The Week Ahead

THE WEEK AHEAD...

The economic calendar is jam-packed this week. From US, early focus will be on Monday's retails sales. PPI and CPI inflation then take center stage. Also featured will be trade balance, and TIC capital flow. Two regional report manufacturing will be released from NY State and Philadelphia with industrial productions. Another round of housing data will be featured with NAHB index, housing starts and building permits.
From Eurozone, main focus will be on Q2 GDP, Jul HICP inflation and most importantly the German ZEW. PPI and CPI inflation data from UK will also be closely watched together with employment report and retail sales.
But after all, the impact of economic data to the markets would be temporary as the focus of attention will likely remain in the credit markets and further unwinding of carry trades.

Weekly Review

THE WEEK IN REVIEW...

BNP Paribas suspended redemption from three funds that are exposed to US subprime markets triggered concern that investors would seek redemptions from other funds, which could in term dry up the markets. LIBOR rates spiked higher in the middle of the week and that in turn, triggered injection of cash from central banks around the world, including Fed, ECB, BoJ, BoC and RBA. But the fear in the makets continued, with stocks stumbling and carry trade unwinding massively. The markets only stabilized on Friday after the Fed added another $38b and pledged more fund will be injected "as necessary" to calm the markets. Looking ahead, news about the credit markets and subprime problem will continue to take the center stage. Economic calendar is jam-packed this week, which could trigger further volatility in the markets. But impact from data could be temporary as they continue to play a secondary role in moving the markets.

Fed kept rates unchanged at 5.25% as widely expected. Tightening bias was, to some's surprise, maintained in the accompanying statement as "the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected," even though downside risks to growth have increased. Regarding inflation, Fed members still think that the sustainable moderation in inflation pressure is not "convincingly demonstrated" yet. Regarding growth, Fed still expects "the economy seems likely to continue to expand at a moderate pace over the coming quarters", but added that it will be "supported by solid growth in employment and incomes and a robust global economy."

Another major events of last week was the BoE quarterly inflation report which confirmed market's expectation that one more rate hike is needed to bring CPI inflation back to 2% target in 09. Sterling was also boosted temporarily by hawkish comments from BoE Governor King who said that the starting point of UK economic growth is stronger than the latest ONS numbers and that inflation expectations have not fallen back yet. Housing market also remains strong.

RBA raised Australian interest rates to a decade-high of 6.5% to curb persistent core inflationary pressures as widely expected. However, reaction to the news was muted as this was already widely expected. Also, markets are speculating that RBA will be on hold at 6.5% for the remainder of the year. Kiwi and CAD was boosted temporarily by lower than expected unemployment rate but just like others, both were pressured again as carry trade unwinding returned to be the focus.

FX Trading Signals for August 12

Sunday, August 12th, 2007 (1950 New York Time/ Monday 0520 IST) JAPAN
Then, on Sunday at 7:50 p.m. NY time we will have Japanese GDP coming out. It is expected that Japanese GDP q/q will come out at around 0.2%. There are going to be several numbers, and this is going to be the most important one. If it comes out at 0.5% or higher, we may possibly see USD/JPY going down by 50 pips or more in the first hour of the report. At the same time, if the GDP reads at 0% or negative, I think USD/JPY may possibly gain 50 pips or more in the first hour of the report. This report is a time sensitive one, and may affect eventually the Japanese government's decisions to either hike or not hike the rate.

3. Sunday, August 12th, 2007 (2130. New York Time/ Monday 0700 IST) AUSTRALIA
Then at 9:30 p.m. New York time we will have Australian inflation report. I don't think this is worth trading.

4. Monday, August 13th, 2007 (0830. New York Time/ 1800 IST) USA
Then on Monday at 8:30 a.m. New York time we will have U.S. retail sales coming out. Probably the most important number is the U.S. retail sales CORE which is expected to read at 0.4%. If it reads at 1% or higher, I think GBP/USD may possibly go down by 30 pips or more in the first hour of the report. On the other hand, if the retail sales come out at zero or negative, I think GBP/USD may possibly gain 40 pips or more in the first hour of the report. That would largely depends on where the price is right before the report. This is definitely not the key indicator so be careful on it.

5. Monday, August 13th, 2007 (1845 New York Time/Tuesday 0415 IST) NEW ZEALAND
Then, at 6:45 p.m. New York time on Monday we will have New Zealand retail sales coming out. It is expected to read 0.5%. If it reads 0.8% or higher, I think NZD/USD may possibly gain 35 pips or more in the first hour of the report. If the retail sales reads 0.2% or lower, I think NZD/USD may possibly go down by 35 pips or more in the first hour of the report.

6. Tuesday, August 14th, 2007 (0430 New York Time/ 1400 IST) UK
Then later, on Tuesday at 4:30 a.m NY time, we will have UK CPI coming out. It's an annualized number, and it is expected to read at 2.3% versus 2.4% last month. The year-over-year regular CPI is the most important reading that everybody cares about. In my opinion, we definitely want to focus on it. If the reading reads 2.5% or higher, I think GBP/USD may possibly gain 50 pips or more in the first hour of the report. At the same time, if the CPI reads 2.1% or lower, I think GBP/USD may possibly go down by 50 pips or more in the first hour of the report. This is definitely a very, very, very key indicator at this point of the economy, and even a deviation of 0.1 % can create a move. I will see how the market is acting before the report, but I am very excited to trade this one.

7. Tuesday, August 14th, 2007 (8:30 a.m. New York Time/ 1800 IST) CANADA
Then, at 8:30 a.m. NY time we will have U.S. trade balance, and we will have Canadian trade balance coming out. The Canadian trade balance is the most important one, in my opinion. It is expected read at 5.5 billion versus 5.9 billion last month. If it reads 6B or higher, I think EUR/CAD may possibly go down by 50 pips or more in the first hour of the report. At the same time, a reading of 5 billion or below will probably force EUR/CAD up by 50 pips or more in the first hour of the report. Watch out for some volatility that may be caused by the U.S. trade balance, although I think if you focus on EUR/CAD and Canadian trade balance, it should work OK.