound tumbles, as the Sterling was the hardest-hit by news of UK banking troubles. The GBPUSD shed a whopping 170 points to weekly lows of $2.0080. The Japanese Yen likewise rallied on the overnight banking news, but later dollar strength left the greenback up ¥0.20 to ¥115.27.

A busy morning of economic data was initially a mild disappointment for outlook on domestic growth, with the critical Advance Retail Sales report coming in below consensus forecasts through the month of August. The US Department of Commerce reported that spending growth excluding automobiles actually fell 0.4 percent through the period—far worse than median analyst estimates of a 0.2 percent improvement. US market interest rates immediately tumbled on the news, with the greenback responding in kind. Yet a closer look at the underlying breakdown showed that much of these declines came on a 2.4 percent tumble in gasoline sales. Excluding gasoline, Advance Retail Sales actually gained an impressive 0.6 percent through the period. Though year-over-year growth continues to slow, early signs show that consumers remain resilient despite highly publicized real estate and lending problems.

A later University of Michigan Consumer Confidence report likewise tempered pessimism on the world’s largest economy, with statisticians reporting a modest improvement in sentiment through the first two weeks of September. The headline index was hardly impressive at 83.8 versus the 83.4 print seen in August, but such data reinforces the view that consumers remain thus far unaffected by credit and real estate market troubles. Consumer confidence numbers leaves scope for robust consumer spending through the medium term, which would undoubtedly boost the broader economy in the face of a housing recession.

Domestic stock markets took their cue from the University of Michigan data; the Dow Jones Industrial Average recovered much of its earlier declines through subsequent price action. The index remained 12 points below yesterday’s close of 13,413, but signs of stabilization may make for a relatively uneventful end-of-week session. The S&P 500 was likewise lower, shedding 3 points to 1,481. At the same time, the NASDAQ Composite eased a similar 0.2 percent to 2,597.

A sharp gain in short term Government Treasury yields highlighted decreased market jitters, with the 2-year Note adding 6 basis points to 4.08 percent. Longer-dated bonds remained tame, however, with the 10-year Note adding a mere 2 basis points to 4.49 percent.

Written by David Rodriguez, Currency Analyst for DailyFX

USDJPY Completing Correction From 111.59

Evidence suggests that a 12 year triangle is complete at 124.13 and that the USDJPY is headed to a new low in the coming weeks. However, the wave structure indicates one more advance is likely to occur before the next bearish leg begins. Fibonacci extensions and retrace levels identify potential reversal points.

Weekly chart analysis 09-14-2007 1

Weekly chart analysis 09-14-2007 2

The USDJPY may have completed a 12 year correction in the form of a triangle at 124.13. Triangles unfold in 5 waves (A-B-C-D-E) and the structure above is clearly in 5 waves. There is risk of wave E extending higher towards the next major resistance level of 128.00 but the weight of evidence suggests that wave is complete at 124.13. For one, wave E is close to 61.8% of wave C. Alternating legs of triangles are often related by 61.8% or a derivation of Φ (Phi….618). Wave E would be exactly 61.8% of wave C at 122.57. The top was at 124.13. A difference of just 155 pips when projecting a move that is nearly 3000 pips works out to just over a 5% error. The time relationships between the different legs of the triangles also favor the idea that wave E is complete at 124.13. The weeks that each leg of the triangle took to unfold (from A to E) were 41, 16, 27, 37, 30. The average length of time for each leg is 30.2. Wave E took 30 weeks. The 'look' is right for a top and reversal of significant proportion. A terminal thrust in the direction of the larger trend succeeds completion of a triangle. In the case of the USDJPY, a terminal thrust would result in a drop below the 1995 low of 81.12. A break of the base of the triangle at 101.26 would strongly signal that price is headed below 81.12. However, with the evidence making a strong case that the triangle is complete at 124.13, a longer term bearish bias is warranted against 124.13.

Weekly chart analysis 09-14-20073

The decline from 124.13 is in 5 waves, which strengthens our bearish argument (the decline from 124.13 is either wave 1 or wave a in a bearish cycle). The rally from 111.59 is in 3 waves and most likely wave a within an a-b-c correction. Wave b of that correction ended at 112.59 as a flat. Wave c is now underway towards the 100% extension of 111.59-117.12/112.59 at 118.12 (this is also close to the 50% of 124.13-111.59 at 117.86). 119.34 is also a possible reversal point (which is close to the former 4th wave of 119.84). In summary, look for a rally to the 118.00/119.00 level before a top and reversal. The next leg is expected to come under 111.59.

