Dollar Volatility Set to Impact Forex Market Today

The USD's volatility is set to continue today as forex trader's eye Federal Reserve Chairman Ben Bernanke's speech as 6 GMT. In the meantime, however, it would be a wise move for investors to open some important positions as they can take advantage of the forex market prior to and after this main news event. Key economic data releases from the leading economies should also be a vital inspiration for traders today.



USD - Dollar Tumbles to a 5 Month Low

The U.S currency continued to slip against the EUR yesterday, dropping 1% to as low as 1.3950. It also dropped to its lowest this year against many of its other major currency pairs as worries about swelling U.S. deficits soured investor's appetites on U.S. assets.

The Dollar has fallen every day this week against the EUR and Pound Sterling, and it marked its third straight daily decline against the Japanese Yen yesterday. Analysts attributed the fall in the Dollar, which has been treated as a lower risk, safe-haven investment, to growing optimism that the worst of the financial crisis has passed. This has caused investors to unwind positions in favor of the U.S. currency built up when fear was widespread, credit was frozen and stock markets were in free fall.

A leading indicator released yesterday was U.S. Unemployment Claims. This number handedly beat last week's result. However, it failed to provide strength to the Dollar as investors may be waiting for key data due to be released today to implement their trading strategies.

Looking ahead today, the news event that may have a very large impact on the Dollar and its main currency pairs in today's trading is Federal Reserve Chairman Ben Bernanke's speech at around 18:00 GMT. This speech is very important as it is very likely to Impact the Dollar volatility. Traders are advised to watch closely, as this is likely to set the pace of the Dollar going into next week's trading.

EUR - The EUR Continues to Strengthen against the USD

The EUR rallied yesterday against the Dollar as encouraging news about the European economy emerged. This sparked hope that the 16-country Euro-Zone may be emerging from the depths of recession. The EUR touched a 5- five month high versus the Dollar to above the 1.3950 level. The European currency finished around 80 pips higher against the JPY to finish yesterday's trading session at the 131.19 level.

The Euro-Zone's manufacturing and services sector recorded their best performance in 7 months, suggesting the Euro-Zone economy will shrink only slightly in the 2nd quarter after a record slump in the 1st quarter. The survey showed a significant improvement, thereby boosting hopes that the rate of decline in the Euro-Zone economy is now moderating after a particularly torrid 4th quarter of 2008 and 1st quarter of 2009. The reduced contraction in manufacturing activity in May suggests that the sector is starting to benefit from the massive de-stocking that has taken place.

Sentiment in the Euro-Zone economy has brightened in the past week following better-than-expected news. The EUR is showing signs of resilience even though there was volatility throughout non-Euro crosses. It will be crucial for traders to identify how the preceding economic indicators from the U.S., Japanese, and other key economies will affect their positions.

JPY - JPY Slides against EUR and Spikes versus the Dollar

The Japanese Yen completed yesterday's trading session with mixed results versus the major currencies. The JPY fell against the EUR yesterday, pushing the oft-traded currency pair to 131.19. The JPY slipped only marginally yesterday against the GBP to the 149.31 level. The JPY did see some bullishness as well as it gained 35 pips against the USD and closed at 94.17.

The Japanese market should have a heavy effect on the JPY versus its major currency counterparts, as the Overnight Call Rate will be announced today. The rate is expected to remain unchanged, but traders should pay close attention to the BoJ Press Conference that will follow to look for expectations of Japan's economic future. A bullish statement from the BoJ could lead some traders to believe the BoJ is forecasting a rosier financial climate in Japan.

Crude Oil - Crude Oil Rises Despite Economic Concerns

Crude Oil rose slightly by 21 pips to $61.63 a barrel yesterday, continuing its comeback. This was despite the U.S. Federal Reserve cutting its forecast for the economy of the U.S., the world's biggest energy-consuming country. Crude is trading for less than half year-ago levels, as demand has softened with the economic crisis. Expectations that consumers may once again want more Oil when the recession bottoms have partly fueled the rally, with traders watching the stock market for economic telltales.

