Reply #17: dollar watch [View All]

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 75.892 Change +0.185 (+0.24%)

Dollar Yen Approaches 108 as Nikkei Skyrockets -- But Danger Ahead in US

http://www.dailyfx.com/story/bio2/Dollar_Yen_Approaches_108_as_1201257316877.html

Risk appetite returned with a vengeance in the currency market tonight as Nikkei skyrocketed by more than 500 points helping to propel USDJPY to within 10 points of the 108 level. Investors in Asia were encouraged by the rebound in equity prices in Europe and US over the past two days after the Fed’s emergency inter-meeting rate cut of 75bp on Tuesday.

With little key data on the economic calendar this week currency markets have been trading in tandem with the equities. Carry trades fell when equities crashed and rose when stock rebounded tracing out rollercoaster price action all week long. The economic picture remains unclear as traders still debate whether US will enter a full blown recession or merely experience a temporary slowdown. Yesterday’s weekly jobless claims were encouraging printing at 301k well below our threshold of 350K and indicate that at least for the moment the labor markets are not seeing any material deterioration in demand.

On the economic front the European data was mixed today with German consumer confidence printing better than forecast at 4.5 vs. 4.3 but nevertheless hitting a 2 year low while Italian Retail sales slipped into negative territory registering a contraction of -0.3% on a month over month basis. The negative effects of the global credit crunch are slowly seeping into the real economy in the Euro-zone and should turbulence persist, consumer demand may weaken significantly, undermining ECB’s hawkish outlook. For the time being however, European monetary authorities continue to err on the side of inflation maintaining a restrictive policy.

With no US economic data on the docket currency markets will look to equities to set the tone once again and today’s early gains in the carry trades and the high yielders could come under pressure if US stocks sell off. After two strong days of gains, equity traders may run into the case of buyer remorse, choosing to take their profits ahead of the weekend. Should stocks falter expect the EURUSD and GBPUSD to do the same as risk aversion/risk assumption remains the only game in town.

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Fed Rate Cut Expectations Falling Like a Rock

http://www.dailyfx.com/story/bio1/Fed_Rate_Cut_Expectations_Falling_1201214354165.html

It appears that nothing can escape the volatility that we are seeing in the financial markets including Fed rate cut expectations. Two days ago, the market was pricing in a strong possibility of 75bp of easing, yesterday that fell to a 92 percent chance for a 50bp rate cut and now the choice is between 50 and 25 instead of 75 and 50 (Vote on How Much Do You Think The Fed Will Cut on Jan 30th). As a result, the US dollar has rebounded against the Japanese Yen, and given back some of its risk aversion related gains against all of the other major currencies. What caused this big shift? The stock market. If equities continued to fall, expectations for a larger rate cut would rise because a further drop in equities would mean that the emergency rate cut by the Federal Reserve did not work. However, equities have stabilized and traders are becoming less risk averse, reducing the need for a large follow up move by the Fed. Yet with less than a week to go before the next central bank meeting, we would not be surprised to see these expectations shift dramatically once again. Consumer confidence, ADP employment, and the advance release of fourth quarter GDP are all potential triggers. Also, keep an eye on stocks because despite Wednesday’s 300 point rise, we have yet to see another impressive move in equities. The $7 billion trading loss incurred by a rogue trader that was announced by French bank Societe Generale today is one for the history books and even though they have offloaded all of the risk, this may be a wake up call for banks around the world to evaluate their own derivatives exposure. The US economy is not out of the woods yet either. Even though jobless claims fell to the lowest level in four months, sales of existing homes also dropped 2.2 percent in December, making last year’s decline in sales of pre-owned homes the largest since 1982. House prices also fell 1.8 percent which was the first annual decline on record. The recent interest rate cuts by the Federal Reserve should go a long way in helping these home owners, but falling property values and stricter borrowing terms will still lead to more foreclosures. The government also announced details on their fiscal stimulus package, but even if this passes the house in the next few weeks, the rebate checks would not be sent until May, far dated enough for more pain to be incurred.

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