Fixed Odds Trading Strategy

The Week Ahead

The US trends will be watched very closely in the short-term as the economy hovers between a limited recovery and a renewed downturn triggered in part by rising energy costs. Given inflation fears, the G8 stance towards the major currencies will be very important ahead of the meetings which are due next week, especially given the recent linkage between dollar moves and the level of oil prices.

Key events for the forthcoming week

Date Time (GMT) Data release/event
Thursday July 10th 11.00 UK Bank of England interest rate decision

Dollar:

There will be further unease over the US economy with fears that increases in energy prices will trigger a renewed decline in activity as consumer spending and industrial activity are damaged. In this environment, markets will be sceptical as to whether the Fed will be able to sanction interest rate increases to help curb inflation. There will, however, still be major uncertainty over economic conditions which will trigger sharp fluctuations in sentiment. The US dollar will continue to gain some defensive support given increasing unease over the global economy with particular concern over Europe. There will also be some speculation that G8 officials will push for a stronger US currency and the dollar should be able to avoid heavy selling pressure.

The dollar weakened for much of the week as yields moved against the US currency, but it was able to regain some ground late in the week as aggressive positions were scaled back following the ECB council meeting with a move to 1.57 against the Euro.

The US ISM index for the manufacturing sector edged higher to 50.2 in June from 49.6 the previous month, contrary to expectations of a decline. The underlying components were weak with the employment index at the lowest level for five years while there was a rise in inventories. The non-manufacturing index weakened to 48.2 in June from 51.7 with confidence undermined in part by the inflation outlook

The latest construction output data was slightly stronger than expected, but the ADP employment data was weak with a reported 79,000 decline in jobs for June.

The pivotal monthly payroll report was close to expectations with a decline of 62,000 while the May data was revised to show a 62,000 drop. The unemployment rate held at 5.5% following the sharp increase seen the previous month. The latest jobless claims data also recorded an increase to 40,000 in the latest week.

There was little overall change in Fed futures over the month with markets still edging away from expecting an interest rate increase within the next two months. Bond yields also fell slightly over the week which limited the dollar’s support.

US officials made no significant comments on the dollar over the week, but there was speculation that currencies would be an important area of discussion at the G8 meetings which are due to begin on July 7th.

Euro:

The ECB interest rate increase will reinforce yield support for the currency and the central bank will maintain a tough stance on inflation in the short-term. The bank suggested that it will not look for a series of rate increases at this stage which will limit Euro support while there will also be increased fears over the growth situation, especially in Southern Europe. In this environment, the Euro is liable to be brittle with the threat of substantial capital outflows.

The Euro strengthened steadily in the run up to Thursday’s ECB interest rate decision, but was then subjected to sharp profit taking against all major currencies.

There was some relief for German retail sales with a 1.3% increase for the month. German unemployment also declined for June following the surprise increase seen the previous month. There was also a rise in Euro-zone retail sales for the latest month.

Producer prices rose strongly while the flash headline consumer inflation rate increased to 4.0% in June from 3.7% which is twice the ECB inflation target.

ECB officials took a tough stance ahead of the bank’s interest rate decision and the bank increased rates to 4.25% from 4.00%, in line with market expectations. This was the first increase in rates for over 12 months.

In the press conference following the interest rate decision, ECB Chairman Trichet maintained a tough approach on inflation with comments that the rate increase was designed to head off secondary inflation effects.

Trichet also, however, effectively stated that bank was now in a neutral stance to await further developments while there were important downside risks to growth. These comments increased expectations that the bank will not look to tighten policy further in the near term. The comments triggered some scaling back of interest rate expectations over the remainder of 2008.

Yen:

Confidence in the domestic economy will remain fragile in with expectations of a further deterioration in conditions. Given a lack of yield support, there will be continued pressure for capital outflows in search of higher yields, especially as there has been increased investor interest in pushing funds overseas. The yen will still gain some support from unease over global economic trends and any further sharp decline in asset prices would discourage carry trades. G7 countries may also push for Asian currency appreciation which would help underpin the yen.

