Fixed Odds Trading Strategy

The Week Ahead

Market confidence towards the dollar will remain weak in the short-termand there are certainly important sources of vulnerability. The US currency is relatively cheap on valuation grounds and there are also still very important vulnerabilities in the other major economies. In this environment, the dollar should be able to resist heavy selling pressure.

Key events for the forthcoming week

Date Time (GMT) Data release/event
Friday August 7th 12.30 US employment report
Wednesday August 12th 08.30 UK unemployment claimant count
Wednesday August 12th 09.30 UK Bank of England inflation report
Wednesday August 12th 18.15 US FOMC interest rate decision

Dollar:

The latest US data has been mixed and optimism that there will be a near-term recovery in the economy will be offset by fears that any improvement in conditions will be fragile and not sustainable. Over the past few months, the dollar has gained support when risk appetite has deteriorated and lost ground on evidence of a firmer economy, but this relationship may start to break down. Dollar confidence is liable to remain fragile on fears over medium-term reserve diversification, although selling pressure should be contained.

The dollar weakened to 2009 lows over the first half of the week as underlying sentiment remained weak and players looked to break currencies out of recent ranges. The US currency found some support at lower levels as confidence in European currencies faltered and it edged stronger ahead of the US payroll data.

Risk appetite was still firm which tended to curb dollar demand, although there was evidence of greater caution over the second half of the week.

The US ISM manufacturing index was stronger than expected with an increase to 48.9 for July from 44.8 the previous month. The orders component continued to improve and the pace of job cutting also slowed sharply over the month which will reinforce optimism over a further recovery in the manufacturing sector.

There was also a stronger than expected with a 3.6% increase in pending home sales for June following a revised 0.8% rise the previous month as lower prices continued to attract buyers into the market.

There was a 371,000 decline in private-sector employment according to the latest ADP survey compared with expectations of a 345,000 decline, although this was still a significant improvement from the previous month. The number of planned job cuts also increased for the month.

The headline US jobless claims data was stronger than expected with a dip to 550,000 in the latest week from a revised 588,000 the previous week while continuing claims were higher than expected. The net impact of the data was to trigger a slight revision to estimates for Friday’s payroll data with expectations that fewer jobs will be lost.

The services-sector data was less supportive as the ISM index dipped to 46.4 for July from 47.0 the previous month, contrary to expectations of a monthly recovery. The orders and employment components also declined over the month. There were also some continuing fears over underlying trends in the banking sector.

Euro

The Euro-zone economic data has continued to suggest a slow improvement in conditions and the ECB is likely to maintain a steady approach in the near term. Credit conditions will continue to be watched very closely amid fears that there will be a deterioration in credit availability while confidence in the financial sector will remain extremely fragile. In this environment, the Euro will still find it difficult to make strong headway.

The Euro strengthened to nine-month highs against the dollar during the week and also pushed to near 2009 highs against the yen before correcting slightly weaker.
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The Euro-zone PMI index for the manufacturing sector was revised up slightly which maintained the sense of optimism towards the Euro-zone

The German factory orders data was sharply stronger than expected with a further 4.5% increase for June following a 4.4% increase the previous month, maintaining optimism over a recovery in the industrial sector, although the Italian output data was weaker than expected.

As expected, the ECB left interest rates on hold at 1.0% following the latest council meeting. Bank chairman Trichet also took a generally neutral stance in the press conference following the meeting with some cautious optimism over a gradual recovery in conditions. Trichet made no significant reference to the Euro’s value.

Yen:

There will be further domestic fund launches and capital outflows from Japan in search of higher yields will be a persistent feature. Inevitably, it will also be the case that these outflows will be much stronger when international risk appetite is firm. There is likely to be greater caution over the global economy and risk appetite which will provide some degree of yen protection, but the Japanese currency is liable to be blocked close to current levels.

The yen was again unable to strengthen through the 94 region against the US dollar and had a generally weaker tone with yen consolidation weaker than 95, although selling pressure was controlled for much of the time.

Bank of Japan members commented on the rise in bond yields and there will be some pressure on the bank to curb any further rise in yields. There was also speculation that the Bank will forecast three years of deflation in its October forecasts and this would maintain pressure for a very loose monetary policy.
The latest capital account data also recorded net outflows by Japanese investors into overseas high-yield instruments and these flows will remain an important negative influence for the Japanese currency.

The yen also gained ground after opposition political comments over a possible review to currency reserve management policies as uncertainty increased ahead of the August 30 general election.
Forex charts

Sterling

The recent economic data has remained generally encouraging. The Bank of England decision to expand quantitative easing will certainly dampen optimism over the economy and there will continue to be very important fears surrounding the government debt outlook, especially if there is evidence that banking-sector losses will escalate. Sterling will still be in a position to resist heavy losses if global risk appetite remains firm. The net risks still suggest a slightly weaker UK currency over the next few weeks as a whole.

