• Euro, British Pound Remain in Consolidation Mode vs. US Dollar
• Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain
• Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

US Dollar, Japanese Yen To See High Volatility on Tuesday Amidst Goldman Sachs (GS) Earnings, US Retail Sales

The US dollar and Japanese yen both took a hit on Monday and ended the day as the weakest of the majors thanks to a surge in risk appetite that took the DJIA and S&P 500 up more than 2 percent.  Economic data certainly did not drive these moves, as the release of the US budget statement was disappointing with the deficit hitting $94.3 billion in June, bringing the deficit for the fiscal year to $1.1 trillion. Instead, FX carry trades and equities were driven higher as speculation mounts that Goldman Sachs earnings for the second quarter will indicate that the firm made huge profits, painting a brighter outlook for the financial sector as a whole. While a large increase in profits is sure to ignite significant risk appetite, these optimistic expectations are bordering on the extreme, creating potential for disappointment and high volatility. This makes it important for traders to be careful with the amount of capital they put on the table.

Forex traders may also notice choppy price action upon the release of US advance retail sales, which are projected to rise 0.4 percent for the month of June, which would mark the second straight improvement, and excluding autos, retail sales are anticipated to increase by 0.5 percent. However, there is potential for a worse-than-expected result, as the International Council of Shopping Centers (ICSC) said that same-store sales tumbled 5.1 percent in June from a year earlier, which was the sharpest decline since March. All told, a negative reading has the potential to stoke risk aversion in the markets, and thus, US dollar strength. On the other hand, surprisingly strong results could offer a boost to FX carry trades and equities.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

Euro, British Pound Remain in Consolidation Mode vs. US Dollar

The euro and British pound were mixed on Monday, but from a longer-term perspective, pairs like EURUSD and GBPUSD remain range bound and we have yet to see any sort of directional break. On Tuesday, the UK consumer price index may reflect lessening price pressures for the month of June. Indeed, the annual rate of CPI growth is forecasted to fall to a nearly two-year low of 1.8 percent from 2.2 percent, keeping inflation within the central bank’s acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further in August. On the other hand, if CPI holds strong, the currency could rally in response. Ultimately, though, a breakout in EURUSD and GBPUSD may have more to do with a directional move in the US dollar, as the currency has just treaded water since the beginning of June.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Commodity Dollars Surge as Canadian, New Zealand Data Surprises to the Upside, FX Carry Trades Gain

The Canadian dollar and New Zealand dollar were the strongest currencies of the day while the Australian dollar trailed close behind as carry trades benefited from increased risk appetite. Meanwhile, Canadian and New Zealand economic data was surprisingly strong. First, New Zealand sales rose 0.8 percent in May, and excluding autos, spending rocketed 1.6 percent, which was sharpest increase since February 2007. The results suggest that the New Zealand economy is holding up rather well and that there is no need for the Reserve Bank of New Zealand to cut rates any further. In Canada, surveys published by the Bank of Canada reflected positive sentiment on the business outlook, and slight improvements in lending conditions. Indeed, the business sales outlook index surged to a nearly 10-year high of 38.0 in Q2 from -22.0 in Q1 as a greater number of firms anticipate increasing sales volume over the next 12 months. Adding to the mix, the Senior Loan Officer Survey showed that lending conditions remain tight, but to a lesser degree than what loan officers saw in Q4 2008 and Q1 2009.

Swiss Franc Remain Range Bound vs. Euro as Data Highlights Swiss Deflation Risks

The Swiss franc was mixed across the majors, and ended the day little changed against the euro after the Swiss producer and import price index rose a slight 0.1 percent during the month of June, while the year-over-year rate plunged to a nearly 23-year low of -5.6 percent from -5.0 percent, adding to evidence that the Swiss economy faces severe deflation risks. Indeed, these downward price pressures are the reason why the Swiss National Bank has turned to physical intervention to try to prevent the Swiss franc from appreciating. All told, EUR/CHF remains within an intraday falling channel formation, with support now at 1.5087/90 and resistance at 1.5170. SNB directorate member Thomas Jordan said two weeks ago that they “continue to consider interventions to prevent an excessive rise in the Swiss franc,” and as a result, traders should beware that the further EUR/CHF falls, the greater the potential for intervention grows.

For those who plan to visit some relatives in UK during the next few weeks, this may interest you. The following chart represents the evolution of the parity of the Australian Dollar against the British Pound (AUD/GBP). After a long-term bearish trend between 1999 and late 2001 (inflection point, point A on the weekly chart), the currency pair started to rise back and has been riding a long-term bullish trend until now.

The most important part of investing is to clearly understand what you’re investing in. In the currency world, most currency traders will talk about the “seven” majors.

The seven majors are the currencies that are traded most often on major brokerage desks around the world. The seven majors are generally paired with the dollar, so technically, the U.S. dollar would count as the eighth “major.”
Here’s a quick 30 second introduction to each of the major currencies…

U.S. Dollar (USD): The majority of trades in the Forex market involve the U.S. dollar against a different currency because it is currently used as the world’s reserve currency.

Euro (EUR): This is the new kid of the currency majors. Lately, the euro has been stepping up to take its place as a reference currency, as well as a larger component of foreign reserves by banks. It is also known as the anti-dollar because the euro tends to appreciate as the dollar depreciates.

Japanese Yen (JPY): The yen has been known as the carry-trade currency because for years, investors have borrowed yen to fund their carry-trades. Because Japan imports all of its oil, when crude oil prices begin to climb this hurts its economy and greatly impacts the value of the yen.

Swiss Franc (CHF): Also known as Swissie, it is sometimes called a ‘safe heaven,’ due to Switzerland’s independent stance, economy isolation, and strong private banking system. This in turn has made their currency very neutral.

The British pound (GBP): Frequently called, Cable or Sterling, the pound first got these nicknames because it was the first currency the Forex market traded through ‘cables’ across the Atlantic. The pound is the fourth most traded currency on the market and Great Britain’s economy is one of the strongest in Europe.

Canadian dollar (CAD): This currency’s unusual nickname, the Loonie, comes from the coins appearance which features a loon, a common Canadian bird, on the coins backside. Canada is a resource-focused economy, so the price of oil drives this currency along with commodities.

Australian dollar (AUD): Known as the Aussie, this currency is popular in the Forex market because of Australia’s currently high interest rates and generally stable economy. The Australian dollar is greatly influenced and driven by gold prices.

New Zealand dollar (NZD): Also known as the “kiwi,” the New Zealand dollar traditionally tracks the Aussie dollar’s path because these economies are tied together through exports. However, sometimes the New Zealand can fall while the Aussie dollar rises as we have recently witnessed.