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European Mid Morning Update 5th June 2008

Thu, 05 Jun 2008 03:46:10 -0400

Waiting for the postman

News from Europe:
                                                    Forecast    Actual
U.K. May HBOS House Prices (MoM) - 1.0%    - 2.4%
U.K. May HBOS House Prices (YoY)   - 3.5%    - 3.8%

The U.K. housing market is looking more and more like following the U.S. with the Halifax Building Society reporting a drop in prices over May of – 2.4% to bring the YoY loss to -3.8%. Coming on the back of the problems in which the Bradford and Bingley find themselves and the growing number of foreclosures, the warning bells are ringing around the Bank of England.

At this point it is just a healthy pullback in what had been a price bubble but given the background of a weaker financial services industry and high inflation the risks are there to be seen.

It is unlikely the BOE will react today by slashing interest rates as other numbers do still confirm there is an element of growth still in the economy as a whole, the OECD just yesterday forecasting this year to return a 1.4% GDP. However, if there are any signs of an acceleration in the contraction then it is also likely the BOE would follow the example of the Fed.

For now Cable is steady but is showing signs of weakening further later today.

The following economic releases are due today:

April
German Factory Orders (MoM) +0.4%
German Factory Orders (YoY) +6.4%

May
U.S. Initial Jobless Claims (31st) 370K
U.S. Continuing Claims (24th)

The ECB & BOE are due to announce their rate decisions

There is little doubt that the rate decisions from the Bank of England and European Central Bank grab the headlines today but is there really any prospect of a surprise to the market?

Not really. The market normally awaits these events but ends up shrugging its shoulders to wait for the next piece of news. The OECD probably summed up the situation by recommending that both banks retain an unchanged policy.

At this point there is little to be gained by hiking rates. However, if they do so there may be more to lose with consumer demand already down the pan and many wondering whether they can meet monthly payments.

By retaining current interest rate levels the intent is to make sure that the economy moderates at a gentle pace with the least disruption and allows for an eventual basing in the economy from which to build the next upswing.

The biggest problem faced in Europe is in the U.K. which is facing its own housing crisis. Not currently bad as the U.S. but definitely at risk. However, while the economy is moderating it is not collapsing and doesn’t have the problems faced by the U.S. The Northern Rock and Bradford & Bingley have been rather unsettling hiccups but have been handled in a way that should ensure the least damage.

So unchanged rates are likely and this should keep the market holding broadly to the range of the past two days and awaiting tomorrow’s non farm payrolls from the States to generate the next larger move.

Note important support and resistance areas:

          USDJPY        EURUSD       USDCHF        GBPUSD
Res: 106.82-00    1.5531-76    1.0585-23    1.9636-65
Res: 105.86-20    1.5460-82    1.0460-89    1.9530-50

Spt: 105.10-30 1.5361-83 1.0390-30 1.9478-98
Spt: 104.20-50 1.5255-83 1.0296-20 1.9390-20

European Morning Update 5th June 2008

Thu, 05 Jun 2008 01:13:29 -0400

A quiet Asian session sees the Dollar underpinned ahead of the ECB & BOE rate decisions

Releases from Australia:
Forecast Actual
April Trade Balance AUD -1.70bn -957mn

Coal and gold exports provided Australia with a large decrease in their trade deficit while a 10% drop in capital goods imports also contributed. The drop in capital goods was caused by a large drop in civil aircraft together with machinery and industrial equipment.

The Aussie remained under pressure this morning having backed off from overnight highs at 0.9628 but until the 0.9519 support gives way we still cannot rule out one final high. However, the overwhelming technical evidence suggests a major high is due around this time and by far the greater risk is on the downside.

The following economic releases are due today:

April
German Factory Orders (MoM) +0.4%
German Factory Orders (YoY) +6.4%

May
U.S. Initial Jobless Claims (31st) 370K
U.S. Continuing Claims (24th)

The ECB & BOE are due to announce their rate decisions

The stronger Dollar bullish argument does seem to be following through. Cable broke down below 1.9695 and is edging lower again this morning as is the Euro but at this point I think we still need to be cautious as I’m rather reluctant to call a direct stronger rally right now. Cable really has a messy structure though it’s difficult to argue with the bearishness but the problem I have with it is that even the bearish projections don’t seem bearish enough…

Looking at the Euro there does seem to be a good argument for a short term base around 1.5361 and we can use this as a marker. Hourly momentum is quite bearish while the 4-hour momentum does have potential to form a bullish divergence. However, I am also aware that the Swissie did enough to complete a triangle at yesterday’s 1.0360 level and if that’s the case the next move should be back up to 1.0623 once again. A clean break above 1.0489 Swissie and below the 1.5361 Euro support will provide the confirmation of direct extension. If that is seen then watch out for a test of the 1.5255-83 Euro area while a more distant target is at 1.5082.

