Fed Minutes Boosts U.S. Dollar

The key market moving event today is the strength of the U.S. Dollar. After trading sideways most of the week, the U.S. Dollar surged against the Euro and the British Pound late Wednesday after the release of the U.S. Federal Open Market Committee minutes. 

The minutes from the Federal Reserve’s meeting last month showed that few Fed members sided with the implementation of additional asset purchases designed to boost the economy. Equity and commodity markets had been trading close to their near-term highs in anticipation of better news, but once the minutes were released, investors were encouraged to lighten up on their long positions. 

As the dollar rose, the Euro weakened substantially with traders confirming the weakness in the single-currency by pushing it through the recent bottom at 1.2267. With a downtrend clearly developed and well intact, Euro traders have now set their sights on the June 2010 bottom at 1.1876. 

Besides the strength of the dollar and the Fed’s next move which could occur when it next meets on July 31 and August 1, traders should continue to monitor U.S. economic reports as these will give clues as to what data the Fed members are assessing when they have to decide on the next possible round of quantitative easing. 

Additionally, Euro traders should continue to monitor interest rates in Spain and Italy. Although moves have been made to shore up the Euro Region’s ailing banking systems, bad news can shift investor sentiment quickly, leading to additional selling pressure. 

The GBP/USD is also under pressure today because of the stronger Dollar. Unlike the U.S.central bank, the Bank of England increased its stimulus earlier in the month, triggering a sell-off in this Forex pair. Traders are following a simple strategy at this time. They are selling the currency linked to the latest round of QE. 

When a central bank applies QE it weakens its currency because the action amounts to “flooding” the market with additional money. As long as the BoE remains more dovish than the Fed, continue to look for weakness. The GBP/USD is set up for more weakness over the near-term which makes the low of the year at 1.5233 the next likely downside target. 

Commodities priced in U.S. Dollars are also trading weaker today. As the dollar rises, these commodities become more expensive to users, thereby, lowering demand. This is happening to August Gold and September Crude Oil this morning. 

Recently, Gold traders have had a hard time determining whether the precious metal was a reserve currency or an investment. Because of the strength of the dollar today, traders are selling gold because of its reserve currency qualities. 

August Gold is currently breaking through the support line of a long-term triangle chart pattern. This could lead to additional selling pressure if this support is taken out with conviction. Watch for a test of the last main bottom at $1547.60. Stops could be triggered under this level leading to a possible test of the bottom at $1532.10. 

September Crude Oil continues to feel selling pressure. The combination of oversupply and the stronger dollar is encouraging traders to lighten up on their long positions. The main trend is up on the daily chart and speculators may be supporting this market in anticipation of problems regarding Iran and the Strait of Hormuz. 

Crude Oil could continue to weaken until it reaches a retracement zone at $83.13 to $81.75. Since the main trend is up, investors may step in at this zone to support the market. 

Today’s overall weakness in the Euro, British Pound and commodity markets is being triggered by disappoint in the Fed regarding additional stimulus. This has led to a strong rally in the U.S. Dollar. As long as the Greenback continues its uptrend, traders should look for downside pressure in the EUR/USD, GBP/USD and commodities priced in dollars. 

Dollar to Climb Today on its Safe Haven Status!

USD
US dollar strengthens against euro and yen

The greenback strengthened against the euro and yen. In fact, it reached a 2 year high against the euro in the American trading session on Wednesday. Against the Australian dollar andNew Zealanddollar, though, it registered a fall.

The EUR/USD rate was at USD 1.2227 at 2:45 PM New York time. The US dollar fell by 0.6% against the Australian dollar and was at 1.0261. TheNew Zealanddollar rose by 0.6% and was trading at 0.7986 US dollars. The US dollar also registered a gain of 0.3% against the Japanese yen, and the USD/JPY rate was at 79.63.

The US dollar gained against the yen and euro, as the minutes of the Federal Reserve meeting in June indicated that a decision on economic stimulus is still not certain. This prompted greater demand for the safe haven currency of the US.

EUR
Euro falls versus the US dollar

The euro depreciated against the US dollar, but gained versus the Japanese in the American trading session Wednesday. The euro is expected to fall further against the US dollar, as analysts feel that the demand for the US dollar will increase due to its safe haven status.

At 2:45 PM New York time, the euro was trading at 1.2227 US dollars. The EUR/JPY trading rate was at 97.58. The euro was trading at 68.0084 against the Indian rupee, and the EUR/GBP rate was at 0.7872. DespiteSpain’s austerity measures, which were announced on Wednesday, the euro still seems to be extremely bearish. Foreign exchange traders also feel that the funds in the European Stability Mechanism will be inadequate to stabilize Europe’s troubled banks.

JPY
Yen falls versus most currency counterparts

The currency ofJapan, the yen, fell against most of its currency counterparts in Wednesday’s Asian trading session. This was amidst the Bank of Japan meeting regarding possible economic stimulus, and a decrease in demand for safe haven currencies. The Bank of Japan also raised its economic assessment ofJapan’s nine regions. This was the first time this has been done since October 2009.

At 1.00 PMNew Yorktime, the USD/JPY trading rate was 79.63. The EUR/JPY trading rate was at 97.58, a decrease of 0.3%. Foreign exchange experts will be awaiting the results of the Bank of Japan meeting on Thursday. Any announcement by the Bank of Japan is likely to affect the yen’s trading rate.

Crude oil
Oil prices rises on supply news from the US

Crude oil prices rose on the news that US crude oil supplies have dropped, and that refineries were operating at 5 year highs. In Wednesday’s American trading session, it was reported that crude oil inventories had fallen by 4.7 million barrels, much more than that was expected. Oil refineries in the US were operating at 92.7% of capacity.

At 1:08 PM New York time, crude oil at the NYMEX inched higher to reach prices of $85.98 per barrel. Brent crude registered a gain of 1.9% and was trading at $99.82 per barrel.

