FOREX, COMMODITIES, STOCKS OUTLOOK 8/09: Quiet Ahead of FOMC Statement & Trading It

Overview: Quiet, tight range bound trading Monday, a negative tone as of midday GMT Tuesday with Asian equities lower despite good China trade figures, disappointing Australian, UK, EU data, and most importantly, caution ahead of the much anticipated FOMC statement later today. Most expect a downgrade of US growth, but the big question is whether there will be any new stimulus measures or hints of them coming. If so, that should be good for risk assets, bad for the USD. If not, risk assets could well give back gains that have the additional stimulus priced in.

STOCKS: US: Up on no particular news, with all major indices higher, likely anticipating more stimulus from the FOMC statement today, which would help stocks. Volume, however, was the lowest of the year, about half the average, reflecting quiet summer vacation trade and lack of belief in the move higher.

US Bonds: Steady as stocks rise: Benchmark US 10 year bond prices fractionally higher, yields down from 2.8240% to 2.8220%. NB: NOTEWORTHY DIVERGENCE: Benchmark 10 year T-bills have continued to rise during the rally in stocks that began in July – suggesting that bond markets do not believe the stock rally is justified. Historically bond markets have been more accurate market gauges, thus this is a very bearish divergence with stock trends.

Asia Stock Outlook: Down: Asian markets reversed from a mostly higher open to finish firmly lower, with a rebound in the yen hurting Tokyo stocks, and Chinese shares ignoring stronger trade data on caution ahead of today’s FOMC statement.

European Stock Outlook: Down – European shares fell in early trade. In a reverse from yesterday, miners down on weaker metals prices after weaker-than-expected Chinese import data suggested lower demand and prices. Uncertainty about today’s FOMC also weighs on equity markets, which are expecting some pro-stimulus words and could sell off if disappointed

Crude Oil Daily Outlook: Down modestly in early Tuesday trade, below $81 but still holding above key $80 support, following stocks as usual on uncertainty about the FOMC statement today, and also weighed by lower Chinese import data.

Gold Daily Outlook: Down: After breaking over key 1200 resistance gold futures retreat somewhat as expected downbeat Fed comments lower inflation concerns

Ag Commodities: Wheat, coffee fractionally higher, sugar down thus far Tuesday

FOREX Daily Outlook Monday and early Tuesday trade GMT: Slight bias to safety currencies but many exceptions. USD strongest, followed by JPY, and #3 risk currency CAD, yet the CHF (#3 safe haven) is the weakest today.

How to Trade EURUSD the FOMC Announcement: As Kathy Lien (fx360.com) points out that predicting market response to the FOMC is tough because both rates and the USD are affected. Fortunately, in 11 out of the past 14 FOMC statements the EURUSD’s US session move continues into the Asian and European sessions. Thus its best to see how the pair is moving into the close of the US session and go with that trend with a view to exiting within the next 24 hours.

A downbeat Fed statement could push the pair back up heading towards the 1.3400-1.3500 area. A more upbeat tone could keep pressure on the pair for a test of support below 1.3100 over the coming days.

US Dollar Daily Outlook: Up vs. all on combination of risk aversion and some short USD position closing in case the FOMC statement later today is less dovish and damaging to the USD than prices currently reflect. Losing ground Tuesday vs. the JPY

Euro Daily Outlook: Down vs. the USD, JPY, AUD, CAD up vs. the GBP, CHF, NZD. EURUSD backs off resistance at its 200 day SMA around 1.3300, sheds about 140 pips. As long as EU economic data for the core economies continues to be better than that of the US AND the EU avoids any new banking/debt trouble, we don’t see the pair reversing trend. See What Will Reverse The USD Downtrend? for details. EU growth typically lags that of US, so expect to see a similar slowdown in the coming months.

Yen Daily Outlook: Down vs. the USD, up vs. the EUR, GBP, CHF, flat to higher vs. the commodity dollars. Markets are not taking Japanese intervention threats seriously, with CFTC data showing Yen long positions near 18 month highs. China’s recent revaluation ameliorates the affects of a rising Yen, and trade figures have not been that bad. The BoJ would be reluctant to attempt intervention without coordination with the US, and the US is not likely to cooperate.

No meaningful reversal in the USDJPY is expected until US bond rates rise. With Japanese real deflation at around 2.9% and 10 year JGBs yielding 1.1%, that means real returns on Japanese Gov. Bonds are around 4% for very low risk, and are virtually tax free for the Japanese market.

British Pound Daily Outlook: Down vs. the USD, EUR, JPY, CAD, AUD up vs. the CHF (though losing yesterday’s gains today), flat vs. the NZD. Backing off 1.6000 resistance. If no major move from the FOMC statement, the GBPUSD could get some action on Wednesday’s BoE Quarterly Inflation Statement or jobs figures.

Australian Dollar Daily Outlook: Down vs. all except up vs. the CHF, NZD, flat vs. the JPY over the past 24 hours but falling thus far Tuesday vs. the JPY. Pressured by poor housing figures Monday. Job figures due out later this week, slowdown expected based on jobs component of earlier PMI and job ad reports.

New Zealand Dollar Daily Outlook: Down vs. all except up vs. the JPY, CHF

Canadian Dollar Daily Outlook: Down vs. the USD, up vs. the JPY (but falling Tuesday vs. the JPY), up vs. the GBP, EUR, CHF, NZD, AUD

Swiss Franc Daily Outlook: Down vs. all

Multi-Day Trade Ideas From Daily Charts

EURUSD: breaking back below resistance of its 200 day SMA around 1.3267, next major resistance not until 1.3373. As noted above in How to Trade the FOMC, wait to see market response towards the end of the US session. If enter long aim for profit target around 1.3400 at least. If the pair falls on a more upbeat Fed statement, look for a retest of at least 1.3100-1.3000.

Daily Trends To Watch – Caution ahead of FOMC today

If markets head lower: Look to short NZDUSD, oil, major US, EU stock indexes

If markets head higher, look for EURUSD to recover recent losses, continue uptrend.

DISCLOSURE: NO POSITIONS