Why the Federal Reserve Needs to Pause

No one wants to be in the shoes of the Federal Reserve today as they begin their 2 day monetary policy meeting. Fed officials face a tough decision when they weigh the risk of deteriorating growth with that of rising inflation. Unfortunately for the Fed, the problems with growth and inflation have only escalated in recent weeks. The US economy shed jobs for 3 months in a row and job losses are expected to continue this month. The US economy is in a recession and it may be just a matter of time before the US central bank admits it. As indicated by the tables in our FOMC Preview, the housing market and the labor market have deteriorated since the last Federal Reserve meeting.

The only dollar positive news has been the increased inflation pressures and mild improvement in manufacturing sector activity. However despite the rise in service and manufacturing ISM - they both remain in contractionary territory. At this point the Federal Reserve's options are limited since they cannot raise interest rates to combat inflation. One of their only options is to let the dollar rise. The strength of the Euro has helped the Eurozone fend off inflationary pressures while the weakness of the US dollar has only exacerbated them. To cut interest rates by 25bp and then signal that they will pause in June would be a simple gesture by the Fed that could bring significant benefits.

Traders would assume that the Fed's rate cuts are over, at least for the time being and as result, they may send the Euro back towards 1.50 and USD/JPY back above 105. A stronger dollar will reduce some benefits for US exporters, but it could help curb inflationary pressures. Postponing any additional easing after their anticipated quarter point rate cut on Wednesday does not mean that the Fed has put an end to their easing cycle. They are just giving the market an opportunity to absorb the 325bp of rate cuts that they have will have doled out since August and any temporary boost from tax rebates. If the economy does not respond, then they could easily pick up where they left off.

Right now, they need to buy themselves some time by forestalling further inflationary pressures. The outlook for the US economy remains weak with house prices falling by the largest amount since 2001 and consumer confidence posting its biggest 3 month slide since the last recession. What is most worrisome about the April consumer confidence report is the fact that the jobs are plentiful question saw the worst response since September 2004 while the hard to get jobs question received the highest response since 2004.

Euro Drops as Consumer Spending Contracts

The EUR/USD has continued to sell-off as incoming economic data reveals further weakness in the Eurozone economy. Not only did Deutsche Bank, Germany's largest bank, report its first loss in 5 years, but the Bloomberg Eurozone Retail PMI index hit a record low. Sales fell across all 3 of the largest euro member states with consumer spending in Italy reporting the biggest dip. Sales in Germany and France are both in contractionary levels.

Despite higher food prices, sales of food and drinks fell by the fastest rate in more than 2 years. This suggests that retail sales across the region will see a similar decline. Fundamentals, technicals and sentiment all support further losses in the Euro. The one thing that could have triggered a meaningful turn in the single currency was reasons for the European Central Bank to cut interest rates.

If economic data deteriorates even further, the central bank may have to seriously consider this possibility. The futures market currently does not expect an interest rate cut until the end of this year at the earliest. Anything to suggest otherwise could cause more volatility in the Euro. German unemployment is due tomorrow and we expect the employment numbers to be Euro negative.

What Is Next For The US Dollar?

Euro Could Fall on German Business Confidence

The Euro has failed to extend its gains beyond 1.60 and we believe that another day of losses may be in store for the single currency. More signs of weakness in the Eurozone economy are beginning to reveal themselves. Even though service sector PMI improved in the month of April, manufacturing sector PMI deteriorated. This suggests that German business confidence could have also decreased this month as indicated by the ZEW survey. A little watched report called the Belgium Business Sentiment Index also tends to have a strong correlation with German IFO (chart). The index fell to a 2.5 year low in the month of April with the drop being the steepest on record. A large decline in German business confidence would be exactly what the Euro needs for a more meaningful turn. Meanwhile ECB member Noyer backtracked the comments that he made yesterday, which drove the EUR/USD to a record high. He said that the market misinterpreted his words and that the ECB is not looking to hike interest rates. For the time being, don't expect them to lower rates either.