Another reason for the rise in oil prices was the fact that automobile sales in China were better than expectations. This would mean an increased demand for oil.

The EURGBP Technical Speaking

The EUR/GBP pair extended the downtrend of the previous days. During most of the European trading session sterling had also a very good run against the dollar.

Earlier this week, the National Institute of Economic Research released their estimate for the UK’s 2nd Quarter Gross Domestic Product at -0.2%. The initial figure suggests that the UK economy has now been shrinking for 9 months. However, the results are considered to have been affected by the diamond jubilee, and it is thought that without the extra bank holiday the economy could have actually grown by 0.2% instead. The NIESR concluded that over the last 2 years the UK economy has remained “broadly flat.”

Rachel Reeves, Labor’s shadow chief secretary to the Treasury, described the forecasts as “very concerning and disappointing,” and used the estimates as an opportunity to criticize the Coalition government’s austerity drive:

“Britain is one of only two G20 countries in a double-dip recession, long-term unemployment is soaring and so borrowing is now going up. That’s why we need a change of course and a real plan for jobs and growth.”

There were no important eco data in the UK yesterday. Late in the European trading session, cable fell also prey to profit taking as global sentiment on risk weighed. This move put floor for the EUR/GBP cross rate too. EUR/GBP rebound off the 0.7871 low and closed the session at 0.7894, unchanged from the previous day. 

Today, there are again no important eco data in the UK. Of late, sterling has run a very strong course and the EUR/GBP dropped below several support levels. As is the case for EUR/USD, the euro downtrend is well in place. However also for this cross rate we have the impression that the move is losing some momentum.

The technical charts also give some kind of doji-like signal, suggesting that the trend might be a bit exhausted short-term. So, we don’t change our fundamental euro negative bias, but in a day-to-day perspective, there might be room for some consolidation or even a cautious countermove. Short term profit taking/stop loss protection can be considered. 

From a technical point of view, the EUR/GBP cross rate was recently captured in a consolidation pattern following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, but there were no follow-through gains.

Lately we looked to sell into strength for return action to the 0.7950 range bottom. This first target has been met. Sustained trading below this level opens the way to the next high profile support, in the 0.77 area (Oct 2010 lows). The pair is oversold and there are indications that the decline is a bit exhausted short-term.

Can You Understand “Fed Speak”

Yesterday, the FOMC minutes (the Federal Open Market Committee), the committee of Federal Reserve members that determines the central bank rate and policy were released from their June meeting. A statement was made at the time of the meeting explaining the thoughts and actions of the committee. Two weeks later the official minutes of that meeting are released to the public.

At which time economists, analysts, traders and speculators try to read the minds of the Fed members to determine what their thinking was and to interpret the meaning of the statement and to predict the next move by the Fed. It is more like reading a crystal ball. The Fed members also use their own language known as “Fed Speak”

Below are the highlights of the minutes. I will leave the interpretation to you.

* The more dovish members of the FOMC are strident in their calls for further monetary policy action; the rest of the committee is taking a ‘wait and see’ approach: “A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth… Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum.”

* There is concern within the FOMC that the Fed is coming to own too many securities: “A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve’s asset purchases would have to be to cause a meaningful deterioration in securities market functioning.” 

* The Fed is considering monetary policies that it has not yet employed: “Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”

* The Fed might move towards issuing a single economic forecast much as the BoC, BoE, and other central banks do: “The Chairman asked the subcommittee on communications to explore the feasibility and workability of potential approaches to developing an FOMC consensus forecast.”

The bottom line is that the minutes imply that the Fed could well undertake further monetary stimulus if the balance of Q2 economic data and early Q3 economic data show ongoing deterioration in the economy. Further deterioration would mean: a) more weak jobs data, b) ongoing disinflation (i.e. inflation falling month-on-month), c) weaker consumption, and d) GDP growth below 2% in Q2.

One economist wrote the follow “Essentially, one’s outlook for Fed policy needs to be premised on one’s outlook for the US economy. We have anticipated subdued US economic growth, a weaker jobs market, and an ebbing in inflation throughout the year (even as markets were quite excited by strong jobs numbers in January and February). As we expect more of the same weak performance from the economy during Q2 and early Q3, we therefore think that QE3 is increasingly likely”. 

Metal and Energy Review

Gold futures closed lower, capping a seesaw session as investors were mostly sidelined, waiting for the Federal Reserve’s policy-meeting minutes from June for any clues about further easing. (1571.45)

Indian gold fell to its lowest level in more than a month, tracking weakness in overseas market and supported by stronger Rupee against Dollar. Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, declined to 1,271.24 tons, as on July 10. Silver holdings of iShares silver trust, the largest ETF backed by the metal, increased to 9,729.89 tons, as on July 9.

There were also signs of concerns in Euro-zone with Italy saying on Tuesday that it may want to tap euro zone aid to ease its borrowing costs.

The minutes of the Fed’s meeting showed policy makers considered the risk that further easing might pose. Some members of the FOMC said that excessive purchases of Treasuries may “at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy.” A few officials said the central bank will probably need to take further action.

Copper futures eased slightly after hour’s trade, as minutes from the US Federal Reserve’s June meeting suggested economic conditions are likely to worsen before policymakers reach a consensus on more stimulus. Copper futures for Sept. delivery closed up by 1.5% at $3.4475 per pound on the COMEX of the New York Mercantile Exchange.

LME nickel has fallen toward 2-1/2 year lows, due to weakness in the stainless steel sector, for which nickel is a key material.

Crude oil rose above $85 per barrel; after a report showed US crude supplies fell for the second week, suggesting demand may be improving also refineries operated at the highest rate in almost 5-years.

The EIA cut has its world oil demand growth forecast for 2012 and 2013 while OPEC said that demand growth will slow in 2013 from what is already a weak level this year. The group, which produces a third of global oil, said daily average demand for its crude would stay below its current production levels.

