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Today’s Jump in ADP Tips A Stronger Non-Farm Payroll Report Tomorrow?

Nick Nasad — Thu, 07 Jul 2011 16:55:49 +0000

Positive NFP Report Can Set the Stage for Risk Appetite, but also Some USD Gains

Positive Scenario: If the ADP report is as predictive as it was in May, and non-farm payrolls come in at 150K or greater that will boost risk sentiment and help equities to rally. We are seeing a bit of that already following the ADP report as traders price in a better NFP reading. Traders and investors are looking for signs from the US economy that it is past the “rough patch” we saw in the 2nd quarter.

If so, that validates the Fed’s view of a pick-up in growth in the second half of the year. That again is a positive development for the “risk-on” trading in currency markets.

However, a rebound in employment growth from the weakness in May also can help the Fed to avoid further discussion of the need for more easing and can also accelerate the pace at which the Fed moves to normalize its ultra loose monetary policy. The first step was to end the accumulation of Treasuries on the Fed’s balance sheet, the next step being stopping re-investing maturing Treasuries, which the Fed is currently doing in order to keep its balance sheet constant and to avoid any tightening in the monetary system. With employment on the mend traders can begin to price a move in that direction by the Fed, which would be USD positive.

Negative Scenario: Of course, we can also have the opposite effect if the ADP report pumps up the markets expectations and then NFP disappoints to the downside. Then, we would see the “risk-on” trading that we saw as a result of the ADP report give back by markets, as traders price in a US economy that still needs more time to get past the weakness of the 2nd quarter. It would also suggest that the Fed will be cautious in regards to normalizing monetary policy, which would undermine the USD.

What Did We Learn From Today’s ADP Report

A slight improvement is expected in tomorrow’s non-farm payroll report as the consensus forecast is for an 85K-100K increase in June following a soft 54K gain in May. However, the market may now be pricing in a better reading considering the strong ADP report.

The ADP report showed a total of 157K private sector jobs created in June, led by a 130K increase in the services sector, and another 24K coming from manufacturing. Expectations heading into the report was for a 70K print, so we almost doubled that forecast in today’s reading – a positive surprise. The increase was primary driven by hiring at small and medium businesses.

The ADP report can be much maligned, as it does tend to miss the non-farm payroll figure rather consistently, but the data does tend to under-predict payrolls by about 60K at least over the past few months (ignoring Dec. 2010), and its drop to 37K prior to May’s NFP was a good predictor of the fall we did end up seeing at 54K. If we have a similar pattern play out, then NFP can come in at 160K-200K, a development that would make the May jobs figure look like an anomoly or a bump in the road as we had payrolls coming in near or above 200K over the preceding 3 months.

You can see the drop off in hiring during May in the above chart of non-farm payroll change.

What About Jobless Claims, ISM Employment Readings?

We also saw a drop in jobless claims today to 418K, better than the 421K expected, however the previous week’s reading was revised higher 4K. While the drop is a welcome sign, we have to be aware of auto-plant shutdowns during summer as they can skew claims figures for the next few weeks.

Unfortunately we remain above the 400K level – when claims are below 400K it implies the economy can add 150K jobs a month – the pace needed to keep up with new entrants into the labor force.

We also can gather some info from the employment sub-gauges within the ISM reports.

In yesterday’s ISM services report, we saw the employment sub-gauge post a 54.1 reading for July, maintaining the level seen in May (54.0). The ISM manufacturing index saw its employment sub-gauge at 59.1, stronger than the reading in May (58.2). These indicators tell us that while employment levels continue to improve, we did not see a pick up in the pace of hiring and would suggest that we temper our expectations from the ADP reading.

Looking at Last Month’s NFP Data:

In May we saw only 80K service sector jobs added compared to 213K in April, and a drop of 5K in manufacturing in May compared to 24K gain in the previous month.

While the ISM employment gauges remain near their levels in May and jobless claims hover above 400K that is suggestive that the NFP figure may be closer to forecasts of an 85K increase, but the ADP figure has injected the chance of a positive surprise to the Non-Farm Payroll report. While that puts some wind at the back of the sails of “risk-on” trades, it also creates more downside risks if the data now disappoints our heightened expectations. All in all, since we weren’t expected an overtly positive NFP report, the ADP reading has given us some clues to a surprise reading making tomorrow’s NFP event even more interesting.

Nick Nasad
Chief Market Analyst
FXTimes

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

ECB Signals Inflation Concern, Another Rate Hike In the Book for 2011

Nick Nasad — Thu, 07 Jul 2011 13:28:08 +0000

The ECB as expected hiked rates by another 25 basis points to 1.5%. The EUR was on the backfoot overnight, and slid in the wake of the 7:45AM ET announcement. However, during Trichet’s comments, the EUR got a bit of a bounce, as Trichet used phrasing signifying that an interest rate meeting may come in September, the meeting after next.

From the Introductory Statement:

“Based on its regular economic and monetary analyses, the Governing Council decided to increase the key ECB interest rates by 25 basis points, after raising rates by 25 basis points in April 2011 from historically low levels. The further adjustment of the current accommodative monetary policy stance is warranted in the light of upside risks to price stability. The underlying pace of monetary expansion is continuing to gradually recover, while monetary liquidity remains ample with the potential to accommodate price pressures in the euro area. All in all, it is essential that the recent price developments do not give rise to broad-based inflationary pressures over the medium term. Our decision will contribute to keeping inflation expectations in the euro area firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. Such anchoring is a prerequisite for monetary policy to contribute to economic growth in the euro area. At the same time, interest rates across the entire maturity spectrum remain low. Thus, our monetary policy stance remains accommodative, lending support to economic activity and job creation. As expected, recent economic data indicate some deceleration in the pace of economic growth in the second quarter of 2011. While the underlying momentum of economic growth in the euro area continues to be positive, uncertainty remains elevated. We will continue to monitor very closely all developments with respect to upside risks to price stability.”

Trichet and the ECB made it quite clear that they still have their eye on inflation and will not end their rate tightening campaign short of their goal of bringing down the upside risks to inflation. The key takeaway’s are the wording that “further adjustment is warranted” and that the ECB will “continue to monitor very closely”, which means we may get a rate hike in September – the meeting after next – which should be supportive of the EUR considering there was some thinking that Trichet may sound more dovish in today’s meeting.

In regards to inflation, Trichet did not wave the all clear, highlighting the factors that will put upward pressures on prices:

“The relatively high inflation rates seen over the past few months largely reflect higher energy and commodity prices. Looking ahead, inflation rates are likely to stay clearly above 2% over the coming months. Upward pressure on inflation, mainly from energy and commodity prices, is also still discernible in the earlier stages of the production process. It remains of paramount importance that the rise in HICP inflation does not translate into second-round effects in price and wage-setting behaviour and lead to broad-based inflationary pressures. Inflation expectations must remain firmly anchored in line with the Governing Council’s aim of maintaining inflation rates below, but close to, 2% over the medium term.

Risks to the medium-term outlook for price developments remain on the upside. They relate, in particular, to higher than assumed increases in energy prices. Furthermore, there is a risk of increases in indirect taxes and administered prices that may be greater than currently assumed, owing to the need for fiscal consolidation in the coming years. Finally, upside risks may stem from stronger than expected domestic price pressures in the context of increasing capacity utilisation in the euro area.”

Trichet reiterated that the ECB does not want to see any kind of “credit default” or “selective default” when asked questions regarding Greece, but seemed coy in getting into too much detail on the subject.

Trichet did say that the ECB will suspend its minimum collateral ratings thresholds for Portugal following the move by Moody’s to put the country’s credit rating into junk status.

From the ECB: “The Governing Council of the European Central Bank (ECB) has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government. This suspension will be maintained until further notice.

The Portuguese government has approved an economic and financial adjustment programme, which has been negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund. The Governing Council has assessed the programme and considers it to be appropriate. This positive assessment and the strong commitment of the Portuguese government to fully implement the programme are the basis, also from a risk management perspective, for the suspension announced herewith.

The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Portuguese government.”

The Trichet news conference didn’t inject as much volatility into the market, and may be overshadowed by the strong data we saw from the US in the form of the ADP report, which caused the EUR to weaken against the CAD while the EUR/AUD was sharply lower on the back of a positive employment report we had overnight.

The EUR gained on the safe haven JPY and CHF post-ADP report, but gave up some of its gains during the press conference.

Therefore, we take away the fact that the ECB seems determined to continue to hike rates a net EUR positive, and it has become more lenient in regards to Portuguese collateral, a sign of flexibility from the ECB that could help calm periphery bond markets and should also help the EUR.

Traders may have already priced in another rate hike from the ECB though the hawkish tinge to Trichet’s message today may have been a bit more than the market expected. Still, it will be up to other data and news to drive direction for the EUR now until we get to the non-farm payroll report tomorrow.

Nick Nasad
Chief Market Analyst
FXTimes

Today’s News Round-Up: ADP Jobs Report Jumps, UK and Germany Production Data Surprises on Upside

Nick Nasad — Thu, 07 Jul 2011 12:53:48 +0000

1. ADP Employment Change Jumps by 157K in June:

The ADP Employment change in came in much stronger than expected, showing the private sector adding 157K during the month of June. That near tripled expectations, and can help set up a better than expected figure in the non-farm payroll report.