British Pound Slips ahead of Retail Sales Report

Over the next 2 trading days, the big action should be in the British pound. We are expecting retail sales tomorrow followed by the first quarter GDP report on Friday. The deterioration in the UK housing market and the UK economy in general will weigh on consumer spending, while the GDP numbers may be partially dependent upon how bad retail sales fared in March. Unfortunately the minutes from the latest monetary policy meeting failed to provide any clarity on how the central bank may vote at the next meeting because the committee was split 3 ways. Six of the nine members voted in favor of the 25bp rate cut, 2 members voted for no cut at all while 1 member voted for a 50bp cut. As a group, they were concerned about everything from growth to credit markets to inflation. Looking ahead, the only things that will shed more light on where the BoE stands would be tomorrow's retail sales report.

Aussie At 24-Year High

The dollar was mostly higher on Wednesday after Luxembourg's Finance Minister Jean-Claude Juncker signaled the weak dollar may harm global economic growth. The yen and Swiss franc fell on increased risk appetite as US equity prices rose. Sterling traded lower although the Bank of England minutes showed two BOE MPC members preferred no interest-rate cuts. The Canadian dollar fell as Canadian retail sales unexpectedly fell in February, increasing speculation of further Bank of Canada aggressive rate cuts following yesterday's 50 basis-point cut to 3.0%.

The AUD/USD penetrated the triple-top resistance and touched the highest level since 1984 as Australia's consumer inflation rose to 4.2% y/y in Q1 2008 for the first time in seven years. The pair is supported by high Australian growth and interest rates. High commodity prices have also supported the pair but limited the aussie's gain as the CRB-index sold off sharply today. There are signs of topping commodity prices and slowing Australian growth. Therefore, we sell one unit of the AUD/USD with stop at 0.9635 although it may be risky.

Awaiting Fed's Decision

While the Federal Reserve is preparing another rate cut at the end of April, the European Central Bank (ECB) has enough room to postpone any intervention further into the future. In effect, ECB officials still promote a strong Euro, as a medicine against a rampant inflation. Nonetheless, the technical picture might delineate a different short/medium term scenario for Euro/Usd, if key technical levels are not overcome.

Inflation is aggressive, but the Federal Reserve should cut rates again

In March, the Producer Price Index (PPI) increased 1.1% (+0.6% expected) and the core index moved up 0.2% (+0.4% expected). The long bull trend in all commodity prices, that began in the year 2000, is here to stay. In fact, energy prices rose 2.9% month over month and are now up 20.4 year over year. Foods moved instead +1.2% and increased 5.8% on a yearly basis. Annually, PPI is at 6.9%, only a fraction below January's 7.4%. The Consumer Price Index (CPI) rose instead 0.3% month over month supported by energy products. March's increase was expected, but the core rate shows +2.4% from February +2.3%.

Despite inflation moving higher, the Federal Reserve should again cut rates at the end of this month by 25/50 basis points and probably in the coming months as well, so to bring fed funds rate below 2.00%. Nevertheless, some pauses might be possible to see how the fiscal stimulus package will impact consumer spending. Almost US$ 120 billion will return into taxpayer pocket this summer. Most of the money will be used to repay debt or into saving accounts, but between 15%/25% should support consumes.

In effect, last week Beige Book confirmed that the economic slowdown is increasing over many of Fed districts (9 of 12). How? First, housing remains very weak, even though some improvements in residential mortgage lending by banks has taken place. Second, consumer spending is falling across the country, as credit is fading away. The bright spots of the U.S. economy are tourism, agriculture and the energy sector.

No Fundamentals!

The US dollar is deteriorating as the Bank of America Corp. the second-largest US bank said earnings fell by 77% which is the third straight quarterly decline as the company is keeping in hand $6.01 billion worth of write downs which worsened the market sentiment. Today, there were no major fundamental data being released by any of the economies as only technical movements moved the markets.

As for the euro was under going a correction wave Friday, today we see the euro back to its normal levels around 1.59 trying to build base above this level hoping the EU economy to support it with strong fundamentals so it can breach the1.60 which will be the new physiological barrier for the single currency. The EUR/USD is traded now around 1.5920 while recording a high of 1.5947 and a low of 1.5794 so far.