Weekly chart analysis 09-14-2007 4

This is a very short term chart of the USDJPY (15 minute). The decline from 115.21 is a clear 3 wave correction. This indicates that the rally expected to challenge 118.00 may be underway from 114.35. With the USDJPY currently trading just north of 115.00, reward/risk is favorable for bulls.

Written by Jamie Saettele, Technical Currency Strategist of

Pound Declines After U.K. Home Lender Gets Emergency Funding

By Anchalee Worrachate and Kosuke Goto

Sept. 14 (Bloomberg) -- The pound fell to a 14-month low against the euro after Northern Rock Plc received the biggest emergency bailout of a British lender in 30 years.

The pound was set for its steepest weekly decline in almost two years on speculation turmoil in the financial markets will prevent the Bank of England from raising interest rates. Northern Rock said it applied for cash from the central bank to ease a ``severe liquidity squeeze,'' because of a squeeze on global credit following a surge in U.S. mortgage defaults.

``Northern Rock's just the latest bad news, and there's probably more to come; the pound's looking increasingly vulnerable,'' said Peter Lucas, chief investment officer at Ashburton Ltd, which manages $1.7 billion in Jersey, the Channel Islands. ``We've been diversifying out of the pound as we see much better investment opportunities elsewhere.''

The pound fell for a third day versus the euro, heading for its biggest weekly drop since November 2005, to 68.89 pence by 1:37 p.m. in London. It earlier reached the lowest since July 2006.

The U.K. currency was poised for a weekly loss versus 15 out of the 16 most-traded currencies. It snapped a three-week advance against the dollar, falling to $2.0155 from $2.0252 yesterday and $2.0287 on Sept. 7.

Investors pared bets the Bank of England will raise borrowing costs this year, interest-rate futures show.

The yield on the December sterling contract fell 13 basis points to 6.17 percent. The contract settles to the three-month London interbank offered rate for the pound, which has averaged about 15 basis points more than the central bank's key rate for the past decade.

Safe Assets

U.K. gilts advanced as the financial-market turmoil stoked demand for the safety of government debt. The yield on the two- year note fell 7 basis points to 5.07 percent, after yesterday touching a nine-month low. It fell 13 basis points on the week.

The price of the 4 percent security due March 2009 rose 0.11, or 1.1 pounds per 1,000-pound ($2,012) face amount, to 98.50.

Ten-year yields dropped 6 basis points to 4.86 percent, near the lowest since March.

Gilts outperformed European debt today on speculation U.K. interest rates have peaked. The extra yield investors demand for holding 10-year gilts over the equivalent German bund narrowed to 72 basis points, the lowest since August last year.

``The fact this procedure has been triggered at all is a stark illustration of how deep and wide the problems afflicting money markets are spreading,'' said John Wraith, head of U.K. interest-rate strategy at Royal Bank of Scotland Group Plc.

Lehman Brothers Holdings Inc. said after the Northern Rock loan that the U.K. central bank will no longer raise rates from 5.75 percent this year. It had previously forecast borrowing costs would peak at 6 percent.

`Blow for Sterling'

``It's a blow for sterling,'' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Singapore. ``What's worrying is that it's a very big name in the U.K.''

The economy may slow next year as higher credit costs shave as much as 1 percentage point from the pace of growth, the Ernst & Young Item Club predicted today. U.K. gross domestic product grew 3 percent year-on-year for the most recent period available, according to Bloomberg data.

The pound was also hurt after a report from Rightmove Plc, Britain's biggest real-estate Web site, said London house prices fell the most in three years in September after five interest- rate increases in the past year curbed spending.

The U.K. currency pared losses versus the dollar after a report showed U.S. advance retail sales grew less than forecast in August. Sales grew 0.3 percent, from a revised 0.5 percent in July, the U.S. Census Bureau said.

The pound also fell versus Japan's currency, dropping almost 1 percent to 230.90, while gaining 0.4 percent on the week. It was at a 16-year low of 251.14 yen on July 23.

Subprime Crisis

``This news raised concern the U.S. subprime loan problem has been negatively affecting more and more entities worldwide,'' said Masafumi Yamamoto, economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan trader. ``More bad news may come in the coming months, bringing the yen higher.''

Credit-default swaps based on Northern Rock's debt rose 35 basis points to 165 basis points today, according to Deutsche Bank AG prices. That indicates a drop in perceptions of its credit quality.

