GDP, Oil, and Unemployment; Demand & Supply battle

Second quarter's GDP missed estimates when in Q4 (2007) revised to negative, and jobless claims climbed by 44K to 448000 which is usually considered a recessionary number. It is at the time that Employment Report, which is scheduled for tomorrow, may show that the economy lost jobs for seventh consecutive months.

The reaction to the report was interesting. Oil price dropped after earlier jump betting that the slowing economy would decrease demand. It helped dollar to pare its sharp losses against other major currencies. However, from the supply/demand perspective, it looks a little complicated for the dollar:

• From the demand side: Some economic data on Friday may show more weakness in euro-area. German Retail Sales may attract more attention which in expected to be declined in June. Oil price may extend its decline in response to any depreciation of Euro and such process could increase demand for dollar.
• From the supply side: It seems reasonable to expect that the current situation could bring more challenge for the greenback. Considering the increasingly deteriorated job market, the prospect for rising interest rate would be completely uncertain.

I think that taking a position ahead of tomorrow's US Employment Report could be a more difficult balancing act; so it would be necessary to be more cautious about technical data.

Monthly Report: July 2008

Monthly Report: July 2008

(to be completed)

US Employment Report; Could ADP be a trigger?

I still think that the Friday's Employment Report is the most important data for the week. The ADP Employment Change is ahead which is considered as an early estimate for the official report.

It would be easier to sell dollar if today's better-than-expected Consumer Confidence didn't affect the market so positively. Crude oil dropped almost 3 $/b when euro depreciate one percent against the greenback.

Should oil drop below 120 it would be very supportive to the dollar. It may happen if the Petroleum Status report shows another increase tomorrow. However I see that price unlikely.

So I just wait until technical data suggest that the balance is going to change against the dollar and then there would be options for taking position.

Bad bet and carelessness made 39 pip loss

A buying order for gold automatically triggered at 925.0 and resulted in loss at 921.1 very soon. I was absent at the terminal when it happened just one hour to the US data, CaseShiller and Consumer Confidence reports and both came better than expected.

I always close positions or reduce the size significantly before any data release and this case was a clear violation to that rule.

Taking position ahead of US data

US stock indexes dropped as much as 2 percent when earning results looks not encouraging and a report from IMF made the picture of US housing market cloudy.

So I found it appropriate to sell dollar (against yen at 107.52) to take a position ahead of US Consumer Confidence and S&P/CaseShiller Composite, both scheduled for tomorrow.

I will increase the size in any opportunity; it is likely that tonight's data from Japan, including Household Spending and Retail Trade, make a better technical condition for selling dollar (or even other pairs such as GBPJPY).

Weekly Outlook: How to Play the Big Picture

This week, Consumer Spending and the second quarter's GDP may look encouraging in numbers but mostly thanks to the positive effects from the tax rebates. At this time, it seems that the market's belief is very near to this:

"The U.S. economy will be weaken in the second half of the year when the effect of the stimulus package start to fade and the negative effects from falling home prices, rising unemployment, and elevated prices of food and energy persist and definitely reduce consumer spending and overall economic activity."

(to be completed)

Calendar Highlights: 27 July – 1 August 2008

Calendar Highlights: 27 July – 1 August 2008

SUN 27 JUL
1845 NZD Trade Balance

MON 28 JUL
0210 EUR German GfK Consumer Confidence Survey
1930 JPY Household Spending
1950 JPY Retail Trade

TUE 29 JUL
000? EUR Germany Consumer Price Index
0240 EUR French Consumer Confidence
0245 EUR French Producer Prices
0430 GBP Mortgage Approvals
0800 EUR German IFO (by Industries)
0900 USD S&P/CaseShiller Composite
1000 USD Consumer Confidence
1950 JPY Industrial Production

WED 30 JUL
000? EUR German Retail Sales
0130 AUD Building Approvals
0400 EUR Italian Producer Prices
0500 EUR Euro-zone Business Climate Indicator
0815 USD ADP Employment Change
1900 GBP GfK Consumer Confidence
2130 AUD Trade Balance
2300 NZD NBNZ Business Confidence

