ForeX

Movers and Shakers (June 23 – June 27, 2008)

US Dollar Extends Losses After FOMC Meeting
The FOMC’s decision to hold rates came as no surprise. In the statement, the committee mentioned a lessened downside risk to growth, but an increased upside risk to inflation. However the statement did not implicate any policy outlook for the next meeting. It seems like the Fed is expecting the slowing economy to curb inflationary pressures. “The Committee expects inflation to moderate later this year and next year.”

Trading was whippy post FOMC statement, but eventually ended in dollar weakness. This weakness was extended in the second half of the week by more recessionary economic releases, a dive in the stock market, and oil prices surpassing $140. The DJIA was ranging around 11,850 until Thursday marked the second worst drop this year of 358 point.

This week, the US Dollar needed some good news to break through an important resistance level for USD/JPY at 108.50. However, FOMC’s lack of following up it’s hawkish stance with a rate hike prevented the penetration. Additionally, the surge of crude oil prices pressured equities markets worldwide and the DJIA took a dive on Thursday, with the USD/JPY following suit. There is some support at the 105.50 level, which may be fragile if US releases are below expectations next week. The next support is at 102.60.

ECB Outlook Hawkish
This week was full of poor economic releases out of the euro-zone, although Wednesday’s extremely surprising industrial new orders figures helped boost the euro. Also, Trichet’s testimony to the European Parliament that the ECB was on a “heightened state of alertness” helped boost the EUR/JPY to its record high.

The European equities markets also slipped as crude oil prices surged. European Dow Jones Stoxx 600 Index dropped 0.9% to 285.82. Global risk aversion prompted unwinding of carry trade and supportd the Japanese yen and Swiss franc.

EUR/USD

EUR/JPY
The EUR/JPY reflected the risk aversion that gripped the financial markets starting Thursday’s European session. This occured right after the pair managed a historic high, above the 169.40 clip. The Euro has been gaining on the back of an ECB rate hike speculations, but these gains were pared by risk aversion.

Looking Ahead

ECB and RBA Set for Interest Rate Decisions

ECB
The European Central Bank is expected to raise its minimum bid rate from 4.00% to 4.25%. The market has already priced in this rate hike, so the direction of the euro will depend on indications of any future interest rate moves. The continuing slowdown can work to limit price pressures in the medium term. This week’s full slate of eocnomic data showed that the slowdown is deepening in the Eurozone.

The market will be sensitive to whether Trichet expects inflation to calm in the medium run. In Wednesday’s statement, Trichet noted: “In line with this view, the latest Eurosystem staff projections foresee average annual inflation between 3.2% and 3.6% in 2008 and between 1.8% and 3.0% in 2009. Compared with previous staff projections, this represents a significant upward revision, reflecting higher oil and food prices as well as increasing inflationary pressures in the services sector.”

The EUR/USD pair has some upside potential in the beginning of next week, as there is a full slate of US economic releases, which have shown anemic growth. Payroll data will be early because Independence Day in the US, July 4th, lies on Friday. The EUR/USD is thus bullish ahead of the ECB interest rate vote.

RBA
The RBA will be less hawkish then the ECB. Inflation is currently at an annual pace of 4.2%. Though this is an uncomfortable rate, the reserve bank has expressed anticipation for inflation to cool from a slowdown. After June’s RBA decision to hold the cash rate at 7.25%, Glenn Stevens noted: “On balance, the board’s current assessment is that demand growth will be moderate this year. In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected, or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed,”

The RBA outlook is similar to the Fed’s with one difference. The Autralian economy is in a much better shape than the US economy. It can contract somewhat without causing alarm to consumers and businesses. So even with a hold, the AUD/USD will have upside potentials looking solely at economic data. Other factors such as commodity prices will also affect the Aussie strength, but dollar weakness will be the more dominant force here. The pair will be testing its 26-year high established in May. June’s attempt to crack it was stalled because of Fed rate hike speculations. This time, it will take some significantly better-than-expected US releases, or a very dovish statement from the RBA to keep a lid on the Aussie against the Greenback.