Australian FOREX Weekly Outlook 13/08/2007

Market Volatility prompts central Banks to inject liquidity. All eyes on U.S. economic data.

13/08/07

last week’s currency trading review

The Dollar was exposed to a volatile week in trading influenced by other markets. The USD opened the week pressured with ongoing expectations of the worst of the credit issue ahead, causing the Dollar to trade at near 15 year lows against a basket of currencies. The FOMC decision on Tuesday to hold rates gave a brief support to the Dollar, as statements included the usual rhetoric often seen by the Federal Reserve, being that inflationary pressures had remained to the upside. Yet any rally was short lived as markets found the reluctance to indicate any future rat hikes and approval for USD bears. A plunge in global markets gave plenty of support to the greenback in the later part of the week as investors continued to unwind risky trades and repatriate overseas investments causing USD demand. The moves were initially instigated by PNB Paribas (largest bank in France) which froze funds on a total 1.6 bln Euro having reported an estimated 700 million Euro loss in the previous fortnight. With ongoing instability in the Financial Markets, the Federal Reserve resorted to injecting funds to add calmness on numerous occasions throughout the week. The Euro was generally down against the USD over the week, having opened with its recent bullish nature. Plenty of concerns in the U.S. Credit markets and the drop in stock prices prompted investors to minimize their exposure. The Euro lost further ground in the late part of the week as investors began pricing less than a 50% chance that the ECB will hike rates in September, as opposed to 70%. The EURO closed last week at 1.3695 having opened at 1.3795. The Japanese was extremely volatile as carry trade unwinding was cause for much of the movement. With risk aversion a focus, the Japanese Yen was relieved of its role as a funding currency. The Yen closed last week 118.32 having opened at 118.92. The GBP was shorted for the majority of the week as trading on the back of other majors. With EURGBP breaking key levels, added to the volatility in markets, the GBP ended the week down due to its recognition as the highest interest bearing currency of the G7 nations. On the data front, UK Trade Balance on Thursday was released at its most narrow deficit since October 2005, yet supportive data did little to provide any strength to the Pound. The GBP closed last week at 2.0218 having opened at 2.0303. The AUD saw the much anticipated and often talked about 25 point hike materialize on Wednesday to sit at its highest level in eleven years of 6.50%. Adding further support to the Aussie Dollar was the RBA leaving the door open for a tightening bias in 2008. Although unemployment figures were released better than forecasts on Thursday the AUD was soon sold off as carry trades continued to unravel in a volatile market. The AUD closed last week at 0.8442 having opened at 0.8575.

The forex trading week preview

In the States kicks off the data week with Retail Sales on Monday, with further pricing data released on Tuesday in PPI ahead of Wednesday’s Core CPI. Other key data will focus on Economic growth on Wednesday as TIC flows, Industrial Production and NY Fed Manufacturing survey all scheduled for release. Housing data takes centre stage on Thursday in the form of Housing starts and Building Permits. We will provide our previews and reviews of these data releases in the daily summary.

In the Eurozone Wednesday proves to be a key data day in the form GDP (Q2) and Industrial Production, Core CPI will be released on Thursday. In the UK CPI is due for release on Tuesday, BoE Minutes and Unemployment Rate on Wednesday whilst Retail sales is out on Thursday. We will provide our previews and reviews of these data releases in the daily summary.

In Japan all key data out of Japan will be released early in the week with GDP and Current Account out on Monday. We will provide our previews and reviews of these data releases in the daily summary.

In Australia Monday is sure to generate interest with the RBA releasing its Statement Monetary Policy. . We will provide our previews and reviews of these data releases in the daily summary.