Sterling strengthened to 10-month highs against the dollar with a challenge on resistance levels above 1.70 while the UK currency also pushed to near 2009 highs against the Euro before losing ground.

The economic releases were generally favourable which provided initial currency support as confidence in the recovery increased. The Halifax house-price index rose 1.1% for July, maintaining the recent run of favourable housing-sector data.

The manufacturing PMI data was stronger than expected with an increase to 50.8 in July from 47.4 previously. This was the strongest reading and the first above the pivotal 50.0 level since March 2008

The PMI index for the services sector rising to 53.2 in July from 51.6 the previous month while there was a 0.5% increase in industrial output for June as car output recovered from the earlier shutdowns while construction activity fell at a slower rate.

The interest rate decision from the Bank of England was no surprise with rates left on hold at the 0.50% level. The decision on quantitative easing was a surprise, however, as the bank announced an increase in the corporate bond buying programme. A further GBP50bn will be bought over the next three months, taking the total to GBP175bn.

The bank was very cautious over the economic outlook, warning that the financial sector was still extremely fragile while the recession would be deeper than expected. The move to increase quantitative easing was negative for the currency and the bank’s comments also dampened the optimism triggered by recent favourable data releases.

Following the Bank of England move, Sterling weakened sharply to lows near 1.6750 against the dollar with the Euro back above the 0.8550 level

Swiss franc:

The National Bank policy actions will continue to have a very important impact on the Swiss currency. There will be deflation fears, especially if there is wider US currency appreciation, and the most likely outcome is that the bank will continue to intervene aggressively if necessary to curb renewed currency gains. These risks will increase if the is renewed downward pressure on the US dollar. The franc will, therefore, find it difficult to make much net headway.

The dollar found support below 1.06 against the franc during the week and attempted to rally, but was unable to make strong headway. The Euro hit resistance close to 1.53 against the Swiss currency.

The Swiss PMI index was firmer than expected with an increase to 44.3 for July from 41.8 the previous month, maintaining the recent improving trend.

Swiss consumer prices fell 0.7% in July to give a year-on-year decline of 1.2% which was slightly below expectations and kept the National Bank alert to the deflation threat. Given these deflation fears, there will be increased central bank determination to avoid Swiss currency gains.

Australian dollar

The Australian dollar challenged resistance levels above 0.8450 against the US dollar, but found it difficult to make much headway for the week as a whole.

There was a significant decline in the latest services-sector PMI index which will create some caution over the economy, especially after the weaker than expected retail sales data. A narrower trade deficit did not have a major market impact.

As expected, the Reserve Bank of Australia left interest rates on hold at 3.00% following the latest council meeting and the bank also removed the easing bias while upgrading its assessment of conditions.

The domestic labour-market data was sharply stronger than expected with the unemployment rate holding at 5.8% while there was a surprise 32,200 increase in employment for the month. The data reinforced expectations that the Reserve Bank will move closer to raising interest rates

The Australian dollar performance will continue to be influenced strongly by degrees of risk appetite and commodity prices. Expectations of a tighter monetary policy should stem any selling pressure.

Canadian dollar:

The Canadian strengthened to highs beyond the 1.07 level against the US currency during the week, but was unable to sustain the gains and weakened back toward the 1.08 level.

The domestic influences remained limited with currency trends still influenced strongly by commodity prices.

The Canadian dollar will find it difficult to make strong headway from current levels even if it proves to be broadly resilient.

Indian rupee:

The rupee secured a generally firmer tone and pushed to 8-week highs against the dollar as the US currency was subjected to further underlying selling pressure

Trading volumes were generally low due to the impact of a strike by state-bank employees with the dollar regaining some ground to 47.80 against the rupee on Friday as there was a mood of greater caution.

Underlying risk appetite was till relatively firm which helped underpin the stock markets and optimism over capital inflows.

The rupee will gain support when global risk appetite improves. Nevertheless, the net risks suggest that the currency will find it difficult to secure more than limited gains.

Hong Kong dollar

The Hong Kong dollar has again been trapped very close to the 7.75 band limit against the US currency. There have been frequent interventions by the HKMA to stem local currency gains and preserve the bands.

There was some increase in corporate US currency demand, but the Hong Kong dollar still secured wider support on optimism over capital inflows.

The Hong Kong dollar should maintain a firm tone in the short-termwith the potential for further intervention by the HKMA to preserve the band limits.

Chinese yuan:

The yuan has again been trapped in narrow ranges near 6.83 against the US dollar with the domestic currency still effectively pegged against the dollar. In its latest monetary report, the central bank again pledged that it would maintain a stable yuan

There was some evidence of caution ahead of a batch of economic data next week while volatilities fell to a two-month low as spot activity remained extremely limited.

The central bank is likely to maintain the near-term policy of targeting currency stability, especially with persistent doubts over the quality of the economic rebound.

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Resource: ADVFN

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.

Profit Vortex

Resource: ADVFN