FOREX, COMMODITIES & STOCKS OUTLOOK 10th August 2010

Dealers’ Room Commentary

Overview
Stocks gained Monday amid light volume as investors hung back to await news from the Federal Reserve meeting on Tuesday. However, shares of Hewlett-Packard plunged nearly 8 percent after the surprise resignation of their CEO.
The Bank of Japan left Monetary Policy unchanged overnight leaving interest rates as expected at 0.10%.The central bank left its economic assessment unchanged. There was even no specific mention of recent JPY strength with the BoJ merely noting that it needed to watch market moves and how they affect the Japanese and global economies.
All eyes are focused on the Fed meeting later today (1815 GMT); with many hoping that Fed officials can do more to fight renewed economic weakness.

Currencies
EURUSD: Steadies after Stops below 1.3150 Triggered
The EUR/USD traded as low as 1.3144 after stops below 1.3150 were triggered. The USD has been trading with a bid tone throughout the Asian session, as the market is squaring up shorts ahead of the key FOMC meeting later today. The next level of support for the EUR/USD is found at last Thursday’s low at 1.3119. The EUR/USD trades 1.3163/66 (0645 GMT)

GBPUSD: Cable not able to break significant 1.60 level
The 1.5820 level was key support with the break below initially targeting a dip to the 200 day MA with support from the June 8 low supporting just below at 1.5472, a break of which then targets a test of the 1.4950/1.5050 region. Sterling failed to pierce the 1.60-level yesterday and now we have seen a significant decline in cable in the last 24 hours.

USDJPY: Bounces from 85.68 Low on Renewed Jaw-Boning
Following the Tokyo fix, USD/JPY fell off from a high of 86.06 to 85.68 along with the Japanese crosses. The waning of demand seen into the fix as well as some US coupon repatriation and sales by PRDC players are seen to have helped this pair lower. USD/JPY has since bounced on renewed verbal intervention by Japanese Cabinet members including Finance Minister Noda and Strategy Minister Arai. Mr Noda wouldn’t comment on intervention itself or specific JPY levels but noted that recent currency moves were somewhat one-sided, meaning excessive JPY strength. He added that excessive currency fluctuations were not good for the economy.
Arai continued that the recent JPY rise was not good for the economy and that he believed the JPY rise would not continue for a long time. The comments followed this morning’s Cabinet meeting where the government maintained its economic assessment and noted concern with sudden JPY strength. The Cabinet Office did downgrade its assessment of industrial output, the first since January ‘09. Many car makers are planning on large output cuts in Q4. USD/JPY currently trades 85.86 /89. The retracement high was just shy of 86.

Commodities
Oil
Oil rebounded from Friday’s $80.04 session lows to close at $80.70. Energy traders sat on the bid on this morning’s sell off right at Friday’s closing level and the technical bounce lifted the contract to $81.73 highs. The 50% Fibo of $92.18/$69.66, the years high and low comes in at $80.92 and you can see that price action is getting dragged towards this level. On the daily’s price action remains negative, with four lower highs. However today’s low if it stands (and it should) would break the three consecutive lower lows and lower closes.
U.S. crude futures extended gains above $81 a barrel on Tuesday after rising 1 percent a day
earlier ahead of industry data later in the day expected to show a decline in U.S. crude inventories. NYMEX crude for September delivery was up 11 cents at $81.59 a barrel by 0022 GMT, after settling up 78 cents at $81.48 a day earlier.
Oil prices have faded from last week’s high of nearly $83 a barrel, dropping 1.6 percent on Friday in the wake of a disappointing U.S. nonfarm payrolls report. Traders are watching to see if the U.S. Federal Reserve is more concerned about economic recovery or the danger of falling into a cycle of falling prices and slowing growth.
The Fed is widely expected at Tuesday’s meeting to renew its commitment to keep interest rates near zero for an extended period. U.S. crude inventories likely fell 1.6 million barrels last week, a Reuter’s preliminary poll ahead of weekly inventory data showed on Monday. With signs that the U.S. economic recovery is faltering, the U.S. government may cut its estimate of global oil demand in its new monthly forecast. The U.S. Energy Information Administration last month raised its global oil consumption growth estimate for 2010 by 60,000 barrels a day, saying it expected world oil demand to climb to 85.82 million bpd this year.
Oil currently trades at 80.90/94 (0650 GMT)
Gold
Gold ticked up on bargain hunting on Tuesday, but some investors were likely to stay on the
sidelines ahead of a Federal Reserve meeting later in the day.
Spot gold added 85 cents to $1,200.85 an ounce by 0033 GMT after falling slightly on Monday as a firmer dollar prompted investors to lock in profits ahead of a closely watched statement by the Fed.
U.S. gold futures for December delivery were steady at $1,203.1 an ounce. Zijin Mining Group said a government-ordered production suspension affecting two of its mines in China’s Shandong province would have an impact on its annual output target.

