Forex Analysis & Today's Strategy USDZAR 24 July 08

NZD crumbles on RBNZ rate cut and dovish guidance. Surprise BOE vote at last rate decision meeting blasts GBP stronger. Key German data on tap. USD recovery extends a bit - what now? AUDUSD at big support zone now after bout of weakness… Overnight News Bullets § UK BoE voted 7-1-1 at rate decision, 1 cut and 1 hike, expectations were just 1 cut § FR Consumer Spending MoM/YoY (Jun) out at, -0.4%/1.0% vs. -0.6%/1.4% exp. 2.0%/3.1% prior. § E-Z Industrial New Orders MoM/YoY (May) out at, -3.5%/-4.4% vs. -1.3%/2.1% exp. 2.5%/11.7% prior. § CA Consumer Price Index MoM/YoY (Jun) out at, 0.7%/3.1% vs. 0.5%/2.9% exp. 1.0%/2.2% prior. § CA Bank Canada CPI Core MoM/YoY (Jun) out at, 0.1%/1.5% vs. 0.1%/1.6% exp. 0.3%/1.5% prior. § US MBA Mortgage Applications (Jul 18) out at, -6.2% vs. 1.7% prior. § US DOE Inventories: Crude Oil -1558K vs. -675K exp. Gasoline 2847K vs. 200K exp. Distillate 2419K vs. 2500K exp. Refinery Utilization -2.35% vs. 0.00% exp. § NZ RBNZ Official Cash Rate cut 25 bps to 8.00 Expectations was no change. § JN Merchnds Trade Balance Total (Jun) out at, Y138.6B vs. Y500.0B exp. Y365.6B prior. § JN Adjusted Merchnds Trade Balance (Jun) out at, Y135.4B vs. 342.7B exp. 642.3B prior. O/N Data Heat map: EU US JP UK SZ AU CA NZ NO SE FR 0 0 - + 0 0 + - 0 0 + Calendar Today's Highlights: Time (GMT) Region Release Consensus 07:30 GE PMI Manufacturing (Jul A) 52.0 07:30 GE PMI Services (Jul A) 51.5 07:30 SE PPI MoM/YoY (Jun) 0.4%/2.9% 07:30 SE Unemployment Rate (Jun) 7.3% 08:00 GE IFO – Business Climate (Jul) 100.1 08:00 GE IFO – Current Assessment (Jul) 106.5 08:00 GE IFO - Expectations (Jul) 93.2 08:00 E-Z ECB Current Account SA/NSA (May) ---/-6.0B 08:00 E-Z PMI Manufacturing (Jul A) 48.7 08:00 E-Z PMI Services (Jul A) 48.8 08:00 E-Z PMI Composite (Jul A) 49.0 08:30 UK Retail Sales MoM/YoY (Jun) -2.6%/4.4% 12:30 US Initial Jobless Claims (Jul 19) 380K 12:30 US Continuing Claims (Jul 12) 3160K 14:00 US Existing Home Sales (Jun) 4.94M 14:00 US Existing Home Sales MoM (Jun) -1.0% 14:35 US EIA Natural Gas Storage Change (Jul 18) 80 23:30 JN Tokyo CPI (Jul) 1.8% 23:30 JN Natl CPI (Jun) 1.9% This and Next Week’s Highlights: Date Region Release Jul 25 GE Import Price Index Jul 25 SW Trade Balance, Household Lending Jul 25 E-Z Euro-Zone M3 Jul 25 UK GDP, Index of Services Jul 25 US Durable Goods Orders, Durables Ex Transportation, U. Of Michigan Confidence, New Home Sales, Baker Hughes U.S. Rig Count What's going on? § The falling demand factor is now clearly seen to effect on the crude, with oil prices now trading near 7-wk lows. Immediate support in the September contract is seen below today’s lows at $123.43 which also acts as a fibo support level. § The New Zealand dollar has experienced a dramatic fall to a 6-month low against USD following the central bank’s unexpected 25bp cut to 8.00%, first cut in 5-years. With further rate cuts in horizon in September, this fall in the Kiwi dollar is set to continue. § Stronger dollar and falling crude oil prices have given a boost to the Asian equities, with Japanese stocks rising for a third day and Nikkei adding over 2% to gains earlier this week. FX EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN 0 + + - 0 0 0 - 0 0 0 FX Trading Strategies Pair Supp. Resis. Comments USDZAR 7.4540 7.6250 Overnight equity gains have given a boost to carry trades and we use this opportunity to establish a rand-long exposure. We are selling USDZAR at 7.5380 offered, targeting the February lows around 7.4140. Stop loss is at 7.5760 bid. MAJOR HEADLINES – PREVIOUS SESSION § New Zealand RBNZ cut its Official Cash Rate for the first time in 5 years, by 25 bps, bringing the rate to 8.00% § Japan Jun. Adjusted Merchandise Trade Balance out at ¥135.4B vs. ¥342.7B expected THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) § Germany Jul. Preliminary PMI Manufacturing and Services (0730) § Germany Jul. IFO (0800) § EuroZone Jul. Preliminary PMI Manufacturing and Services (0800) § EuroZone May Current Account (0800) § UK Jun. Retail Sales (0830) § US Weekly Initial Jobless Claims (1230) § US Jun. Existing Home Sales (1400) § UK BOE Deputy Governor Bean to speak (1735) § Japan Jul. Tokyo and Jun. National CPI (2330) § Japan Jun. Corporate Service Prices (2350) Market Comments Dire warnings and dovish talk at the beginning of the week from the BOE's known dove Blanchflower failed to hurt GBP much and then yesterday's BOE minutes showed the committee divided with a very surprising 7-1-1 split vote. Blanchflower was of course the member voting for a cut, while Timothy Besley sought a 25 basis point