Australian FOREX Weekly Outlook 23/07/2007

Bernanke admits to slowing housing sector and the affects of the Sub-Prime are yet to come. China rate hike allows for Japanese Yen strength.

23/07/07

last week’s currency trading review

The Dollar once again was weighed heavy with growing uncertainty in the slowing housing sector. Markets pre-empted poor data out of the US in the early part of the week as USD bears far outweighed bulls. Tuesday saw a slight reprieve in the greenback attributed to buoyant readings in TIC flows, PPI and Industrial Production. However any correction was short lived ahead of Chairman Bernanke Bi-annual address to the house maintained the usual rhetoric regarding inflationary remained on the upside risk, yet admitted that the recent sub-prime defaults was beginning to take its toll on the economy, curbing consumer spending. The Euro was relatively quiet for most of the week, overall gaining on the back of a weaker USD. The majority of the move in the Euro came at the beginning of the week with a strong reading in CPI, warranted ongoing speculation of future rate hikes. The Euro closed last week at 1.3824 before closing the day at 1.3783. The Japanese was once again pressured due to the appeal for the low-yielding currency in funding carry trades. The Peoples Bank of China decision to increase the overnight rate did however cause significant of the carry trades adding to Japanese Yen strength. The Japanese closed last week at 121.23 having opened the week at 121.81. The GBP began the week with buoyant outlook trading at key 2.0400 levels for the first time in 26 years. Further more strong reading in inflation added to ongoing speculation that the interest rate will sit at 6.25% (70% chance). The Sterling Pound was also supported with GDP recording significant economic growth in the UK on Friday. The GBP closed last week at 2.0548 well above the open of 2.0370.The AUD was quiet on the data front with RBA Governor Stevens’ speech moving markets significantly, with his view that the AUD was not overvalued representative of market fundamentals. The AUD closed last week at 0.8797 having opened at 0.8714.

The forex trading week preview

In the States further emphasis will surround the housing sector with existing home sales out on Wednesday and new home sales out on Thursday. Further more on Thursday, Durable Goods will be made public ahead of Fridays key releases in GDP and Core PCE. We will provide our previews and reviews of these data releases in the daily summary.

In the Eurozone begins its data week on Tuesday with Current Account, Manufacturing PMI and Services PMI. Other key data out of the EZ for the week will be in the form of German IFO survey scheduled for release on Thursday. In the UK may be expecting a quiet week in data, yet should not constrict ongoing interest on the Sterling Pound. Housing data seems to be the only worthy piece of data release for the week. We will provide our previews and reviews of these data releases in the daily summary.

In Japan most eyes will be on the CPI data release on Thursday as well as Retail Sales. We will provide our previews and reviews of these data releases in the daily summary.

In Australia will have a busier week, with CPI out on Wednesday. Neighboring New Zealand is scheduled for an interest rate announcement on Thursday and Trade Balance on Friday.We will provide our previews and reviews of these data releases in the daily summary.

The currency in focus

GBP/USD has been making massive gains of late as markets expect further interest rate hikes from the UK, increasing the yield differential between the Sterling and the Greenback. With UK interest rates the highest in the G7, any data releases which imply inflationary pressures albeit from the housing sector or labour market could signal further upside moves in cable. As such, Rightmove House Prices and Nationwide House Prices will be looked at closely from the UK, and housing data from the US, namely, Existing Home Sales and New Home Sales as well as key inflationary related data (Durable Goods, Core PCE) also. With the market focusing on the sub-prime mortgage problem out of the US, any soft housing data could be detrimental to the greenback. Look for resistance at 2.0700 and key support bordering 2.0600 and the 2.0550-70 area.

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