The Japanese currency strengthened to highs around 105.0 against the dollar during the week, but there was substantial selling interest on rallies and it weakened back towards the 107.0 level following the US data.

The headline Japanese Tankan index fell to +5 in the June quarter from +11 the previous month while there was also a decline in capital spending plans which maintained the generally gloomy outlook over the economy.

There were reports of an increase in capital outflows out of Japan on yield grounds with evidence of a flow of funds into investment trusts, which allocate funds into overseas bonds, at the highest level since last August.

Sterling:

The latest economic data has suggested a further deterioration in conditions with both the major PMI surveys substantially below the 50.0 level while there have been warnings over consumer spending. In this environment, the Bank of England will be very reluctant to sanction any interest rate increase to help stem inflationary pressure. Overall confidence in the economy and currency will also remain weak, but there is still scope for underlying capital inflows on valuation grounds which should limit losses from current levels.

Sterling proved to be generally resilient over the week and strengthened to a two-month high of 2.00 against the US dollar before correcting weaker. The UK currency also found support near 0.80 against the Euro.

The UK data remained generally depressed over the week with evidence of a sharp downturn. The PMI index for manufacturing declined to 45.8 in June from 49.5 the previous month. This was significantly below the 50.0 threshold and was the lowest reading since late 2001. The construction PMI index also fell sharply for the third successive month to 38.8 and there was no relief from the services sector with the PMI index weakening to a fresh 5-year low of 47.1 for June.

The housing data remained weak with mortgage applications falling by over 50% in the year to May, the lowest level for over 10 years, while the latest evidence continued to suggest that house prices are falling. There were further corporate warnings from the housing sector while there were also warnings over the retail spending outlook which tended to undermine sentiment.

Sterling gained some support from reduced capital outflows as valuations remained attractive from a medium-term perspective.

Swiss franc:коли под наем

There will be further concerns over the growth outlook with the domestic indicators continuing to suggest an underlying slowdown. There will also be concerns over the Swiss financial sector given the banking-sector vulnerability. The franc will gain support from global growth fears with defensive inflows while there will also be some speculation over capital inflows from global central banks on reserve diversification grounds. Nevertheless, the Swiss currency will struggle to secure strong gains from current levels.

The dollar weakened to lows near 1.01 against the franc before pushing back to 1.0270 following the monthly payroll data. The Swiss currency fluctuated around the 1.61 level against the Euro.

The Swiss PMI index for June weakened to 54.8 in June from 55.2 which was a three-year low for the index. Consumer prices rose by 0.2% in June following the 0.8% increase previously and the annual rate dipped back to below the 3.0% level at 2.9%.

National Bank Chairman Roth was optimistic that the inflation rate would decline later in 2008, but he warned that significant franc depreciation would not be welcome.

The franc gained some support from a decline in risk appetite over the week, although the impact was measured with underlying confidence still subdued.

Australian dollar:

The Australian dollar pushed close to 25-year highs against the US dollar during the week and retained a firm tone despite intermittent corrective periods.

The Reserve Bank left interest rates on hold at 7.25% following the latest council meeting. In the statement accompanying the decision, the bank was more confident that policy had been tightened enough to curb inflationary pressures and this dampened expectations of further interest rate increases.

There were declines for housing and car sales over the month, but there was a stronger than expected retail sales report with a 0.7% monthly increase.

The Australian dollar continued to move in line with degrees of risk appetite with the currency edging weaker when equity prices came under heavy selling pressure.

Overall sentiment should remain firm in the short-term, but the Australian dollar will struggle to make much headway from current levels.

Canadian dollar:

There were no significant domestic data releases during the week with the currency buffeted by shifts in sentiment and technical considerations as ranges were relatively narrow. The Canadian dollar was unable to sustain a move towards parity and weakened to lows near 1.0220 before stabilising.

The Canadian currency struggled to gain any support when commodity prices increased. The potential beneficial impact to the currency was offset by increased fears over the domestic economy and lower risk appetite.

