Forex Market Overview

Forex Market Overview 05 August 2008

The Usd was broadly stronger in Asian session, as traders position themselves for today's FOMC rate announcement. The EurUsd slid from 1.5590 to 1.5524, while the UsdJpy took a weaker tone in the Asian afternoon, falling to 108.05 from 108.32. The AudUsd & NzdUsd continued to be sold off on the back of the RBA comments, dropping to 0.9223 and 0.7259 respectively. The Jpy fueled carry trades took a bearish tone with EurJpy pulling back from yesterday's 168.78 highs to 167.96. After a busy day of trading, the crude is current softer down -1.08% to $120.09bll, while gold closed below the psychological $900oz lvl, now trading at $887.83oz. The Asian stock markets are following Wall Street lower, with the Hang Seng down -2.23%, while European stock futures are looking at a mixed open.

In Australia , the RBA held rates at 7.25% as was widely expected. What was unexpected was the absolutely frank talk from the central bank. In today's communication, the RBA stated "with demand slowing, the board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing". We view this transparent comment as an admission that unless we witness and economic miracle in the next 4 weeks, the market should expect a 25bp cut in September. With the market now shifting expectations to a 25bp cut in September and possibility of a 50bp cut in December, we expect the Aud to continue to come under selling pressure.

In the Eurozone retail sales, PMI and industrial production will keep the markets busy. We are expecting all three indicators to show weakness and putting pressure on the ECB to act.

In the UK , July's CIPS/Markit report on services is likely to verify that activity in the sector is slowing significantly. The index dropped sharply from 49.8 to 47.1 in June, (below the 50 level that theoretically separates contraction from expansion). We expect the GbpUsd to continue its downward market to 1.9300.

The highlight of the trading day will be the FOMC rate announcement. We are expecting the Fed to hold at 2.00%. Since they were unwilling to move higher in June we doubt conditions warrant have changed for the better. With renewed troubles in the financial markets and weakness in economic data, from our perspective the window for higher rates has closed. In addition, we expect the accompanying statement will be relatively unchanged and will disappoint the market by not taking a more hawkish tone. We still see upside inflation and downside economic risk to be basically balanced. Currently we expect the Fed to hold until 2009.

Daily Forex Pivot Points

AUDUSD

R 3: 0.9419
R 2: 0.9347
R 1: 0.9301

CURRENT: 0.9213

S 1: 0.9164
S 2: 0.9032
S 3: 0.8979

EURJPY

R 3: 169.97
R 2: 169.73
R 1: 169.19

CURRENT: 167.14

S 1: 167.32
S 2: 166.98
S 3: 166.01

USDSGD

R 3: 1.3850
R 2: 1.3827
R 1: 1.3775

CURRENT: 1.3756

S 1: 1.3651
S 2: 1.3606
S 3: 1.3567

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