The loan will be made at a ``punitive rate of interest,'' according to the British Broadcasting Corp.

Northern Rock gets a higher proportion of its funding from the money markets than rivals such as HBOS Plc.

Yen Heads for Weekly Loss as Demand for Riskier Assets Resumes

By Kosuke Goto and Ron Harui

Sept. 14 (Bloomberg) -- The yen headed for the first weekly decline in three as investors resumed purchases of higher- yielding assets funded by loans made in Japan.

The Japanese yen fell against all 16 most-active currencies this week as global equities gained and a credit-market crisis eased in the U.S., prompting investors to re-enter so-called carry trades. The currency rose earlier today on media reports that Northern Rock Plc, the U.K.'s fourth-largest home lender, will receive emergency funds.

``The markets are calming down after the initial report of Northern Rock,'' said Masafumi Yamamoto, a currency economist at Nikko Citigroup Ltd. in Tokyo and a former Bank of Japan trader. ``Investors' risk appetite has increased this week. This led to yen-selling.''

The yen traded at 114.99 per dollar at 11:55 a.m. in Tokyo from 115.08 late in New York yesterday and 113.38 on Sept. 7. It was also at 159.58 per euro from 156.10 a week ago. The yen may move between 113 and 117 per dollar next week, Yamamoto said.

Japan's currency rose against the pound today as the Bank of England will provide Northern Rock with a short-term credit line to keep it operating, the Financial Times said. The loan will be made at a ``punitive rate of interest,'' the British Broadcasting Corp. said. The yen rose to 232.10 per British pound from 233.07.

Asian Shares Gain

The Australian dollar, a favorite of carry trades, rose to 96.45 yen from 93.72 a week ago. New Zealand's dollar, also popular for carry trades, climbed to 81.92 yen from 78.36 on Sept. 7. The Standard & Poor's 500 Index climbed 0.8 percent yesterday and the Morgan Stanley Capital International Asia-Pacific Index of regional shares advanced 0.8 percent today.

Investment trusts will market more than 2.4 trillion yen ($21 billion) of mutual funds this month that aim to buy foreign assets, according to data compiled by Bloomberg. The odds the central bank will lift the overnight lending rate on Sept. 19 fell to zero percent this week, based on calculations by Credit Suisse Group using overnight interest-rate swaps.

``Sales of investment trust funds are not so bad,'' said Kei Katayama, who helps oversee the equivalent of about $1 billion at Daiwa SB Investments Ltd. in Tokyo. ``Japanese retail investors are still sending money abroad constantly, stemming an appreciation of the yen,'' which may fall to 118 per dollar by year-end, he said.

Interest-Rate Gap

Japan's 0.5 percent interest rate is the lowest among major economies. That compares with 4 percent in Europe, 5.25 percent in the U.S., 5.75 percent in the U.K., 6.5 percent in Australia and 8.25 percent in New Zealand.

In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread between the borrowing and lending rate. The risk is that currency moves erase those profits.

One-month implied volatility for the yen rose to 11.70 percent today, from 11.38 percent yesterday. Dealers quote implied volatility, a gauge of expectations for currency moves, as part of pricing options. Higher volatility may discourage carry trades as it implies greater exchange-rate fluctuation risk.

The dollar may rise for a second day against the euro, rebounding from a record low before a U.S. report today that may show retail sales picked up in August, signaling consumer spending is holding up in the face of an economic slowdown.

Smaller Cut?

The U.S. currency is set to snap two weeks of losses versus the yen on speculation the U.S. economy is resilient to the subprime-mortgage crisis, backing the case for the Federal Reserve to lower interest rates by less than a half percentage point. The yield spread between two-year U.S. and Japanese bonds widened to 3.21 percentage points from 3.08 percentage points a week earlier.

``The report may show personal spending is solid and add to expectations the Fed won't have to cut rates by 50 basis points,'' said Seiichiro Muta, director of foreign exchange at UBS AG in Tokyo. ``The dollar may strengthen'' to 115.65 yen and $1.3815 per euro today, he said.

The dollar trimmed this week's decline to 0.8 percent versus the euro to trade at $1.3877. The Commerce Department may say at 8:30 a.m. in Washington that retail sales rose 0.5 percent in August after a 0.3 percent increase the prior month, according to a Bloomberg News survey of economists.

Interest-rate futures show traders pared bets on a half percentage point cut by the Fed at the Sept. 18 meeting to 58 percent odds yesterday from a 76 percent chance a week ago.

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