US Growth Output Downgraded

As Federal Reserve members continue their two-day session at Jackson Hole, Wyoming, the Commerce Department released a revised growth figure for the U.S. economy for the second quarter. The revised figure shows the economy grew at an annualized rate of 1 percent for the three months ending in June compared to an earlier estimate of 1.3 percent. The worse-than-expected result will add pressure to Fed Chairman Ben Bernanke to announce further stimulus efforts.

Source: BBC News

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Sterling Falls as UK Consumer Confidence Weakens

The British pound fell against the major currencies today following an update indicating that consumer confidence is on the decline in the UK. For August, the consumer sentiment index administered by the Nationwide Building Society lost 2 points, falling to a reading of 49 for the month. This matches the lowest result since April. The forward looking index suggests the index could fall another 3 points in the next few months.

The news put a halt to recent gains for the pound. Against the euro, sterling dropped to a two-week low of 0.8690, while against the dollar, sterling declined 0.6 percent to $1.6280 in late-day trading in London.

Consumers continued to suffer through higher prices in July with the Consumer Price Index climbing an annualized 4.4 percent after jumping 4.2 percent in June. A steep increase in energy costs along with an increase in the Value-Added Tax (VAT) from 17.5 percent to 20 percent contributed to the hike in prices.

Despite the increase in CPI, the recovery appears to have stalled. Unemployment remains elevated with 2.5 million people currently out of work. Youth unemployment is particularly troubling with more than 20 percent of workers under the age of 25 looking for placements. A recent survey of businesses suggests that the employment outlook will continue to deteriorate for the remainder of the year with the unemployment rate projected to reach 9 percent by the time 2011 draws to a close.

The weaker consumer sentiment and worsening employment picture may provide the Bank of England with sufficient reasons to hold off on an interest rate hike. Governor Mervyn King has argued for several months now that even though the Consumer Price Index is well above the 2 percent target rate for growth, raising interest rates is not in the best interests of the country. According to King, the anemic pace of growth could very well turn negative should borrowing costs rise providing further inducement for consumers to hold off on the purchase of big ticket items.

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Don’t forget EU’s woes when buying EUR’s

Will we get to see an extension of last weeks price action this morning? With London on holidays and New York slowly getting back to normal, the interest may not be there today. However, it’s times like this when liquidity at a premium, has a ‘big’ affect. For FX, investors take on Ben’s speech in Jackson Hole is that the big picture for the future is ‘easier’ monetary conditions, even if the extent is only ‘modest’.

Thus far, the different regions have greeted the news positively, with equities mostly higher and the USD weaker. On its own this morning is the Swiss franc, trading in a bubble and running scared in response to press reports that some domestic banks are considering charging its customers negative interest rates on sight deposits.

It seems that the market has got the general feeling that more monetary stimulus is in prospect. Bernanke has expanded the September meeting to two days combined with his statement that policy makers still have a range of policy options available to implement a ‘new’ ease is giving investors the ‘thumbs up’ to embrace risk.

Trichet has also been helping that cause. His comments Friday that he would not allow European banks to become illiquid stating that ‘the idea that we could have a liquidity problem in Europe is plain wrong’. Analysts note that these comments could lead to an LTRO expansion at the ECB’s next meet which may ‘pull down credit spreads on European financials’. Another boost for the EUR?

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading session.

The dollar is lower against the EUR +0.12%, GBP +0.13% and JPY +0.03% and higher against the CHF -1.03%. The commodity currencies are stronger this morning, CAD +0.43% and AUD +0.47%.

The loonie rose for the first time in five weeks after Bernanke insisted on Friday that Canada’s largest trading partner’s, the US, economy is not weak enough to warrant immediate additional stimulus. The thin CAD market was able to rally as equities gained on Bernanke’s statement that the US economy is likely to recover in the second half of this year and this despite a disappointing Canadian GDP print for the second quarter.

Now that the Fed is taking a timeout regarding implementing any of their monetary tools to stimulate growth, Bernanke is passing the buck. The market will have to wait and see what today’s fallout will be like to gauge the ‘real’ market attitude to Ben’s Jackson Hole speech. Expect dealers to start shifting their attention back to European woes. Until now, the commodity growth sensitive currency, the loonie, remains range bound. It’s movements are been dictated to by the risk loving and risk aversion trading strategies that are positioning most portfolios.