The news helped sense a surge of risk appetite through the currency markets, with higher yielders benefiting against the safe haven currencies (CHF, JPY). The USD was stronger against the JPY and CHF as the positive jobs report gives the US a positive fundamental bias in today’s session.

The USD was weaker against the CAD, as the Canadian economy is strongly tied to the health of the US economy, that it benefits from positive US news more so than other commodity currencies. We saw oil move higher in the wake of the release as well.

Jobless claims data also came in better than expected, sliding to 418K from 428K.

2. German Industrial Production Climbs 1.2%, More Than Expected in May:

Just like we saw in factory orders data earlier in the week which came in stronger than expected, today’s German industrial production data also surprised on the upside. Output rose 1.2% in May, compared to a drop of 0.8% in April, and with the leading indicator factory orders up, we should see a strong June as well.

That bodes well for the German economy, which of late has been experiencing some cooling of its economy, but as the data this week shows its shouldn’t be considered a marked slowdown.

From Bloomberg: “Production of investment goods jumped 2.5 percent from April and output of basic goods rose 0.7 percent, the report showed. Consumer-goods production stagnated in May and construction output increased 1.1 percent.

The pace of expansion may slow somewhat in the coming months after order intake moderated recently, the ministry said.

Factory orders rose 1.8 percent in May from the previous month, when they gained 2.9 percent, led by domestic demand for investment goods, the ministry said yesterday. Companies are increasing spending and hiring to meet surging demand, putting more money in consumers’ pockets and broadening the country’s recovery that has driven the euro region’s expansion.”

3. UK Manufacturing Rebounds 1.8% in May:

We had a positive release from the manufacturing sector in the UK. Manufacturing output rose 1.8% in May, a stronger than expected rebound for the sector after it had seen production decline by 1.6% in April.

In fact it was the biggest monthly increase since March 2010. The strong reading came as a result of factories rebounding from the supply disruptions brought about by Japan’s March earthquake and tsunami, as well as an extra public holiday in April.

Indications for next month’s reading may not be as good considering the manufacturing PMI has been coming in weaker for the last few months, sliding in June to 51.3 from 52.1.

From Bloomberg: “From a year earlier, manufacturing rose 2.8 percent in May. Overall industrial output rose 0.9 percent on the month and fell 0.8 percent on the year. There were declines of almost 6 percent in mining and quarrying and oil and gas output in May.

In the three months through May, manufacturing declined 0.2 percent from the previous quarter and industrial production fell 1.5 percent, suggesting industry will act as a drag on growth in the second quarter.”

Nick Nasad
Chief Market Analyst
FXTimes

Examining the ECB Rate Decision and Trichet: Keys to Listen For and Possible Scenarios

Nick Nasad — Wed, 06 Jul 2011 22:15:29 +0000

Inflation Remains Above ECB’s Target:

Inflation continues to remain a problem for the Euro-zone. ECB officials have been quite adamant about the need to hike rates to 1.5% this week with Trichet constantly re-using the term “strong vigilance” in regards to inflation over the past few weeks. The use of that phrase usually implies that Trichet and the Governing Council are ready to raise rates in the following meeting.

Headline annual inflation has hit a high of 2.8% this year, but the index fell back to down to 2.7% in the flash version for June.

The ECB can take that as a sign that inflation pressures are easing, considering oil prices have come down off their peaks in February. Still, the ECB’s mandate dictates price stability and the Governing Council will want to see inflation come down further in the second half of the year.

Last Month’s Statement Put Emphasis on Price Stability:

Here’s the opening paragraph from Trichet’s last introductory statement:

“The information that has become available since our meeting on 5 May 2011 confirms continued upward pressure on overall inflation, mainly owing to energy and commodity prices. The underlying pace of monetary expansion is gradually recovering. Monetary liquidity remains ample, with the potential to accommodate price pressures in the euro area. Furthermore, the most recent data confirm the positive underlying momentum of economic activity in the euro area, while uncertainty remains elevated. Overall, our monetary policy stance remains accommodative, lending support to economic activity. On balance, risks to the outlook for price stability are on the upside. Accordingly, strong vigilance is warranted. On the basis of our assessment, we will act in a firm and timely manner. We will do all that is needed to prevent recent price developments giving rise to broad-based inflationary pressures. We remain strongly determined to secure a firm anchoring of inflation expectations in the euro area in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. This is a prerequisite for monetary policy to make an ongoing contribution towards supporting growth and job creation in the euro area.”

And what we said about the accompanying growth and inflation forecasts that day: ”As we can see, the concern remains on inflation, and the guessing game now turns to when the next rate hike after July will be with current expectations around October/November. The ECB revised higher its projections for GDP growth and inflation forecasts, as was expected. It now sees inflation of 2.5/2.7% for 2011 from 2.2/2.4% in the March projections. The expectations for 2012 remained the same at 1.7%. . The 17-nation euro-area economy will grow 1.9 percent in 2011, up from the previous 1.7 percent projection. Growth will slow to 1.7 percent in 2012, the ECB said, reducing its forecast from 1.8 percent. That was a bit of mixed news, and the slowdown in growth expected in 2012, as well as inflation expectations remaining unchanged for 2012, dampened enthusiasm for the EUR.”

That assessment came before the recent turmoil surrounding Greece, with the ECB and EU members currently unable to get past the impasse of how to have private bond holder participation in a second Greek bailout without it being labeled a “selective default” by credit rating agencies.

The ECB will go through with its rate hike tomorrow, and market focus will turn to how dovish or hawkish he will be about the next round in the ECB rate tightening campaign.

Keys to Keep An Eye Out For From Trichet:

Trichet will continue to show concern about inflation, though with the ECB switching to the less hawkish phrase words of “monitoring” or “monitoring closely” or “extremely closely”. Each one of these can be interpreted differently, with the former meaning a rate hike may be 2 or 3 meetings away, while “very closely or extremely closely” means a rate hike may come the meeting after next. The latter is therefore more bullish for the EUR, while the former is dovish.
Even though oil prices have come down, we should continue to hear Trichet warn against losing sight of keeping price stability. That focus should continue to reinforce that the ECB will not be done hiking rates yet in this cycle. We will have another rate hike this year.
Will he acknowledge that some of the inflationary pressures from oil may have subsided? If so, that could weaken the threat of energy inflation, which would mean the ECB has room to assess the data before raising rates again.
What is the ECB’s outlook for Germany’s economy, and as a result inflation? It’s been Germany’s strong growth that has propelled the Euro-zone to a 0.8% GDP growth rate in the 1Q. However, expectations are for that to slow. Still, if Germany continues to maintain momentum, that could imply that another rate hike would be more likely sooner rather than later.
Will there be any new info regarding ECB’s efforts to help provide liquidity to Greek and Portugal banks and now to Portugal? Some new lending facility to keep contagion from spreading? Trichet may be purposefully coy here, but it’s feasible that he unveils some new methods that the ECB is using to help stem the crisis. The market’s reaction to such an announcement would be mixed, depending on exactly what was proposed.
What will the ECB do with its Greek bonds if they are labeled as a “selective default”? What if not all 3 rating agencies label the debt as in default, what would happen then?

The fact that we set up before the announcement seeing if Trichet will push back further interest rate increases, that undercuts some of the fundamental support for the EUR pair. Of course, the last 2 months have given plenty of reasons to short the EUR as the sovereign debt crisis has seen a new episode.

Still, from an interest rate perspective, the ECB is the only bank out of the major economies (US, UK, CAN, AUS, NZD, SWZ, JPN) that is raising interest rates. That underlying dynamic had helped to bring the EUR higher throughout 2011, as the ECB has moved to raise rates, and so while the EUR remains weak on the sovereign debt issue it still has some support from the fact that its interest rate differential is improving against its major rivals.

But, in the hear and now, EUR/USD is being dominated by negative headlines, and therefore the EUR is still susceptible to forces that don’t have to do with fundamentals but more with “animal spirits” and investor sentiment.

Let’s try and lay out some rough scenarios for tomorrow:

1. ECB holds rates steady. Very small chance and would catch the market completley of guard.

2. ECB hikes rates and uses phrase “strong vigilance”. That would imply a rate hike in the following meeting in August. If Trichet uses “strong vigilance” the EUR is set to take off as that would be a surprise.

3. ECB uses the phrase “monitoring very closely” in regards to inflation. That would imply the next rate hike comes in 2 months time in September. The expectation of the market at this point is for the 3rd scenario which means we may get volatile trading during Trichet conference as he touches on the topics of inflation, growth, the USD, and the ongoing debt saga.

4. ECB uses the phrase ” monitoring closely” dropping the “very”. That would imply the next rate hike may not come till October. If Trichet hints that interest rates are going to come later rather than sooner (scenario 4), the EUR may stumble, as the rate differential advantage the EUR has loses some of its allure.