The Canadian dollar may continue to struggle for direction in the very short-term, but the net risk suggest a slightly weaker trend is realistic.

Indian rupee:

The rupee came under renewed pressure during the past week with the currency dipping to lows beyond 43.30 against the US dollar on Thursday before a marginal recovery on Friday as global markets stabilised.

The currency was unsettled by the same factors which have damaged the currency over the past few months. Oil prices pushed to fresh record highs over the week which undermined the rupee directly and increased fears over the trade account.

There were also further fears over capital outflows as stock markets generally remained under pressure. There was evidence of central bank intervention to support the local currency, although no specific levels were defended.

Overall, the Indian currency will remain vulnerable to further selling pressure unless there is a reversal in oil prices as there will be the threat of further capital outflows.

online casinoHong Kong dollar:

The Hong Kong currency secured a firmer tone over the week, strengthening back through the central rate of 7.80 against the dollar with consolidation around 7.7980.

US yields remained generally lower which unsettled the US currency, especially as local inter-bank rates strengthened slightly.

The Hong Kong dollar was still unsettled by weakness in the Hang Seng index during the week with the index at a 15-week low before a tentative recovery.

The interest rate trends suggests that the Hong Kong dollar should continue to resist significant losses against the US currency even if any further advance is limited.

Chinese yuan:

The yuan continued to strengthen during the week with another post-float high against the US currency at near 6.85 as the dollar remained generally weak. There was a partial retreat to 6.8610 on Friday as the US currency recovered ground.

The authorities announced tighter controls on capital and the use of fake export invoices in an attempt to curb speculative capital inflows.

There was also further evidence that the authorities were looking to promote periods of yuan weakness to discourage aggressive speculative inflows.

The Non Deliverable Forwards (NDF) spreads narrowed over the week with markets expecting the yuan to rise less rapidly over the next 12 months.

The net trend is still likely to be for a firmer yuan, although there will be further bouts of weakness as the authorities continue to combat speculative capital inflows.

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The Week Ahead

Growth and interest rate expectations will continue to be very important for market sentiment in the short-term. The scaling back of US interest rate expectations will remain a negative dollar factor in the near term, but the Euro-zone will be at risk of increased capital outflows. The G8 response to a renewed surge in commodity prices will need to be watched very closely in the short-term with volatility levels liable to increase.

Key events for the forthcoming week

Date Time (GMT) Data release/event
Thursday July 3rd 11.45 ECB interest rate decision
Thursday July 3rd 12.30 US employment data

Dollar:

The most recent data releases have suggested that the US economy remains vulnerable and there is the risk of a further deterioration, although the key feature is likely to be major uncertainty as there will still be some optimism over a subdued recovery later in 2008. The Federal Reserve has switched to a slightly more aggressive policy, but is still reluctant to tighten in the near term and yield support will be limited. There is still the scope for investment flows into the US, especially with increased doubts over the global economy. The dollar should be resilient, but will struggle to secure more than limited gains.

The dollar initially strengthened during the week, but was unable to break key Euro support levels and then weakened steadily with lows beyond 1.5750 while the trade-weighted index also stumbled.

The Federal Reserve left interest rates on hold at 2.0% following the latest FOMC meeting. There was 9-1 vote with Fisher dissenting and calling for a rate increase.

In the statement accompanying the decision, the Fed stated that inflation risks had increased, although it still expected a decline in the rate over the next year. There was less pessimism over growth despite warnings that the labour market was softer while there was on-going weakness in the housing sector.

Consumer confidence weakened further in June to 50.4 from a revised 58.1 the previous month and this was the 5th lowest reading in the history of the survey as expectations remained extremely weak.

Durable goods orders were unchanged for May while jobless claims were unchanged at 384,000, although the underlying trend suggested a small increase. New home sales fell slightly over the month while there was a small increase in existing home sales. House prices continued to fall with the Case-Shiller index recording a 15.6% decline in prices in the year to April.