Outlook for the Canadian economy has come under serious scrutiny over the past few weeks, again pushing parity to the fore. Investors are better buyers of dollars on dips until proven wrong (0.9770).

The Aussie dollar climbed to a three-week high o/n before a report tomorrow is expected to show that building approvals increased in last month. The currency happened to print its strongest level in three weeks as Asian bourses gained after the Fed eased concerns that the US economy would stall. The expectations of rate cuts down under have been wound down and there is improved risk appetite following Bernanke’s comments.

Last week RBA governor Stevens said inflation ‘bears careful watching’, easing speculation that policy makers would cut rates any time soon in a speech to the House of Representatives Standing Committee. Futures dealers reduced their expectation for RBA rate cuts over the next year by-7bp to +126bp. He acknowledged the ‘heightened’ degree of uncertainty offshore, but again, highlighted the impact from the improvement in the terms of trade on income keeping inflationary pressures elevated. Importantly, Stevens discounted concerns over bank funding. He has also commented on how Australia’s corporate, household and Government balance sheets are strengthening. Although the Governor stating that the currency at 1.10 is ‘getting ahead of itself’. Currently, investors are better buyers of Aussie dollars on pullbacks as long as this risk loving environment remains (1.0614).

Crude is higher in the O/N session ($85.47 up+10c). Crude prices rallied on Bernanke comments that growth will resume and the central bank has tools to stimulate the economy. Also aiding prices last week was the US weekly supply declining as refinery rates matched their highest level for 2011.

Oil stockpiles fell -2.21m barrels to +351.7m last week. The market had been anticipating a build of inventories of +800k barrels. Crude imports fell-477k barrels per day to +8.77m. Also of note, data released by the IEA shows that the US SPR supply fell -4.8m barrels last week. On the flip-side, gas inventories rallied +1.36m barrels to +211.4m. Analysts had been expecting a-1m barrel decline. Average gas demand in the last four-weeks fell -2.4% from a year ago. Finally, distillates (heating oil and diesel), rose +1.73m barrels to +155.7m, more than the forecasted rise of +700k barrels. Refinery utilization rose +1.2% to +90.3% of capacity.

The report is bullish for crude and bearish for the products. For the moment, Crude prices continue to hold just above strong support levels, supported by Libya, exclude them from the equation and the commodity remains vulnerable. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. The market now waits for Ben to re-enforce the Fed’s intentions.

Gold rallied on Friday as falling global bourses coupled with the commodity’s biggest weekly drop in more than three-months boosted investor demand. Earlier in the week, the metal demand diminished after a rally to new record highs. From a technical perspective this is a normal correction given the magnitude of this months move. The weak long investors have been tapping the market and taking some profit off the table on speculation that financial markets may be stabilizing, eroding the appeal of the precious metal as a safer haven. The commodity has lost over 8% in the past three-days, that’s equal to all of last two week gains. Technically it’s a crowded trade that investors wished to pare on expectations Bernanke will do something to boost equity prices today. It will be interesting to see how this market reacts after Friday’s illiquid and relatively low participation.

Before last week, the commodity trade was up +31%, y/d, as the global debt crises and volatile stock markets boosted the appeal of the metal as an alternative asset. A hike in margin requirements for gold forwards in Shanghai is also helping to curb the precious metal’s meteoric rise. This is a similar move to the COMEX margin hike of +22% earlier in the month.

Big picture, with the Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,822+$24.80).

The Nikkei closed at 8,851 up+54. The DAX index in Europe was at 5,603 up+67; the FTSE (UK) currently is 5,129 down-1. The early call for the open of key US indices is lower. The US 10-year eased 3bp on Friday (2.20%) and is little changed in the O/N session.