A Look at the Daily EUR/USD:

The EUR/USD has retraced 61.8% of its relief rally from last week. Trichet can help give the market new direction and increased volatility, before Friday’s NFP. But, we are also seeing that the swings both downward and upward have been coming in smaller. The sharp decline in early May was longer than the upswing in the second part of May. Similarly, the early June fall was smaller than the previous swing and again with our relief rally last week. Therefore, we are starting to see prices consolidating around a center point near 1.4350, close to where we are now, and where we are seeing the medium term 21 and 55 ema’s moving squeezing closer together.

With a dovish Trichet, the EUR/USD can extend its decline to its upward sloping trendline around 1.4170, while a hawkish Trichet can give the pair support at this level following the sharp slide earlier in the week.

However, we have to see what the incoming news is regarding the sovereign debt situation and the USD, including general risk sentiment so the markets may pay attention to Trichet, but he’s not the only focus in these conditions, though it inject a could amount of volatility.

Let’s see which way we come out on the other side of this release, and what we have gathered from Trichet in regards to the ECB monetary policy going forward. It could turn into a wild ride.

Some extra links on the ECB rate decision:
From Marketwatch: No stopping ECB rate hike, economists say
From Wall Street Journal: Signals to Expect From ECB’s Trichet

Have an opinion on what may happen with the EUR/USD? Want to share you opinion with FXTimes? Please join the conversation by posting a comment below.

Nick Nasad
Chief Market Analyst
FXTimes

ISM Non-Manufacturing Index at 53.4, New Orders Slower, Prices Tumble, Employment Holds Steady

Nick Nasad — Wed, 06 Jul 2011 14:19:22 +0000

The ISM non-manufacturing index, the main measure of overall services activity in the US, showed another month of activity increasing, but the reading for June at 53.4 was below forecasts of a 53.9 reading, and below May’s 54.6.

The internals of the report reveal some interesting tidbits.

First off, we see a huge drop in the prices sub-gauge, from 69.6 in May to 60.9 in June. That means that the strong inflationary pressure that we have seen over the past few months is likely easing. If that comes through in the incoming CPI data that will give consumers a break, and it will also leave the door open for the Fed to decide to keep rates at their low levels for longer if the economic recovery showed further signs of deterioration. But it seems a major headwind – higher prices pushed up by rising food and energy costs – may be easing somewhat.

In terms of activity, the data was not promising. We saw new orders sliding to 53.6 from 56.8 in May, a negative factor. The backlog of orders declined below the 50 level. This is a measure of future activity. Inventories dipped from 55.0 to 53.5.

The employment index meanwhile managed to remain at its levels from May, not saying much considering the weak jobs report we had during that month, but we at least avoid going in the wrong direction. In the ISM manufacturing PMI we saw the employment sub-gauge increase. That should herald a slightly better number for the non-farm payroll report that we get Friday, something in the range of 80K-100K, which is the current consensus range. Nothing to dispell that from the ISM reports.

The immediate reaction in markets has been a move towards safety, with the Yen gaining ground against the EUR and USD. The USD was also a bit stronger against the EUR, GBP, and AUD, as US equities have turned downward in today’s session and with the risk factors floating around today – concerns over Portugal and China’s rate hike – the services report missing expectations should not break that sentiment.

Nick Nasad
Chief Market Analyst
FXTimes

Portuguese Yields Blow Out, as Portugal and European Commission Chide Downgrade

Nick Nasad — Wed, 06 Jul 2011 13:46:07 +0000

Portugal’s borrowing costs were battered today following yesterday’s downgrade of its credit rating by Moody’s.

From Bloomberg: “Portugal’s downgrade to junk status and wrangling over the role of investors in a new Greek bailout package fueled concern about the solvency of the region’s high- debt nations, sending their bonds tumbling.

The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds surged 148 basis points to a euro-era record 949 after Moody’s slashed yesterday its credit rating four levels to Ba2, below investment grade. The yield on Italy’s 10-year bond reached the highest in almost three years, while Ireland’s 2-year yield topped 15 percent for the first time.”

Let’s take a look at that in visual terms as we see the surge in the spread between German and Portugal 10-year bonds:

That means borrowing costs for Portuguese companies and banks will be more expensive and it will be that much tougher for the economy to get back to normal footing. The events of yesterday and today also highlight the dangers of contagion and that the sovereign debt crisis goes beyond just Greece.

From Financial Times: “Portugal has hit back at Moody’s for downgrading the country’s sovereign debt to junk status, criticising the US rating agency for failing to take into account new austerity measures and a “broad political consensus” in favour of tough fiscal discipline.

Vítor Gaspar, finance minister, said the ratings cut to below investment grade failed to reflect the unequivocal support of the main government and opposition parties for the country’s €78bn financial rescue programme.

Pedro Santos Guerreiro, editor of the Jornal de Negócios business daily, said the ratings cut threatened to become a self-fulfilling prophecy, undermining the investor confidence Portugal needed to resolve its debt crisis.”

The article has other rebukes to the Moody’s downgrade including new taxes that were past last week that showed the countries determination to solve its crisis. That one-off tax will require Portuguese workers to forfeit hal fot he extra one month’s pay the receive as a December bonus. That is a very strong step, but now, the road to recovery may be that much tougher thanks to this downgrade. Credit default swaps climbed to a record high.

The European Commission had some strong words for the rating agencies as well:

From the Global Post: ”The Commission questioned of the “appropriateness of behaviour” of international ratings agencies, which also include Standard & Poor’s and Fitch.

European Commission spokesman Amadeu Altafaj told a Wednesday news briefing:

“The timing of Moody’s decision is not only questionable, but also based on absolutely hypothetical scenarios which are not in line at all with implementation. This is an unfortunate episode and it raises once more the issue of the appropriateness of behaviour of credit rating agencies.”

Reuters reported that the European Commission President Jose Manuel Barroso said Moody’s decision had added to speculation concerning euro-zone debt. He told a news conference in Strasbourg:

“Yesterday’s decisions by one rating agency does not provide more clarity. They rather add another speculative element to the situation.”

Naturally the talk has now shifted to the possibility that Portugal, like Greece, will need a second round of financing from the EU/IMF but Germany’s deputy finance minister said such talk is premature as the German government has faith that the measures taken will help avoid the country sliding to default. While the market may be skeptical at this point, the proof will be in the pudding, as we have to examine if Portugal can meet its budget deficit and tax intake targets.

We will continue to keep an eye on the main risk indicators in the sovereign debt crisis which is the yields on periphery government debt which were blowing out in today’s trading as that will guide the EUR crosses the rest of the trading day.

Spain-German 10-Year Yield Spread - http://www.bloomberg.com/apps/quote?ticker=.SPAGER10:IND
Italy-German 10-Year Yield Spread - http://www.bloomberg.com/apps/quote?ticker=.ITAGER10:IND
Portugal-German 10-Year Yield Spread - http://www.bloomberg.com/apps/quote?ticker=.PORGER10:IND

We will also be listening to the ECB to see if they will open up any special liquidity facilities for troubled banks and will have more to say regarding the creditworthiness of troubled sovereigns and what they will or wont take as collateral.

Nick Nasad
Chief Market Analyst
FXTimes

GBP Slides Despite Higher Home and Retail Prices, Further Declines Expected on BOE Expectations

Nick Nasad — Wed, 06 Jul 2011 13:03:09 +0000

The Pound had a strong overnight session on Tuesday, but it was the opposite scenario in today’s European session, as the GBP/USD slid back to its lows from Tuesday’s session just below the psychologically important 1.60 level.

On Tuesday, sterling was boosted by a slightly better Services PMI report and the fundamental data was actually better than expected in that housing prices rose more than expected – a positive for the housing sector – while retail prices also climbed stronger than expected – a fact that would put a bit more pressure on inflationary pressure and on the BOE to consider the effects of its ultra-loose monetary policy on prices.

From Bloomberg: “U.K. shop-price growth accelerated last month to the fastest pace since October 2008 as rising commodity costs and a decline in the pound boosted inflation, the British Retail Consortium said.

Retail prices rose 2.9 percent from a year earlier after advancing 2.3 percent in May, the BRC said in an e-mailed statement in London today. On the month, prices rose 0.5 percent after increasing 0.1 percent in May.

Britons are seeing their finances squeezed at the fastest pace since the 1970s as inflation outpaces wage growth and the government implements budget cuts and increases sales tax to reduce the deficit. The Bank of England will keep its key interest rate at a record low tomorrow, economists forecast, as recent survey data adds to signs the recovery is faltering.”

Despite the higher inflation, it seems the Bank of England will keep to its loose policy as there is growing concern about the pace of the recovery. At least on the housing front the news was positive boosted by the low interest rates.

From The Guardian: “House prices rose significantly by 1.2% in June, according to figures released by the Halifax. The bank said the 0.5% decline in house prices during the last three months was the smallest quarterly fall for a year.

Martin Ellis, the Halifax housing economist, said low interest rates, an increase in the number of people in employment and some tightening in market conditions earlier in the year are likely to have caused the recent rise in prices.”

Despite the data, risk aversion was the key to today’s trading and the GBP (being a higher yeilder in this environment) declined.

The important question now for the GBP pair is if it can break out of its recent 6 session range between 1.6140 and 1.5975.