Natural gas futures rallied the most in 3-weeks, as forecasts for hot weather to spread from the Mid-west to the North-east next week signaled stronger demand from power plants. Natural gas inventories are expected to increase by 26-30bn cubic feet, actual data will be released by EIA later in the day

German Judges Control the Future of the Euro

Judges of Germany’s Governmental Court expressed worry over the course of day-long hearing earlier this week over finding the right balance between a quick ruling on the European Stability Mechanism’s legality, and taking more time to get their decision right.

Exactly when a decision will be offered was left open by the panel. The court adjourned following a nearly 11-hour hearing without offering particulars on its plans.

Judges with their questions of witnesses suggested a two-part decision was perhaps most probably, first on the demands to produce a temporary injunction against ESM in about 3 weeks, after which in early 2013 upon the broader constitutional question.

However the court also suggested uncertainty over the distance a choice over the temporary injunction should go. They pressed witnesses over how much time the legal court must reach a ruling, even raising the possibility of a “middle solution” of the single, full decision in two to 3 months.

With government witnesses warning of serious consequences for EMU of a long delay, judges appeared to acknowledge that granting even a temporary injunction could possibly be interpreted as a sign that they were leaning against approving the ESM and monetary Compact, which was passed by having two-thirds majority by Germany’s parliament last month.

An injunction “will be interpreted by the foreign press as ‘euro-rescue is halted'” Court President Andreas Vosskuhle said in the course of the hearing straight into the injunctions sought by opponents of European rescue fund.

But Vosskuhle also recognized opponents’ arguments that allowing the ESM to enter into force now could make the treaty unstoppable, rendering any future ruling on its constitutionality ineffective. The timing of the decision clearly is “hard,” he said.

German Bundesbank President Jens Weidmann said in his testimony any assessment of the consequences of a delay is “highly speculative” and noted the temporary EFSF had enough funds available to handle even the envisaged programs for Spain and Cyprus.

But he also acknowledged an ESM delay could carry consequences if the situation in Europe had to deteriorate further in the coming weeks or months.

“In this particular scenario, doubts about the adequacy of the existing available finances would cause greater uncertainty,” Weidmann said. This could also increase pressure upon the ECB, and as such increase the risks for its balance sheet, Weidmann said.

German Finance Minister Wolfgang Schaeuble was more aggressive, telling the court it was eventually a “issue of weeks.” In comments to reporters after, he emphasized that ESM must take effect so that you can give the broader Eurozone reforms being enacted time for them to take hold

Schaeuble earlier warned the results of delay would extend “far beyond Germany,” including financial ramifications as well as a “clear strengthening” of the existing Eurozone crisis, which could once again lead some European countries to have serious refinancing problems.

Rangebound Markets Await Fed Minutes

The U.S. Dollar is trading weaker this morning amid speculation the U.S. Federal Reserve may act as early as August to provide additional stimulus to the economy. The first clues as to whether the central bank will implement additional easing measures could be contained in the release of the June FOMC minutes due out this afternoon at 2:00 pm Eastern time. 

Trading in the Euro, British Pound, Gold and Crude Oil can best be described as subdued this week as investors have decided to focus on the Fed report rather than economic news and European events. 

In June, the Fed decided to continue another round of Operation Twist, a move that was perceived by some as weak, triggering a sharp sell-off in the U.S. equity markets, but giving the dollar a boost. Today’s minutes will shed some light as to whether the central bank was considering additional monetary stimulus and if there was any dissension among Federal Open Market Committee members. 

If the minute s show that enough FOMC members were in favor of more aggressive stimulus action than Operation Twist, then currencies and commodities may rise as the U.S. Dollar is likely to be pressured. This is especially true in the wake of the poor U.S. employment data revealed on Friday. 

The EUR/USD is trading marginally higher ahead of the Fed minutes, mostly on the news that Spanish Prime Minister Mariano Rajoy increased the country’s austerity measures by an additional 65 billion Euros. 

Technically, the Euro could accelerate to the upside on a short-covering rally if 1.2333 can be exceeded. Another key area to watch is 1.2286. A trade through this level will erase this week’s small loss and put the market higher for the week. Finally, regaining the former bottom at 1.2247 may also be enough to warrant additional position paring. 

Although the formation of a support base could trigger a short-term rally, it is not expected to be a trend changing event. In fact, it may give the market some breathing room and allow bearish traders to refresh their positions at more favorable prices before eventually correcting to 1.1876. 

After enduring several days of selling pressure, the GBP/USD is trading firmer today, but like the Euro, the move is far from turning the main trend to up on the daily chart. Most of today’s strength can be attributed to speculation the Fed minutes will reveal additional stimulus in the near future. Technically, the Sterling pound support this week in a retracement zone bounded by 1.5519 and 1.5458. 

August Gold is trading better as traders seem to be positioning themselves for a break in the dollar. The motivation behind the Gold market still remains a mystery since traders don’t seem to know whether to treat it as a reserve currency or an investment. Technically, the market is in the midst of a non-trending triangle chart pattern that could lead to a volatile breakout move over the near term. 

August Crude only is also being underpinned by the prospects of a weaker dollar. Demand remains low, however, bullish speculators are holding on in the hopes of a potential conflict in the Middle East. The $90 level remains solid resistance, but a breakout through this barrier could trigger additional short-covering. A solid support base has been built under $80; however, the market could still drift into a retracement zone at $83.13 and $81.74. 

Look for tight trading ranges during the early morning and mid-session, but for ranges to expand after the release of the Fed minutes. Traders will be scanning the report for any news regarding additional stimulus from the Fed. The call for more stimulus will likely lead to a drop in the U.S. Dollar. 