Concerns about the reliability of supply also have begun to creep into the market, highlighted by an escalating conflict between rebels and security forces in Nigeria's Oil-rich southern region this week. There is a reasonable possibility that Oil prices will continue to be bullish going into next week, providing that the economic situation of the leading economies continues to rapidly improve.

Article Source - Dollar Volatility Set to Impact Forex Market Today

British Pound Strength May Endure on Confirmation of Record UK GDP Decline (Euro Open)

The British Pound may shrug off confirmation that the UK economy shrank the most since 1979 in the first quarter despite downward revisions to private consumption and investment with traders already pricing in sluggish performance in the foreseeable future. Overnight data saw the Bank of Japan upgrade their economic outlook for the first time since 2006.

Key Overnight Developments

• Bank of Japan Upgrades Economic Outlook for First Time Since 2006
• Euro Higher, British Pound Range-Bound in Overnight Trading

Critical Levels



The Euro extended gains in Asian trading hours, adding as much as 0.5% against the US Dollar. The British Pound remained range-bound, oscillating in a well-defined 70-pip band above 1.5820.

Asia Session Highlights



The Bank of Japan kept overnight interest rates at 0.10%, as expected, and maintained their monthly purchases of government bonds at 1.8 trillion yen. The bank did another step toward easing lending conditions however, announcing it will now take foreign bonds as collateral for borrowing. US, UK, German and French government debt will be accepted. Most notably, the central bank upgraded their economic outlook for the first time since July 2006, saying growth will begin to recover in the second half of the 2009 fiscal year, an improvement from previous expectations of a rebound in the first half of FY2010. The BOJ expects the recovery will be export-driven, saying domestic demand will probably continue to weaken.

Euro Session: What to Expect



The second revision of UK Gross Domestic Product is set to confirm that the economy shrank -1.9% in the first quarter, the most since 1979. Although the headline figure is likely to remain unchanged, a number of key components are expected to see downside revisions to paint an even bleaker view of the struggling economy. Most notably, the fall in Private Consumption is expected to be scaled up to -1.0% from the originally reported -0.7% while the drop in Gross Fixed Capital Formation (i.e. investment) is expected to nearly double the originally reported result of -2.3% to print down -4.1%.

Although this is surely bad news for economy, the ability of the release to meaningfully derail the recent rally in the British Pound seems limited. Sterling traders heard everything they needed to about growth prospects when the Bank of England’s quarterly inflation report revealed expectations inflation will remain below the target 2% until 2012 as the economy takes a slower path to recovery. Indeed, this week saw the UK unit shrug off a weak CPI report as well as news that rating agency S&P downgraded their UK outlook from “stable” to “negative”.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound Strength May Endure on Confirmation of Record UK GDP Decline (Euro Open)

Is The Carry Trade Recovering?

The carry trade has fallen far from its place as a lucrative trading strategy since the subprime crisis progressed into a general financial crisis nearly two years ago. However, after evolving through a period of anti-carry, forced deleveraging and a complete collapse in interest rate differentials; have we finally come to the bottom in sentiment and the reversed carry flows?

Currently, interest rates are still scraping recent historical low and there are significant pitfalls that could spark a second wave of fear and flight to safety. On the other hand, with rates essentially on a level playing field and the concept of safety dramatically altered by the events of the past few years, the response to such a dire turn for the market could be substantially different. With the markets looking to enter a new phase, we will cover the risk and reward of the traditional carry trade strategy and then talk about how it can be used in today’s markets.

