Kim Jong-Il Dies & Asian Currencies Weaken(20-Dec-11)

FX markets are now settling into holiday trading mode on thin volume punctuated by sudden volatility. News that North Korea's leader Kim Jong-Il died of a heart attack on a train became the primary event Asia. N. Korea transfer of leadership has already been established with Kim Jong-il third son Kim Jong-un handpicked for role. While a smooth transition is generally expected (some internal tensions have been reported) the injection of uncertainly will keep Japan and South Korea (JPY and KRW) on guard. Confirmation of the North Koreans leader death caused USDKRW spot to spike to 1195 however the highest prints were erased with the new high adjusted to 1185. Risk appetite remains weak as European policy maker’s attempts to stabilize the European debt crisis look to have to have stalled. Given this outlook, we suspect that risk will remain uncertain and should weigh heavily on FX risk correlated trades. Regional equity indices fell broadly with the Hang Seng down -1.18% and Shanghai falling -2.38%. It seems at this point that there will be little forward progress from now until the end of the year. EURUSD the FX markets new barometer for risk sentiment fell to 1.2983 before rallying to 1.3030. With liquidity expected to run thin ahead of the holidays, headlines regarding Europe will be the primary driver of volatility but we don't anticipate any clear direction. In addition, with IMM data showing a noticeable increase in EUR short positions, traders are especially vulnerable to an unexpected short squeeze. On Friday, Fitch credit rating agency put six Euro zone nations rating on watch negative while also dropping Frances outlook to ‘negative’ from ‘stable’. While the move was unremarkable Fitch did stated that a comprehensive solution for the Eurozone debt crisis is “beyond reach”. The moved has intensified the markets focus on S&P as the ratings agency in their move to review 15 of the 17 countries that a decisions regarding France would come soon after the conclusion of the EU summit. While most expected France to be downgraded, including Sarkozy himself the actual adjustment would be profoundly negative for the Euro. ECBs Draghi in a FT interview reiterated his opposition to increasing the ECBs purchases of trouble European sovereign debt. He went on the reject the concept of a country to leave the Eurozone as the move would breach existing treaty and ominously stated "you never know how it ends really"

With economic data in Europe disturbingly weak, the focus this week will be on the US economic data which has been showing clear indications of recovery. The US economy has good momentum heading into 2012 and this week's US GDP Q3 final estimate should set the stage for a strong USD rally. There is considerable evidence that the 2.00 read will be revised higher. Another interesting event will be the Riksbank rate announcement on Tuesday. With the Norges bank setting the pace for the scandies last week and going for a larger than expected cut of 50bp, traders will be watching for a deeper than expected cut. We are current penciling a 25bp of easing as Europe's risks to growth are now clearly a concern of Europe northern neighbors.


By

M.Zohaib Gadit

Forex Trading Consultant

Market Brief

EURUSD has slid dramatically lower since Friday morning, as murmurs of a Greek default have grown louder and risk appetite has vaporized in the market place. German press reports out over the weekend suggested that the German Economics Minister was already looking at contingency plans to protect domestic banks should there be a Greek default, increasing the number of official sources shown to be mulling the scenario which only months ago seemed unthinkable for policymakers. Some had speculated that the Greeks might even announce a default over this past weekend, but that development has not been forthcoming, as Prime Minister Papandreou unveiled fresh property taxes and state wage cuts to help avert default. Adding to a broader lack of confidence, ECB member Jurgen Stark announced his resignation late on Friday, with the reason believed to be a fundamental disagreement over the decision to recommence asset purchases. EURUSD has now slid to lows of 1.3495, and there may be further losses yet to come as the news flow trickles through.

Unsurprisingly, with all the turmoil in Europe there has been a continuation of bearish trading in the Asian stock markets, with the Nikkei currently trading -2.3% on the day and Hang Seng -3.9%. The Shanghai Composite has, for now, been shielded from the losses as the exchange is closed for the Mid Autumn Festival Public Holiday. S&P futures are currently down over 1% already, and expectations are for a lower open across the major European indices. In particular, it will be worth watching how the FTSE 100 reacts to the news that UK banks may have to stump up some GBP7bn in order to comply with the Vickers Plan to separately recapitalize consumer and securities units by 2019.

Today’s data calendar is pretty light so i predict most FX movement to be stimulated by headlines and rumours.

By
M.Zohaib Gadit
Forex Trading Consultant

GBP/USD Outllook

Intraday 5970 is key level. Targets below are 5905-5930, 5880-95 and 5845-60. Above targets are 6028 and than 6055 area. Break of this will target 6145. Today’s sensible range is 5845-6055. If market goes out of these ranges stay away from it as that will be an abnormal behavior.

From trend follow-up perspective important closing rates are areas of 5940, 6014, 6050.

By

M.Zohaib Gadit

Forex Trading Consultant

EURO/USD Outlook:The pairs seems content to wait for the ECB

The pairs seems content to wait for the ECB before choosing a direction, although broad based indicators are painting a bearish picture. Trading remains choppy and subject to headline reactions. Initial support stands at 1.3951 (17th June low) then 1.3837 (12th June low). Resistance is located at 1.4149 (7th Sept high), 1.4278 (6th Sept reaction high) then 1.4386 (1st Sept high).

By

M.Zohaib Gadit

Forex Trading Consultant

Pound retreat from 1.6000 highs

Pound retreat from 1.6000 highs on early Asian session has extended briefly to a fresh 2-month low at 1.5915, and the pair bounced up strongly ahead of the release of BoE's Monetary policy decision, to erase daily lows reaching 1.5995 high.