In the US session we are noticing that the British pound is starting to gain grounds as the BoE announced measures to exchange government bonds for mortgage securities worth 50 billion pounds just to stimulate the lending between British banks, the period for this plan is just one year, but it might be renewed to the upcoming three years. As this news came out, the royal currency fell as result of unclear situation. As the sterling lost momentum it could not breach the level support of 1.9825 as it started gaining again. The GBP/USD is trading around 1.9857 while recording a high of 2.0027 and a low of 1.9810.

The yen is gradually gaining against the greenback dragging USD/JPY pair to the 103.30s after recording a high of 104.06 and a low of 102.98 as the Japanese outlook remains mixed.

RBNZ April 24 OCR Preview: Firmly on hold at 8.25%

Emissions Trading Scheme

No significant new information has come to light as regards the inflationary impact of this. However, we think the RBNZ is underestimating the effects. They themselves highlight this possibility as an upside inflation risk.

Fiscal

The RBNZ noted "additional fiscal stimulus" as a risk, and also that it could occur earlier than assumed: "fiscal stimulus occurring once inflation pressures have clearly eased is likely to be of less concern". The RBNZ is unlikely to be delighted by reports that tax cuts could well be rushed through under urgency as early as October this year. We also agree that given the healthy fiscal position and a sharply slower economy the stimulus could be considerably bigger than the RBNZ is currently assuming.

NZD

The RBNZ noted that "even if other things pan out largely as assumed, an additional risk is that the New Zealand dollar depreciates faster than we have assumed." So far, this has not been the case, but it certainly remains a pertinent risk.

Conclusion

All up, the Reserve Bank remains firmly in "wait and see" mode - as they have reconfirmed in speeches and presentations since the March MPS. The market is not expecting a change in the OCR at next week's meeting, and we concur. The main interest in the OCR review is therefore the tone of the document. We expect the balance will be tilted towards recognising that downside risks to near term growth both in NZ and abroad have intensified, while acknowledging that the inflation picture is still a problem. In the June MPS we would expect rate cuts to be brought forward from their current projection of end-2009, but to nowhere near market pricing, which suggest cuts as soon as October this year.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.9758; (P) 1.9841; (R1) 1.9992

Cable's rise from 1.9599 continues today and extends further to as high as 1.9979 so far. As discussed before, break of the falling trend line and 1.9894 resistance confirms that whole decline from 2.0391 has completed in form of a falling wedge at 1.9593. At this point, intraday bias remains on the upside as long as 1.9882 minor support holds. Further rally should be seen to 2.0391 and probably to test 2.0464 medium term fibo resistance. On the downside, below 1.9882 minor support will turn intraday outlook neutral first. But pull back should be contained well above 1.9689 support and bring rally resumption.

In the bigger picture, down trend from 2.1161 have made a low at 1.9337. Recent price actions suggest that rebound from 1.9337 is still in progress and is set to have another rise to 2.0391 and above. However, with 61.8% retracement of 2.1161 to 1.9337 at 2.0464 remains intact, whole down trend from 2.1161 is probably still in force and is in favor to extend further.

Though, on the upside, firm break of 2.0464 fibo resistance will dampen this view and could then bring retest of 2.1161 high. Meanwhile, on the downside, below 1.9599 is now needed to turn short term bias back to the downside for retest of 1.9337 low.

U.S. M1 Money Supply Falls as M2 Gains

(CEP News) - M1 Money Supply fell $24.8 billion in the week ending April 7, while M2 increased $9.8 billion, according to figures released from the Federal Reserve Thursday.

The Fed's Treasury holdings fell $12.2 billion to $548.6 billion in the week.

Borrowing by securities firms fell $7.8 billion from the previous week, averaging $24.8 billion in the week.