The moving average picture has become very “braided”, while we do see the RSI failing to move back towards the 70 level during its test of 1.6125 in Tuesday’s session. That means momentum to the topside was limited. If we continue to trade ina range, then we should not get below the 30 level in the RSI here, but if we do it could mean the selling momentum is strong enough that we break through the support outlined at 1.5975.

We may also be on the lookout for a pull back from today’s decline which can give us a better chance to play the downside from a risk to reward ratio.

Looking at the 4H we see that the current range is a consolidation after the pair had slid sharply through some previous important supports:

Here we see that the medium term 21-ema and 55-ema have squeezed, but that we may be at the start of another downswing. The 1.0675 level holds important as a previous level of support turned to resistance, and if we can move back below that level and hold below that, it sets up the case that we may be in a bearish continuation pattern. If risk aversion continues to be the theme of this week, say we have weaker US services and non-farm payroll data, and Trichet sounds dovish in his press conference, that would really open up this scenario.

The RSI in the 4H has also been unable to move above hte 60 level, showing there isn’t much momentum to the topside, while we have seen the pair drop to the 30 level and stay in oversold territory a few times during June. If a bearish scenario continues to play out, we would first look to test our lows from last week near 1.5920 then looking at the daily timeframe we have an important level at 1.5880 as another target level.

If we reach the aforementioned 1.5880 level which is our 61.8% retracement of the swing upwards from January to April, then we look to be setting up a downward channel that if we target the lower boundary can put us at the 1.5775 level. The ranging action we looked at in the 1 hour is the pair grinding its way through the 200-daily ema which right now corresponds with the 1.6050 area. This could also be the pair trying to establish a bottom near our March lows, which we have to be careful about in regards to a trading strategy that shorts the Pound.

The expectations continue to be that the Bank of England will sit on its hands going forward, that their first rate hike may not be until the second quarter of next year, and even then the rate may only climb to 1.50% by the end of 2012. The ECB is set to reach that level tomorrow. As long as data continues to show an uneven recovery with weak consumer spending as a result of austerity measures – and even housing may not be safe from further price falls – we continue to be bearish on the prospects for the GBP.

Nick Nasad
Chief Market Analyst
FXTimes

Risk Averse Session Hits AUD and NZD as China Hikes Rates

Nick Nasad — Wed, 06 Jul 2011 12:06:52 +0000

Risk off trading has come to the forefront as this week started with risk-off news in the from of several developments. First, we had credit rating agency cast doubts on the private bond holder participation in a 2nd Greek bailout without it being labeled a selective default. We had worrying signs coming from the Chinese banking sector. We followed that up with a downgrade of Portugal by Moody’s which felled the EUR, while today we had confirmation of rumors that the Chinese central bank was going to raise interest rates, which they did today.

From Bloomberg: “China raised benchmark interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008.

The one-year deposit rate rises to 3.5 percent from 3.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will increase to 6.56 percent from 6.31 percent.

Today’s move may fuel concern that monetary tightening will trigger a slowdown in the world’s second-biggest economy. A manufacturing index fell in June to the lowest level in 28 months on weaker growth in orders and output.”

A combination of Euro-zone sovereign debt worries and concern about slower growth in China adds up to a move towards safe haven currencies and away from higher yielders. The EUR/USD extended its losses from yesterday, slicing last week’s rally’s gains to 50%.

The EUR/CHF also saw a strong 1% drop in today’s overnight session. But we also heard the Swiss government complaining about the strong value of the Franc, though the SNB may be quite powerless to do anything about it.

See more on EUR/USD in our Technical Update: EUR/USD Plunges after Topping Confirmation; Starts Triangle Scenario

The news regarding China would have the most impact of the AUD/USD and NZD/USD as they rely on Chinese imports of their goods to boost trade – a strong contributor to overall economic growth.

The AUD/USD slid down to the 1.0653 area, testing the 55-ema in the 4H timeframe:

After the strong rally which came amid heightened risk appetite on relief with the Greek situation, we are now pricing in risk averse events, which can cause us to further retrace last week’s rally. A move below the 55-ema, targets the 200-ema and beyond that the 50% retracement of the swing last week at 1.0590. How US equities respond to the news out of China as well as the upcoming ISM services index will be crucial to whether this pair extends its fall or finds support here.

Later today, at the start of the Thursday Asian session we want to watch for the Australian employment report, as that is our final Aussie fundamental risk event for the pair.

The NZD/USD remains in a range after its strong gains early last week as we can see in this 1H view of the pair:

A break out of this range to the downside would test the 200-ema in this timeframe, and expose this pair to further declines. That would again depend on risk aversion dominating the US session. The Kiwi has been resilient of late and we would have to see further confirmation of weakness before attempting to short the pair.

Nick Nasad
Chief Market Analyst
FXTimes

Previewing Tomorrow’s ISM Non-Manufacturing Index

Nick Nasad — Wed, 06 Jul 2011 02:15:29 +0000

Tomorrow’s key fundamental release will be the ISM Non-Manufacturing index, a measure of the US services sector – which makes up about 85% of the economy.

Positive data can help give the USD some strength, as we would move one step away from the weaker growth seen in the 1st and 2nd quarters, one step away from the “temporary” soft patch that the US economy hit as a result of higher gas prices, Japan supply disruptions, and Greek sovereign debt concerns.

Manufacturing Rebounds in June

We saw the ISM manufacturing index climb in June, though much of the increase was led by inventory build up.

From Econoday: “Manufacturing is showing improvement at the national level according to the latest ISM report but a key question is what underlies the latest gain. The headline composite of 55.3 is 1.8 points higher than in May but inventories, one of five equally weighted components, jumped 5.4 points to 54.1. This reading could indicate restocking tied to prior Japanese supply shortages. However, it may or may not indicate business expectations for improvement in demand. Order readings offer the best gauge on that and they are recently soft, with new orders showing only slight month-to-month acceleration at 51.6 compared to 51.0 in May. But employers must be somewhat optimistic about future demand as employment is a big positive in the report with this index rising 1.7 points to a very strong 59.9. Input price pressure is severe but easing while production is steady at a moderately strong 54.5.”

Services Sector to Hold its Gains?

In the services sector, the main decline in the index came in March (57.3) and April (52.8), but already showed some signs of rebounding in May (54.6).

This is off the peaks we saw at the turn of the year, when the index was just below the 60 level in January and February.

Here’s a look at the breakdown of the May ISM Services report:

In May, we saw positive developments in new orders, employment, and new export orders. Let’s see if June can see further gains in those key sub categories.

Positive Scenario – Beat the expectations of 53.9, by 0.5 or more. That can have both the affect of improving the US fundamental picture, which is a USD positive, but can also carry dangers to the USD if it sparks risk appetite that favors higher yielders at the expense of the safe-haven USD.

The context of the market’s sentiment around the release can help guide us. If we are already seeing higher yielders gaining, then the report will support further risk appetite. However, if we come into the report with equities and sentiment weaker, then a positive print, while helping higher yielders to recover, can benefit the USD as it means the economy is on its way to recovering from the 2nd quarter slowdown.

With employment growth subdued however, it means less economic activity and less demand for services, which will likely temper any reading to the topside.

Bearish Scenario – A weaker than expected report, one in which we see a decline to 53 or below, opens up the case of risk aversion, falling stocks and a move out of higher yielders and into safe havens like the JPY, CHF, and even though it may be a US release causing the move out of risk, the USD.

Risk sentiment recovered from the negative news of Moody’s downgrading Portugal. However, if we add continuing weakness in the US economy to the mix we can see further “risk-off’ trading dominating.

Nick Nasad
Chief Market Analyst
FXTimes

Which Way Does Risk Sentiment Blow This Week? Look at US and EUR Factors…

Nick Nasad — Tue, 05 Jul 2011 12:57:14 +0000

After a week in which we had very strong performance in global and US equities, the big question this week will be how equities fare in the week after. Much of the positive sentiment came on the back of relief that Greece will not default in the short term, and that European leaders would release the next tranche of aid for the country.

With that huge risk factor out of the immediate path of traders – though some worries remain about the credit rating agencies still judging the ”voluntary” debt roll over as a selective default – the attention may now turn more to the fundamental picture.

The risk appetite trade will be front and center this week as we see if last week’s gains in equities are sustainable or if we experience a correction or pullback. Weaker fundamental data will give incentive to traders to take profit.

Will US Data Show Economy Exiting Soft Patch? How Does Market Respond to Another Month of Soft Job Growth?

In the US, the focus will be on whether we start to see some of the data showing improvement as the economy moves past some of the strongest headwinds that were aligned against it in the 2nd quarter. Traders will be looking for data to show better times ahead, that the soft patch was temporary.

Last Friday’s ISM manufacturing report gave us the first indication that that may be afoot as the index came in stronger than expected at 55.3, helping to lift expectations that the supply disruptions as a result of closed Japanese plants may have worked through the system.

Data this week will feature factory orders, the ISM non-manufacturing index, and our batch of employment reports including the ADP employment change on Thursday and Friday’s non-farm payroll data. The expectation is that the ISM services index eased slightly in June, falling to 54.0 from 54.6. A surprise reading here to the topside would undoubtedly help the theme of risk appetite, while a disappointing result can cast doubt on how quick the US can escape the 2Q malaise. The non-farm payroll report is expected to show the economy adding 87K jobs, a second straight month of soft job growth, which may have the effect of undercutting expectations around the economy – especially if we have a figure that disappoints to the downside.

