US Dollar: Don't Dismiss the Possibility of Pre-Labor Day Volatility

Daily Forex Fundamentals | Written by Global Forex Trading | Aug 22 08 22:31 GMT |

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The Stories in the Currency Market

US Dollar: Don't Dismiss the Possibility of Pre-Labor Day Volatility

Over the past 2 days, volatility has ripped through the currency markets.On Thursday, we saw the biggest decline in the US dollar against the Japanese Yen since the beginning of the month and today, we saw strongest rally.What are the culprits?The financials and oil. The health of Lehman Brothers has been a big story this week and the speculation today that they may be acquired by a Korean bank has sent stocks through the roof.Not only would this M&A deal be positive for the US dollar, but it would also help to eradicate one of the market's biggest fears.This of course is only speculation as there has been no official announcement from Lehman. There are still problems with Fannie Mae and Freddie Mac. As we suspected, in his speech today at Jackson Hole, Bernanke strayed away from talking tough on inflation given the problems in the financials.In the current environment of financial market instability, traders needed Bernanke to reassure them that he will take care of the financials first and worry about inflation later - which was exactly what was delivered. However don't be mistaken, the Fed is still looking to raise interest rates in 2009.This morning, the Fed chief said that interest rates are "relatively low" and as a result, we expect at least 1 rate hike next year.Oil prices on the other hand have erased all of yesterday's gains on a pipeline restart.Going into the new week, everyone expects trading to be light given the upcoming Labor Day Holiday in the US. However, with a lot of US economic releases on the calendar and a possible announcement from Lehman Brothers, we caution against dismissing the possibility of pre-Labor Day volatility.In 2007 and 2006, the EUR/USD consolidated within a tight range in the week before Labor Day, but in 2005, the EUR/USD surged to a new 3 month high.As for economic data, we are keeping a close eye on the existing and new home sales reports as well as durable goods, second quarter GDP and consumer confidence.

Stagnant Growth Drives British Pound to a 2 Year Low

The British pound dropped to a 2 year low against the US dollar as growth stagnated in the second quarter.Even though retail sales surged in July, that number will be included in the third and not second quarter data.Consumer spending in the second quarter was actually weaker than the first, which is part of the reason why annualized GDP growth was the slowest in 16 years.We strongly believe that the UK economy is in trouble and as long as oil prices remain at current levels or lower, the Bank of England could be one of the first central banks to cut interest rates.The market has already priced in at least 50bp of easing by the BoE over the next year and it should only be a matter of time before the central bank Governor King acknowledges it.The volatility in oil prices over the past 2 trading days has certainly made it difficult for central bankers to determine whether the drop in commodity prices is here to stay. In the week ahead, the UK economic calendar is light with only Nationwide House prices and the CBI Distributive Trades Survey due for release.As a result, we expect the near term fate of the British Pound to be determined by the US dollar.

Euro: Vulnerable to Weaker Economic Data

This week, the Euro was driven primarily by dollar sentiment and even though this relationship could continue in the coming week, there are few pieces of Eurozone economic data that could shake things up for the currency. The primary releases that we are watching for from the Eurozone are the German IFO and employment reports.Given the problems in the financial markets and the deterioration in the Eurozone economy, we expect German business confidence to remain weak.The same is true for the German employment report.According to the latest manufacturing and service sector PMI numbers, the labor market deteriorated this month.We agree with the recent comments by ECB member Liebscher who said that Eurozone growth will be low this year but a recession is unlikely.Meanwhile Switzerland will be releasing their employment report, UBS Consumption index and the KoF Leading Indicators report next week.We continue to expect steady numbers which will keep the Swiss National Bank on hold at their next monetary policy meeting.

Will the Liquidation out of Commodity Currencies Continue?

The drop in oil and gold prices has hit the Canadian, Australian and New Zealand hard. The AUD/USD and the NZD/USD are the day's biggest percentage movers with the former dropping 1.50 percent and the latter falling 1.68 percent.Interestingly enough, there was no economic data released from Australia or New Zealand which indicates that commodity prices and the US dollar are behind the move. The rally in stocks also confirms that risk aversion is not the problem.The economic calendar for Australia continues to be devoid of any significant data.New Zealand on the other hand will be releasing its trade balance on Monday evening while Canada has their GDP report scheduled for Friday.Whether the liquidation out of commodity currencies continue will be determined by the sustainability of the current sell-off in oil. In addition to the Caspian Sea pipeline reopening which triggered today's reversal, OPEC oil production is expected to rise in August while Labor Day travel is expected to drop to an 8 year low.

Japanese Yen: Busy Economic Calendar

The US dollar staged an impressive recovery against the Japanese Yen, but unfortunately that move has not translated into strength for all carry trade currencies.The sharp selloff in the AUD/USD and NZD/USD prevented meaningful gains for AUD/JPY and NZD/JPY.Like the rest of the world, the Bank of Japan is worried about inflation according to the minutes from their July 14-15 monetary policy meeting but unfortunately for the time being, they face the same problems that everyone else does – which is the inability to respond to rising inflationary pressures through monetary policy.The Japanese economy has suffered greatly from the slowdown in global growth and the rise in commodity prices.The economic calendar for Japan next week is extremely heavy as they will be releasing their employment, consumer spending and inflation reports.Unfortunately, we expected the data, which are all expected on Thursday evening to have a limited impact on the Japanese Yen.
USD/JPY:Currency Pair in Play Over the Next 24 Hours

The most potentially market moving piece of economic data due on Monday is the US Existing Home Sales Report (12:30 AM GMT)

The currency pair that we are keeping an eye on is the USD/JPY. It has entered our “Buy Zone” which is established using Bollinger Bands.On a weekly chart, we also see that the currency pair has closed above the 50 percent Fibonacci Retracement of the 124.15 to 95.83 sell-off that lasted from June 2007 to March 2008.At this point, we expect further gains. The levels to watch are 110.67, the August 15 high and 109.50, which is shorter term support.A close below that level negates the uptrend.

GFT Forex

Kathy Lien
http://www.gftforex.com

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