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Tuesday, 1 Apr 2008
ISM Manufacturing Index On Tap
Yesterday, the greenback fell close to a record low against the EUR at the rate of 1.5890. The USD depreciated during the first hours of the trading session mainly as a result of higher than expected CPI released from the Euro-zone at 9:00 GMT yesterday. Later, the greenback gained back all its losses with the Chicago PMI release which came well higher than expected.
Yesterday's Chicago PMI reading rose to 48.2, well higher than expectations of 46.0 and a much better reading than last month's 44.5. With the report release, many investors gained back their faith in the greenback and went short on the EUR/USD, considering the report as an improvement in the U.S. economy and a first result of the Fed's moves which are forecasted to help the U.S. economy avoiding the recession.
Meanwhile, Gold continued to lose ground yesterday. The impact of the Chicago PMI release made traders seek less risky investments than Gold and thus Gold depreciated sharply closing the trading session at 8 day low at the price of 915 USD for an Ounce.
Today, analysts expect the ISM Manufacturing Index to drop to 47.5 from last month's reading of 48.3. This important indicator gives an overall view of the U.S. economic behavior over the previous month. Traders should watch these surveys closely to have larger picture of the direction of the USD for the next days.
Meanwhile, tomorrow's employment component will also be watched carefully as a gauge for Friday's Non-Farm Payroll report. NFP is expected to fall into negative for the 3rd consecutive month, which will significantly raise expectations for another sharp rate cut by the Fed at the end of April. Till now, the Federal Reserve has slashed rates by 300 basis points and is expected to cut again as soon as next month. Currently, futures are fully pricing in a 25bp cut, while increasingly leaning towards a 50bp cut. If we see today's Manufacturing Sector Report and other data, including the NFP, add to the pile of evidence pointing toward a U.S. recession, futures markets may shift quickly to fully price in a 50bp cut.
Yesterday was a volatile session with the EUR swinging between gains and losses. The EUR rose as high as $1.5895 before retreating to around $1.5802 midway through the New York session. The EUR came close to a record high against the USD yesterday as higher than forecasted European price data reinforced expectations that the inflation-focused European Central Bank is not expected to start cutting rates soon. The CPI release from the Euro zone came at a 3.5% reading, compared with a year-on-year rise of 3.3% in February, marking a new record of the Euro-zone inflation since the launch of the Euro.
While the Euro-zone data points to some slowdown of growth, elevated prices remain the ECB's main concern. The high inflation rate in the Euro zone is adding worries to the European Central Bank about price pressures in Europe and feed the expectations of near term interest cut by the ECB to control the prices and to achieve the annual target of a 2% inflation rate.
With the highest inflation rate release, analysts expect the EUR/USD to break higher from the narrow consolidation range developed in recent days, with potential to peak the 1.60 rate over the next week. Moreover, the German Unemployment Rate released today is expected to show an improvement on the working force of the biggest exporter in Europe. Forex traders should follow the U.S. ISM reading to have more information of the EUR behavior today.
The JPY depreciated yesterday against the USD losing most of its profits gained last Friday. The JPY lost 1.2% from its value and closed the trading session at the rate of 99.91 JPY per USD, while the EUR climbed 0.8% to 157.80 JPY.
The market rebounded from a tumble on Monday, despite the weaker-than-expected results of the Bank of Japan Tankan business sentiment survey. As a matter of fact, there was not much surprise in the Tankan. The market has already priced in these weak readings, adding to evidence of a worsening economic outlook and reinforcing some market speculation that the BoJ may cut interest rates later in the year.
Today, the only news to be released from Japan is the yearly Monetary Base report which is not expected to have a major influence on JPY behavior today. Forex traders should follow the figures coming from the U.S. and Europe to indicate if the JPY will keep depreciating today or correct.
The Wild Card
|15:30||USD||Natural Gas Storage||-162B||-85B||-|
|18:01||USD||30-y Bond Auction||3.81|2.2||*||-|
|21:30||NZD||Business NZ Manufacturing Index||55.7||*||-|
|04:30||JPY||Revised Industrial Production||m/m||0.5%||0.5%||-|