Markets
US Markets
Stocks gained Monday amid light volume as investors hung back to await news from the Federal Reserve meeting on Tuesday. However, shares of Hewlett-Packard plunged nearly 8 percent. The Dow Jones Industrial Average rose 45.19 points, or 0.4 percent, to 10,698.75. The S&P500 rose 0.6 percent to close at 1,127.79, while the Nasdaq rose 0.8 percent to close at 2,305.69. For these indexes, the gains were the first in three trading days. The CBOE volatility index, widely considered the best gauge of fear in the market, rose above 22. At the Federal Reserve meeting Tuesday, many expect officials will keep rates near zero for “an extended period.” The central bank is expected to release a statement at 18:15 GMT
Investors are wondering if Fed officials are more concerned about a recovery or if the economy is heading toward deflation and slower growth. Some expect the Fed will renew purchases of mortgages and Treasury’s to lend the economy support. If the Fed takes this action, markets will be reassured, said Bruce McCain, chief investment strategist at Key Private Bank.
U.S. stocks rose on Monday in the quietest session of the year on speculation that the Fed would signal potential steps to boost the sluggish economic recovery. The dollar held rare gains on Tuesday as investors chose discretion over valour and pared short positions ahead of a possible change in U.S. monetary policy, a Bank of Japan meeting and figures on Chinese trade.

European Markets
European shares closed higher on Monday as strong crude prices boosted oil majors, and with sentiment also lifted by speculation that the U.S. Federal Reserve may inject extra stimulus measures to spur the economy. The FTSEurofirst 300 index 1071.26 14.51 (+1.37%) of top European shares provisionally closed higher after falling 1.1 percent on Friday when downbeat U.S. jobs data renewed jitters over the pace of economic recovery.
Oil majors were among the big gainers, as crude prices climbed above $81 a barrel on a weak dollar. Royal Dutch Shell 1822.50 + 26.50 (+1.48%)], BP +432.75 7.40 (+1.74%)] and Total all rose.
Investors anticipate that the Fed’s meeting on Tuesday may send a clear signal it is prepared to print more money to support a faltering economic recovery if necessary.
Stocks declined on the European open this morning (0702 GMT), with the Italian FTSE/MIB down 0.49% at 21265/75, whereas the IBEX has fallen 0.46% trading at 10748/51, while the DAX has also declined 0.59% to 6322/24.

Asian Markets
Japan’s Nikkei average slipped into negative territory in thin trade on Tuesday, pushed down as Chinese shares fell after trade data for July showed imports were weaker than expected. Market players said there was little impact from a Bank of Japan decision, announced just before the market reopened for the afternoon session, to keep interest rates steady and hold off on any new policy steps. The benchmark had ended morning trade up 0.5 percent, helped by a halt in the yen’s advance against the dollar while investors waited to see if the U.S. Federal Reserve would consider or embark on new policy steps.
Chinese imports for July were up 22.7 percent from a year earlier, the General Administration of Customs said, but this was lower than the market had expected and sent Shanghai shares to end the morning session down 1.8 percent. .
The benchmark Nikkei edged down 0.3 percent or 28.01 points to 9,545, while the broader Topix lost 0.4 percent to 853.82.
Speculation is rife that the Fed may signal the chance of further monetary easing and possibly drive the yen towards an all-time high above 80 yen to the dollar, although other market participants are more focused on potential boosts to the U.S. economy. The Fed is expected to release a statement at 1815 GMT.
The Bank of Japan kept interest rates steady and held off on new policy steps, saving its limited policy options for when yen rises accelerate enough to damage a fragile economic recovery.
Market players said there was a greater chance of a strong yen if the Fed implemented steps that would likely lead to lower rates and with the BOJ keeping things unchanged, a move that could prove negative for stocks since a stronger yen eats into exporter profits when repatriated. Exporters were mixed, with Sony Corp slipping 0.7 percent to 2,682 yen and Canon Inc flat, while Kyocera Corp edged higher.