Fundamental Pitfalls

To get to the point the market is at now, the once-popular carry strategy was wrung for both risk and return. When the financial crisis was really hitting its stride through the end of 2007 and into 2008, the sheer panic was driving the markets. Investors were looking to transfer their funds not from a risky asset to a risk-free one – they were still trying to find an alternative with a high return. However, when liquidity seized, the realization of just how dire conditions had become dawned. The exodus from speculative positions and instruments was immense; and only recently have we seen interest in high yielding currencies return. It is true that the ‘basing’ period of the past six months has passed without the threat of another major bankruptcy, default, or liquidity crisis. Does this mean the path is free and clear for a return to pure carry? No. There are still bigger concerns looming; and any one of them can stoke fear.

Recessions Are Still Prevalent – Speculative interests often spurn the present in expectation of a greater source of return later down the line. However, traders may have to wait a long time and suffer significant drawdowns along the way if they start calling for positive growth, earnings and capital investment now. Most, timely data to this point has offered only improvement in pace, not in absolute terms. For example, consumer confidence indicators from many of the world’s leading economies have stepped up from multi-decade lows; but are still under water. More discouraging is the general pace of growth data. Japan recently reported its worst contraction on record and US officials recently downgraded their projections for 2009. Should expectations for a late-2009, early-2010 return to growth fall apart so too will trader sentiment.

Government Aid – Dealing with a state of financial disaster, the world’s governments were forced over the past few years to inject liquidity into the market, extend guarantees on corporate debt, buy shares, nationalize banks and take trillions of dollar worth of toxic debt onto their books. This has led to tremendous, fiscal strain for the world’s largest economies (which has even begun to threaten the stability of some stalwart nations). Though policy makers acted quickly to put out the financial fire; they did not do so without mind to the eventual ‘exit strategy.’ At some point, the stabilizers will be removed from the market; and we will see if the market can make it on its own. Without doubt, the greatest threat to in the government’s exit is the rotation of toxic assets back into the market. Asset backed securities (ABS), mortgage backed securities (MBS) and other illiquid, hard to value derivatives were accepted as collateral so banks could draw liquid funds. As the worst seems to have passed, central banks will be eager to push these securities off their balance sheets; but they will have to do so with finesse and incredible sensitivity as to how their actions are impacting market sentiment.

Regulations Will Stifle The Recovery – Many believe that the worst global economic crisis since the Great Depression was borne from a lack of regulation and responsibility. Law makers certainly fall within that category; and while trying to stabilize the 2007-2008 crisis; they were simultaneously drafting policy to prevent such a cataclysmic event from happening again in the future. In their zeal, however, the markets may flounder. The government’s presence in the market is a natural dampener as their desire is to dampen absolute volatility. They do so by tempering leverage, reducing credit, influencing rates of return, and generally boosting regulation. It seems may seem relatively benign to suggest that accounting rules will be changed to promote transparency; but this could in fact have a tremendous impact on sentiment. In the US, FASB (the Financial Accounting Standards Board) passed rules that would require banks to report billions in additional losses taken on assets and liabilities that were left out in previous earnings.

Interest Rates: The Promise of Returns

For any strategy to work, it has to have an acceptable balance of risk and reward. Over the past two months, carry interests have rallied largely on the presumption that the threats to financial stability have been rectified. However, there can never be a sense of certainty as to how risk develops; so speculators must be compensated for the danger of losses with the allure of comparable returns. In a setting of pervasive recession and cautious investing though, what kind of returns can be expected?

In the table below, we are given the current level of the benchmark Libor rate. This is a better representation of fundamental returns than overnight lending rates. After months of policy easing, the world’s rate of return has depreciated substantially. Interest rates that were once near 9.5 percent in New Zealand, 5.5 percent in the US and 6.5 percent in the UK are now mere shadows of what they used to be. Not only is this meager compensation when considering the potential for another crisis; but it offers little in the way of yield differential. The greatest premium among the eight most liquid currencies comes with AUDJPY; yet this pair is extremely volatile and there is the specter that the high-yield component can be further deflated through a grinding recession. In the ‘Adjusted 3 Month Libor Rate’ column, we have adjusted the current rate to include the expected change in the benchmark over the next 12 months.