Therefore we return to a more fundamental release driven trading this week compared to the more headline news driven trading we have had over the past few weeks.

EUR Should Be Supported by ECB Hike, But Greece Worries Still Loom in Background

If risk sentiment improves, that can help bolster the case of the EUR, which should be supported by the ECB hiking rates this week. We also have European ministers working on a second Greek bailout, which would guarantee funding for the country through 2014. While positive movement on this front can help the EUR, we started the week with jitters as S&P said that it would label the current bond-holder participation plan as a selective default.

Also on tap will be Germany’s factory orders and industrial production for May, two key readings on how the German manufacturing sector has coped with the Japan shortages. Factory orders are expected to show a 0.5% decline compared to a 2.8% increase in April, while industrial production is forecast to make up the 0.6% drop in April with a climb of 0.7% in May. Again, we are looking for positive data to help boost the risk appetite trade, while weaker data would benefit the risk-off trade and would argue for a correction of the recent equity gains.

Keeping an Eye on US Treasury Yields

For the US, another important factor is how US Treasury bond yields continue to react to the end of QE2. We have seen the 10-year yield reach 3.2% after a strong surge last week.

That creates some concern that bond markets have not responded well to the end of the easing program. For the USD one major worry is the continuing debate around the government federal debt ceiling. While some resolution is expected, tensions over the next few weeks can limit USD gains. Usually higher yields can attract foreign investment, but that is when yields are climbing on the back of expectations of economic growth and higher inflation, not as a result of yields climbing on a heightened risk premium. It will be important to monitor which way yields head this week just as it will be to monitor equities.

So it’s not a clear which way sentiment takes us this week, and it will be important to watch the various factors laid out above. If we do see a continuation of risk sentiment from last week, the EUR/USD would be poised to rally to the 1.47 area, however risk aversion can see the EUR/USD top off near its current levels and retrace some of the 450 pip rally we saw last week.

Nick Nasad
Chief Market Analyst
FXTimes

News on Chinese Lending Upsets Sentiment, But GBP Gains on Small Positive Surprise in its Services PMI

Nick Nasad — Tue, 05 Jul 2011 12:08:18 +0000

With currency market back to full swing after the holiday weekend in the US, we saw generally choppy conditions in the Asian and European sessions. After last week’s relief rally, traders took some risk off the table and as a result we saw a move into the CHF and the USD. The major concern that reverberated around markets was fears about China’s latent credit risks.

From Bloomberg: “Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national auditor’s estimate, and the industry’s credit outlook could decline, Moody’s Investors Service said.

“The Chinese audit agency could be understating banks’ exposure to local governments,” Yvonne Zhang, a Moody’s analyst in Beijing, said in the report today. The “apparent absence of a clear master plan to deal with this issue” is likely to exacerbate problems and lenders may be left to manage a portion of the souring loans on their own, it said.

Bank shares fell and bond risk rose on concern that the banks will be unable to absorb losses on defaults should property prices drop. Moody’s estimates that local governments’ debt is about a third more than the audit office’s findings last week of 10.7 trillion yuan. Non-performing loans could reach as much as 12 percent of total credit, it said.”

The scale of these loans can pose a threat to the Chinese banking system, and we saw commodity currencies pressured against the USD.

From Marketwatch: “China’s banking system will require an eventual bailout by the central government, according to some analysts, who said figures released last week on the size of local-government borrowings point to the need for a rescue.

Credit Suisse economist Dong Tao said the numbers backed up concerns he’s been voicing for the past two years on China’s toxic loan problem.

“Ultimately, we believe that the central government will need to separate the local government’s bank debt from banks’ balance sheets and recapitalize the banks,” Tao said in a note following the release of data on China’s local-debt obligations by the National Audit Office.””

As we came into the European session, data for the final version of Euro-zone Services PMI for June came in weaker than expected, posting a 53.7 compared to the preliminary version of 54.2. That is an 8 month low for the services sector, and can reflect some weakness as unemployment remains high and households and investors are seeing their real incomes squeezed. In a second report we saw retail sales decline 1.1% for the month of May, a figure that too was weaker than expected (0.96% drop was forecast).

We are set t have another rate hike from the ECB this week and that helped to steady the EUR, but the question will turn to the plans of the Governing Council after this vote. Will the ECB be reluctant to send the signal that they will hike rates again in a 2-3 meeting window.

While the EUR slumped against the USD, the GBP bounced up off its overnight lows after its Services PMI came in a slightly better than expected. The PMI rose to 53.9 in June, inching up from 53.8 in May, but better than the forecast of a 53.6 reading. The slightly better release is rare for the UK, which has been pretty consistently under-performing in regards to its fundamental data. It’s a sign of how bleak things looked in the GBP, that a pretty small upward surprise managed to have a strong impact on the GBP which climbed to a high of $1.6128 against the dollar, and the EUR/GBP slipped back below 0.90.

Nick Nasad
Chief Market Analyst
FXTimes

AUD/USD Elliott Wave Structure and Technicals Bullish Ahead of the RBA Meeting

Nick Nasad — Mon, 04 Jul 2011 16:50:26 +0000

Forex Technical Update

AUD/USD

- Looking at the 4H chart, we see the AUD/USD possibly capitulating a sharp reversal swing that started last week from near 1.04.
- Notice that the the rally broke above a channel after it completed a 5-wave (abcde) structure.
- Note also that the RSI never broke below 30 to establish bearish momentum. Instead the current swing pushed the reading above 70 in the 4H chart, establishing bullish momentum.
- The structure of the rally can be broken down into 5-waves, with the 3rd wave being the most dynamic, a classic motive or impulse Elliott wave structure. Once again, structure suggests the AUD/USD is now in a bullish mode.
- In the short-term as we wait on RBA’s meeting later in the Asian session, we could be developing a minor correction. It is anticipated to be relatively dovish.
- The 4H chart shows a projection for this correction near the 200SMA, between 38.2% and 50% retracement. Look for the market to be supported above 1.06 to confirm strong bullish intent to break above the current resistance at 1.0770.
- The daily chart shows that the broken channel seen in the 4H chart was a second corrective pattern, after a declining wedge that mostly developed in April.
- In EW terminology we have completed a double 5′s corrective structure.
- Note that the RSI never sustained a break below 40, albeit cracking it briefly. This means the bullish momentum established previously is still intact after this 3 month long consolidation, especially if we see the RSI reading rise above 60.
- The fundamentals seem to be losing steam, but the Aussie always remained resilient. If the current rally breaks through the resistance at 1.0770, we can be heading back to the record high at 1.1010.

Why is the Aussie so strong despite expectations of softening and prolonging the same interest rate? Subscribe and become a member to share your views and join live discussions as well as webinars about the markets.

Fan Yang CMT
Chief Technical Strategist
FXTimes

This Week’s USD/CAD Trading Plan Focused Around Following Oil and Equities Post Relief Rally

Nick Nasad — Mon, 04 Jul 2011 16:16:21 +0000

We want to try and create a trading plan using the recent moves in oil price as an indication for what may happen with the USD/CAD. The bias in this scenario is that oil prices will not be able to maintain their recent rally, and may fall down from the $95.80 level. If this happens, and we have a more general move toward caution in the equities market, then the USD/CAD has a chance to retrace its strong move in last week’s trading.

The basics of the set-up are as follows:

Trigger: Oil price test and failure at $95 level, risk appetite swings towards caution.

Scenario 1: Oil price fall back down to $90. This would require risk aversion in the markets. This could come from weaker equities as a result of poor fundamentals, or more dovish ECB, though key events in the calendar weigh more towards the second half of the week.

While US manufacturing data was stronger than expected, global manufacturing was still overall weaker in June. That should weigh on oil prices, especially as data from China shows its manufacturing sector cooling. With Saudi Arabia pumping out more oil and the release of 50 million barrels via the IEA the overall weak state of the US labor market should put downward pressure on oil prices. An expectation that oil prices will fall is therefore a major plank of this trading plan for the USD/CAD.

Scenario 2: Equities extend last week’s rally, meaning the 2-month downward correction could be over? That could imply continued relief in global markets from Euro news, though we have already started the week with some negative headlines.

Keys:

1. Oil prices.
2. US labor data, how will equity and commodity market respond to another month of weak US job figures?
3. Will Trichet signal that ECB will be on sidelines for a while after this week’s rate hike? Recent sovereign debt-concerns means the central bank may not want to squeeze periphery countries more so than it has too. Much rides on ECB’s interpretation of Germany’s growth and inflation prospects in how it goes forward.

A look at Oil:

Oil prices rebounded last week, as we had general risk appetite. The question is will the $95.80 level, which had acted as support in May and is a 61.8% retracement of oil’s rally from $83.80 to $114.80, now continue to act as resistance as it did the last 2 weeks? The scenario we are looking for would have WTI oil prices test and then bounced down off this level. That can set up a chance for a reversal in the USD/CAD. In scenario 2, oil prices would rally past this area, and retest the 50% retracement, and that would then favor a continuation in the USD/CAD.