hike. The reaction in the market, in our estimation, likely had more to do with heavy short GBP positioning that simply was not ready for the news, more than the idea that this is some amazing revelation that dramatically raises the odds of tightening from the BOE going forward. Still, GBP broke significantly stronger versus its European counterparts, and the action underlines the idea that the EURGBP bull market is largely over with, especially with the recent shift to neutral in ECB rhetoric and signs of broadening malaise in the EuroZone economy. Helping the GBP higher was a rally in the USD, as the two currencies' strength seems to have strong correlations on days with high volatility. Of the two, we would expect the USD to eventually take the upper hand, especially if the epic battle in the range between 1.9900 and 2.0100 results in a break to the downside here in the near term. The UK Retail Sales number today is likely to be an ugly one and could offset the freakishly strong (and probably inaccurate) one from May. NZD was in double trouble yesterday and overnight as one of New Zealand's largest finance companies, Hanover Finance, froze half a billion dollars of investors' capital and announced that it was undergoing a restructuring plan. Then the RBNZ cut rates by 25 basis points overnight, which was only about half priced into expectations. The RBNZ statement was very dovish: governor Bollard said that inflation is likely to peak at 5 percent and then fall below the RBNZ's 3 percent target by 2010. Another 100+ bps of easing is priced in for the RBNZ in the coming 12 months. With foreigners supplying all of the capital to keep the New Zealand dollar afloat and considering the diminitive size of the market, the NZD unwind could become disorderly at times now. 0.6500 here we come in NZDUSD? The USD gained further ground against most of the major currencies yesterday. Again, our niggling little problem with this USD rally is that it is the right thing (for the long term, in our view) that isn't happening for all of the right reasons. Namely, the USD rally has been associated with a resurgence in risk appetite in equities and supposed relief about the fallout from the mortgage sector. The cynics' view on this situation could be that perhaps hedge funds as a group are simply removing risk from the table and licking their wounds as the US government seems bent on doing battle with free markets: note the recent SEC rules on short-selling financial companies and threats of reporting requirements related to futures positions in the oil market. Evidence of this, of course, is to be found in the monster (probably mostly short-covering driven) rally in financial stocks and the sell-off in crude oil, with the US benchmark losing far more value than its Brent counterpart as the US legislature mulls position reporting measures and even a release of supplies from the Strategic Petroleum Reserve. Apparently, the latest efforts point to a deadlock on this matter, though a vote will go out today on the possible release of 70 million barrels of oil from the SPR. President Bush is likely to veto that measure, but that veto would face an override if enough Republicans back the measure. A key test for the financial stocks and therefore the USD may come on the 29th of July when the short selling rule is set to end, but the SEC has said that it could renew this rule and even spread it to other stocks. We'd like to see the USD continue its recovery in an environment with lower risk appetite to feel like it is on a sustainable strengthening trajectory. Carry trades continue to edge higher in many places, but we have a hard time seeing a dramatic extension of this development as our default view is that this rally in financial stocks will begin to fade soon. Watch out for the preliminary PMI readings and all-important IFO out of Germany this morning. That latter number has been a big market mover in recent months and could have a bearing on the EURUSD sell-off. Charts: AUDUSD and NZDUSD AUDUSD is on the verge of a breakdown again. It's been on a verge many times in the recent past, however, and always seems to manage to pick itself up off the mat, but can it do so this time if the trendline and the 55-day moving average give way again? NZDUSD weekly chart: NZDUSD showing a head and shoulders type formation here, with the neckline essentially at current levels. It seems much lower levels could await in a hurry if the pair continue lower through these levels, though the path lower has been a very choppy one in the recent past for this pair.

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