Forex Market Update

Friday, Oct 23, 2009, 12:57 GMT
By John Hardy Consultant/FX Strategist Saxo Bank
GBP back in the doghouse after miserable GDP figure. EUR looking a bit lonely at the top?
JPY weaker still on weak bonds as US Treasury announces another record treasury auction next week.
MAJOR HEADLINES – PREVIOUS SESSION
Australia Q3 Import/Export Price Index out at -3.0%/-9.6% QoQ vs. -2.8%/-4.7% expected, respectively
Germany Oct. Preliminary PMI Manufacturing out at 51.1 vs. 50.1 expected and 49.6 in Sep.
Germany Oct. Preliminary PMI Services out at 50.9 vs. 52.5 expected and 52.1 in Sep.
Germany Oct. IFO Business Climate out at 91.9 vs. 92 expected and 91.3 in Sep.
EuroZone Oct. Preliminary PMI Manufacturing out at 50.7 vs. 50.0 expected and 49.3 in Sep.
EuroZone Oct. Preliminary PMI Services out t 52.3 vs. 51.3 expected and 50.9 in Sep.
UK Q3 GDP first estimate out at -0.4% QoQ and -5.2% YoY vs. +0.2%/-4.6% expected, respectively
UK Sep. BBA Loans for House Purchase rose to 42088 vs. 39300 expected and 40841 in Aug.
EuroZone Aug. Industrial New Orders rose 2.0% MoM vs. 1.2% expected
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
US Sep. Existing Home Sales (1400)
US Fed's Kohn to Speak (1530)
Australia Q3 Producer Price Index (Sun 0030)
Market Comments:
Pound whacked on negative GDP surpriseThe GDP report from the UK today triggered a massive slide in sterling as the data was a very negative surprise in light of the recent pound appreciation. The fall in GDP officially made this recession the longest since 1955, when records were first initiated. It's rather remarkable that the economy was unable to manage the slight expected uptick in quarterly growth after the recent quarters of unprecedented public support to the economy. Especially disappointing in light of the collapsing pound sterling of the last year is a failure of manufacturing to recover more strongly and provide the lift one would expect from the ability to price goods more competitively. Today's move looks to have set a firm ceiling for the pound for now, and EURGBP may have a go back at the recent highs, while GBPUSD may remain capped for some time with the spectacular evening star formation of the last three days (assuming GBPUSD closes today around current levels.
Yen's diminishing yield appealThe Yen lost even more ground into today' US session as bonds slipped to new lows (close to recent highs in yield just under 3.50% on key US 10-year benchmark). Some credit for the slide in bonds is given to the US Treasury's announcement of another record treasury auction next week, with $123 billion in government paper on the block. The auction will include $44 billion of 2-year notes, $41 billion of 5-year notes, $31 billion of 7-year notes and $7 billion in TIPS. In the coming year, the Treasury is going to need to extend the duration of its auctions in order to finance the profligate spending of the Obama administration and Congress, so we can expect plenty more records to fall this year - especially in the 10-year and 30-year categories. The US budget deficit was some 10% of GDP for the fiscal year ending September 30, the highest since the second World War. So far, demand has been very healthy at recent auctions, and with yields at key levels here, the bond market may be the center of attention next week. We looked at EURJPY and whether it is overpriced yesterday. It appears from the latest action that JPY crosses are focusing more on the long end of the curve than the short end, which has gone nowhere of late.
US Existing Home SalesUS Existing Home Sales will be released today and may show a strong reading due to the first-time home buyer credit, which is expiring December 1. While Congress is debating extending the measure - even to any buyer of a home rather than first time buyers only, any renewal and extension is likely to have a far smaller impact than the original initiative. After all, first time home buyers are acting as if they have a deadline at present, so the supply of such buyers would be far smaller after the deadline. As for non-first time buyers, most of them probably own a home in which their equity has declined significantly in recent years. (60% of home buyers in 2006 and 2007 owe more than their houses are worth, according to a recent estimate by Fitch). And in the longer run, such measures only move forward demand at the cost of demand further down the road. It's all very short sighted and a rather pathetic way to continue to artificially prop up home prices. The more important development for house prices will be the winding down of the Fed's $1.25 trillion in mortgage-backed security purchases next March and the potential effect this will have on mortgage rates.
ECB and the strong EuroThe ECB's Nowotny was out jawboning again about the obvious problem of the EURUSD trading at 1.5000 while the Chinese have not budged the yuan. He said the China is "massively influencing" markets, including the Euro. His other comments on the Euro economy were relatively sanguine, indicating that inflation would remain subdued in the medium term and growth would likely turn positive next year, even if exist strategies are "premature". Clearly, the biggest problem facing the EuroZone currently is the strength of its currency.
Looking aheadThe focus today for FX is on the inflection point reached in bonds today ahead of the NY open and whether equities will be able to punch through higher once again after trading in a relative constrained range for most of the week. The Euro looks a bit lonely on top, considering that CAD, GBP and JPY are all well off their recent highs versus the greenback. Interest rate differentials make EURUSD looked a tad overpriced now -- though it appears that the USD will continue to focus mostly on the ups and downs in risk appetite.
Next week's US economic calendar highlights include Consumer Confidence on Tuesday, Durable Goods Orders on Wednesday and the most important: first estimate of Q3 GDP on Thursday. Two interesting central banks are out announcing rates next week: Norges Bank looks ready to make its first hike on Tuesday and New Zealand will announce rates as well.
Have a great weekend!
Chart: GBPUSDGBPUSD in a spectacular reversal today that, if we close approximately at current levels or lower, creates an evening star reversal somewhat similar to the previous two major reversals. It certainly appears the action is capped for now, though a one day reversal does not a new trend make. Next major focus will be the 21-day moving average, which is still rather far off to the downside, though it has been a clear focus in recent months.

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