How to Use the Carry Trade in Today’s Market

Whether you believe the bullish turn in the market is genuine and we have embarked on the next bull wave or the imbalance of risk to return will weigh speculation for months to come; there is a means to use the traditional carry trade in your strategy.

Interest Bearing: For the first scenario, we will take the optimists’ approach. Should the promise of positive growth eventually translate into greater returns, we will see not only yield income rise but capital gains (as funds are put behind this strategy) as well. In this setting, the most appealing trades will be those that will see their interest rate differential expand rapidly. This requires going long a currency whose benchmark lending rate is already relatively high and is likely to rise quickly; while the opposing (funding) currency will see its target rate hold relatively steady through the most aggressive times. From a fundamental perspective, the Australian dollar is the best candidate for the high-yielder as its economy has suffered a relatively mild slump and the RBA has signaled its intent to dampen its easing regime. Alternatively, the list of low rates is broader. Specifically, the Japanese yen, US dollar and Canadian dollar maintain extraordinarily low rates and their respective policy groups have expressed their intent to keep them that way into 2010. However, of the three, the yen wins out with more than a decade of interest rates below 0.25 percent.

Aligning Speculation: The other method for using carry in your strategy is aligning a pair to the general prospect of rising or falling sentiment. In its most basic form, the carry trade is merely a reflection of trader confidence; and this is a particularly engrossing theme for the markets now. As such, we will look for the currencies most sensitive to interest rate changes. In the bullish scenario, we have already established that the Australian dollar is the most likely to appreciate while the greenback, Canadian dollar and yen are most likely to maintain their pace. In the situation be the opposite and general rates of return be encouraged to fall, the US and Canadian dollars will receive flows as their rates are already as low as they can go (which indirectly means their respective policy officials are willing to do as much as they can to encourage growth). At the same time, the Australian dollar will see its benchmark stumble; but it is the fundamentally weak New Zealand target rate that threatens to drop the quickest.

Written by John Kicklighter, Currency Strategist
Article Source - Is The Carry Trade Recovering?

Prices Hit Highs Unseen since 2008

With recent market volatility, the price level for a few currencies and commodities have begun to see prices not seen since last year. For instance, the price of the EUR/USD pair has now risen to a level not seen since the first week of January, 2009. Crude Oil has also shocked the market lately with a continuous uptrend, rising above $62 for the first time since last November. With rallies this large, the forex market becomes more predictable, and traders can reap the benefits.



USD - USD in Down-Trend since April

The USD witnessed a steady depreciation against most of its major currency counterparts on Wednesday. The Dollar has lost ground for 3 straight sessions against the EUR, and 3 of the last 4 sessions against the Yen. The USD was trading at 1.3604 per EUR and 94.85 per Yen at the close of Wednesday's trading sessions.

According to the FOMC meeting minutes there is willingness by the Federal Reserve to go beyond the $1.75 trillion it has already committed to purchasing, and increase the amounts of mortgage and Treasury securities-purchase programs. The Fed made a similar announcement on March 18, stating it would buy $300 billion in Treasuries; this announcement led to the U.S. Dollar plunging. Purchase of Dollar-denominated debt can have a negative affect on the value of the currency since the Fed pays for these purchases by printing more money and therefore devaluing the currency. In addition, the U.S. recession appears to be deeper than expected and a slower recovery is being factored in over the next two years since labor markets remain under pressure.

While the USD recovered some of its immediate losses since the release of the FOMC meeting minutes, it has been declining significantly since the start of the week and shown a downward trend since mid-April. This is due in part to the recovery in equities markets, which increased traders risk appetite. Important economic indicators to watch today are the Unemployment Claims, to be released at 12:30 GMT, and Fed Chairman Ben Bernanke's speech tomorrow. Positive news will put further pressure on the Dollar.