The USD/CAD in 1 Hour Timeframe:

After last week’s close to 330 pip swing fro its high near 0.9910 to 0.9580, will we have a correction or continuation? The very strong bearish candles give us pause in buying until we see confirmation of oil prices and equities heading south. If that trigger does not materialize then we won’t trade this pair. At these levels, the risk to reward makes decent as we’ve moved a far way from our moving averages and we may want to see a corrective move before any further continuation.

Scenario 1 Targets:

First look for 0.9680, 50% mark from the upswing we saw throughout May and June.
Second target would be 0.9735, next ladder up in the fibo scale.

Scenario 2 Targets:

The important levels to the downside include the 0.9550 then 0.9520 levels, one a fibo retracement, the next an important pivot.

Fundamental Factors To Watch for Market Sentiment:

1. How Will US Equities Perform Following Such Strong Rally - A lot of the gain in CAD was off North American equities surging higher as we can see in the daily look at S&P below (click on the image for larger picture).

The index used the 200-ema (dark gray) as support following the one-and-a-half month decline that brought us down to 1256 from a high of 1372. The surge in equities the last week was the best performance in 2 years, a jump of 5.6%. But after feeding off the positive headlines from the European Greek debt crisis last week, this week the attention will turn inward.

From Marketwatch: “After five days of strong gains in the stock markets that were boosted by receding worries of a Greek default, eyes will likely turn closer to home next week to read the tea leaves of key U.S. economic data including June employment and retail sales reports.”

If economic data brings equities back down to earth, we could have the context for oil prices to fall as well, which could help us in the set-up of this USD/CAD trade. In addition to the jobs and retail sales data, we should also be mindful of the end of QE2 (which may or may not have been priced into the market during its decline in May and June.

2. Canada’s Fundamental Docket Highlighted by Employment Data –

For Canada, we started the week with a look at producer prices, which came in cooler than expected, and still have data on building permits, housing prices, employment change and the Ivey PMI on tap the rest of the week. The next Bank of Canada announcement is in 2 more weeks on July 20th, and market attention will be tuned it to see if the BOC takes a more dovish or hawkish tone throughout 2012. A hawkish tone could mean a rate increase in August, while a dovish approach takes us out to October.

Consumer prices came in red hot in May, which can steer the BOC towards a more hawkish approach and helped the CAD to garner some of its gains last week, but today’s PPI report can mitigate some of the inflation pressures from the CPI as the PPI is a leading indicator for CPI.
The Bank of Canada’s Governor skewed more to dovish language prior to the CPI report so we would like to see if it shifts sentiment in terms of the bank’s outlook.
This week’s permits data and Ivey PMI (measures overall business conditions in services and manufacturing) should give us an inside peek into conditions in both housing and the general economy, while the most important indication of CAD direction will come from the employment report. Building permits had declined 21.1% in April, and are expected to bounce back with a 5.1% increase in May. The Ivey PMI, which reached a strong reading of 69.1 in May, is expected to show some cooling in June to 66.3. That is still strongly above the level of 50 separating expansion from contraction.
While we saw higher CPI last week, we also saw April’s monthly reading for Canada’s CPI show a flat reading, showing some slowdown in the economy. The Ivey PMI was 57.7 in April, then rose to 69.1 in May.
Expectations are for the Canadian economy to have added 12.7K new jobs in June, which would follow a 22.3K increase in May. Like the CPI report, this is a top-tier fundamental indicator that can help give the CAD direction at the end of the week.

Nick Nasad
Chief Market Analyst
FXTimes

Will EUR Strength be Undercut by S&P’s Decision to Label Bank Participation Plan a Default?

Nick Nasad — Mon, 04 Jul 2011 12:32:12 +0000

We got out of the gates this week with some negative news in regards to the Euro, which pressured the single currency in light trading after its impressive rally last week.

That development was S&P coming down on the opinion that the French-German private bond holder participation plan that was unveiled at the start of last week would be considered a “technical default” by the rating agency. The plan had had a positive response by banks and market participants, and seemed to have helped quiet one of the concerns around a new Greece bailout.

From Bloomberg: “Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

The S&P statement came less than 48 hours after euro-area finance ministers authorized an 8.7 billion-euro ($12.6 billion) loan payout to Greece by mid-July and said they would aim to complete talks with banks on maintaining their Greek debt holdings within weeks.”

Some pullback may be warranted in the EUR/USD after the pair rallied around 400 pips in a very strong relief rally, but this news can undercut some of that momentum, considering it can cause the various parties to have to scrap this most recent plan and look for another solution that would avoid a technical default. But at this point would anything really satisfy the credit rating agencies?

The release of the next tranche of Greek aid should help to calm fears of any immanent default (Greece can pay the 4 billion euro of bills maturing between July 15 and July 22), but the underlying problems remain. One of the key questions now is if Greece is able to implement the new austerity measures it’s Parliament voted on last week, and if it can hit its budget deficit targets.

We now await word from the other 2 rating agencies and if they will follow S&P in labeling the current set-up for private bondholder participation a default.

“Fitch Ratings said June 15 it would probably keep ratings of Greek government bonds above default level if European Union leaders go ahead with plans for investors to voluntarily roll over their debt, while lowering Greece’s issuer rating to “restricted default.””

We also look for details on the structure of the for the second Greek bailout.

Looking at the EUR/USD pair in a 1 hour timeframe, we see the full rally from last week, and notice that in this timeframe we had nice trending characteristics. The angle and separation between the shorter term 21-ema (red) and medium term 55-ema (blue) was growing (as can be noted in our MACD) and price only briefly punctured the 21-ema.

However as we start the week, we do have price stepping down to the 55-ema, meaning the trend’s speed has slowed. We also see the 21-ema turning sideways and downward, though it has not yet crossed the 55-ema. We should watch for that development as that would imply some topping action.

If this news creates a bearish pressure on the EUR we can target the 1.4430 area initially (a pivot from an old level of resistance not seen in the chart), below that the 23.6% retracement of our full rally as well as the 200-ema (gray). Failure to support price there could mean a further retracement – a move down to 1.4360.

There is a caveat to today’s news: ““It is our view that each of the two financing options described in the Federation Bancaire Francaise proposal would likely amount to a default,” S&P said in the statement. “But, once either option is implemented, we would assign a new issuer credit rating to Greece after a short time reflecting our forward-looking view of Greece’s sovereign credit risk.””

If the other rating agencies do not come to the same conclusion as S&P that could give the EUR the relief it needs, and with the focus coming on the ECB interest rate decision in which a rate hike is expected, the EUR can still find some buying pressure. A break of our high at 1.4575 would confirm further bullish momentum.

However even there, if the ECB and Trichet sounds any kind of dovish tone, that could also act as a negative factor on the EUR.

Therefore, the current set-up is tricky. We come off a nice weekly trend, and so far find the pair supported. However, as we are still at the early stages of any topping action the risk-to-reward for a further pullback makes some sense, especially given the negative news surrounding bank participation in a second bailout. The bumps in the road in the sovereign debt crisis should give the EUR fits and starts, and this week may be of the “fits” variety.

We may not have conclusive action one way or the other considering the low liquidity today, but its good to plan how to trade this pair if we in fact move to a counter-trend mode for the pair in the shorter time periods.

We are also not limited to the EUR/USD pair as other EUR crosses were pressured in today’s trading (though surprising not the EUR/CHF which is usually very sensitive to sovereign debt news).

Nick Nasad
Chief Market Analyst
FXTimes

ISM Manufacturing Index Comes in Better Than Expected, Giving Some Momentum to US Economy Heading Into 2nd Half of the Year

Nick Nasad — Fri, 01 Jul 2011 14:17:32 +0000

The manufacturing sector in the US faced a sharp slowdown in May, as the ISM Manufacturing PMI fell from 60.4 in April to 53.5 in May. Expectations coming into the June data was for another decline to 51.9 as weaker growth in the US mixed with the aftereffects of supply disruptions as a result of the earthquake in Japan.

However, the release came in better than expected, posting a reading of 55.3.

Here’s a look at a chart of the ISM Manufacturing Index over the last few years:

As we can see the manufacturing sector roared ahead after the bottom of the recession, one of the main catalysts for growth during late 2009 and during 2010. The index had climbed into the 60′s prior to the headwinds that were faced by the economy at the end of the 1st quarter and heading into the 2nd quarter.

Today’s data shows that the manufacturing sector may have shook off the hangover from these headwinds and may again have some momentum as we head into the second half of the year.

Looking deeper at the data, the report had some positive internals. We see that new orders remained around the levels we saw in May (51.6 vs 51.0) as did production (54.5 vs Mays 54.0), that the employment index climbed to 59.9 from 58.2, and that prices eased to 68.0 from May’s 76.5.

A stronger manufacturing sector has been a big push of the current administration and with a generally weaker USD, American exporters should find their products to be more competitive in the global marketplace. Exports have climbed to record highs in recent months, but they have been offset by a rising oil bill which has limited the positive impact of trade on GDP (though we did have a surprise trade reading for April which showed the trade gap narrowing unexpectedly). Oil prices have come off their highs this year, so that should help to minimize some of the pressure from oil prices. Can global demand for American goods help lift the sector in the 2nd half?

