Times of Malta : FOREX WEEKLY REVIEW: Mixed FX Indicators…awaiting market signals

[RTFX]

Last week, signs of improved economic conditions prevailed in the Euro zone. The downturn in the services sector in the Euro zone almost came to an end in August and firms’ forecasts have reached their best level in over two years. Similar figures from Germany and France show that the service sector has returned to growth in Europe’s two largest economies, confirming the upturn illustrated last week by their unexpected return to growth in GDP during Q2’09. The figures also show that the contraction in the manufacturing sector has significantly reduced in August and that production has increased for the first time in 15 months. These figures lead to the conclusion that the Euro zone economy as a whole has seized to contract after suffering the worst recession in its history.

In the US, industrial activity in the Philadelphia area has improved significantly in August and even ended a series of ten consecutive months of contraction, according to the Philadelphia Federal Reserve Index released last Thursday. Another element that shows a rebound in activity, the leading indicators index of the US, also published last Thursday, has further improved in July for the fourth consecutive month. The publication of existing home sales in July showed the largest increase since 2007. These indicators suggest that the recession has reached a bottom and that the US economic activity will start growing
without any doubt soon.

Comments from key officials of major industrialized countries will also be in line for a resumption of the global economy. The Chairman of the Federal Reserve, Ben Bernanke, said "after having fallen sharply over the past year, economic activity seems to have stabilized, both in the United States and abroad, prospects for a return to growth in the short term are good.” Angel Gurria, Secretary General of the OECD, said that countries that have implemented the heaviest recovery plans would most likely lead the way to recovery.

This renewed optimism has sparked a rally in the Stock markets and foreign exchange market, with a renewed appetite for risk. The Euro, the British Pound, Australian and New Zealand Dollar all closed with sustained gains last week, while the US Dollar and the Yen were out of favor with investors.

It is always difficult to predict a market turnaround, don’t we say "the trend is your friend?" or "the market is always right?"? However, some signs make me believe that risk appetite (that is, increase in carry trades) may be nearing its end. In my opinion, however, investors underestimate some indicators that would otherwise weigh differently on their investment strategies.

First, in the US, the crisis seems far from over in the housing sector. According to a study published by an association of banks specializing in real estate, the number of Americans who have had their homes seized for non‐payment or being late on repayment of their credit is up 13% in Q2’09. The most worrisome is the change in the profile of borrowers, where now even fixed‐rate borrowers are struggling to repay their debts, in contrast with previous times where only subprime category and variable rates borrowers were most likely to default their payments.

Second, last week, US authorities closed the 81st bank this year. The latest is the Guaranty Bank, with $13 billion assets and $12 billion deposits. The biggest bankruptcy of 2009 remains Colonial Bank, pronounced bankrupt two weeks ago, which had $25 billion worth of assets.

Third, the Shanghai Stock Market worried investors. Fears of tighter solvency rules imposed on Chinese banks weighed again on the confidence of Chinese people. The Shanghai Stock Market lost 3.30% last week, recovering slightly after dropping 20% during the past two weeks. The important psychological threshold of 3,000 points is crucial.

The last element that could affect the "carry trades" is the Japanese elections on the 30th of August.

According to polls, this election should see the defeat of the Liberal Democrats (LDP) of Prime Minister Taro Aso in favor of the Democratic Party. As the Democratic Party seems to have a radically different view on monetary policy, some investors may sell the Dollar aggressively and purchase the Japanese Yen in coming weeks, bringing in its wake a decline in carry trades.

Upcoming FX Key Events:
• 27‐Aug ‐ US Q2 GDP Preliminary
• 28‐Aug ‐ UK Q2 GDP Final
• 30‐Aug ‐ Japanese Election
• 1‐Sep ‐ US FOMC Minutes
• 3 Sep ‐ ECB Interest Rate Decision

FX Technical Key Points:
• EUR/USD is neutral, support around 1.4000, key resistance 1.4447
• USD/JPY bearish, resistance at 95.90, support at 88.50
• USD/CHF is neutral, watch 1.0600 or 1.1000
• AUD/USD is bullish, support at 0.8150, resistance 0.9150
• NZD/USD is bullish, support at 0.6575



This article has been prepared by Nicolas Longchamp, Head of Trading at RTFX Ltd.


Source : the Times of Malta
http://www.timesofmalta.com/