EUR - EUR Benefits from Heightened Risk Appetite

Yesterday's release of the U.S. Federal Open Market Committee's (FOMC) meeting minutes sent the EUR to its highest level against the USD since early January. The EUR advanced 1% to 1.3768 from 1.3630 yesterday. Earlier the EUR touched the 1.3830 price level, the highest since Jan 5th. However, the EUR slid against the USD slightly after a German report showed producer prices fell at the fastest rate in almost 22 years. The EUR also decreased 0.2% to 130.51 yen from 130.81 Wednesday.

Currently there is a shift into a risk-taking environment spurred by a rally in the stock markets and a decrease in volatility. The USD is the anti-risk currency. It also appears that investors are still confident that the U.S. is set first for a recovery compared to others like Japan, the U.K or the Euro-Zone. According to the International Monetary Fund (IMF), the Euro-Zone regional economy will contract 4.2% this year, more than the projected 2.8% contraction in the U.S. and the 4.1% fall in the U.K.

The EUR may gain for a 4th day versus the USD as the Flash Manufacturing PMI and the Flash Services PMI (German, French and Euro-Zone) reports are due to be released today at 7:30 and 8:00 GMT, respectively, and may show that the region's manufacturing and service sectors contracted at the slowest pace in 7 months.

JPY - Yen Rises after News of Japan's Record Economic Contraction

The Yen rose versus all 16 of the most-traded currencies yesterday after Japan reported that its economy shrank at a record pace. The Japanese currency advanced to 130.04 per EUR, up from 130.77 yesterday. The Yen appreciated 1.3% to 94.75 per Dollar, up from 95.97 Wednesday.

The JPY gained modest ground after Japan's Cabinet Office said the economy shrank an annualized 15.2% in the 3 months ending March 31st, following a revised 14.4% contraction in the previous quarter. Japanese Gross Domestic Product (GDP) fell 3.5%, the most since records began in 1955. Speculations that the recession in the U.S, the world's largest economy, is far from over helped to further boost demand for the Japanese currency as a refuge from the international downturn. However, there are signals that the U.S. currency may have fallen too quickly against the Yen and could strengthen.

Crude Oil - Crude Oil Surges above $62 a Barrel

Crude Oil surged yesterday above $62 a barrel, increasing by $1.94 in a relatively short time-frame. This marks one of the largest price jumps seen in almost 6 months! However, early this morning, Crude Oil for July delivery dropped as much as 69 cents, or 1.1%, to $61.35, breaking three days of gains. This was due to a decline in U.S. stocks after the Federal Reserve predicted a deeper recession and a government report showed a drop in fuel demand.

Prices also climbed after refinery fires and unrest in Nigeria threatened supplies. A falling Dollar further assisted the price increase. However, U.S. oil demand hardly improved, and remained 7.6% weaker than a year ago when Americans were already consuming less. There is doubt that the fundamentals of the oil market can support prices above $60 a barrel since there isn't any improvement in demand and no sign the Organization of Petroleum Exporting Countries (OPEC) is likely to reduce output any further in their meeting at the end of this month.

Monday's Memorial Day holiday signals the unofficial start of the U.S. summer driving season. So far gasoline demand gained 3.6% this past week. A continued increase in demand will help push the Oil price further up, however, with the latest report from the Federal Reserve a quick economic recovery in the U.S seems less likely.

Article Source - Prices Hit Highs Unseen since 2008

US Dollar Fails to Gain on Stock Weakness, Pressured by Fed Forecasts (Euro Open)

The US Dollar consolidated at lower levels in the overnight session, failing to capitalize on falling stock prices across Asian exchanges as the minutes from the last Fed policy meeting continued to weigh on the exchange rate. Japan’s service demand fell to the lowest since 1995 while Australian consumers expected lower inflation in May. UK Retail Sales are on tap in European hours.