Oil & Gas Update

During early Asian session, oil futures prices are hovering above $84/bbl with marginal gain of 0.30 percent in electronic platform. As per American Petroleum Institute, crude oil stocks have declined more than 0.60 million barrels. Fall in oil stocks might have added some positive points in oil prices. However, we may expect the gains may not continue to sustain on concern of slowdown in global economy growth.

 Most importantly, today market is waiting for the FOMC minutes of Fed meeting. Extension of operation twist by Fed government may not hint for any further quantitative easing which may weigh on oil prices. Most of the Asian equities are trading down on concern of slowdown in China economy growth, which may limit the gains in oil prices. From economic data front, US trade deficit is likely to widen further adding pressure on oil prices. Investors must eye on DOE inventory data releasing tonight.

As per DOE, crude oil stocks are likely to fall, whereas other petroleum stocks may climb up. Thus, mixed picture of inventory data may limit the gain oil prices.

Currently, gas futures prices are trading below $2.870/mmbtu with marginal gain of 0.40 percent in Globex electronic platform. Today we may expect gas prices to continue the bearish trend on concern of lower demand due to fall in temperature in US consuming region. On the other side, as per National Hurricane centre, there are 60 percent chances of tropical storm formation near eastern pacific region which may create supply concern to add positive direction in on gas prices. Consumption of power sector has also increased by 1.5 percent, which may support gas prices to remain on higher side. As per US weather forecast, temperature is expected to remain high in eastern region, which may create demand for gas consumption. However, called off of Norway Energy industry strike may limit the gain in this commodity.

There has not been much news of the Japanese request for NG exports to Japan, the proposal is under consideration by the EIA, but is supported by the Administration. No final decision has been made, but markets are hoping for favorable approval, opening the way for additional demand for the US’s high production of Natural Gas.

Spain to Give Up Control of its Banking System

Spain will be forced to secede most of the control over its banks to European institutions—and will be required to impose losses on local investors—in return for a bailout €100 billion ($123 billion), according to the draft agreement accompanying the rescue.

The requirements, some of which can be to remain explosive politically, recommend that holders of junior bonds and preferred shares issued by bailed-out banks will incur losses. Analysts said a significant proportion of such investors in Spain are small depositors who bought the securities through the banks’ branches.

The conditions absolutely are a first glimpse into what would be the brand new framework for euro-zone banks once a new, powerful supervisor is established—as leaders of the 17 euro countries agreed with a summit in June.

The leaders said for the summit that the stricter euro-zone oversight system for lenders would be a precondition for allowing their bailout fund to directly inject money into struggling banks, rather than funneling the cash through the government—a move that could eventually help Spain avoid an even-larger rescue.

In the short run, however, the bailout agreement, a copy of which was seen by The Wall Street Journal and on which finance ministers are required to sign off by on July 20, gives a taste of the existing level of control that governments should give up in exchange for euro-zone assistance.

Policy makers say they hope stringent stress tests and tighter oversight coming from the European Commission, the EU’s executive, and the European Central Bank will force banks to finally resolve a brutal meltdown of real-estate prices in Spain and recognize the losses from mass defaults they manufactured.

After the stress tests, which should be accomplished by early autumn, banks which have capital shortfalls will either have to raise that cash on the market or request help from the government, which by then will have use of the bailout money.

But crucially, the banks won’t get taxpayer funds until they have come up by having burden-sharing arrangement with investors. According to the draft document, those investors include simply not only equity holders, but additionally owners of hybrid capital and subordinated debt. 

The idea behind this exercise, for which Spain still maintains to produce a legal basis, usually is to limit how much taxpayer-funded bailout money that has to be pumped into the banks. 

However in the case of Spain, such arrangements may still hit ordinary citizens directly, as hundreds of thousands of them bought preferred shares in local banks. Holders of senior debt aren’t mentioned in the document, implying that they may escape losses for now—as they’ve in other large bank rescues in Europe in recent years.

Better U.K. Manufacturing Data Underpins British Pound

Trading in the major Forex and commodity markets is light this morning as traders await tomorrow’s key FOMC minutes report. Traders will be looking for guidance from the U.S. Federal Reserve as to what criteria it may be considering before implementing another round of quantitative easing. Additional concerns about the economy were raised on Friday after the U.S. reported weaker-than-expected jobs data. 

Today’s report that China’s imports rose 6.3 percent last month from a year earlier or less than half of the 12.7 percent increase forecast in a Reuters poll failed to impress traders even though it now looks like demand is lagging in the world’s second largest economy. Concerns are being raised that the monetary and fiscal policy easing conducted by China’s central bank since late last year have failed to produce the soft landing that government officials had helped for. 

The GBP/USD is trading slightly better this morning after U.K.manufacturing data showed a surprise improvement in May. The U.K. Office for National Statistics reported that manufacturing output rose 1.2% on a monthly basis in May. Analysts were looking for a 0.2% decline. 

Since reaching a bottom at 1.5460 inside of a daily chart retracement zone at 1.5522 to 1.5462, the Sterling has stabilized. The market appears to be forming a support base while awaiting a catalyst to drive it higher. 

The EUR/USD is being underpinned by technical factors this morning following Monday’s reversal bottom. Volume is still down but should pick up later this week when the Fed reports its minutes. Although a short-term bottom could be forming, it shouldn’t be enough to change the trend to up and is most likely to trigger a short-covering rally or correction. 

The Euro rose on Tuesday after the European Union agreed to provide aid to Spain. Disappointing Chinese trade data pressured the Euro slightly overnight, but not enough to wash out Monday’s small gain. 

On Tuesday, the Euro group issued a statement supporting the plan to give Spain more time to contain its fiscal deficit. The arrangement calls for the Euro group to provide as much as 30 billion Euros to assist Spanish banks by the end of this month. The announcement may have come just in time as Spain’s 10-year bonds moved above the critical 7% price level on Monday. 