THU 31 JUL
0145 CHF Consumer Price Index
0200 EUR German ILO Unemployment Change
0500 EUR Italian Consumer Price Index
0500 EUR Euro-zone CPI Estimate
0500 EUR Euro-zone Unemployment Rate
0830 CAD Gross Domestic Product
0830 USD Gross Domestic Product
0830 USD Personal Consumption
0945 USD Chicago Purchasing Manager
2359 USD Total Vehicle Sales

FRI 1 AUG
0100 JPY Total Vehicle Sales
0355 EUR German Purchasing Manager Index
0430 GBP Purchasing Manager Index
0830 USD Employment Report
1000 USD ISM Manufacturing

(All times in EDT, source: dailyfx.com/calendar )

Case Study: Reaction to UK Retail Sales

MPC's minutes on Wednesday helped sterling to appreciate against major currencies when it showed that there was a vote for an increase in interest rate. It also showed that they want to have more data before any decision on changing the rate and it was when Retail Sales and GDP were ahead.

Retail sales in UK dropped the most in decades, -3.9 percent, and sterling depreciate in response. But I think the opportunity was missed well before the data:

• The best time for selling pound might be probably at the midnight of Central Europe, when technical data were increasingly showing divergence (e.g. RSI divergence and MACD crossover in GBPJPY chart).


• And before the release, some weak economic reports from euro-zone such as German IFO and Euro PMI in addition to this fact that more concerning data are ahead from US housing markets were a trigger to the market to buy back the Yen as reducing carry trading.

How NZ Dollar Reacted to a Rate Cut

The chance of a rate cut was about 50-50 though the final decision, reducing the interest rate by 0.25 percent, interpreted as a surprise. Consensus in economic calendars was for no change, but in one hour to the decision, I searched related news in Bloomberg and I found a useful article reflecting the possibility of a rate cut as soon as this meeting.

The statement shows that further rate cuts are to come; "Provided that the outlook for inflation continues to improve and there is no excessive exchange-rate depreciation, we would expect to lower rates further", RBNZ's Alan Bollard said.

However, the first reaction was far less than what I expected from such event. It may be because that the current 8.0 percent interest rate is still attractive enough to limit the negative effects.

MPC Minutes; Policymakers want to have more data

Bank of England released the minutes of last MPC meeting today. In a relatively rare case the members split three ways in the decision to keep interest rate unchanged. Timothy Besley wanted an increase, David Blanchflower a reduction, when other six members voted to no change.

Market interpreted the situation as a strong resistance in MPC's view against rising inflation. For the day the British pound reacted positively to the news.

Case Study: Has each day its own story?

Yesterday was the day of dollar when comments from US officials, especially from Fed's Plosser, helped dollar to appreciate significantly. Euro was among victims when depreciated almost one percent against dollar. So it was a question to me that to what degree the new data could affect Euro today.

French consumer spending declined 0.4 percent and Industrial New Orders dropped 3.5 percent in May which was 2.5 percent more than analysts' estimates. As the chart shows, the yesterday negative reaction didn't change the expected result from the new reports. Euro depreciated nearly 0.7 percent against dollar through the day.

So at least in this case it seems that one could bet against the currency despite its recent sharp drop.

Case Study: Speeches vs. Economic Data

It was expected that Henry Paulson's speaking at Senate would be dollar-supportive even when it is about a rescue plan for the two US home loan lenders, Freddie Mac and Fannie Mea.

Almost at the same time, 8:30 EDT, Fed's Plosser was to give speech on US economy. He said the interest rates should be raised "sooner than later" to fight inflation. It was not surprise knowing that he voted against lowering rates in recent FOMC meetings.

All worked in favor of dollar despite weak economic data from contraction in Richmond Fed Manufacturing Index or falling House Price Index.

Case Study: Swiss Trade Balance

Swiss TB's surplus was estimated to be narrowed to 1.60B in June from 1.87 in May. Last Friday's report already showed that Trade Balance in Euro-zone turned to deficit in June, so I thought it may be repeated again for Swiss.

However, in less than 15 minutes to the release of the report (0815 CET), USDCHF was just 15 pip above the day's low and technical data didn't reflect any weakness in Euro. EURUSD stayed at its resistance where it had passed some hours before.

Finally, the data showed that the TB surplus widened to 2.41B, well better that expected. Euro and Franc both reacted positively to the report.

I see it as a case showing how technical data, especially when diverge from fundamentals, could suggest that the market's view (or balance) might have already changed.

