Tuesday, June 13, 2006

Forex Fundamentals

When trading forex long term it is good to keep an eye on forex fundamentals, so here is a brief overview of what is going to happen with major currencies.

S Dollar. The foreign exchange market has been extremely quiet today with most currency pairs aside from the Canadian dollar calmly consolidating....

The next few days will be very
busy as traders prepare themselves for a long list of key economic data scheduled
for release from all of the major countries around the world as well as a number of
Fed speeches. Bernanke’s credibility has really come to question over the past few
days and will be tested even more so this week. Financial editors of the press have
had a blast touting his keen ability to confuse the markets which comes in clear
contrast to the transparency, clarity and simplicity that he initially promised when
he became Federal Reserve Chairman. He is slated to speak this evening and then
once again in the morning and in all likelihood, he will stick to the script on Bank
Supervision because he knows that if he fails to affirm his newly hawkish stance,
all credibility would probably be lost. Given earlier signs of slower growth, this
week’s data, starting with tomorrow’s retail sales report could potentially surprise
to the downside. If retail sales do come out extremely weak, the market will wonder
whether Bernanke is playing with fire, risking a global slowdown to combat
inflation. Of the other Fed officials that spoke today, they either refrained from
mentioning monetary policy or simply repeated their concerns with inflation.
Whether inflation is really prevalent will also be proved this week as we first see
the producer price index tomorrow morning and then the consumer price index on
Wednesday. These will be watched even more closely than they usually are because if
neither confirms the strong inflation concerns of the Fed, Bernanke’s credibility
will be in question once again, which would be negative for the US dollar. The only
piece of economic data that was released today was the US’ monthly budget statement,
which reported a larger deficit of -$42.8 billion compared to a -$35.4 billion
forecast. Structural problems have been plaguing the US economy for years and based
upon the latest figures, it is far from being resolved. Meanwhile the hurricane
season begins with warnings that the season’s first Tropical Storm Alberto could be
named a hurricane. With oil prices still hovering above $70 a barrel, if any
hurricanes this summer hit the US oil and gas heartland along the Gulf Coast, we
could easily see another record high in crude, which could pose another risk to the
sustainability of consumer spending. If the US consumer goes, so does the US
dollar. However as long as the US consumer holds on, the Fed will be able to as
well, which would validate and exacerbate the greenback’s recent climb * so keep an
eye on weather patterns as well as retail sales.

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