Brazilian Real Declines on Economic Outlook

After touching a one-year high versus the greenback this week, the Brazilian currency declined in a corrective movement, as speculations suggested that the wealthiest economy in South America may not provide support for extensions in the current real’s rally.

Even after posting a report indicating growth for the last quarter in Brazil, the real did not manage to extend its gains after touching a one-year high previously this week, as corrective movements and speculations regarding the future of the Brazilian economy weighed on the real’s outlook, which lost more than 1 percent versus the greenback towards the end of this week’s session.

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Dollar Posts Sharpest Fall in 5 Months Versus Majors

The dollar had the sharpest decline since May versus most of the 16 main traded currencies as the U.S. currency is having its attractiveness decreased since borrowing costs declined, forcing investors to look for yield in other markets around the world.

Several reasons extended the gains of multiple currencies versus a weakened and less attractive U.S. dollar, as mainly evidences of a global economic recovery are playing a fundamental role behind this week’s dollar downtrends. The Great Britain pound managed to hit a one-month high versus the greenback after the Bank of England finally declared that a asset-purchasing program that lasted for months to stimulate the weakening British economy will not be extended, helping traders to be more confident into buying pound-priced assets. The yen also climbed intensively versus the dollar as China’s economic figures suggest that the Asian growth outlook will improve, inviting Japanese exporters to repatriate capital invested overseas.

Analysts indicate that the current outlook for the U.S. currency is bearish and is likely to remain so, as long as bullish patterns continue to be fueled by favorable economic reports worldwide. The borrowing costs of the dollar also are affecting negatively the greenback, since it has become more attractive to traders opt for diversification of their portfolios regarding currency funds

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Yen, Dollar Fall as Stock Gains on Earnings Pare Safety Demand

The yen and dollar weakened against most of their major counterparts as global stocks rose on speculation more corporate earnings will beat expectations, damping demand for the safest assets.

Japan’s currency slid for a third day against the euro after Intel Corp.’s revenue forecast exceeded analysts’ estimates following better-than-expected earnings yesterday at Goldman Sachs Group Inc. and Johnson & Johnson. The pound advanced to the highest level versus the dollar in almost two weeks on the smallest increase in U.K. jobless claims in a year.

“A number of key players with better-than-expected earnings eased the risk backdrop,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank by assets. “The market snapped back on the positive news.”

The yen declined 0.9 percent to 131.76 per euro at 9:34 a.m. in New York, from 130.62 yesterday. The dollar slid 0.9 percent to $1.4088 per euro from $1.3967 and touched $1.4102, the weakest level since July 2. The yen was little changed at 93.7 versus the dollar, compared with 93.50.

A JPMorgan Chase & Co. gauge showed implied volatility on options for major exchange rates fell to 13.59 percent in a third day of decreases. Reduced volatility indicates less probability of currency fluctuations that may erode profit on investments in higher-yielding assets.

The dollar fell 1.3 percent to 8.158 South African rand and the yen declined 1.3 percent to 12.02 versus the Swedish krona as the Standard & Poor’s 500 Index advanced 1 percent, encouraging risk demand.

Benchmark Rates

The target lending rates of 7.5 percent in South Africa and 0.25 percent in Sweden compare with as low as zero in the U.S. The Bank of Japan kept its target interest rate at 0.1 percent at the end of a two-day policy meeting today.

Intel, the world’s largest chipmaker, rose 7.1 percent in U.S. trading after it forecast quarterly revenue will reach as much as $8.9 billion. JPMorgan and International Business Machines Corp. are among other companies in the S&P 500 due to report results this week.

“There is a sense that optimism-driven trading is re- emerging,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “The forecast-beating results from Goldman Sachs and Intel suggest the yen will weaken and stocks will advance.”

U.S. Output

U.S. factory production decreased 0.4 percent in June after a revised 1.2 percent drop in previous month, the Federal Reserve reported today. The median forecast of 73 economists surveyed by Bloomberg News was for a reduction of 0.6 percent.