In this specific case, it may be the result of last night American Express earning report which reflected weakness in consumer spending. It may reflect concerns on upcoming US data on housing markets which show no sign of stabilizing. Also In my view, it could show a revised view and estimate on the report itself.

Unusual positions and very usual losses

All recent positions resulted in heavy losses. There are clear reasons:

I was completely wrong when underestimating the possible negative effects from the US housing and credit problems especially the case of Freddie Mac and Fannie Mea. Yesterday, President G. W. Bush made a press conference explaining the government plan for supporting the two firms and the deposits of American people. At the same time, Bernanke was at the senate when repeating concerns on credit conditions and also the prospect of inflation.

I was also wrong in creating the positions. In the case of selling EURUSD there were significant errors and mismanagement:

• Although it was generally inappropriate to sell the euro at that time but considering economic data then the possible option could be EURGBP, not EURUSD.


• Also too much risk had been taken when I hold the position in a very weak technical conditions until making almost 100 pip loss.

In the case of selling GBPUSD I made the worst choice. I sold a currency when it was facing CPI data that has been its only support in recent months. Even a very armature trader doesn't make such crude decision.

The market certainly doesn't make mistake and I paid the full price of my decisions.

Taking an unusual position ahead of UK CPI

In less than 4 hours to UK CPI, GBPUSD has reached near its daily resistance. I think most of the data has been priced and it may be an opportunity to prepare for the possible reactions after the report. I decided to sell sterling against dollar and it may looks unusual but there are reasons to me:

• Inflation could support a currency from interest rate perspective, but it is usually unsuitable in a long term especially when the economy increasingly shows signs of slowdown. It may be also a chance to be in a better place before tomorrow's UK Employment report.


• After the report, the market must face economic data from US, Advanced Retail Sales and PPI which is likely to work in favor of dollar, at least in a short term.

Taking position on German ZEW survey

EURUSD may pass 1.6000 this week but I think it is unlikely to happen tomorrow when German ZEW is expected to reflect how inflation and appreciation of Euro has shacked confidence. At the same time, US Advanced Retail Sales are due to release on Tuesday which may be a little encouraging in current conditions.

So I decided to sell Euro against dollar, at 1.5905 when technical conditions look also supportive.

87 pip profit; Closing the last position

I decided to close the last position, selling EURUSD, just before UK PPI data. If I had more flexibility the reducing the size was absolutely better because I must enter again before tomorrow's German ZEW survey. However, it is not so bad, because I can take time for almost 12 hours.

28 pip made 8.3 percent profit

The position, selling EURGBP closed at support, 0.7985, with 28 pip profit. I think there could be still room to make more profit but the size of the position doesn't give me that flexibility.

50 pip profit; Reducing the size in European session

Asian market reacted positively to the recent news from the US but it might not repeat in European one. Although technical data confirms the current position but I think that anything which is related to the credit crunch is fundamentally so risky that worth to be more cautious. So I decided to reduce the size of the position and taking 50 pip profit.

Starting the week with high level of uncertainty

Euro-zone Industrial Production is to be released in about 10 hours which is expected to show contraction in May. It is when there is still concern about the future of the Freddie and Fannie. One hour ago, US Treasury announced a possible plan to rescue the two firms; however it is not very clear to me that whether it could calm the markets.

In this situation I decided to start the week. I have sold EURUSD at 1.5941 and 1.5958 in the early trading hours. Also I am short on euro against sterling at 0.8013 which is a position on today's UK Producer Price Index. It is possible to hold both positions until Tuesday when the German ZEW survey could emphasize on the weak side of Euro economy.

First reactions to the Treasury's statement about the rescue plan have been positive so far but it is subject to high level of uncertainty.

Weekly Outlook: Hunting the Weaker

In my view, recent depreciation of dollar, especially on Friday, doesn't reflect any particular strength in most of other currencies. Investors preferred to buy more gold as a safe heaven when the level of risks rose significantly in response to IndyMac crisis, Fannie and Freddie troubles, and increased tensions in Iran's nuclear program.

US: Everyday in the last week had something to increase pressure on the greenback. Even an unexpected narrower Trade Deficit on Friday had almost nothing for the dollar; poor dollar!

Euro zone: GDP revised lower, industrial production contracted in Germany and France, German exports turned negative when trade surplus narrowed, all show signs of weakness in an economy that must face even more burden from recent increase in interest rates.

