Forex Market Overview

Forex Market Overview 26 June 2008

Usd was stable in the Asian session after being sold off in response to the FOMC meeting. EurUsd ranged between 1.5660 and 1.5685 while UsdJpy trended upwards from 107.75 to 108.05. Carry trades continued to exhibit strong momentum with EurJpy finally breaking thru 168.80 resistance, climbing to 169.40 and AudJpy followed that trend by breaking thru 103.48 resistance, reaching new highs at 103.69. In addition, given the fact that the EurJpy has historically proven to be a good indicator of risk appetite we expect continued demand of yield driven currency trades.

US stocks ended higher Wednesday after oil prices fell and the Fed left rates unchanged at 2%. The major indexes retreated from their post-FOMC highs in late-afternoon trading, with the Dow barely closing in positive territory. Asian markets trading higher this morning after the Fed said downside risks to growth appear to have diminished and gave no signs that it will raise interest rates anytime soon. Sony & Nintendo led the advancers. Oil prices pulled back after an unexpected increase in crude stockpiles but pared their losses after the Fed statement; the Aug '08 contract was down $2.45 to $134.55. Gold prices closed lower on the back of lower oil prices; the most active was the Aug '08 contract down $9.30 to $882.30. We also saw Sep '08 silver -13.2 ¢ at $16.607/oz.

Yesterday the Fed left rates unchanged at 2.00% and the statement showed the downside risks have diminished slightly and upside inflation risks have increased. Overall the statement had a less hawkish tone then what the market was expecting and failed to indicate that the fed is in any real hurry to begin hiking rates. As expected Fisher voted for an immediate hike (on the record saying the fed shouldn’t have moved below 3.5%). What was interesting and perhaps the strongest signal to the market that rate expectation have become over done was Plossers vote to hold rates along with the majority. In addition, the lack of assessment by the Fed of how inflation measured against growth ie which measurement would steer the Fed monetary policy suggested again that members are in no rush to hike given the unsettled domestic condition. With both rate cuts and hikes off the table in the near term much depends on economic data. We currently are not expecting much for the US and believe data will point to an economy just getting by but with significant downside risk. This should keep the Usd under pressure and we are watching for EurUsd to begin creeping upwards.

While data out of New Zealand has little monetary policy effect, a wider Current account deficit was not what official were hoping for (declined to 2.160bn deficit in Q1 from 3.410bn in Q1). Account deficit GDP ratio at 7.8%. Net income deficits worsened while exports outstripped imports.

Austria data was mixed with Conference Board indicators printed higher then expected at 0.3% vs. -0.4% while job vacancies rose 3.4% after a drop in April of -2.5%.

In the UK five members of the MPC will testify to the treasury committee on May inflation report (not a position we envy). This should be a good time for the markets to receive some clarity regarding how seriously the members are considering a rate hike. Especially given last weeks mixed communications signals. But overall we expect that we will see a diverse view of how each member views the inflation verse growth situation.

Daily Forex Pivot Point
AUDUSD
R 3: 0.9655
R 2: 0.9648
R 1: 0.9604
CURRENT: 0.9578
S 1: 0.9490
S 2: 0.9448
S 3: 0.9405

EURJPY
R 3: 171.00
R 2: 170.00
R 1: 169.15
CURRENT: 169.13
S 1: 166.77
S 2: 166.00
S 3: 165.51

USDSGD
R 3: 1.3850
R 2: 1.3827
R 1: 1.3730
CURRENT: 1.3666
S 1: 1.3635
S 2: 1.3580
S 3: 1.3554

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