Wednesday, August 31, 2011

FOREXYARD: Forex News Blog

FOREXYARD: Forex News Blog

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Swedish Krona Gouged by Risk-Off Mentality

Posted: 30 Aug 2011 07:20 AM PDT

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Despite reports of phenomenal growth in financial arenas and in GDP expansion, the Swedish krona (SEK) entered a downward slump over the past few weeks. Lying beneath this bearish groove is a history lesson that shows the krona persistently struggling during times of risk aversion.

The relatively high interest rates of the Swedish economy make the currency appealing in times when risk-taking is gaining ground among investors. The speculation that the Riksbank will lift interest rates at each meeting this year merely adds to this sentiment. But the downgrade of US debt by S&P's ratings agency put global investors in a mentality of risk flight.

It is true that investors have seen some mild upticks in risk sentiment over the past few days, but such broodings have yet to flood back into the SEK in the way they were just one month ago. It is largely forgotten by now that the global recession of 2008 dramatically reduced the export capacity of the Swedish economy and that fears of a double-dip recession are beginning to do the same.

Growing pessimism and an outlook of impending recession are generating a lot of flight from the once-booming Swedish economy. It is true that Sweden weathered the financial storm better than most, but it is false to assume that it is above the present turmoil. The SEK may continue to see downward movement against its primary basket of currency rivals, having already shed 2% in the last two days.

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Italian Retail Sales Dips into Negative Growth

Posted: 30 Aug 2011 07:16 AM PDT

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As Italy battles its debt contagion fears and struggles with its ailing financial system, a report out this morning revealed that Italians also appear to be holding on to more of their earnings than assumed. The monthly retail sales report out of Italy has less impact on the strength of the regional currency, the euro (EUR), but if the Italian economy continues to flop, larger ripples may become a cause for concern.

The report was expecting approximately 0.2% growth in retail sales in Italy, up from last month's contraction of 0.2%. The actual report, however, showed an eerily similar reading of -0.2%. With spending in decline, a stimulus may become necessary to get the Italian economy going once again.

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Housing Demand in Australia Slumps Further

Posted: 30 Aug 2011 07:14 AM PDT

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A building approvals report released this morning by the Australian Bureau of Statistics uncovered a slump in demand in the housing market. The monthly indicator was expected to see an uptick of approximately 2.1%. The actual result seemed to convince many investors to move away from the Australian dollar (AUD).

Demand for new buildings is measured by this monthly indicator which reports on the percent change in new buildings approved for construction. The results revealed only 1.0% growth for the month of August, up from the previous month's 3.6% contraction, but still bearish when compared with estimates. The news appears to be weighing heavily on the AUD this week.

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Trichet’s Comments and Political Woes Weigh on EUR

Posted: 30 Aug 2011 05:53 AM PDT

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A combination of Trichet's comments, political woes, and an Italian bond auction has all combined to create selling pressure on the EUR. On the charts an evening star pattern is beginning to take shape. Therefore, today's closing price should be closely followed.

Yesterday ECB President Jean-Claude Trichet told the European Parliament that inflation risks for the medium-term are "under study" prior to the ECB's next meeting on September 8th. The comments come on the heels of yesterday's decline of -0.1% in August CPI for Germany could make market participants think twice about the ECBs next rate hike. Expectations have been built in for the ECB's third 25 bp increase in this year with most rate strategists eyeing Q4 after Mario Draghi takes over the helm of the ECB to secure his inflation fighting credentials. The August inflation data may derail those plans and reduce markets' expectations for an additional rate increase this year.

Today's Italian 10-year bond auction was weaker than usual with the bid to cover ratio down at 1.27 from 1.38 despite The ECB continues to buy Italian and Spanish debt, albeit in smaller amounts. This has supported the BTP market which could be trading with a yield near 6% if it were not for the ECB holding together the ship. We may expect further deficit cutting measures by Italy given the recent demands made by the ECB.

The collateral demands by Finland continue to hold up the approval of the July 21st agreement for additional Greek aid. Finnish Prime Minister Jyrki Katainen said, "the collateral agreement needs to be solved as soon as possible so Finland’s aims will not hurt other countries.” The comments were made in the newspaper Helsingin Sanomat. German Chancellor Angela Merkel continues to oppose any side pact made outside the realm of the July 21st agreement. Additional demands on Greece could further threaten Greece's ability to address its fiscal problems.

Given the headwinds the EUR faces the EUR/USD has been unable to maintain a bid above 1.45 for the past 11-weeks. Today the EUR/USD was pushed as low as 1.4385 before recovering to 1.4420. Should today's candle close near this level we could have an evening star pattern, a bearish sign. Support comes in at the Thursday/Friday low of 1.4325 followed by the rising trend line off of the July low at 1.4260. Resistance is located at Friday's high of 1.4550.

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