Forex Market Overview

Forex Market Overview 23 July 2008

The Usd consolidated gains in the Asian session as hawkish comments from US officials and oil falling sharply helped boost the Usd. The EurUsd stayed in a tight range from 1.5775 to 1.5798, while the UsdJpy saw choppy trading between 107.16 to 107.38. The NzdUsd slipped to 0.7750, as traders speculate on an earlier than expected rate cut. The AudUsd also lost ground, despite the higher then expected inflation reading. The US equity market shrugged off poor earnings to close up and Asian equities are following. Commodities still are soft with gold down -1.65% to 945.68oz and wti crude at 127.74, as the declining global growth story gains traction and damped demand of inflation hedges.

It was Fed’s Plosser ultra hawkish comment that added momentum to the Usd buying frenzy yesterday (part of a recent trend of hawkish comments from Fisher, Hoenig, Stern & Lacker but divergent from Bernanke’s stated views). Stating "We will need to reverse course - the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later. And I believe it will likely need to begin before either the labor market or the financial markets have completely turned around." The comment “before either the labor market or financial market has completely turned around” was unprecedented, since the Fed has never raised rates while payrolls shown a negative trend. As we stated yesterday in our Asian session, we had expected rhetoric from policy makers to affect FX sentiment in the ultra short term and expect the aggressive Usd buying to reverse intraday.

Australian CPI released today rose quicker than the market had expected by 1.5% q/q vs. 1.2% exp (lifting y/y to 4.5% vs. 4.2% exp). However, the RBA preferred measure rose by q2 1.2% q/q, which was unchanged from previous reading. We expect the RBA to be on hold for the remainder of the year, as moderating growth should help ease inflationary pressures.

The highlight of the European session will be the UK MPC minutes for July. There are mounting signs that the MPC might have slightly shifted towards a growth focus. June’s minutes showed that members had discussed further tightening and, since then, all measures of inflation have increased (ppi, cpi and inflation expectations). However, much of this deterioration was expected. What has been unexpected was the rate of moderation in the real economy and the genuine risk the UK might slip into a recession. We expect Blanchflower to have voted for a cut (as always), but the market might get a surprise from Kate Barker, a good proxy for general sentiment. With the Gbp trading at 1.9900 on yield differentials, any real or perceived shift could lead to a considerable sell-off.

14.00gmt - Fed's Mishkin speaks
16.15gmt - Fed's Kohn speaks

Daily Forex Pivot Points
AUDUSD
R 3: 0.9895
R 2: 0.9850
R 1: 0.9818
CURRENT: 0.9673
S 1: 0.9675
S 2: 0.9665
S 3: 0.9597

EURJPY
R 3: 171.07
R 2: 170.00
R 1: 169.92
CURRENT: 169.78
S 1: 168.25
S 2: 166.00
S 3: 165.33

USDSGD
R 3: 1.3717
R 2: 1.3660
R 1: 1.3597
CURRENT: 1.3606
S 1: 1.3452
S 2: 1.3395
S 3: 1.3300

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