Yields on shorter term treasuries remain rooted to their record lows after the Fed signaled earlier this month that they are willing to take further measures to prevent the US from falling back into a recession. There was no action taken in Jackson hole and with Bernanke refraining from endorsing the use of additional stimulus coupled with a disappointing growth report released on Friday happened to push yields lower. The market has been reacting to what’s not in the Fed’s speech. Treasuries did pare some of their gains after reaching the highs of the day as investors took assurance from Bernanke that growth would eventually resume. 10-year yields remain range bound +2.35-2.03%.

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U.S. Dollar Sell-Off Continues Ahead of Key Speeches by Bernanke, Trichet

Fundamental Headlines

• Bernanke May Forgo Easing as Data Point Higher – Bloomberg

• Gold Extends Biggest Slump in 18 Months – Bloomberg

• U.S. Budget Watchdog Cuts Debt Forecast – Financial Times

• Contours of Obama Jobs Package Coming into Focus – Reuters

• Jobless Claims Rise – WSJ

European Session Summary

The Japanese Yen, Swiss Franc and U.S. Dollar were the three weakest currencies in the overnight session as the market continued to price in what looks to be a third round of quantitative easing, a policy measure that will purportedly be announced tomorrow. With the global economy slowing, as evidenced by significantly more negative data than positive data in recent weeks, Federal Reserve Chairman Ben Bernanke’s speech tomorrow at the Jackson Hole Economic Policy Symposium has catapulted itself into the spotlight as this week’s key event.

Tomorrow, in Jackson Hole, Wyoming, world leaders with gather at the Federal Reserve’s annual Economic Policy Symposium, an event the Federal Reserve Bank of Kansas City describes “a forum for central bankers, policy experts and academics to come together to focus on a topic that is not necessarily of immediate concern, but instead looks into the future at emerging issues and trends.” This limited description of the event is misleading, however, considering the state of global economic affairs.

AUD/USD 5-minute Chart: August 25, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Any hints of a third round of quantitative easing – or lack thereof – will determine the fate of the U.S. Dollar for an indefinite period of time. With risk-appetite climbing slightly again today, as noted by rallies by the commodity currencies and global equity markets, it appears a form of easing is being priced in – perhaps too ambitiously. After last year’s speech by Chairman Bernanke that further easing was a policy option, the Dollar slid drastically, and has been the world’s worst performing major currency since Chairman Bernanke’s speech last August.

As such, the bid for safe havens was fading into Thursday, with the Australian Dollar, Canadian Dollar and New Zealand Dollar the three strongest currencies on the day, at the time this report was written. The Loonie was the strongest of the riskier assets, as jobs data out of the United States belayed some worries about the labor market in the world’s largest economy.

Pre-North American Session Data

In terms of data ahead of the North American trading session, jobless claims figures out of the United States were once again disappointing, holding above the psychologically significant 400K threshold. The print of 417K beat the 405K projection, according to a Bloomberg News survey, the Labor Department’s report showed on Thursday. However, the increase is being attributed to a labor dispute with one of the United States’ largest communications company. Accordingly, with those employees removed from the claims figures, the jobs data is slightly more appetizing, with the rate at which companies are letting go their employees slowing.

USD Jobless Claims: August 2010 to Present

Prepared by Christopher Vecchio

Thus far on the day, the Dow Jones FXCM Dollar index was slightly higher, despite the sell-off of the safe haven currencies. At the time this report was written, the index was trading at 9489.27, after opening at 9484.90. The index has oscillated between 9498.56, the daily high, and 9467.88, the daily low.

24-Hour Price Action

Key Levels: 13:30 GMT

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

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More Market Consolidation Expected Ahead of Fed Chair Event Risk

By Joel Kruger, Technical Strategist 26 August 2011 05:46 GMT All should be fairly quiet ahead of anticipated Bernanke event risk Scaled back expectations of Fed Chair speech into Friday trade Key investors warn of risks to additional monetary policy measures Eurozone banking woes still a major concerns and more volatility expected 3 Month LIBOR hits highest level in a year RBA Stevens on wires sounding anything but hawkish Looking to Buy Usd/Jpy is our favorite strategy over short-term Markets are expected to trade within relatively tight ranges ahead of the most highly anticipated event risk for the week, in the form of the 14:00GMT speech by Fed Chair Bernanke at Jackson Hole. While many had initially been expecting a dramatic market moving speech with announcements of new monetary policy measures and the beginning stages of an embarkation on a third round of quantitative easing, expectations have now been scaled back dramatically, with markets looking for more vague references of a general readiness of the Fed to act if necessary, and an ongoing commitment to keep rates ultra accommodative for an extended period of time. At this point, it seems as though even the most dovish of investors are now more willing to recognize the serious negative risks over the longer-term associated with the implementation of another round of easing. Pimco’s El Arian was recently on the wires saying that “Bernanke must not push QE3 or run the risk of building another bridge to nowhere.” Still, no one can be certain what the Fed chief will say and the speech brings with it a good deal of potential for solid volatility ahead of the weekend.