UK: Economy looks generally weak in Europe and the Britain is not an exception. Industrial production shrieked 0.8 percent in May and consumer confidence dropped in June to 63 from 69. It is just when the MPC find it more difficult to restore balance between fighting increasingly rising inflation and promoting economic growth.

Having that background and looking at this week's calendar, I think every day has its own victim; dollar in one day, euro in another.

(to be completed)

Calendar Highlights: 13-18 July 2008

Calendar Highlights: 13-18 July 2008

SUN 13 July:
1845 NZD Retail Sales

MON 14 July:
0430 GBP Producer Price Index
0500 EUR Euro-zone Industrial Production
1000 USD Fed Meeting on Mortgage Rules
1845 NZD Consumer Prices
1900 GBP RICS House Price Balance
2130 AUD RBA's Minutes

TUE 15 July:
0?00 JPY BoJ Rate Decision
0200 JPY BoJ Monthly Report
0430 GBP Consumer Price Index
0500 EUR German ZEW Survey
0830 USD Producer Price Index
0830 USD Advanced Retail Sales
0830 USD Empire Manufacturing
0900 CAD BoC Rate Decision
1000 USD Bernanke Testimony at Senate
1530 USD Fed's Yellen Speech
1950 JPY Tertiary Industry Index

WED 16 July:
0200 EUR German Consumer Price Index
0245 EUR French Consumer Price Index
0315 CHF Adjusted Real Retail Sales
0430 GBP Jobless Claims Change
0500 EUR Euro-zone Consumer Price Index
0830 USD Consumer Price Index
0900 USD Net Long-term TIC Flows
0915 USD Industrial Production
1000 USD Bernanke Testimony at House
1400 USD Fed Releases Minutes, Forecasts

THU 17 July:
0100 JPY Leading Index
0830 USD Housing Starts
1000 USD Philadelphia Fed
1030 CAD BoC Monetary Policy Report
1950 JPY BoJ Minutes

FRI 18 July:
0200 EUR German Producer Prices
0430 GBP Public Finances
0500 EUR Euro-zone Trade Balance
0830 CAD Leading Indicators

(All times in EDT, source: dailyfx.com/calendar)

Weekly Report

There was no trade for the week ended July 12.

Undecided Makes no Profit

Australian dollar appreciated against dollar in response to the strong job market. I had it in mind from the beginning of this week but I had no specific plan to take a position.

Is it too late for playing BoE rate decision?

BoE is to set rate tomorrow when it is expected to leave it unchanged. Recent comments from MPC's members affected the market sentiment about the future of monetary policy in short term. Two month ago there was a significant possibility of a decrease in interest rate but today is completely different. Although the fundamental data have been even weaker but the policy makers are now clearly concerned about inflation and considered an interest rate rise at their last meeting.

It may explain that why today's drop in Nationwide consumer confidence was unable to change the minds of sterling buyers. Dollar weakness in recent days has been a catalyst helping sterling to appreciate almost one percent for the day.

So, why I can't buy the British pound with confidence? Because I am thinking on the other side; long term negative impact from high levels of interest rates on an economy which faces inflation, falling home prices and slowing consumer spending. I think there will be people who want to benefit by selling the currency at a relatively high price.

If I am true in analysis how I can translate it to profit? I see it too late to be a buyer, but after the decision there would be opportunities for selling the sterling when the entry time would be highly depended on technical data.

Measuring a currency's strength

Earlier today, there was relatively weak data from Australia. Westpac consumer confidence dropped to -6.7%, a 16-year low, and an index of home loans dropped as much as 7.9 percent in May which is the most in eight years.

Australian dollar depreciate against major currencies after the reports but the trend started to reverse in about 4 hours. Although the US dollar was generally weak today but I don't see it as the only reason for a 1% appreciation of Aussie against greenback. I think it shows the strength of the currency.

However it is also important to remind that the employment report is scheduled to release tonight which is expected to reflect at least the inflationary pressures and the need for high levels of interest rate for a longer term.