The net impact was a downgrading of market expectations surrounding potential interest rate increases by the Federal Reserve. Futures markets put the chances of an August rate increase at below 25% compared with over 50% previously.

There were no significant comments on exchange rates from Treasury of Fed officials and the dollar was unsettled late in the week by a sharp decline on Wall Street together with fresh record highs for oil prices above US$140 per barrel.

Euro:

The ECB will maintain a tough approach on inflation in the short-term which will help underpin the Euro. Internal divisions are still liable to increase, especially with evidence of further deterioration in the economy. In this environment, political stresses are liable to increase which will tend to magnify capital outflows. Overall, the Euro remains structurally vulnerable which will limit gains and any further increase in market tensions would increase speculation that the ECB will not push ahead with the planned July tightening.

The Euro secured a generally firm tone over the week with the tough central bank stance on inflation offsetting the impact of economic unease.

The Euro-zone data remained generally weak and unsettled the Euro at times. The German IFO index weakened to 101.3 in June from 103.5 which was the lowest reading since 2005. The PMI indices for the manufacturing and services sectors both weakened to below the 50.0 level for June with the services sector at a 5-year low. There was notable weakness in the French PMI data for the month.

There were some areas of optimism with a rise in French business confidence while Euro-zone industrial orders also rose, but the consumer mood remained downbeat.

The ECB maintained a broadly similar approach to policy in its latest comments. President Trichet stated that inflation risks had increased with a particular concern over wage developments. There were, however, further comments suggesting that only a small rise in rates was being considered and no series of increases.

Government officials in the region were less confident over the situation with warnings that an interest rate increase would be damaging for the economy.

Yen:

The domestic data remains uninspiring which will keep the Japanese currency on the defensive, especially with a lack of yield support as the Bank of Japan stays on hold. There will be a further temptation to push funds into high-yield overseas assets which will tend to weaken the yen. Increased doubts over the global economy will, however, pose important risks to carry trades and there will be important defensive demand for the yen at times, especially if equity markets continue to slide.

The Japanese currency found further support weaker than the 108.30 level against the dollar and strengthened back to beyond 107.0 on Thursday. The yen weakened to all-time lows against the Euro before finding some respite.

The domestic data was mixed over the week as growth and inflation fears persisted. There was a solid 2.9% rebound in industrial production for May, but the household spending data was weak with a 3.2% annual decline.

Underlying consumer prices rose 1.5% in the year to May and this was the highest reading for 10 years as fuel prices rose sharply over the month.

The Bank of Japan remained generally cautious over the economic prospects, warning that the domestic and global economy faced testing conditions, while there was no suggestion of an imminent increase in interest rates.

The capital account data suggested there were substantial outflows from Japan. There was also speculation over an increase in flows into investment trusts which placed funds into offshore high-yield bonds, supported by summer bonus payments.

Sterling:

The latest housing data will reinforce expectations of a sharp slowdown in the economy and the threat of recession. The growth considerations will certainly complicate the Bank of England’s options in the short-term, but the possibility of a rate increase to control inflation will offer some Sterling support. A lack of confidence in the US and Euro-zone may also offer some protection on relative grounds even if the domestic prospects are poor. The UK currency is still unlikely to make strong headway in the short-term.

The UK currency weakened marginally against the Euro over the week, although ranges were generally narrow. Sterling strengthened to 1-month highs against the dollar above the 1.9850 level before edging lower.

The latest BBA data recorded a further decline in mortgage approvals in May to the lowest level since the survey started in 1997. The latest CBI retail sales survey was slightly more optimistic that the previous month, although there was still a net balance reporting lower sales for the month.

In testimony to the Treasury, the Bank of England MPC member continued to warn over the inflation outlook with the potential for the rate to move above the 4.0% level this year. MPC members stated that the bank would do what was required to get inflation back to the 2.0% level, but that it would not aim to bring it down too fast. Wage trends would be a key element in determining the bank’s policy.

The net effect was a slight downgrading of interest rate expectations over the next few months, although the impact was relatively limited given the global stresses.