While most of the attention will be on speculation ahead of the Bernanke speech, the European debt crisis will not be sitting to far in the backseat, with ongoing uncertainty and fear still very much dominating investor sentiment. Funding pressures in Europe continue to escalate, with the 3 month LIBOR rate hitting its highest level in a year. European banks like Barclays, Credit Agricole, Credit Suisse, RBS, Soc Gen and UBS have all reported needing to pay above Thursday’s daily LIBOR fixing, while Credit Agricole has also said that US money market funding to the bank has been roughly halved due to the escalation in market tensions. Meanwhile, the ECB was the only central bank to tap the Fed via its swap lines in the previous week. As such, we continue to expect the ongoing deterioration and stress in the Eurozone to be the primary source for volatility and this theme should continue to dominate headlines over the coming weeks and months. The United States is now looking at least somewhat closer towards the path to recovery relative to the Eurozone economy and we see more risks associated with the Eurozone over the medium-term.

Elsewhere, although the Australian Dollar is tracking marginally higher on Friday thus far, RBA Stevens hasn’t been offering any real reason to be looking to buy the higher yielding antipodean after giving his semi-annual testimony to Parliament. Short of officially signaling the need for a rate cut, comments that the central bank was ahead on inflation and there was room for stimulus, certainly highlighted the very apparent shift in the RBA’s stance over the past several weeks amidst slowing local economic data and an escalating global macro deterioration. Stevens even addressed the Australian Dollar strength itself after saying that he felt that the rise to 1.1000 Aud/Usd was getting ahead of itself. The currency which has been highly correlated to risk sentiment could start to lose its correlation if the central bank continues to show signs of monetary policy reversal over the coming weeks. We are of the opinion that this will in fact be the case despite the attractive yield differentials, with China still very much at risk for additional cooling going forward.

On the strategy front, while we are currently on the sidelines, we continue to like the idea of looking to be long Usd/Jpy at current levels. As per our technical analysis below, the market failed to show any fresh downside follow through after breaking to record lows into the 75.00’s and has since closed back above some shorter-term consolidation highs to suggest that some form of a base is now in place. Additionally, our in-house speculative sentiment index (SSI) has been showing a decent reduction in retail long positioning in Usd/Jpy which further strengthens the case for additional upside going forward.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4500 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped by 1.4500, while only a daily close back above 1.4535 negates. Short-term support now comes in by 1.4255 and a break back below should accelerate declines.

USD/JPY:Although the market recently broke to fresh record lows below 76.00, failure to establish any downside momentum on the break suggests that the market could be looking to establish a more meaningful base. The latest daily close back above 77.30 encourages recovery outlook and we look for additional upside over the coming sessions back towards critical short-term resistance by 80.25. A daily close back under 76.80 delays constructive outlook.

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out by 1.6600 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while the latest daily close back under 1.6350 should accelerate declines.

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

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26 August 2011 05:46 GMT

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Japanese Yen: Currency Intervention, PM Election Takes Center Stage

By David Song, Currency Analyst 26 August 2011 21:35 GMT Fundamental Forecast for Japanese Yen: Bearish

The Japanese Yen lost ground after advancing to a fresh record-high during the previous week, and the low-yielding currency may weaken further as policy maker step up their efforts to stem the marked appreciation in the exchange rate. Indeed, Japan Finance Minister Yoshihiko Noda introduced a $100B program to help businesses deal with the ongoing strength in the local currency, and there could be increased pressures on the Bank of Japan to intervene in the foreign exchange market as Moody’s downgrades the region’s credit rating by a notch to Aa3.