Although the news underpinned the Euro yesterday, it did begin to weaken early during Tuesday’s session as investors remained pessimistic regarding secondary-market interventions and preferred creditor status beyond Spanish bank aid. 

August Gold is trading a little firmer early in the trading session because of the slightly weaker U.S. Dollar. Traders seem a little confused about whether Gold should be treated as a reserve currency or as an investment. Because of this the market has formed a non-trending triangle on the daily chart. This typically means a market will remain range bound until prices consolidate enough to trigger a breakout. Volatility is building inside of this triangle but will not show up until the market makes its move. At this time the direction is uncertain. 

August Crude oil is trading a little better. The weaker Dollar is a contributing factor to its firmness. The main trend remains up despite the recent weakness. Supply issues continue to exert a bearish influence on the market, however, speculators are helping to support prices in the hopes that a bullish situation will arise in Iran. 

Overall, the markets are quiet this morning as traders position themselves for tomorrow’s important Fed news release. The FOMC minutes should provide the energy these markets need to move. 

Crude Oil Tumbles as Norway’s Oil Workers Strike Ends!

JPY
Yen gains versus most currencies

The yen gained versus the US dollar, euro, Australian dollar and New Zealand dollar in Tuesday’s Asian trading session. The USD/JPY trading rate at 1:29 PM in Tokyo was 79.49 and the EUR/JPY rate was 97.63. The resource linked currency i.e. the Australian dollar was trading at 80.77 yen, its weakest level in 11 days. The New Zealand dollar declined by 0.3% and was trading at 63.16 yen.

Japan’s Nikkei also fell for a fourth day in a row, on the cue that China’s imports have grown at half of the pace expected by economists. This has caused worry in Japan, as China is Japan’s largest overseas market. The continually high rate of the yen may further dissuade countries to import goods from Japan.

It is expected that the Bank of Japan will announce some economic stimulus packages in its meeting scheduled for July 11-July 12. However, some experts feel that even this move may not bring down the rate of the yen.

USD
US dollar gains versus euro in Tuesday’s Asian trading session

The US dollar gained in value against the euro, but fell against the Japanese yen on Tuesday. Despite the fall against the yen, technical analysts feel that the greenback could rise over 80 yen in the near term.

At 1:29 PM Tokyo time, the USD/JPY rate was at 79.49. The euro was trading at $1.2292 at 7.46 AM London time. The Australian dollar declined 0.3% against the US dollar, with the AUD/USD rate at 1.0180. Even the New Zealand dollar fell against the US dollar, as 79.44 US cents fetched 1 New Zealand dollar.

As a trend, the US dollar’s rates against other currencies seem to be affected by data coming out of competitors’ economies rather than the US economy itself.

EUR
Euro declines against US dollar and yen

The euro declined against the US dollar and yen on Tuesday, after data showed that France’s industrial output dropped in May 2012. Industrial output fell by 1.9%, worse than the projections of 1% made by experts. Bond sales of Italy and Spain did however extend gains, which is a good sign.

At 7:46 AM in London, the EUR/USD trading rate was $1.2292. The EUR/JPY rate was 97.63, down by 0.3%. Foreign exchange experts feel that in the long term the dollar will gain in value, and the euro will decline. It also seems that the European Central Bank could even reduce interest rates further in order to spur on the Eurozone economy.

Crude oil
Crude oil prices fall as Norway’s oil workers call off strike

Oil prices fell on Tuesday, after rising earlier on Monday. The fall was primarily due to Norway’s oil workers calling off their strike, which had threatened to affect oil production in the country.China reported that it has reduced its oil imports to 5.28 million barrels a day, and this caused negative sentiment in the oil market as well.

At 3.08 PM Singapore time, oil was trading at $84.62 a barrel at the New York Mercantile Exchange. In New York, oil prices have declined by 14% this year. In London, Brent crude was at $98.56 a barrel, down by 1.8%.

The negative sentiment in the global economy is also keeping oil prices at lower levels.

What’s the Skinny on the EUR/GBP ?

Yesterday, the EUR/GBP cross rate hovered in a sideways consolidation pattern in the lower half of the 0.79 big figure. There were very few eco data in Europe and in the UK. So, trading was mostly technical in nature. The pair came close to the previous low (0.7950) around noon, but the level could not be regained. As was the case for EUR/USD, the EUR/GBP pair showed some intraday swings but without a clear trend. The appearance of Mr. Draghi before the EU parliament was also no game-changer. EUR/GBP closed the day at 79.30, little changed from the 0.7934 close on Friday evening. 

The focus of the day was the Eurogroup meetings, and markets were expecting some sort of follow up or implementation of the EU Summit Bank Plan announced on June 29th, which was stipulated to go into effect on July 9th. The Eurogroup statement dealt with the immediate problems of Spain but ignored any immediate action to implement the EU plan weakening the euro.

Overnight, BRC like-for-like retail sales were reported up from 1.3% to 1.4% in June, but still failed to meet consensus expectations (2.0%). The RICS house price balance was also weaker than expected.

However, as was most often the case of late, poor UK eco data didn’t really hurt sterling. On the other hand, the euro ceded some ground across the board and this is weighing on the EUR/GBP cross rate, too. 

Later today, UK calendar contains the Industrial/manufacturing production data, the UK May trade balance and the NIESR GDP estimate. The data are expected to confirm the poor economic momentum in the UK. However, quite a big negative deviation from consensus is probably needed to have any negative impact on sterling trading (against the euro). In addition, yesterday’s price action suggests that it won’t be easy for EUR/GBP to regain the 0.7950 barrier in a sustained way. For now, EUR/GBP trading is still dominated by a sell-on-upticks trading approach. 

From a technical point of view, the EUR/GBP cross rate was recently captured in a consolidation pattern following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, but there were no follow-through gains.

Of late, we looked to sell into strength for return action to the 0.7950 range bottom. This first target has been met. Sustained trading below this level opens the way to the next high profile support, in the 0.77 area (Oct 2010 lows). 