Calendar Highlights: 6-11 July 2008

MON 7 July:
0430 GBP Industrial Production
0600 EUR German Industrial Production
1100 USD Fed's Yellen speaks on US Economic Outlook
1900 GBP NIESR GDP Estimate
2130 AUD ANB Business Confidence

TUE 8 July:
0830 USD Bernanke speaks at FDIC forum
1000 USD Pending Home Sales
1900 GBP Nationwide Consumer Confidence
1950 JPY Machine Orders
2030 AUD Westpac Consumer Confidence
2130 AUD Home Loans

WED 9 July:
0200 EUR German Trade Balance
0430 GBP Visible Trade Balance
0500 EUR Euro-zone GDP (1Q F)
2000 NZD Business NZ Purchasing Manager Index
2100 AUD Consumer Inflation Expectation
2130 AUD Employment Change

THU 10 July:
0245 EUR French Industrial Production
0400 EUR ECB Publishes Monthly Report
0700 GBP BoE Rate Decision
1000 USD Bernanke and Paulson Testify before House Committee

FRI 11 July:
0030 JPY Industrial Production
0100 JPY Consumer Confidence
0830 USD Trade Balance
1000 USD University of Michigan Consumer Sentiment

(All times in EDT, source: dailyfx.com/calendar)

G-8 Summit and Market Reactions to Geopolitical Factors

This week started with G-8 summit in Japan which still affects almost every movement in the markets. As it was expected, global leaders expressed concerns on inflation and its negative effects on both economic and social activities; and for almost a year it has been common to hear inflation and then the need for a stronger dollar, which is usually dollar-supportive.

Today dollar also finds another support from sharp drop in oil prices. Two reasons can express recent drop in commodity prices: first, expectation for a global economic slowdown, and second, the recent comment from Iran's Ahmadinejad at D-8 (not G-8!) meeting which is received as a softer expression.

But how powerful these factors are? I think this could be understood by comparing them to the reactions from other economic data and events today. US pending home sales drop more then estimates and Bernanke opened the door for extending current facilities to financial institutions into 2009.

German Factory Orders

Factor orders in the Europe's largest economy unexpectedly declined for the six straight month in May. According to Bloomberg, "the last time orders fell for five consecutive months or more was in 1992. The German economy shrank the following year."

(This post has been added with delay)

Japan's Tankan Index

Tankan Index, which reflects confidence among Japan's largest manufacturers, dropped to 5, less than estimates but a four year low.

(This post has been added with delay)

US Unemployment vs. ECB Rate Expectation

Initial jobless claims passed 400K, which is usually a number in recessionary periods. Unemployment rate stands at 5.5 percent in June, after biggest jump in almost two decades in May.

However, the negative reaction to the dollar was limited, probably because the data was overshadowed by the market expectation on the future of interest rates in Europe; it is expected that the ECB is not in a position to raise its benchmark again, after raising it today.

(this post has been added later)

ECB finally raised interest rates; Exploring different views

French View:
French's Nicolas Sarkozy has been an opponent of ECB for what he sees as forgetting growth at the price of fighting inflation. However Sarkozy's Finance minister, Christine Lagarde seems to be comfortable with the comments from Jean Claude Trichet reducing the possibility of further interest rate rise.

"The comments of French officials carry greater weight after France on July 1 took over the presidency of the 27-nation European Union, meaning it will help shape the EU's agenda and policies for the rest of this year.", Bloomberg said.

Italian View:
Silvio Berlusconi repeatedly showed concerns on inflation especially from rising oil and other commodity prices which he blames excessive speculation as the main reason. According to Bloomberg, in the past, Berlusconi has criticized ECB for raising rates when European growth was slow, but for now, after arriving in Tokyo for attending G-8 summit, he praised ECB's decision to raise its benchmark interest rate.

European Bonds:
Two years German bund rose for the week because the market pared bet on further interest rate rise. Comment from Trichet was also effective when he said he has "no bias" on more rate moves.

Traders:
The euro will rise to $1.60 in the next two months as inflation pressures won't abate and traders will step up bets on rate increases, said Simon Derrick, chief currency strategist in London at Bank of New York Mellon Corp.

``Trichet has confirmed that the central bank has shifted back to a more neutral stance,'' BNP Paribas SA strategists led by Hans-Guenter Redeker wrote in a research note dated yesterday. ``We believe that interest rates are now on hold, suggesting that further downward pressure on the euro is now likely to develop.'' The euro may fall to $1.53 on a break below $1.5650, according to BNP.

(This post has been added with delay)