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The currency market in the week ahead

Written by A Forex View From Afar on Saturday, August 16, 2008

The currency marketThe currency market in the week ahead in the week ahead will have to deal with inflation, growth, confidence and retail numbers

This week starts with a dollar in unique shape, something that the greenback has been searching for quite a while. The dollar has strengthened for 5 weeks against a wide range of currencies; the dollar index cannot find any resistance tough enough to stop the gains at the moment, and Chicago based Commitment of Traders reports now show net long dollar positions.

Euro-Zone: The currency market will have another hard test of valuations as a number of releases gauging the investor and consumer sentiment from the euro-zone hit the wires. Lately, the analysts have failed to gauge the release numbers and sentiment. One of the most important this week, the Zew economic sentiment for the Euro-zone, is expected to come at -65.0, dropping 90 points from a year earlier. The Purchase Managers Index (PMI) releases, showing the latest developments in the manufacturing and service sectors, will be out this week as well, with activity levels in the Euro-area expected to show continued contraction.

The U.S. PMI reads however show activity is starting to pick up on the other side of the Eur/Usd pair, after its dip into the contraction zone. The strength the euro had for some time, together with high interest rates had a negative effect on the Euro-zone business climate and this is starting to be reflected now in the Zew and PMI releases.

Central Banks: The Reserve Bank of Australia and the Bank of England will release the meeting minutes. The RBA releases are expected to show the board expects a prologue slowdown at the same time that inflation will be less of a worry, the markets will have to question how much is already baked into to current valuations. The Bank of England meeting minutes are expected to show that the MPC had 7-2 (hold-cut) vote for a hold. At the last release the vote was 7-1-1 (hold, cut, raise). The financial and economic data coming out of UK has weakened at a steep pace since the last meeting. An additional vote for a cut may trigger another wave of selling, sending the pound even lower from the current 22-months low and probably extending the longest decline in the last 37 years. That is unless the ‘sell the rumor’ part of the ‘sell the rumor buy the news’ has already been put in place. Retail sales on Thursday may bounce the pound around as the markets look for the recent economic effects on the U.K. consumer.

In Japan the GDP releases recently showed the economy contracted at a strong pace in the second quarter. The finance ministry, the movers behind the Bank of Japan said in recent statements that the economy may have a hard lending in the following quarters, as exports decline. It is a possibility the bank will consider to loosen the monetary policy at the next meetings, the first of which is on Monday, and if so the Jpy may further depreciate.

America: The U.S. calendar is somewhat lighter in the coming week. There are just two releases expected that might create a lot of volatility and are both scheduled in the same day: building permits and Producer Price Index on Tuesday. The recent release data shows the new building permits may have found a (temporary) bottom, but adjusting from the raw numbers, the housing market is in a very bad shape. The expected number, of almost 1M, is just half of what the releases would have shown from the expansion phase of 2003-2006. At the same time, the Producer Price Index shows a large degree of inflation coming from the food and energy products and eventually those numbers will hit the CPI, especially if oil cannot breach and hold under $110 a barrel. If the U.S. releases are not up to scratch the market can look forward to Fed Chairman Mr Bernanke’s speech at 10:00 EDT on Friday to put things into perspective.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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