Euro Recovers From Early Session Weakness

The EUR/USD recovered from an early session loss down to 1.2255, the weakest since July 2010. Early in the session the Euro was under slight pressure in follow-through selling after last week’s late decline.

Although there weren’t any blockbuster decisions released after today’s regional finance ministers’ meeting in Brussels to discuss the European debt crisis, the European Commission did manage to reverse the intraday course of the Euro when it said future capitalizations of banks by rescue funds wouldn’t require government guarantees.

There aren’t a lot of reasons for the Euro to rally at this time and the negatives certainly outweigh the positives. One reason is the poor outlook for growth. This morning,China reported a decline in inflation. This was further evidence that the European crisis was causing the global economy to falter.

Consumer prices in China only 2.2 percent in June from a year earlier. This was the slowest pace in 29 months for this important growth indicator, leading the Euro to weaken versus the Japanese Yen. 

Initially, the Euro fell versus the Dollar on worries that European finance ministers would fail in reaching a plan to stem the weakness in the Euro Zone. Spanish and Italian bonds fell as yields rose as investors expressed their concerns in the marketplace. Later in the session, these worries were quelled when news surfaced that the recapitalizations of banks by the European Stability Mechanism will not need a sovereign guarantee. 

Finally, European Central Bank President Mario Draghi reiterated his stance from last week that further interest rate cuts will depend on the data and economic environment. He also added that the ECB would “do everything to maintain price stability from both sides in the Euro area.”  This was no surprise as this is the ECB’s mandate. 

This morning’s news was enough to stabilize the Euro, but hardly enough to cause a bottom to form or the trend to change to up.

The GBP/USD is up slightly in light trading. Traders are focusing on the European finance ministers’ meeting and the release of the U.S. FOMC minutes on Wednesday. Technically, the Sterling is trading inside of a key retracement zone at 1.5522 to 1.5462. 

August Crude Oil futures opened higher in a continuation of last week’s strong finish. Traders are reacting to the inflation news from China and the general weakness in the U.S. Dollar. Speculators could be underpinning the market on the hopes that Iran’s tough talk against the European embargo will lead to something more significant, but there are no specific signs that this is a major concern today. Technical factors could be supporting crude oil since the main trend turned up on the charts a little more than a week ago.

August Gold is also trading better, but traders are going to have to decide whether this precious metal is an investment or a reserve currency. Investors have had a tendency to buy dips and sell rallies lately while those who perceive it as a reserve currency have been pressuring it when the Dollar rises. Today’s weaker Dollar is probably causing some light short-covering. 

Overall trading is light in three of the four major markets with crude oil being the most active. Volatility is likely to increase on Wednesday when the Fed releases its minutes from the June meeting. 

Gold, Silver, Crude Oil and Natural Gas Update

futures traded in a tight range but managed to close higher, as the dollar weakened while bargain buying was seen after previous week’s sharp drop in the prices. Gold holdings  of SPDR gold trust, the largest ETF backed by the precious metal, declined to 1,275.46 tons, as on July 9.

Silver holdings of iShares silver trust, the largest ETF backed by the metal, increased to 9,729.89 tons, as on July 9.

The dollar index, which compares the US unit to a basket of other currencies, declined to 83.161, down from 83.359 on late Friday.

Hedge funds and money managers boosted their bullish bets in US gold futures and options by 30% in the week up to July 3, after a European deal to shore up banks and cut borrowing costs increased bullion’s investment appeal.

Speculators also sharply cut their copper net shorts after prices rallied over 5% during the period covered, as per CFTC data.

China’s annual consumer inflation came in at 2.2%, a lower rate than the 3% in May, which left room for Beijing to ease policy without stoking upward price pressures. China’s Trade Balance widened this morning with exports report above forecast, but a huge drop in imports. Markets are disappointed with the data.

Copper closed in positive, recovering from its earlier dip to one-week low on hopes for more monetary easing by central banks, including in top metals consumer China.

Copper futures for Sept. delivery closed down by 2.4% at $3.4095 per pound on the COMEX of the New York Mercantile Exchange.

Oil prices jumped 2%, with Brent futures rising back above $100 per barrel, as a strike by workers and a planned lockout by companies threatened to completely shut Norway’s crude oil production. By the end of the day, the oil strike was settled and oil prices returned to their prior levels.

Iraq’s government said crude oil exports from the semi-autonomous northern region of Kurdistan to neighboring Turkey are “illegal” and threatened on Monday to take “appropriate action,” in a continuation of recent of tensions between the two as reported by the Wall Street Journal.

Natural gas futures closed higher, as forecasts for above-normal temperature in mid-July for much of the nation raised hopes of rising gas consumption. Natural gas futures traded on NYMEX has moved into backwardation for the first time in 10-months, as record heat boosted demand from power plants. (Backwardation occurs when the front month contract trades at a higher price than contracts for later delivery).

Japan and China Weigh on Silver, Gold and the Euro

In the early morning the machinery orders in Japan declined drastically indicating continued weakness in economic activity. The Asian equities on the same note have retreated and are trading down by 0.2 to 1.12 percent.

China’s annual consumer inflation cooled to 2.2 percent in June, from May’s 3.0 percent, giving Beijing more scope to ease monetary policy to support growth without stoking upward price pressures. However, the Chinese Premier has called for more aggressive efforts to preset and fine-tune economic policies, as the world’s second-largest economy still faces huge downward pressure and may continue to pose downside risk for base metals.

From Europe the shared currency has declined drastically last week while today the Euro zone officials are cautioning against expecting any quick action from the bloc’s finance ministers when they meet today to sort out the tangle of loose ends and disagreements left by last month’s EU summit. The German export import numbers are likely to remain bleak with contracting current account and trade balance. Even the Sentix investor confidence is likely to remain weak and may continue to weaken base metals.