Key Overnight Developments

• Japan’s Service Demand Falls to the Lowest Level Since 1995
• Australian Inflation Expectations Show Weakness in Consumer Sentiment
• US Dollar Fails to Gain on Stock Weakness, Consolidates at Lower Levels

Critical Levels



The Euro consolidated gains in overnight trading, oscillating in a 50-pip range below the 1.38 level. The British Pound followed suit, trading sideways in a 70-pip band below 1.58. The US Dollar failed to capitalize on losses across Asian stock exchanges, with the typically safety-linked currency weighed down by the Fed’s revised growth forecasts and prospects of expanded quantitative easing.

Asia Session Highlights



Japan’s Tertiary Industry Index fell much more than economists expected in March, tumbling -4.0% versus expectations of a -1.5% result. Service demand dropped by a hefty -9.16% from a year earlier, printing at the lowest level in 14 years. The metric follows how much households and businesses spend on such things as utilities, health care, and financial services. The jobless rate has surged to the highest in nearly five years, trimming disposable incomes and encouraging precautionary saving to weigh on spending. Private consumption accounts for over 58% of total output, pointing to continued weakness in overall growth in the months ahead after the economy shrank by a record 4.0% in the first quarter.

Australia’s survey of Consumer Inflation Expectations saw the headline figure slip to 2.3% in May from 2.4% in the previous month, the second-lowest reading since the metric set a record low at 2.2% in March. Looking at the details, 57.5% of survey respondents expect prices will go up, the most in 6 months. Curiously, hourly wage growth expectations continued lower, with respondents saying those will increase at a pace of 3.9%, down from 4.7% in the preceding month. Extrapolating the likely mentality of Australian consumers as reflected in the data, it is reasonable to suppose that they are likely to buy what they need now, expecting prices to be higher and the wage climate less favorable in the future. This bolsters the negative view of long-term consumer sentiment that we noticed in analyzing March retail sales figures, wherein we saw that the way consumers were spending the government’s fiscal package suggested it was seen as a one-off income boost, hinting at expectations of lower spending power in the months ahead.

Euro Session: What to Expect



UK Retail Sales are expected to rise 2.4% in the year to April, the second consecutive month that sales growth accelerated after setting a record low at 0.4% in February. The improvement will likely come as the government’s spending boost begins to work its way into the broad economy. Still, the metric has been trending firmly downward since May of last year and the expected upswing will hardly amount to a break from that trajectory. Looking ahead, retail activity is likely to remain subdued: the unemployment rate has ticked up to 4.7% in April, the highest in over 11 years, and is expected to top 9% by the beginning of next year, shrinking disposable incomes to put substantial pressure on spending. Indeed, Business Investment is set to fall -4.0% in the first quarter to bring the annual pace of decline to -5.9% from -4.5% in the three months to December 2008 as companies scale back capacity amid dwindling domestic and overseas demand. Household spending accounts for 63% of overall economic growth, hinting that the UK will continue to underperform for some time yet.

Written by Ilya Spivak, Currency Analyst
Article Source - US Dollar Fails to Gain on Stock Weakness, Pressured by Fed Forecasts (Euro Open)

Economic Growth Boosts Risk Appetite, Commodity Prices

These past several weeks have seen a series of positive economic data emerging from various economies. Even a record contraction in Japanese GDP was anticipated and the market impact was minimal. As market optimism takes hold, safe-haven assets such as the USD begin to weaken. Traders have witnessed recently as the greenback has lost strength to most other currencies, and commodity prices have begun to climb back to 2007-2008 price levels. Is the recession coming to an end?



USD - Dollar May Slide Further On Global Optimism

The U.S Dollar declined Tuesday against its major counterparts after a report from the U.S. Commerce Department said new construction of houses fell to a record low in April. The USD traded at $1.3630 per EUR after falling 0.5% yesterday. Against the Yen the U.S currency was at 95.94 after decreasing 0.3%. Analysts said that the data showing U.S. housing starts and permits unexpectedly fell to record lows doused the view that the housing market was stabilizing, denting optimism in the market for the U.S currency.