The Empire factory index, a measure of production in the New York region, fell 0.6 percent in July after sliding 9.4 percent in the previous month, the New York Fed said. Readings below zero signal a contraction. The median forecast of 53 economists surveyed by Bloomberg News was for a 5 percent drop.

The pound rose against the dollar as the U.K. report on jobless claims last month indicated the worst of the recession may be over.

Sterling’s 18 percent drop versus the dollar in the past year has been overdone and investors should buy the currency to prepare for a “steep” economic recovery, according to Stephen Jen, managing director of macro and currencies at BlueGold Capital Management LLP in London.

‘Bearish’ on Pound

“A lot of people seem to be bearish on the pound at the moment because it’s so easy to tell a U.K.-negative story,” Jen said in an interview yesterday. “The country has a very aggressive monetary policy and a cheap currency. And it’s underowned.”

Britain’s currency will have to appreciate to about $1.75 to reflect the U.K.’s economic potential, he said. Sterling increased as much as 1 percent to $1.6467, the highest level since July 2.

China’s foreign-exchange reserves topped $2 trillion for the first time in a sign of the difficulty the nation faces in finding places to invest. The reserves rose a record $178 billion in the second quarter to $2.132 trillion, the People’s Bank of China said on its Web site. That compares with a $7.7 billion gain in the previous three-month period.

The South Korean won rose for a second day, climbing 1.2 percent to 1,278.35 per dollar, while the Indonesian rupiah advanced 0.9 percent to 10,122 and Malaysia’s ringgit climbed 0.5 percent to 3.5652.

The Bank of Japan forecast that the world’s second-largest economy will shrink 3.4 percent in the year ending March 2010, more than the 3.1 percent predicted in April. That would outstrip last fiscal year’s 3.3 percent contraction as the worst in the postwar era. The central bank extended its emergency- credit programs to Dec. 31 from Sept. 30.

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Dollar edges up vs yen, steady vs euro on US data

The dollar pared losses against the yen but remained lower against the euro on Wednesday after data showed a slight rise in U.S. consumer prices and improvement in northeastern manufacturing activity.

Both reports added slightly to the more optimistic tone in the market, driven partly by better-than-expected U.S. corporate earnings results so far this week.

The dollar edged up to 93.60 yen JPY= from around 93.40 yen before the data, while the euro was steady around $1.4080 EUR=, up about 0.8 percent from late Tuesday.

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EUR/USD - Top of Major Triangle

Price action on EUR/USD, a daily chart of which is shown, made a substantial bullish move as of Wednesday (7/15/2009) morning, but is still in an overall continuing consolidation. This consolidation has taken the form of a triangle pattern, where price has just reached the upper triangle border for a third touch. Any breakout to the upside of this triangle should meet immediate resistance in the 1.4200 region, the level of the last significant high within the consolidation. And any subsequent breakout above that level should easily target major resistance at around 1.4335, the level of the uptrend high and the very top of the triangle. Strong downside support on any subsequent breakdown below the triangle pattern continues to reside in the 1.3750 price region

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US trade gap shrinks to nine-year low

The US trade deficit narrowed sharply in May to its lowest level in nearly a decade, led by a plunge in imported oil and a rebound in exports, government data showed Friday.

The deficit fell nearly 10 percent in May to a seasonally adjusted $26bn, the lowest level since November 1999, the Commerce Department said. Most analysts expected the gap would widen to $30bn amid the global recession that has battered international trade. The May deficit was 57.1 percent lower than a year ago, while trade volume grew only 0.4 percent. The Commerce Department lowered the April deficit to $28.8bn from $29.2bn.

The reduction in the trade gap resulted from a slight decline in imports and a stronger increase in exports as the weak dollar made US goods and services more affordable.

With the world’s biggest economy reeling from a prolonged recession, imports fell for the 10th consecutive month, by 0.6 percent, to $149.3bn, their lowest level since July 2004.