In response, BoJ Governor Masaaki Shirakawa retained his pledge to carefully monitor the Yen while speak to policy makers earlier this week, and went onto say that the central bank can implement additional monetary tools to balance the risks for the region should the exchange rate pose a greater risk to the economy. The increased reliance on the central bank may lead the board to take additional steps to dampen demands for the low-yielding currency, and the BoJ may look to increase its asset purchases further rather than stepping directly into the currency market. At the same time, the election scheduled for August 29 will also come into focus as the Democratic Party of Japan looks for Prime Minister Naoto Kan’s replacement, and the transition could derail confidence in the government’s ability to address the risks surrounding the region as policy makers come under increased scrutiny. In turn, the central bank may have little choice but to step up its efforts to shore up the economy, and we may hear the BoJ announce additional measures next month as the region struggles to recovery from the devastating earthquake/tsunami from earlier this year.

In turn, the near-term rebound in the USD/JPY may gather pace in the week ahead, and the exchange rate may continue to retrace the sharp decline from earlier this month as the fundamental outlook for Japan deteriorates. However, the Japanese may outperform against its major counterparts should carry interest falter, while the dollar-yen may give back the advance from 75.94 as market participants continue to diversify away from the reserve currency. - DS

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26 August 2011 21:35 GMT

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FOREX: US Dollar May Rise as Bernanke Disappoints Stimulus Hopes

Talking Points

Ben Bernanke May Disappoint Traders Waiting for More Fed Stimulus Aussie Dollar Gains as RBA’s Stevens Talks Down Case for Rate Cuts Needless to say, all eyes are now on Federal Reserve Chairman Ben Bernanke as the he delivers his much-anticipated speech at the central bankers’ symposium in Jackson Hole, Wyoming. Markets appear positioned for the unveiling of further stimulus, with S&P 500 stock index futures scoring gains overnight. Such an outcome would naturally bode well for the spectrum of sentiment-sensitive currencies while weighing on established safe-havens and especially the US Dollar.

Traders waiting for the Fed to come riding to their rescue may be due for a disappointment however. When Mr Bernanke began to unveil QE2 at last year’s Jackson Hole sit-down, the central purpose was to ward off deflation expectations. A year on, medium-term inflation expectations (as reflected in bond yields) are down over 25 percent, putting the policy’s success in question.

Meanwhile, the unprecedented move to define the “extended period” through which rates will remain “exceptionally low” at the last FOMC meeting as mid-2013 may have been the beginning of a new, post-QE approach to stimulus. The announcement gave firms and investors a clearly defined window to capitalize on low borrowing costs and enough lead time to plan to do so. This seems like a clear attempt to offset the largest perceived problem with the effectiveness of QE in spurring the private sector out of complacency: the inherent uncertainty surrounding the use of a new, unorthodox policy tool.

The Australian Dollar led a modest advance against the greenback in overnight trade after RBA Governor Glenn Stevens’ testimony before the government’s Economics committee struck a dovish tone, presenting the case against interest rate cuts. The central bank chief said inflation will top 3 percent in the third quarter, adding that price growth data “continues to be concerning”. Stevens went on to say the central bank aims to contain CPI growth at 2-3 percent while noting that recent inflation figures have been “a bit troubling”.

Asia Session: What Happened

Tokyo Consumer Price Index (YoY) (JUL)

Tokyo CPI Ex-Fresh Food (YoY) (JUL)

Tokyo CPI Ex Food, Energy (YoY) (JUL)

National Consumer Price Index (YoY) (JUL)

National CPI Ex-Fresh Food (YoY) (JUL)

National CPI Ex Food, Energy (YoY) (JUL)

MNI Business Condition Survey (AUG)

Euro Session: What to Expect

German Import Price Index (MoM) (JUL)

German Import Price Index (YoY) (JUL)

Gross Domestic Product (QoQ) (2Q P)

Gross Domestic Product (YoY) (2Q P)

Index of Services (3Mo3M) (JUN)

KOF Swiss Leading Indicator (AUG)

Critical Levels

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