The USD also slid as a result of improving business sentiment in Germany, which spurred renewed optimism about the global economy, reducing demand for safer assets and boosting currencies perceived as riskier. Traders were also closely watching U.S. stock markets for indications about investors' appetite for riskier assets. Earlier, major indexes clawed into positive territory, pushing the dollar to the lows of the day.

The greenback may decline further versus the EUR as three U.S. financial firms' efforts to return government bailout money fueled speculation that banks have sufficient cash, reducing demand for Dollar-safety.

EUR - Pound Reaches 6-Month High vs. USD

The EUR rose on Tuesday, trading at $1.3625, up half a percent from Monday, due to a surprisingly big improvement in German economic sentiment. The ZEW indicator jumped to 31.1 in May from 13.0 in April, above economist estimates of a 20.0 reading. This suggests that analysts and investors were not as grim about the economy as before.

The British Pound also rose to the highest level this year against the Dollar after ICAP, the world's biggest broker of transactions between banks, posted increased profit, and Marks & Spencer Group Plc's net income beat analyst estimates, stoking optimism that the worst of the recession is over.

Analysts said the EUR-positive reaction to the ZEW report suggested that market participants saw improving sentiment in the Euro- Zone as boosting demand for risk, even as other data show that the economy remains weak. Gains in the EUR and Sterling helped to push the Dollar down as some traders unwind positions in the U.S currency. The USD is perceived to be a safe-haven option during times of uncertainty; however, the ongoing bets that the global economy is improving has warmed demand among investors for riskier trades in past weeks.

JPY - Japan's Economy Shrinks at Record Pace

The Yen fell for a 3rd day against the EUR as stocks gained after a government report showed Japan's economy shrank less than expected last quarter. The Yen fell to 131.17 per EUR from 130.81 yesterday in New York trading. The Japanese currency also declined against the Dollar to 95.70.

Japan's economy shrank an annualized 15.2% in the three months ending March 31st, following a 12.1% contraction the previous quarter. Japan's Gross Domestic Product (GDP) has also contracted by 4.0% in the first quarter of this year, marking its biggest quarterly fall on record. Economists have said that despite this very bad data, it was in line with the expectations and therefore neutral in terms of market impact.

Analysts have said that even though some market players were still unsure of the outlook for the Japanese economy, their expectations remain that this is the bottom for the economic recession and they may start to see a recovery from here onwards.

Crude Oil - Crude Hits $60 a Barrel

Crude Oil prices rose Tuesday, briefly topping $60 a barrel as analysts expected a drop in U.S. crude inventories, though gains were limited by disappointing U.S housing data. Oil's gains yesterday were aided by the Dollar's slump against the other major currencies, which bolstered demand for commodities as an alternative investment. Crude was up 62 cents, or 1.1%, at $59.65 a barrel yesterday. Previously it topped $60 overnight to reach $60.48, the highest level since the middle of November. However, Crude Oil reduced its gains after data showed U.S. April housing starts fell to a new low.

Oil prices have been on an upward trend since mid-April in equity led rallies. They have recovered from below $33 in December last year after a plunge from record highs above $147 in July. On Wednesday, market players will shift their focus to U.S. Crude Oil Inventories data. Analysts expect the data to show a decline in oil reserves by 1.3 million barrels. A reading above or below estimates can have a major influence on Crude Oil trading.

Article Source - Economic Growth Boosts Risk Appetite, Commodity Prices

British Pound May Look Past Bank of England Minutes, Follow Risky Assets (Euro Open)

The British Pound may yield a muted response to the upcoming release of the minutes from the latest meeting of the Bank of England considering the markets have likely already priced in a very dovish bias after last week’s dismal quarterly inflation report. Rather, sterling may opt to fall in with risky assets yet again.