Gold slid slightly from its prior closing and the Asian equities have also retreaded followed from the Friday’s overseas session which drag shares after the US jobs numbers reflected worries for the economy to maintain a stable growth.

The markets are also pressurized after the Chinese Premier voiced downward forecast for the Chinese economy despite their inflation dropped to 29-months low.

The euro at present moment is tepid having little change from its weekly closing of 1.2288

Moving ahead, we think the euro may subside ahead of the regional finance ministers meeting today where the main topic would be the crisis combating actions taken by the chiefs at the EU-summit last month. The more concern will be on the ECB president Draghi’s address to the public. The risk is, Draghi dismissing the idea of boosting ESM funds upfront. That would have already been reflected in German bond yields inching towards its lowest favored by haven flows and conviction on ECB not doing any activities.

Also, the probability of delayed implementation of the new plan, confirmation of the same may appear critical for the shared currency. Besides, reports today may show the German trade balance has shrunk which would be another dragging down factor for the euro.

Silver futures prices have revived at the early trading despite the Chinese economic down turn was alarmed. As discussed in gold’s outlook, the Euro may wobble ahead of the ECB testimony and the regional chiefs meet later today. Dismissing the idea of raising ESM funds and the probable late implementation of the stances taken in EU summit could be proved fatal for the euro. 

Monday Morning Markets

US stocks gave mixed endings as US added just 80,000 jobs in June, darkening the outlook for the US recovery and dashing some of the political momentum President Barack Obama gained after the Supreme Court upheld his healthcare law last week.

European stocks declined for a third day before reports on US jobs and unemployment. US were little changed, while Asian shares fell.

German industrial output rebounded more than economists forecast in May as construction buttressed Europe’s largest economy against the sovereign debt crisis. Production rose 1.6% from April, when it dropped 2.1%, the Economy Ministry in Berlin quoted. Markets forecasted an increase of 0.2%.

Negative eco comments from the Director of the ECB sent the euro tumbling, trading below 1.23

UK stocks were little changed near a two-month high as investors awaited a report on payrolls and unemployment in the world’s biggest economy. Hopes for Fed stimulus have pushed the USD upwards

 China’s stocks rose, sending the benchmark index to its biggest advance in a week, as developers and industrial companies gained on the central bank’s second interest-rate cut in a month, overshadowing losses by banks.

The People’s Bank of China yesterday lowered the benchmark one-year lending rate by 0.31% point and one-year deposit rate by 0.25% point, effective today. The rate cut was released prior to data that showed the economy grew at the slowest quarterly pace since 2009. This morning’s release of PPI and CPI were well below forecast.

Japan also reported poor eco data with their current account widening and machinery orders plummeting.

Oil was up by 0.50%, the second day in New York amidst speculation that a meeting of European leaders last week and ECB meet could bring relief from the debt crisis that threatens to slow the economy, however, demand remained weak and subdued. By the end of the week oil was falling again as markets ignored rhetoric from Iran

Gold tumbled to trade at 1581.55 in Asian trading Monday morning, falling from highs in the mid 1650.

Weak U.S. Jobs Data Prompts Flight into Greenback

Demand for risky assets fell sharply and the U.S. Dollar strengthened against most major currencies after theU.S.government reported weak jobs data for the third straight month. Today’s U.S. Non-Farm Payrolls report showed that employers added only 80,000 jobs in June. This figure dragged the 2012 average monthly jobs pace down to 150,000, well off the pace of the first six months in 2011 of 161,000. The unemployment rate was unchanged at 8.2 percent. 

The U.S. Dollar Index spiked higher on the news as traders began to factor in the possibility the U.S. Federal Reserve would have to implement another round of quantitative easing. This amounts to providing fresh liquidity in the market in an attempt to jump start the economy once again only three years after the last recession ended. 

Usually the speculation that a central bank was planning to inject liquidity is bearish for the home currency, but in this case, investors were driven to the relative safety of the U.S. Dollar, putting pressure on higher risk asset classes such as equities and commodities. 

Foreign currencies were hit particularly hard today with the EUR/USD plunging to a new low for the week. The down move also took out last month’s low at 1.2287, setting up the possibility of a continued decline into the June 2010 bottom at 1.1876. Today, sellers essentially “piled on” the Euro after yesterday’s announcement by the European Central Bank decided to lower interest rates across the board. 

The GBP/USD is also under pressure but the break isn’t a strong as the Euro’s. On Thursday’s the Bank of England jump-started the down move by injecting additional liquidity into the economy. The main trend is down in this currency pair, however, at this time it is still only testing a short-term retracement zone.  The pace of the current break suggests that the June low at 1.5268 is well within reach. 

August Comex gold and August WTI crude oil futures are also taking a beating today as commodities priced in dollars fell sharply because of the rise in the Greenback. The break in crude oil was a sign that traders were ignoring the possibility of a conflict with Iran over European oil sanctions which began on July 1, instead choosing to focus on weaker demand if theU.S.economy sours. 

The weaker U.S.jobs data suggests the economy is stalling. This could prompt action by the Fed to stimulate the economy. The news that the world’s largest economy could be sputtering is encouraging investors to seek the sidelines with the best alternative being a position in the U.S. Dollar.

US Jobs Numbers BAD – its time for the Bazooka from the Feds

The US Nonfarm Payroll surprised markets and disappointed economists.

The final report gave the following information:

 

Nonfarm Payrolls 

Actual

80K

 

Estimate

90K 

 

Prior

77K 

 

 

 

Unemployment Rate 

8.2%

 

8.2% 

 

8.2% 

 

 

 

Average Weekly Hours 

34.5

 

34.4 

 

34.4 

 

 

 

Private Nonfarm Payrolls 

84K

 

102K 

 

105K 

   

 There was not one bit of positive data in the report, no silver lining unless one would say that the unemployment rate did not climb again this month, or weekly average hours remained close to the same, when the average work week in the US is 37.5, this number says that most people are working complete weeks.