Swiss franc:

The Swiss currency will gain some support on defensive grounds, especially if there is a sustained deterioration in global credit conditions and sharp declines in stock markets. There will be concerns over the domestic economy, especially with speculation that the banking sector will remain under stress which will have a wider negative impact. Overall, the Swiss currency will still find it difficult to secure strong gains given the domestic doubts.

The dollar was unable to break above the 1.05 level against the Swiss franc during the week and dipped sharply to lows near 1.02 over the second half. The franc also found support close to 1.6250 against the Euro.

The Swiss currency gained support late in the week from a sharp downward move in stock markets and a renewed increase in global credit-related stresses.

There were concerns over the domestic economy with fears that further stresses in the banking sector would undermine the Swiss financial sector. There was some speculation over a bid approach for banking group UBS which provided brief support to the Swiss currency. The latest consumption index weakened again in May, although it was still at an historically relatively firm level.

Australian dollar:

The Australian dollar retained a generally firm tone over the week as the US currency was subjected to downward pressure. The currency pushed to highs just above the 0.96 level against the US dollar before hitting resistance.

Commodity prices were mixed, but gold prices firmed very sharply late in the week which helped support the Australian currency. Higher iron ore prices were also agreed in the latest contracts which boosted confidence in future export earnings.

Speculation over a domestic interest rate faded, but the potential currency impact was offset by a decline in global yield expectations.

Overall, despite continuing yield support and commodity optimism, the Australian dollar will struggle to secure more than limited further gains against the US currency.

Canadian dollar:

The Canadian dollar secured small net gains over the week and tested levels below the 1.01 level against the US dollar, but was struggling to make strong headway as conviction over moves was lacking.

There were no significant domestic developments with markets still expecting that the Bank of Canada would leave interest rates on hold in the short-term.

A surge in metals and energy prices over the second half of the week provided some degree of support o the Canadian dollar, but this was offset by an erosion of risk appetite as stock market prices were subjected to downward pressure.

Overall, the Canadian currency is likely to remain blocked on any rallies towards parity against the US dollar with energy prices triggering significant volatility.

Indian rupee:

The rupee found support during much of the week and pushed to a 3-week high against the US dollar on Thursday at around 42.65. The currency was underpinned initially by a further 0.50% increase in the Reserve Bank’s key interest rate to control inflation, the second increase during June.

The rupee gained some temporary respite as oil prices weakened and the local stock market attempted to rally. Market conditions were much less favourable late in the week. A combination of weaker equity markets and a surge in oil prices pushed the rupee back towards the 43.0 level on Friday.

Overall, the Indian currency is unlikely to make much headway in the short-term given fears over capital outflows, although there is scope for near-term support close to 43.0 with some central bank support close to this level.

Hong Kong dollar:

The Hong Kong currency was able to find further support weaker than the 7.81 level against the US dollar during the week and strengthened to around 7.8025 on Friday.

The HKMA left interest rates on hold following the Federal Reserve decision to leave the Fed funds rate on hold at 2.00%.

There was a decline in US yields over the week which helped stem selling pressure on the Hong Kong dollar. The currency was still unsettled by concerns over the stock market during the week as regional markets dipped sharply.

Overall, the Hong Kong dollar should again be able to resist significant losses against the US currency as arbitrage activity will dip on any move towards the 7.81 level.

Chinese Yuan:

The Yuan continued to strengthen during the week with another post-float high against the US currency at near 6.86 before some stabilisation on Friday. The moves were restrained given underlying dollar weakness and futures markets were not signalling expectations of faster appreciation.

The Yuan gained support from expectations of capital inflows surrounding the Olympics while there underlying yields moved in the Yuan’s favour as US yields declined. There were further international calls for the currency to strengthen with IMF head Strauss-Kahn stating that the Yuan was substantially under-valued.

Overall Yuan volatility is liable to remain higher over the next few weeks. The net flows still suggest that net appreciation is realistic, although the central bank may look to encourage some retracement in the near term.

Profit Vortex

Resource: ADVFN