By Interactive Brokers  -

The euro is back to unchanged against the greenback at $1.4355 in early U.S. trading after earlier reaching $1.4405 following an encouraging reading of business and investor confidence. However, the dollar is not giving in so easily this morning, for now at least, and appears to be fighting its way back to erase losses against other majors. In all the dollar has had a very positive week with more investors having been forced to quit short dollar plays during a week of concerns over rising risk aversion thanks to sovereign downgrades and potential vilification for a sea change to the direction of longer term yields.

Euro – The Munich-based IFO released its strongest record of business confidence amongst German executives in 17 months. The November reading of 94.7 not only improved on October’s 93.9 index value but also surpassed expectations. The IFO cited improvements in current conditions and healthy prospects for the future based upon evidence of rising manufacturing exports, namely to China.

The IFO survey helps drag up the prospects for the Eurozone where a recent slide in confidence amongst investors this week raised question marks over the potential for the economy to maintain its momentum in the face of a stiff wind from the rising euro. As welcome as today’s latest reading on the economy is, investors are not translating that into a significant relief rally for the euro. The euro did make gains against a broadly weaker yen to ¥129.65.

U.S. dollar – The dollar faces an empty data slate on Friday and there is little to drive it heading into the weekend. With a claw back against eth euro and a rise against the yen, the dollar index is indicating a minor gain for the session.

Aussie dollar is attracting some buyers at the end of a torrid week. The mix of increasing risk aversion and a less hawkish tone from the RBA likely means that monetary policy isn’t going much higher. Still investors are clearly saying today that the potential for the currency remains bright and are buying against the dollar today at 88.86 U.S. cents.

Japanese yen –The bank of Japan announced no change to its monetary policy stance overnight and left interest rates at 0.1%. It did, however, warn that it won’t tolerate price declines. The market reaction was to sell the yen and today the dollar buys ¥90.45 and it does provoke one of those questions often investors try to understand. If the premise of interest rates remaining low caused the yen to fall today, why does it rise when financial markets recoil? At such points of inflexion when risk events create safe haven demand, it is true that the yen and the dollar both go higher as investors rank their role as safety plays rather highly. Today’s largely worthless words warning about intolerance to deflation will likely spur the notion that the government’s bond purchase program will maintain even less appealing yields on 10-year bonds.

British pound – Sterling jumped against the dollar following data released by the Bank of England showing mortgage approvals rose in volume from 60,000 in October to 63,000 last month. Earlier in the week a RICS report apparently showed a bullish take for British home prices. Together these pieces of data continue to show a resumption of possible growth. Recently a spurt in inflationary pressures implies more of the same. The pound rose to $1.6173 but the euro rose to buy slightly more pounds today at 88.66 pence.

Canadian dollar – The Canadian dollar today buys 93.85 U.S. cents as investors attempt to find a floor for Canada after yesterday’s broad U.S. dollar rally. A strong rise in domestic inflation showed up to reveal the biggest consumer price rise in a eight months. However, the jump in energy prices – 14% for gasoline prices – is due to the run off of a sharp drop in prices through October last year. So the comparison to a low November 2008 base “embarrasses” the Canadian situation. Still, Bank of Canada governor, Mark Carney reiterated his commitment to frozen rates through the first half of next year.

By DailyFX -US Dollar:

Fundamental Outlook for US Dollar: Bullish

- US Retail Sales disappoint and the US Dollar rallies
- Federal Reserve’s interest rate decision sparks impressive US Dollar volatility
- Forex options and futures sentiment suggests USD may continue rallying

The US Dollar fell near fresh year-to-date lows versus the Euro and other major counterparts, but a sharp end-of-week reversal suggests that the downtrodden Greenback could stage a larger recovery. Impressive S&P 500 rallies played a large role in dollar weakness. A late-week US University of Michigan Consumer Confidence nonetheless proved sharply disappointing, and the key risk sentiment barometer turned notably lower into the week’s close. The strongly-correlated safe-haven US currency continues to take its cues from risky assets, and a true turnaround in stocks could herald an accelerated USD correction. We feel that a sustained US Dollar rally is almost inevitable, but timing the turn remains extremely difficult and we’ve thus far been early in our calls for Greenback strength. Increasingly one-sided sentiment nonetheless that Friday’s USD rally could be the start of a bigger move.

Limited US economic event risk in the week ahead leaves volatility expectations noticeably lower, but the dip hardly precludes short-term breakouts. Last week’s string of top-tier economic reports underlined the fact that forex traders still care about economic data, but market reactions are not always intuitive. Indeed, the dollar has frequently rallied on a number of disappointing US economic data releases. The strange dynamic owes itself to the USD’s strong link to risk sentiment and the S&P 500. When the S&P gapped lower following a clearly worse-than-forecast University of Michigan Consumer Confidence report, the US Dollar rallied sharply against the Euro and other key counterparts. If we can expect similar price action in the days ahead, US Dollar bulls should hope that domestic economic sentiment has likewise taken a turn for the worse. Recent Consumer Confidence figures suggest future consumption-linked reports may similarly disappoint.