Private payrolls, which are small business, large and medium size businesses combined, but America can usually rely on small private businesses to hire faster then the larger business, but when small business are not hiring, that means that small business are continuing to suffer.

In the US, the economy has to react over 200k jobs per month just to keep numbers positive and at this rate we continue to lose jobs.

If one were to look deep to find a bright light or a silver lining, we could then look to the Federal Reserve where Ben Bernanke has promised to pull out the big guns if the economy needs a boost.

With these numbers and a month of lackluster eco data, the economy needs a big boost and so does President Obama, as elections grow near, if he can not fix or show improvement to the economy, his time in office is very limited. Elections are scheduled for November 2012.

With these numbers it will be bye bye Obama.

Watch and listen carefully for Ben Bernanke, we should be hearing from the Fed’s early next week.

What Did the ECB Actual Do On Thursday

Although the ECB didn’t announce any radical new action yesterday, it did take a number of steps that are significant moves for a traditionally cautious and conservative policymaker. 

First of all, the main refinancing rate was cut to a new record low level of 75 basis points. 

Second, the ECB matched the 25 basis point cut in its refinancing rate with a 25 basis point cut in its deposit rate that took the latter to zero.

The ECB has usually altered this policy rates by the same amount but attention has tended to focus only on the refinancing rate because it is normally the key policy rate determining interbank money market rates.  Since EMU began in 1999, market rates tended to set close to the ECB refinancing rate and normally some distance away from both the upper boundary set by the marginal lending rate or the lower boundary set by the ECB’s deposit rate

In the past couple of years, however, major injections of liquidity by the ECB and market expectations that policy would remain accommodative and/or be eased further have meant that interbank rates drifted below the refinancing rate towards the ECB’s deposit rate.  Given the increasing amount of funds deposited at the ECB it is scarcely surprising that the ECB deposit rate has become an increasingly important floor to market rates.

Yesterday’s ECB decision to take its deposit rate and, by extension, the floor to market interest rates to zero is something of a step into the unknown.  As a speech by ECB Executive Board Member Benoît Cœuré (19th February 2012) noted ‘a switch to zero or negative interest rates bears some risks – mainly of a microeconomic nature – which would have to be weighed against potential benefits in terms of additional macroeconomic stimuli.’  Mr. Cœuré cited a possible drop in money market turnover, an adverse impact on important market intermediaries, such as money market funds and possible adverse effects on the profitability of commercial banks that could result in a credit contraction.  Mr. Draghi was reluctant to be drawn on the possible consequences of a zero deposit rate at today’s press conference but it would seem the ECB Governing Council has judged that any risks would be outweighed by the benefits of lower money market rates in channeling investors away from less risky assets.

The decisions on Thursday to cut the refinancing rate to a record low and to reduce the deposit rate to zero only partly reflect the extreme weakness of the Eurozone economy.  They also stem from a need to respond to major problems in the functioning of the Euro area money market that is further weakening the economic outlook.  Transactions in the Euro area money market have become increasingly fragmented along lines largely determined by national boundaries.  Interbank activity has also reduced sharply in terms of the volume and maturity length of transactions.  As a result, changes in ECB policy rates don’t immediately or automatically flow through to bank funding costs nor consequently to the real economy.  Commercial banks will benefit to the extent that they fund themselves through the ECB’s refinancing operations.  However, in circumstances where the interbank ‘plumbing’ isn’t operating properly adjusting the policy thermostat by cutting official rates may not prompt an immediate and equal change in borrowing costs for financial institutions and their customers. 

Rate Cuts, Stronger U.S. Data Pressuring Euro

The European Central Bank surprised the financial markets on Thursday by cutting more than its benchmark interest rate. It also lowered its deposit rate and the rate on its marginal lending facility. All three key lending rates were lowered by 25 basis points; however, the move lowered the deposit rate to zero for the first time in history. The EUR/USD plunged sharply lower on the move, wiping out all of the gain from the June 29 rally.

The action in theory should flood the market with cash after deposits reached near record levels. Like the U.S. Federal Reserve, the ECB must believe that there is plenty of stimulus aid in the market, but that it is not being circulated properly. The move should pressure the Euro but encourage demand for riskier assets. 

ECB President Draghi supported his decision by stating “downside risks to the Euro area economic outlook have materialized.” He added, “Economic growth in the Euro area continues to remain weak with heightened uncertainty.” This leaves open the door for further action later in the year. 

Traders also sold the EUR USD because of a pair of friendly U.S.jobs reports. Weekly jobless claims fell by 14,000 and the ADP Employment report showed a better-than-expected rise. These reports dampened hopes that the Fed would implement additional quantitative easing measures to boost the faltering economy. 

The GBP/USD plunged on the news that the Bank of England boosted the size of its quantitative easing program. Although the news of the increase by 50 billion pounds was already priced into the market, the Sterling sold off because of the strength of the U.S. Dollar. The Greenback was boosted by better than expected jobs data which caused many traders to shift their outlook for tomorrow’s U.S. Non-Farm Payrolls report. Traders are now concerned the Fed will refrain from any QE activity if the employment report is better than expected. 

The rising U.S. Dollar is also pressuring gold. Typically, commodities priced in dollars fall when the Greenback rises because of lower demand. The move in August gold looks like position squaring rather than a trend change at this time. August crude oil is bucking this trend, however, and posting a small gain. Concerns about a possible conflict with Iran continues to encourage speculative buying and short-covering. 

Overall, it’s been a one-sided Forex market with both the Euro and the British Pound falling after key decisions by their central banks. Further downside pressure was triggered by better-than-expected U.S.jobs data which dampened hopes of additional quantitative easing by the U.S. Federal Reserve ahead of Friday’s key jobs report.