Today’s data caused a mixed reaction in currency markets. Prior to the release we had seen commodities weaker, which pressured higher yielders like the EUR and commodity currencies like the AUD and CAD. Following the release the USD gained on the EUR, GBP and JPY, but was initially weaker against the AUD and CAD as stronger US manufacturing is good for higher commodity prices.

With the report also boosting risk appetite, the USD may still come under some pressure against its higher yielding counterparts such as the EUR and GBP, so we have to see how things shake out over the next hour or so.

Global manufacturing data shows continued softness and its encouraging to see that the US sector did not succumb to the same malaise. We’ll see if this report helps keep traders and investors in a “risk-on” mode next week after we have come off a strong week for equities already. We have seen a strong relief rally following Greece’s passage of its austerity measures as well as positive signs in regards to the participation of private bond holders in a second Greek bailout.

Nick Nasad
Chief Market Analyst
FXTimes

Chinese Manufacturing Activity Slows in June, Will AUD/USD Still Break its Month-Long Range?

Nick Nasad — Fri, 01 Jul 2011 12:36:38 +0000

We documented the slowdown in the manufacturing sector in the UK, but we also had a weaker than expected reading from the Chinese official manufacturing PMI, which eased to 50.9 in June from 52.0 in May. The final version of the HSBC manufacturing PMI, at 50.1, barely showed activity expanding as the index matched its reading from the preliminary version.

A slowdown in China means that the efforts undertaken by the central bank – hiking interest rates and increasing the amount banks have to hold in reserve – are having an effect. If demand for commodities from China declines as a result, then we could see commodity prices be pressured in the coming months, which would be a negative developments for the country’s that rely on Chinese imports such as Australia and New Zealand.

The Aussie has been very strong this week on the back of a relief rally as the situation in Greece eases, but we should watch for signs that China will not be as hungry for raw materials as we had recently.

As we can see from copper prices over the last year we had had a steady rise throughout 2010, but have leveled off and receded during 2011. The end of June did bring an increase in prices, showing the effects that this week’s risk appetite has had on most asset classes. Will we move back to a period of rising prices or will the recent manufacturing slowdown crimp demand if we return to the highs we had seen at the turn of the year?

Oil prices in the wake of the Chinese release:

From Retuers: “Brent crude oil slipped more than $1 to around $111 a barrel on Friday after China’s factory output grew at its slowest pace in 28 months and as the market awaited tenders for sales from the IEA’s emergency oil stocks release.”

As did gold:

From Reuters: “Gold fell to six-week lows below $1,490 an ounce on Friday, hurt by a drop in oil prices, gains in the dollar and Greece’s approval of an austerity package, which cut the metal’s appeal as a haven from risk.”

Lo0king at the AUD/USD, we see that the Aussie has had a strong run this week, but it stalled out in today’s trading (so far).

The pair has been in a range over the last month and while we almost broke that range to the downside last Friday, the dip below 1.0440 was a clear-out, as the relief rally that was sparked to start this week with the positive developments in regards to the Greek situation helped riskier higher yielders to rally. The attention could shift to the weaker state of global manufacturing, which could undermine demand for Australia’s main exports – iron ore and coal.

What we want to look for now is if the pair is able to build on its recent rally and break above the 1.0775 high set in June, or if that level acts as important resistance and we remain confined with the range we have had. How stocks and commodities return after the weekend will be key as we have to see if this relief rally extends into a second week.

Also key next week will be the Reserve Bank of Australia interest rate meeting. While the RBA is expected to hold rates steady at 4.75%, we want to see the latest assessment by the central bank as we have heard Governor Stevens be a bit dovish in the most recent minutes. Prior to the that we also have important data in the form of retail sales, the TDMI inflation gauge, as well as trade data so it will be a busy week for the Australian fundamentals.

Nick Nasad
Chief Market Analyst
FXTimes

UK Manufacturing Slowdown Continues as PMI Comes in Weaker Than Expected

Nick Nasad — Fri, 01 Jul 2011 11:57:32 +0000

We had waiting for the UK manufacturing data this week to give us an indication into how the UK economy fared in June and as this indicator had been weaker than expected 3 months in a row prior to June. Well, we got another weaker report as the PMI fell to 51.3 from 52.1 in May, and worse than expectations of a climb to 52.3.

From the Release: “At 51.3 in June, down from a revised reading of 52.0 in May, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index® (PMI® (fell to its lowest level since September 2009. The rate of increase has eased in each month since the PMI hit a series-record high at the start of the year. The PMI is calculated from data on new orders, output, employment, supplier performance and stocks of purchases. For Q2 2011 as a whole, the average PMI reading (52.6) is the lowest since the recovery began in Q3 2009. It is also well below the 59.8 posted for the opening quarter of this year.

New orders fell”>or the second successive month in June. The latest reduction reflected subdued domestic market conditions and slower growth of new export orders. The rate of increase in new export business was the weakest during the current sequence of expansion and well below the near series-record peak seen in February. Companies reported higher demand from Asia, mainland Europe and the US, but noted that slower global economic growth was constraining new export order inflows.”

The news bolsters c for the central bank to continue to hold rates at their record lows, and if deterioration in the economy extends then the prospect of more quantitative easing is still on the table. That has kept the Pound pressured.

The GBP/USD pair gu< >ts overnight gains, but so far this session traded within the range we saw yesterday, as the Pound has been unable to build on its gains seen earlier in the week even as we have had some strong risk appetite which favors the Pound over the US Dollar.

<=">
<">the gb=”USD”h> rally to 1.6120 in this week’s trading but was unable to hold that level. That bolsters the bearish case in this pair, as we had moved beyond an important support level at 1.6075 and while price action overlapped that support, we have traded below it in the second half of the week. We did manage to form a bottom at 1.5915, and have set some higher highs this week, but we look to be consolidating before another leg down. Now, the USD does not enjoy the same interest rate advantage as the EUR which we discuss below, but the Fed did end its policy of quantitative easing which was a move toward a neutral loose policy from an easing loose policy so is an improvement.

We will monitor nexe<&>8217;s UK data including services and construction for further clues on the UK economy, and if they disappoint we can move back to the lows we had seen this week . Until the fundamental bias for the GBP shifts with some better fundamental data, the pressure will remain on the Pound.

The EB< >air cldove the 0.9050 level, putting the pair at its highest level in 15 months. While the Bank of England keeps rates at 0.5%, the European Central Bank is set to raise rates next week to 1.5% from 1.25% extending the interest rate advantage between the 2 currencies.

“ere is =”lon” >a< >his pair with monthly candles. We see that the EUR had been dominant prior to 2008, but in the subsequent 2 years, the pair gave up around 50% of it rally from 0.6630 to 0.98, before rebounding in 2009 and 2010. Now, we see the pair again reclaiming its bull run, the , and after a period of consolidation The next level to the topside is the 0.9140 pivot from March 2010, which is also the 61.8% retracement of the downward swing we have seen from the 0.98 high to the low in 2010 at 0.8070. With the short-term worst case scenario averted in the Greek situation and the interest rate advantage in favor of the EUR, we can expect that the fundamental bias will favor the EUR in the next weeks and we should hit that pivot and can move higher to the 0.94 pivot set in 2009.

EUR/CHF and USD/CHF Experience “Melt-Up” as Greek Concerns Recede

Nick Nasad — Thu, 30 Jun 2011 14:27:58 +0000

Out of the major currencies, the Swiss Franc has the most to lose in any resolution of the Greek sovereign debt problem, even one that is a short term one, that kicks the can down the road to September. It was reported earlier today that German banks would participate in a voluntary roll over of Greek debt, joining French banks.

With the vote for austerity measures out of the way yesterday and expectations that a vote today on implementation will also pass, we have seen safe havens sliding, with the JPY joining the CHF.

US equities opened stronger for a 4th straight day, and the sense of risk appetite was boosted by a stronger than expected reading from the Chicago PMI.

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H we take a look at the 4-hour chart of the USD/CHF and we see a strong rally in today’s session, as we retraced 61.8% of the full swing in the pair from 0.8550 to 0.8275 and with the market momentum we look set to break through that area.

< EUR/CHF we see the pair extending its gains this week, up to the highs we had seen two weeks ago, pushing through important trendlines, as well as the 200-ema.

r

Js Newswire reported stops being ripped through the 1.21 area.

isentiment continues to improve and the developments in the Euro-zone sovereign debt crisis continue to move forward positively, the unwinding of CHF shorts and a further reversal of CHF gains that we have seen in recent months is very possible.

ld be a sigh of relief for the Swiss National Bank which has been powerless to help stop the appreciation of the Franc, which undercuts exports from the country and has acted as a headwind to economic growth.

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Iion and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analy

German Banks On Board for Rollover, Retail Sales Fall, Total Unemployed Falls Below 3 Million

Nick Nasad — Thu, 30 Jun 2011 12:30:44 +0000

The Euro continued its advance in today’s session, rallying as high as 1.4218 at the start of the NY session. We continue to have the relief rally this week as Greece has passed its first and main austerity vote before a second vote later today on implementation.