Foreseeable highlights in the week ahead include Treasury International Capital (TICs) data, Housing Starts and Building Permits reports, and an end-of-week Existing Home Sales release. The first report may prove especially interesting to recently-skittish US Treasury Bond traders, as it will underline the health of foreign demand for US Dollar asset classes. Much was made of a “failed” US Treasury auction at the end of July, where demand for 2 and 5-year Treasury Note was sharply lower than expected. Commentators suggested that supply of US Government debt had far outstripped demand and Treasuries tumbled on the news. Recent 30-year bond auction results nonetheless showed healthy demand for long-term debt—that which is particularly susceptible to fears of excessive government deficits and creditworthiness. We here at DailyFX could not help but notice that the news coincided with the Fed’s aggressive balance sheet expansion on the week. Indeed, the Fed’s Quantitative Easing measures have explicitly purchased Treasuries and likely overstated the health of demand for US debt. The TICs report will provide a breakdown of foreign purchases and demystify the source of robust 30-year bond demand, and any signs of weakness in foreign purchases could have noteworthy effects on the US Dollar and domestic stock markets.

Prominent housing data could likewise drive volatility in the US S&P 500 and the Greenback, but results for the choppy data series are especially difficult to handicap. We will clearly keep a close eye on the S&P and other risky asset classes through upcoming trade. Whether or not the US dollar can finally stage a comeback will likely depend on the trajectory of financial risk sentiment. -

Just a brief post going into the NFP data release in 70 minutes.

EUR/USD has been in a very small range since yesterday afternoon; the coil is being wound up and getting ready to spring. I was thinking this morning that it has been a while since any talking head has had anything but a long bias towards EUR/USD. Nobody says that being short is a good idea. I seem to be one of the last commentators to side with the Long EUR/USD crowd when we turned our outlook positive on July 20 and put on our long position July 30.

So the concern is that no one is short. No one is out there worried about covering a short position if EUR/USD gaps higher after the data release. No one will be desperate to buy back their EUR/USD position regardless of price. There will be no Dealing Desk Managers shouting at their dealing team to “Lift every Offer You See!!”

Conversely, if EUR/USD starts to tumble after the data release, there are a lot of long EUR/USD positions that got to the party late and are barely above (or maybe below) their entry point. These are the players that may be spooked easily by a drop in EUR/USD. And remember the biggest short-term players in this market (large dealing desks) need transactions to make money. Their goal is to drive the market into action.

So without commenting on the actual data release (estimates range from -150k to -475k jobs)we focus on the market action and will lighten up our position before the data release this morning. If we are right with our call for a 1.47xx handle sometime in the next 5 weeks, then there is still a lot of room on the upside to participate and re-enter our full long position.

Stay Nimble!

Stephen Leahy
Back Bay FX Services, LLC
www.backbayfx.com

By Wachovia – Gain a wider view of the factors behind current economic news with comprehensive analysis and commentary from Wachovia Economic Commentary and Currency Risk Management Groups.

Read Today’s Wachovia Daily FX Report Here

Our detailed commentary from last week both before and after the FOMC statement on Wednesday noted that we believe that the Fed’s comments would lead to USD strength in coming weeks. So far our theory has been tested as USD has fallen to levels that printed before the FOMC statement. EUR/USD is trading at 1.4110, USD/JPY at 96.11, and importantly GBP/USD cracked through the 1.6725 level. So we are on guard for any further USD weakness as we think we are at levels that could cause a long-covering push lower on USD (meaning higher EUR/USD and GBP/USD).

Lets not forget that our post FOMC statement theory of stronger USD is a long-term plan. If EUR/USD closes the week significantly higher that the 1.4100 level……and if GBP/USD can regain and hold the 1.6700 levels, then we may have to re-assess our strong USD expectations for the next few weeks. But for now we keep our strong USD plan in place.

Another challenge to our strong post FOMC strong USD theory is that the movement in the US 10 year note seems to have already made its large move. The US 10 year note yielded just above 4.00% about three weeks ago and is now hovering around the 3.5% level. As we noted last week, that is a huge move in a short time period.

We think the yield on the US 10 year note will have to break below 3.50% for much further USD strength. 3.50% is an important psychological level, yet we are seeing and hearing more and more commentary about rates moving towards the 3.00% level. This does conflict with our view of the 10 year yields by years end (we think higher), but with the extremely volatile trading of the 10 year note in the last 12 months, its possible we will see lower rates in the short term and then a move higher towards the end of the year.