Exports, which had fallen for the two preceding months, increased 1.6 percent, their strongest gain since July 2008, to $123.3bn. Exports of goods rose $2bn to $82.1bn, as increases in exports of industrial supplies and materials; foods, feeds, and beverages; consumer goods; and capital goods more than offset a decline in automotive vehicles, parts, and engines.

The goods deficit fell 6.5 percent to $37.3bn. The services surplus rose for the third month running, by 2.1 percent to $11.4bn. A steep 11 percent drop in oil imports accounted for half the decline in the May trade gap. Excluding oil, the trade gap closed 4.7 percent.

The deficit with Canada, the largest US trading partner, tumbled nearly in half in May from April, to $628m, a trough last seen in March 1994. The politically sensitive gap with China, the country’s second-largest trading partner and responsible for more than half of the US deficit, widened 4.4 percent to $17.484bn from $16.754bn in April.

Critics accuse the Asian powerhouse of keeping its currency artificially low to gain a trade advantage. The US trade gap with the 16-nation eurozone halved in May from April, to $2.096bn. With Japan, the deficit narrowed to $1.914bn from $3.218bn

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Aussie dollar to weather China spat

The simmering diplomatic spat between Australia and China over the detention of mining company employees in Shanghai is unlikely to have significant fallout for the Australian dollar, analysts say.

While not eliminating the chance that Australia's relations with its biggest trading partner may suffer, the market experts don't see any impact so far.

The China-Rio situation, ''is not an important market mover,'' said RBC Capital Markets currency strategist Sue Trinh. ''There might be speculation that the Australia-China relationship is being strained...but we think the media speculation is overblown and any Aussie weakness on the back of that should fade.''

The Australian dollar has slumped about two US cents since the world learned that China had detained Rio Tinto employees last Sunday, including an Australian Stern Hu. The drop, though, was mostly tied to weaker commodity prices worldwide.

The Aussie dollar was buying 78.2 US cents in early afternoon trading, down from a high of 80.39 US cents on July 7, when Mr Hu's arrest became public.

Mr Hu, along with three Chinese co-workers, is accused of illegally obtaining information that hurt China's national interests.

The detention comes as Rio Tinto and other miners, including BHP Billiton, continue to negotiate new iron-ore contracts with China holding out for a larger cut than the 33 per cent reduction on last year's prices agreed by Korean and Japanese steelmakers.

The arrest also comes just weeks after Rio Tinto rebuffed an $US19.5 billion ($25 billion) investment from state-owned Chinalco.

Market dynamics

Nonetheless, whatever political and economic worries stirred up the situation, the Aussie dollar's fall is more about market dynamics than political rows, said HiFX senior consultant Tom Averill.

''To my mind I don't think there are many people in the market paying a huge amount of attention to the Rio story,'' he said. ''I don't think it's a huge market mover really.''

''Softer commodities and softer equities coming into the end of the quarter'' are the main factors, he said, especially as the bulk of the US reporting season kicks off next week.

The real pressure on the Australian dollar, Mr Averill said, is because it "had come too far too quickly over the previous quarter". Its recent fall ''is just a correction in the trend that people wanted to see.''

Mr Averill sees the dollar falling to as low as 74-75 US cents in the next two weeks. However, in the long term, the Aussie dollar is set to gain as the US dollar declines on investor worries about the state of the US economy and the US government's finances.

Long-term question

Although analysts doubt that recent events between China and Australia will impact the Aussie soon, they say a pattern of rising trade tensions could eventually weigh on its value.

If over time the market views the trade position between Australia and China being threatened, "that could have a downward impact on the Aussie'', ANZ economist Amber Rabinov said.

"We've seen the Aussie trade in recent time increasingly as a play on Asia, particularly if Chinese economic prospects are looking good ... so you could theorise that if this trade relationship was threatened, that would weigh down on the Aussie.''

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