Key Overnight Developments

• Japan’s Economy Contracts at Record 15.2% Pace
• Australian Consumer Confidence Plummets

Critical Levels



Euro price action saw itself fall off horizontal resistance against the U.S. Dollar located at the 1.3662 level. Dollar pairs in general confined themselves to tight trading ranges with the British Pound moving virtually nowhere during Asia’s trading session.

Asia Session Highlights



Japan's economy in the first quarter contracted more than it did in the final three months of 2008, but still managed to perform stronger than economists had expected. The first three months of 2009 saw Japan's economy shrink 4.0%, worse than the negatively revised 3.8% contraction that the Asian country saw in the final period of the previous year. Expectations had called for the figure to actually perform weaker, that is that the economy would contract by 4.3% in this period. On an annualized basis the rate of output decline rose to a record pace of 15.2%. A Bloomberg survey showed that economists expected the annualized pace to be as optimistic as +2.0% and as bad as -19.8%.

Across the board, investments continued to dwindle. Capital investment alone fell 10.4% in this recent period as opposed to a decline of only 6.7% and 4.4% in the final two quarters of 2008. Investments in new residential home development fell 5.4% after actually rising in the final 6 months of the previous year. Overly-optimistic investments in these residential properties may bode negatively for those who participated. As a result of the contracting economy, those who tied their money into such ventures may now be seeing a residential community averse to purchases of new homes. Unless these development projects primarily resided in apartment ones, these investments could continue to bring the economy southward as lost money fails to be transferred to productive capital needs. But because Housing Loans have been steadily increasing since December, property developers may actually benefit from this contracting economy, which has brought about very low interest rates.

Australian Consumer Confidence fell in May after having risen in April for the first time since December, according to Westpac Bank. May saw consumer sentiment fall 4.3% after surging ahead 8.3% during a month in which the Australian stock market recouped its losses for 2009. April's figure comes on the back of stock selling and rising energy prices. Wages paid to Australian laborers rose in line with expectations, albeit at a slower rate than during the final three months of 2008. The move came during a time when unemployment rose, allowing employees to use the weak labor market as a bargaining tool.

Euro Session: What to Expect



German Producer Prices are expected to have contracted -1.3% in the year to April, the most in nearly 7 years. Falling wholesale inflation foreshadows continued downward pressure on consumer prices as lower manufacturing costs are passed on via cheaper finished products. The annualized inflation rate fell to the lowest level in a decade in March and although prices rebounded a bit on Easter-linked spending and currency depreciation in April, the risks surely remain to the downside as deepening recession compounds lower input costs. Indeed, the danger going forward is that continued weakness in economic growth both at home and abroad will encourage expectations of deflation, a scenario that would substantially compound the downturn by encouraging consumers and businesses to perpetually hold off on spending and investment to wait for the best possible bargain. For their part, the European Central Bank has continued to lag in offering aggressive monetary easing on par with their counterparts in the US, UK and Japan. Although ECB President Jean-Claude Trichet announced that the bank would move forward on quantitative easing with a scheme to “purchase euro-denominated covered bonds issued in the euro area,” details of the program (and thereby its actual commencement) have been delayed at least until the next policy meeting on June 4th. Such waffling may see the Euro punished as traders price in a longer path to recovery.

Minutes from the last meeting of the Bank of England are also on tap, with traders anxious to get a glimpse into the dynamics behind policymakers’ surprise decision to expand quantitative easing (QE) programs by 50 billion pounds. On balance, the impact of the release may prove to be on the muted side of things considering the markets have already had an opportunity to price in a very dovish BOE after last week’s quarterly inflation report revealed that the bank expects inflation to remain below the target 2% until 2012 as the economy takes a slow path to recovery from the current downturn. Indeed, yesterday’s weak CPI report failed to hold back the currency as risky assets advanced across financial markets. Still, selling pressure could emerge if it is perceived that the last QE boost was one in a series of expansions that will continue in the medium term.

Written by Ilya Spivak, Currency Analyst
Article Source - British Pound May Look Past Bank of England Minutes, Follow Risky Assets (Euro Open)