Euro Lower after Election in Germany

The Euro fell overnight as a virtual tie occurred in their national election over the weekend. This result caused any to fear that the reforms the market saw coming were to be delayed. This result should keep interest rates soft in the near term as any consensus will be hard to come by. ECB president Trichet said on Monday that Euro zone interest rates were at historic lows and that reforms needed to take place. The fall in the Euro was not a big surprise to me (although I was not short over the weekend). It was in my opinion the path of least resistance. I look for further downside in the days to come.

These are the FX trading ideas for today.

FXTRADINGIDEAS@AOL.COM

Bank of Japan close to tightening Monetary policy

The bank of Japan is very close to ending its ultra lose monetary policy its deputy governor said Thursday. Kazumasa Iwata the most dovish of the nine policy board members also stated that current policy would be maintained until deflationary expectations were eliminated. Toshikatsu Fukuma a more hawkish board member stated that the Bank of Japan was becoming more confident about an end to deflation saying that the end to the quantitative easing could come as early as next year. It seems the bank of Japan want to clearly send a message to that market (ala the Fed) what and when there next move will take place.

U.S. industrial production disappoints

Industrial production came in at .1% against an expectation of +.3%. This caused little reaction to a rather quiet market. Other numbers today were Retail sales -2.1% (against -1.4%expectations) and Retail Sales less Autos +1.0% (.5% expectations). All in all numbers as expected and the market is now looking for the Fed to move interest rates up once again at their meeting next week. Will they change the wording in the statement is the big question.

FXTRADINGIDEAS@AOL.COM

Swedish inflation moves higher....

Swedish UND1X underlying inflation, adjusted for taxes and mortgage interest rates, accelerated to 1.0% in August from 0.7%. This compares to market expectations for inflation to rise to 0.9%. The Riksbank projected in its dovish June Inflation Report that underlying inflation would stand at 0.4% in August, but the latest indications from the Executive Board suggest that these forecasts have subsequently been revised higher (the next set of Riksbank forecasts is due on 20 October).
Details of the CPI report that a lot of the upside in prices related to energy, for which the underlying inflation measure is not adjusted. Prices of fuel and electricity and heating both contributed 0.1% points to the CPI rise. In addition, the post-sales rebounds in clothing and footwear prices also added further 0.1% points to the CPI rise.
The outcome is consistent with the previous evidence that inflation "surprises" for the Riksbank often relate to unexpected developments in commodity prices. For example, since the beginning of 2003 we find a positive 0.50 correlation between the YoY change in the Reuters/CRB commodity price index in SEK terms and the outcome of the actual UND1X annual inflation rate vs the latest Inflation Report forecast.
Although the Riksbank continues to see the UND1X unadjusted for energy as the best measure of cyclical inflation pressure, members of the Executive Board have also made it clear that volatile energy prices receive special consideration in the index. As such, the fact that upside surprises related mostly to energy prices, should limit the scope of market impact.
However, with markets already in a fairly hawkish mood after yesterday’s Riksbank minutes, the outcome should nevertheless enforce expectations that the next move in Swedish rates will be up. The 2Y SEK swap spread, which has explained ¾ of the variation in EUR/SEK this year already implies the currency pair at 9.20 according to the historical relationship. The only thing that keeps EUR/SEK from falling at the moment is the lack of pressure on USD/SEK. If we add the USD influence on EUR/SEK into the regression, the current "fair value" in the currency pair rises from 9.20 to 9.27.

UK PPI Number's Softer then expected.

UK PPI input prices rose just 0.2% MoM in August, far lower than consensus of 1.4% even allowing for the upward revision to July (2.5% vs 1.8%). A more modest rise in fuel costs (+0.5%) were also offset by a 0.6% drop in input prices excluding “food, beverages and petroleum products”, effectively the core measure of input prices.

In contrast to the large shortfall in input prices, output prices rose 0.3% MoM, more or less in line with consensus of 0.4%. As result, there was a very fractional rise in manufacturing margins, but after the compression of earlier months from higher energy costs, this will be scant compensation.

Overall, the lower than expected headline PPI might provide a bit of support to short-sterling and give this morning’s retreat in GBP a little more impetus. But with the more directly relevant CPI and retail sales data still due later this week, the impact should be fleeting. Certainly, one month’s PPI data will not have MPC members rushing to re-cast their current outlook.

China announces no change in FX reserve policy

Chinese assistant central bank governor Ma Delun said China had made no changes to the way it manages its FX reserves since revaluing the Yuan in July. He added that this move had not prompted China to sell U.S. Treasury bonds. He also added that China would not, in the future, be looking to sell Treasures. Mr Delun said that the guiding principles of China’s FX management remained unchanged. These are first security, Second liquidity and third the possibility of making money.

Dollar looking bid but be carefull

The dollar today has been trading with a strong biddish tone. This makes sense to me in the short term and the economy continues to move ahead steadily. BUT BE CAREFULL. As the U.S. begins rebuilding New Orleans (and they will in a very quick manner) money will not be an object. They will spend whatever it takes to bring the city back as quick as possible. This will be an opportunity for the Federal government (I.E. President Bush) to make up for the tremendously slow response to aid the region. Also remember this is a similar story to last year when the dollar weakened against the Euro from 1.2000 to 1.3600 in the last 4 months.


FXTRADINGIDEAS@AOL.COM

Back from Vacation

Well I am back from vacation and see that thier is a feeling in the market that the Fed may take a pause after September in the light of the disaster in N.O.