Dollar-Yen, in spite of breaking my support is back on its way higher and while I cannot be sure on the short-term wave structure I can only repeat the 106.82-00 target which is crucial in the medium term. Along with this we should be aware of the 161.18-25 support in Euro-Yen.

And to complete the set, the Aussie has been as erratic as could be imagined. It’s still balanced between a larger reversal lower and one final test higher. Below 0.9519 would be pushing the bearish case. The Canada reached my longer target without much of a correction at all. However, I feel now that the 1.0190 area should force a slightly larger pullback before it can complete the move towards the 1.0325 corrective peak.

Note important support and resistance areas:

         USDJPY        EURUSD       USDCHF        GBPUSD
Res: 106.82-00    1.5531-76    1.0585-23    1.9636-65
Res: 105.86-20    1.5460-82    1.0460-89    1.9530-50

Spt: 105.10-30 1.5361-83 1.0390-30 1.9478-98
Spt: 104.20-50 1.5255-83 1.0296-20 1.9390-20

Asian Morning Update 5th June 2008

Wed, 04 Jun 2008 19:31:17 -0400

Like a bachelor the market has a fear of commitment…

Releases from Europe:

April                                       Forecast    Actual
Euro-zone Retail Sales (MoM)    +0.2%    - 0.6%
Euro-zone Retail Sales    (YoY)    - 0.8%    - 2.9%

May
U.K. Services PMI 50.5 49.8

Releases from the States:

May                                             Forecast    Actual
Challenger Job Cuts             (YoY)                103.5K
ADP Employment Change               - 30.0K    +40.0K
Non-Manufacturing ISM Composite      51.0        51.7

Jobs data was mixed while the non-manufacturing ISM was much firmer than expected but still down from April’s 52.0. Overall, while employment numbers are still suffering there are signs from improved corporate profitability along with the Fed surveys that U.S. industry is beginning to cope with the fallout of the past year.

Speaking once again yesterday Fed chairman Bernanke also spoke more positively on corporate conditions but cautioned that rising public expectations for inflation are a “significant concern.”

He also pointed out though that “there's little sign they are driving workers to demand higher wages as occurred in the 1970s and committed himself to “Maintaining confidence in the Fed's commitment to price stability remains a top priority.”

All nice and hearty comments but there are still many risks and the central one now is consumer confidence. In fear of losing their jobs and being able to cope with higher prices provides no contribution to confidence and this needs now be the main drive by the Fed and the U.S. administration.

They are acutely aware of the inflationary threat and this is causing the market to believe there may be room for a rate hike. The OECD cautioned against such a move recommending that the Fed should retain an unchanged policy for another 12 months.

Unless there is any significant increase in domestically driven growth and demand leaving rates unchanged should do little to worsen inflationary pressures which are already providing a drag on spending anyway.

The same can be said for the Euro-zone where the OECD recommended the same strategy but here they extended the period of unchanged rates to 18 months as they see growth continuing to moderate to +1.7% this year and +1.4% next. They also see the U.K. positing a 1.4% GDP next year too but remain more bearish for the European island.

Following Germany’s shock slide in retail sales the numbers for the Euro-zone as a whole also took a tumble and tends to argue in favor of the OECD’s case. While Bernanke pointed out that a 1970’s style wage spiral does not appear to be developing in the States the same may not be true for Europe where the mainland is seeing a boom in industrial protests against rising costs.

Through all this the Dollar really failed to make much headway yesterday possibly feeling a slight concern over news reports of Lehman’s Q2 hedging losses of around $600m and the sharp decline in its stock which is making life difficult for the Wall Street firm to raise fresh capital.

Ahead of today’s ECB rate decision, which is again expected to end with an unchanged policy, the market looks to have taken a day off and awaits Trichet’s post conference musings although he normally provides little new information at these meetings preferring a more consistent transparency throughout the month.

There is little on the release slate either with just U.S. Factory Orders having the potential to shift the Dollar one way or the other. Even then the prospect of tomorrow’s non-farm payroll numbers will probably restrain the market from excessive moves once again.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Australian April Trade Balance AUD -1.70bn

Interday Forex Analysis | GFT Forex

European Mid Morning Update 5th June 2008

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European Morning Update 5th June 2008

See Also

Asian Morning Update 5th June 2008

See Also