Tuesday, August 2, 2011

Forex Outlook 8/2/11

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By Mike Conlon | August 2, 2011

Half-way home! Last night, the House of Reps passed the debt-ceiling bill and it is expected to pass the Senate today with the President to sign shortly thereafter. This removes the immediate fears from the market, but nevertheless a credit downgrade is still possible which could have uncertain effects.

This really has been a side-show though, as the it removed the focus from the real problemâ€"that the global economy is slowing. Yesterday the relief rally taking place early in the morning completely reversed itself after the ISM manufacturing numbers came out here in the US which were worse than expected, posting a reading of 50.9 vs. an expected 55. This created a 200 point swing in the Dow and reversed the markets from risk-taking to risk-aversion.

Yesterday was interesting in that there was notable Swiss franc and Japanese yen strength, despite higher stocks and oil. This didn’t take long to revert to the mean, with stocks giving back early gains.

This morning the markets are lower as attention has returned to the fundamental fact that the global economy is slowing. The Euro is lower as the bond vigilantes have Italian debt in their cross-hairs as yields are stating to rise. A Spanish re-funding on Thursday has Euro officials on edge and waiting to see where yields settle.

This has prompted the RBA in Australia to leave rates unchanged overnight, citing the slowing global economy (particularly the US and China) as more of a detriment than intermediate inflation.

The recent Japanese yen strength has the markets hopeful that the BOJ will intervene again in its currency and the rate policy meeting on Thursday could bring about such action. The rate decisions from both the ECB and the BOE are expected to produce no change.

Lastly, this week’s Non-Farm Payrolls report on Friday is expected to show gains of 100K jobs. With the dismal number posted last month this may be a stretch, though reduced expectations could produce a positive result.

So prepare for a global slowdown, but be ready to seek yield when you can!


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