The EUR/USD managed to break through the highs from the last two weeks, and may now be targeting the 1.47 are, the highs we hit in early June. >p the beginning of the week we had positive news from France in that French banks were willing to participate in a voluntary debt rollover. Today we heard the same from Germany. >p
">om ">oomberg“Germany’s biggest banks and insurers and the government agreed on a draft proposal to roll over Greek debt holdings before a meeting with Finance Minister Wolfgang Schaeuble today, people familiar with the plan said.

tThe">irms will commit to providing financing for a Greek aid package, said the people, who declined to be identified because the talks are private. The draft, which may change during the meeting between Schaeuble and industry executives, left open how much debt would be rolled over and under what conditions, they said.”

>o< >hat both French and German banks are on-board, though the full details of German participation are still unclear, it is up to policymakers and the banks to agree to such a way to do this participation that it would not be categorized as a “credit event” or “selective default” by credit rating agencies. This has been the ECB’s position.

lnow await further details of a 2nd Greek bailout.

h< >eantime we got some interesting data from Germany in the form of retail sales and employment.

i< >ales fell fell quite sharply in the month of May, sliding 2.8% on the month compared to expectations of a 0.6% increase. Sales were flat in April. That was the largest slump in nearly 4 years.

d points to weakness in domestic demand despite a labor market with an unemployment at decade lows. That means that Germany will have to continue to rely on export driven demand as domestic consumer spending remains restrained. That should have a bearing on the 2nd quarter GDP figures, and could be a warning sign in terms of the economy entering a period of slowdown.

e<"padding-left: 30px;">From href=eet Journal: &#;The sales data appear to contradict other German economic confidence indicators, which are flashing green as the country’s economy rebounds sharply from the financial crisis.

e<"padding-left: 30px;">German >arket research group GfK said Tuesday its forward-looking consumer climate index is set to rise in July, reversing the weakening trend of the past few months, as income expectations improve significantly and the upward momentum of the German economy continues.

e<"padding-left: 30px;">German >esearch institute Ifo said last week that German business confidence rose in June for the first time since February, to 114.5.”

the blame for the weak report fell on higher oil and gasoline prices, which cut into household incomes, as well as an outbreak of E. coli which cut into food sales.

ond important release we saw the number of unemployed fall by 8K, which meant the total number of unemployed stayed below the 3 million mark. However, the drop was lower than the 17K decline expected.

e<"padding-left: 30px;">From href=g: &#;German unemployment declined for a 24th straight month in June, underscoring the resilience of Europe’s largest economy amid the euro region’s debt crisis.

dThe number "> people out of work fell a seasonally adjusted 8,000 to 2.97 million, the Nuremberg-based Federal Labor Agency said today. Economists forecast a drop of 17,000, according to the median of 32 estimates in a Bloomberg News survey. The jobless rate held at 7 percent, the lowest since records for a reunified Germany began in 1991.”

In theone as a whole, today also saw the release of inflation data, which came in cooler than expected. Inflation for the month of June, the preliminary version, registered a 2.7% reading which was the same as we had in May, and also lower than expectations of a bump higher to 2.8%. Still, inflation continue to run above the ECB’s 2% target and the last few days Trichet has been talking an interest rate increase next week.

He didy~~erday and again today.~~

From <e<=>http:Bloomberg> ““monetary policy stance is still accommodative and risks to price stability are on the upside,” Trichet told lawmakers in Brussels today. “We are in a state of strong vigilance and we stand ready to act in a firm and timely manner to avoid that recent price developments give rise to broad-based inflationary pressures over the medium term.”

~~What does all t~~d mean for the EUR?

Well, even thouen retail sales data came in weaker than expected, so far it has not been a major part of the country’s overall growth, though hopes had been it would pick up considering the picture in the labor market. That can still happen, but perhaps skewed more towards the second half of the year. The unemployment data, while missing forecasts, is still the best its been in a decade and so no real threat to the German recovery there. The inflation data in the wider Euro-zone has started to miss forecasts consistently, and with one more rate hike we may see the ECB wait another 2-3 meetings before thinking about raising rates again. Therefore while we have a big focus on the rate hike upcoming, its more important to factor in what comes after next week’s ECB meeting. If the ECB takes a more cautious approach then the EUR may lose some of its luster from the prospect of higher rates. We should continue to look for German data to guide the way forward for the ECB.

We’ll geteues to their thinking next week, but for now we want to see how the EUR/USD and other EUR crosses respond to the very strong rally of this week. Do we need to correct this move? Will it be a shallow 23.6% retracement of this week’s upswing? Or, will some bump along the road in the sovereign debt situation knock the EUR back further. If attention turns back to fundamentals, next week’s ECB meeting can hold another “buy the rumor, sell the news” moment if Trichet does not sound hawkish enough. Till then we await general global data including a slew of manufacturing reports which can have a strong impact on risk sentiment and our higher yielders including the EUR.

For a tis look at the EUR/USD see today’s Technical Update: EUR/US" channe="ng Upw">ds; Now Testing Triangle Resistance

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FXTimes

nformato contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
>

Risk Appetite Returns to Currency Markets with US Equities and Oil Higher

Nick Nasad — Wed, 29 Jun 2011 15:39:47 +0000

The US S&P500 had a whippy reaction to the start of today’s trading, but has regained its bearings, reclaiming its intra-day highs. Futures had been higher heading into the Greek vote, then sold off at around the open to yesterday’s closing levels, before rebounding again in late morning trading. European equities rallied for the biggest gain in 3 months.<><<>> positive report from the US housing sector helped US equities as pending home sales rose more than expected.<><< style="padding-left: 30px;">>rom << href="http://www.bloomberg.com/news/2011-06-29/pending-sales-of-u-s-existing-homes-rise-8-2-.html" target="_blank">>loomberg<> “More Americans than forecast signed contracts in May to buy previously owned homes, signaling the residential real estate market may be rebounding from a slump earlier in the year.<><< style="padding-left: 30px;">>he index of pending home resales increased 8.2 percent from April after a revised 11 percent drop the prior month that was smaller than initially reported, the National Association of Realtors said today in Washington. Economists forecast a 3 percent increase, according to the median estimate in a Bloomberg News survey.” >ptention in the US was also on Bank of America which said it would settle disputes over mortgages gone bad.

sFr”> Ma”>etwatch8220;Shares of the country’s biggest banks rose and drove financial stocks to the top of the gainers column Wednesday as Bank of America Corp. agreed to pay an $8.5 billion settlement to mortgage investors and reserved another $5.5 billion against future claims, in the largest-ever settlement of its kind.”

<a< >ontinued a 3rd day of gains for US stocks, which helps risk sentiment in currency markets, pushing up higher yielders and commodity currencies at the expense of safe havens.

< <="http://www.fxtimes.com/wp-content/uploads/2011/06/062911-sp500-1300.png">> > can see in the 4-hour period chart above the index has managed to move through its longer-term 200 ema (in dark gray) and is testing its 200 simple moving average (light gray) currently. We have created a bottom at the 1256 level which corresponded nicely with our daily 200-ema. A break above these moving average could open up further gains to the topside.

<t7 straight weeks of weakness in equity and commodity markets, this week’s events including a way forward for a “voluntary” debt rollover in any 2nd Greek bailout as well as the passing of the austerity measures today by Greek politicians has given the market the chance for a relief rally.

<ircing the rally in stocks was a gain in oil prices, with WTI crude rallying back above the $95 a barrel level, breaking through the 55-ema in the 4-hour timeframe and back into the range we had throughout most of May (not picture). Oil was helped by a a bigger than expected drawdown in oil stockpiles in the US.

<yFrom”>a hre<="http://online.wsj.com/article/BT-CO-20110629-709868.html" target="_blank">Wall >treet Journal: 20;Crude futures rose above $95 a barrel Wednesday after a government report showed a surprise drop in U.S. oil inventories, suggesting demand is increasing ahead of the Fourth of July holiday.

<yThe “>partment of Energy’s weekly inventory data showed a 4.4 million drop in U.S. crude stockpiles, larger than the 1.6-million-barrel decline analysts were expecting. Gasoline stocks fell by 1.4 million barrels, which also surprised analysts.”

< <="http://www.fxtimes.com/wp-content/uploads/2011/06/062911-wti-oil-95.png">> > < >esult of these developments we saw riskier commodity currencies (AUD, NZD, CAD) which gain on the safe-haven USD and JPY.

EUSD which had declined from a 3-week high following the austerity measure vote, reclaimed that mantle by 11:30 AM ET at the 1.4435 area.

Thpant thing to focus on now is if this positive momentum continues the rest of this week, and into the next week. We have a slew of global manufacturing reports on tap (Japan, China, US, UK, Euro-zone) this week which will likely drive investor sentiment. Global manufacturing had been hard hit after the supply-disruptions in Japan, but also by weaker growth in the US, and so it will be interesting to see how things fared in June, and what the data can tell us about conditions going forward into July.

Be ufacturing results can help to continue to fuel the risk-on relief rally, and shift some of the fundamental bias that had been dragging down equities over the past 2 months. On the other hand weaker data can cause equities to give up some of these gains.

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a< a>d opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.>/em>