The BoE maintain its Bank Rate at 0.5% all time high, and to keep the target of its bonds purchasing programme at GBP 200 billion.

By
M.Zohaib Gadit
Forex Trading Consultant

Market Brief

Australian employment unexpectedly contracted and the unemployment rate rose in August, sending AUD sharply lower. Market moves have been mild so far in Asia after the large risk rally on Thursday. The ECB decision will be a highlight of the European session.

Australia lost 9.7K jobs in August compared to the 10K gain expected. The unemployment rate rose to 5.3% from 5.1%, no change was forecast. There was no change in the participation rate and full-time jobs decreased 12.6K, so there was no silver lining in the report. AUD/USD immediately fell 50 pips to 1.0590 and has given up half the gains from Wednesday's session. It's not the first time Australia has posted a surprisingly weak report but the numbers are often volatile so we won't draw any conclusions. The RBA statement and separate comments from Stevens yesterday pointed to a central bank that's comfortably on the sidelines.

Gold has rebounded $35 in early Asia-Pacific trading after falling $80 on Wednesday. The German court decision not to block Eurobonds took some of the sovereign fear bid out of gold but the price action so far shows once again that buying interest in strong immediately after any selloff.

The $300 billion jobs stimulus program set to be announced by Obama on Thursday was been frequently cited as the reason for the rally in risk. That may have been overstated as a short-squeeze looked to be evident and the German court and Italian parliamentary news was more important. In any case, the risks are high that the plan will get bogged down or transformed by partisan US politics.

The highlight of the European session are the rate decisions from the ECB and BOE. The Bank of England is first at 11 GMT but no action is expected and, in that case, there will be no statement released. There is some talk about further easing but the core of the MPC appears to be strongly opposed.

The ECB decision comes 45 minutes later and will be followed by a press conference from Trichet.I expect to see, at minimum, an incremental shift to a more dovish stance. Expect him to exclude, or tone down the recovery closely monitoring phrase from the previous meeting. Any action or strong dovish hints will weigh heavily on EUR.

By

M.Zohaib Gadit

Forex Trading Consultant

Today's key central bank decisions from the Bank of England and European Central Bank

Today's key central bank decisions from the Bank of England and European Central Bank shall draw scrutiny market. Both set to remain unchanged, but the ECB could adopt a more dovish outlook at its press conference. Australian unemployment rises, Japan trade surplus shrinks.

Recent lacklustre economic data in the UK has prompted a lot more dovish speculation as to the next steps that the Bank of England might take with respect to additional stimulus measures for the UK economy.

Yesterday's disappointing manufacturing and industrial production data for July has reinforced perceptions that Q3 growth could well contract, and prompted further calls from arch dove Adam Posen for further stimulus measures of around £50bn to help stimulate the UK economy.

While the calls for these measures are starting to become more strident and audible, including a call from the Institute of Directors, they are unlikely to happen today given the mathematics involved on the committee, but also due to the current high level of inflation.

Not only four members would have to become dovish, but also switch over to actual rate cuts. Yet, given that inflation in the UK could well rise further given that energy prices rises have yet to filter through, it could well prove unwise to risk further price rise pressures by weakening sterling and pushing imported inflation higher.

On the other hand, the committee could well think that higher inflation is a price well worth paying, however it is by no means certain that further fiscal measures would work, given the forces at play in the UK economy.

Later on the European Central Bank also starts its deliberations on interest rates and like the Bank of England it is also likely to keep policy unchanged. Recent deteriorations in economic conditions in Europe has highlighted the folly of the previous ECB rate hikes this year in precipitating recent upward pressure in bond yields across peripheral Europe, as well as choking off economic growth.

The markets focus is going to be more on President Trichet's press conference in light of his comments at Jackson Hole, about reviewing the pressures on price stability the focus will be on how dovish he is in his language, and the likelihood of possible hints about rate cuts by year end.

In Australia the latest employment report for August showed that unemployment rose by 9.7k, confounding expectations of a drop of 10k and the unemployment rate rose unexpectedly to 5.3% as recent market turmoil appears to have hindered jobs growth in the Australian economy.

In Japan the latest trade balance numbers unexpectedly shrank sinking to a surplus of 123.3bn yen from 149.1bn yen in June, showing that the economy continues to struggle to recover from the effects of the events of earlier this year in all likelihood due to its a stronger currency. To reinforce concerns exports were down 2.3% from July 2010, while imports were up by 13.6%.

By
M.Zohaib Gadit
Forex Trading Consultant

Concerns remain about the state of the UK economy

In the UK, despite last night's speech by the Chancellor reassuring that the UK recovery remains on track despite recent weak data, concerns remain about the state of the UK economy, as evidenced by yesterday's disappointing BRC retail sales numbers. These fears are likely to increase this morning if July manufacturing and industrial production data show further signs of slowing down or contracting further in the case of the industrial production data.

June's industrial production data came in flat on a monthly basis and down 0.3% year on year and though July's number is expected to rise 0.2% the year on year number is expected to slip further to -0.4%. Manufacturing production is set to be slightly more positive improving on a monthly basis from -0.4% to 0%, though the annual figure is expected to slip from 2.1% to 1.9%.

Weak numbers will once more increase the pressure on the Bank of England to embark on more QE at tomorrow's rate meeting, an outcome which at this moment seems unlikely despite some speculation to the contrary.

By
M.Zohaib Gadit
Forex Trading Consultant