This is the stuff we love about the global capital markets; they are like a spider web. If you pull on one corner of a spider’s web, then rest of the web has to shift to accommodate the external action. But the web does not move in a linear manner, the web’s movements depend on so many factors that it is never easy to determine which shape the web will have in the future.

Stay Nimble!

Stephen Leahy
Back Bay FX Services, LLC
www.backbayfx.com

Last week we posted three comments on specific moves in the currency markets, and one commentary regarding US Treasury Yields.

Our posting from June 8 that the next large move in GBP/JPY would be lower has yet to work out. We thought then that the technicals of the pair were leaning towards a gentle roll-over and cause the pair to give up a few big figures. But GBP/JPY has held on and even rallied up to the 162.00 level. So far today the pair has fallen hard. We still think that the fundamentals will bring this pair significantly lower in coming weeks; and we continue to search for technical indicators to confirm our beliefs.

US 10 year Treasury yields have in fact dropped as we mentioned. This has been closely tied to the USD strength and the tunr lower by the major commodities. Please visit our blog posting from June 9 to review our analysis (http://www.backbayfx.com/blog.php)

Canadian Dollar. Our call to watch for a falling Canadian Dollar (best expressed through a long EUR/CAD position) worked out well last week. We noted that the fundamentals and technicals were lining up for a drop in CAD and when the Bank of Canada gave his speech on June 11, EUR/CAD powered higher as we expected. The move went as much as 250 pips in the money, and is presently still 200 pips higher than our trade entry levels.

Our Friday posting that EUR/USD was breaking through support levels was spot on and we are presently trading at the next levels of support as we expected (www.backbayfx.com/blog.php). We continue to watch for the next leg lower in EUR/USD but would not chase this move with a market order at these levels. We will look for a pullback to slightly higher levels before initiating another short positon.

Stay Nimble!

Stephen Leahy
Back Bay FX Services, LLC
www.backbayfx.com

By ForexDistrict -

Gold is trading at $930 as of 9:13am, London Time. Gold’s Pool-Position is 32% Long, meaning that most Finotec clients are selling the precious metal.

Gold declined against the Dollar as a rallying greenback eroded interest in the precious metal. The greenback gained against most of the major currencies after Russia’s Finance Minister Alexei Kudrin said the nation has full confidence in the U.S. currency. Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, have remained unchanged at 1,132.15 metric tons since. “The gold price tumbled lower, affected by the firmer tone of the U.S. dollar,” David Moore, commodity strategist at Commonwealth Bank of Australia, said in an e-mail today. Gold is trading at $930 as of 9:13am, London Time. Gold’s Pool-Position is 32% Long, meaning that most Finotec clients are selling the precious metal.

As originally posted on Forex District.

gold
forex news
currency trading

BY ADAM HEWISON -

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“The Wall Street firms that trade directly with the Federal Reserve say speculators betting that interest rates may head higher this year are wrong.

Policy makers will keep the target for overnight loans between banks in a range of zero to 0.25 percent this year, according a survey of 15 of the 16 primary dealers of U.S. government securities that trade with the central bank. A majority predict no increase until at least the second half of 2010. Cantor Fitzgerald & Co. officials weren�t able to immediately provide a forecast.

Yields on two-year Treasury notes surged 44.4 basis points June 5 and 8, the biggest two-day increase since Sept. 18 and 19, and Fed funds futures contracts show a 58 percent probability of a rate increase by November on signs that the economy is bottoming. Implied yields on eurodollar futures, also used to speculate on changes in central bank policy, increased even as the U.S. government said on June 5 that the unemployment rate rose to 9.4 percent, the highest since 1984.”
From Bloomberg, June 9th
____________________________________________

We find this news article quite interesting. Essentially it seems that the biggest dealing desks are at odds with the market participants. So will the “smart money” dealing desks, with their connections to the US Fed, and their quantitative pricing models be correct, or will the markets view win out? Remember that markets are affected by George Soros’ theory of reflexivity, which poses that markets are effected by participants’ actions, thereby effecting the market’s fundamentals.

In this case the “house” (bond dealers) and the “players” market participants are at odds. We will be watching the yield on the 10 year US Treasury Note as it closes in on 4% to see where the line in the sand is drawn by the dealers.

The interest to currency traders is that as longer term interest rates have moved higher, the short term rates controlled by the US Fed stay low. This creates a steepening of the yield curve that implies inflation in the future. That change in the steepness of the yield curve is what has hurt the USD over the last two months. Inflation will erode the value of the USD.

So keep an eye on the yield curve to see if as the yield on 10 year Treasuries closes in on 4%, the market and the US Fed start to raise the short term rates which would lessen the steepness of the yiueld curve. This would be bullish for the USD.

Stay Nimble!

Stephen Leahy
Back Bay FX Services, LLC
www.backbayfx.com