Market Awaits Ammunition

European Mid Morning Update

Releases from Europe:

	Forecast	Actual
March
French CPI (MoM)	+0.6%	+0.8%
French CPI (YoY)	+3.0%	+3.2%

French CPI at 3.2% YoY and oil climbing today to reach $112.48 indicates the inflationary pain will continue. With Italian inflation numbers today along with Germany's and the Euro-zone's later this week the ECB will watch with alarm. Already ECB officials have been stating that there is no room to lower interest rates this year - but with the credit markets in a rather delicate state they will be gritting their teeth and biting into pillows each night…

The following economic releases are due today:

February

U.K. DCLG House Prices (YoY) +7.4%

March

Italian CPI (MoM) +0.5%
Italian CPI (YoY) +3.3%
U.K. CPI (MoM) +0.6%
U.K. CPI (YoY) +2.6%
U.K. RPI (MoM) +0.5%
U.K. RPI (YoY) +3.9%
U.S. PPI (MoM) +0.7%
U.S. PPI (YoY) +6.1%
U.S. PPI ex food & energy (MoM) +0.2%
U.S. PPI ex food & energy (YoY) +2.7%

April

German ZEW Survey: Econ Sentiment - 30.0
German ZEW Survey: Current Situation +32.8
Euro-zone ZEW Survey: Econ Sentiment - 33.0
U.S. Empire Manufacturing - 18.0
U.S. NAHB Housing Market Index +20.0

It has been a strange old Asian session with what looks to be an impasse over what to do next with the Dollar. Some commentators are now so desperate for ideas they are looking at U.S. corporate earnings for inspiration.

Wachovia and GE disappointed and today is Citibank and Merrill's turn to announce Q1 results. Citi has sold off leveraged debt to remove it from the balance sheet and Deutsche is expected to do the same.

And in spite of a heavier release schedule today it is difficult to point to just what will provide the catalyst for any move. If anything it has to be the German and Euro-zone ZEW surveys along with the Empire manufacturing and NAHB housing market index from the States.

The market is bearish Dollars but has repeatedly hit barriers to the downside and unless they can muster up the ammunition to push the Dollar further down the risk s actually more on the upside for now. This should still be seen in the context of a correction only. Indeed, if there are any further losses in the Dollar it only looks like the Euro that will take the strain while new lows seem less likely in other currency pairs.

Major Market Mover: Inflation Unchanged In The U.K!

Inflation in March remained unchanged from February in U.K, as rising food and energy prices remain a threat for the BOE to achieve their desired target for inflation at 2.0%, presenting challenges as the central bank struggles to avoid the first recession since early 1990s!

Prices on the consumer level rose 0.4 percent in March after rising 0.7% the prior month and below median estimates of 0.6% rise, while compared with a year earlier inflation rose 2.5% unchanged from the prior estimate also below median estimates, while core CPI rose 1.2% inline with the previous reading.

Retail price index also fell in March yet reflecting dropping house prices and lower interest rates charged by banks on payments, RPI rose 0.3% on the month down from 0.8% back in February, while compared with a year earlier RPI rose 3.8% also down from the previous 4.1% and below the 3.9% forecasted by median estimates.

While a survey in Germany showed that future expectations were very low in April according to the ZEW Survey, the Economic sentiment fell to -40.7 from the previous -32.0, while the Current situation sentiment rose to 33.2 from 32.1, as for the Euro Zone the ZEW Survey signaled deteriorating expectations over the future of the 15-nation economy as the Economic sentiment also fell -44.8 from -35.0.

The BOE were very clear when they admitted they expect a 'sharp slowdown' in economic activity during this year after they decided to cut their rates by another quarter percentage point to 5.00 percent, while their inflation expectations remained elevated as the bank expects inflation to rise above 3.0 percent, which requires the BOE Chairman Mr. King to write a letter of explanation for the Government!

While the falling expectations over the future of the Euro area remains the notable thing even as the 15-nation economy remained resilient to a recession in the world's largest economy the United States, and a settling above the $1.50 mark Euro but luckily for the ECB their economic fundamentals are still 'sound', though highlighted by 'an unusual amount of uncertainty' over the extent of damage that occurred to the economy!

Later in the day the U.S Commerce Department will release the producer price index for March, as expectations are for a sharp rise in prices due to the never ending rise in energy and raw material's prices!

Struggling central banks around the globe should be the defining characteristic for this era as they are divided into two groups, one group remained focused on deteriorating growth levels led by the Feds and the BOE, and the other group are focused on inflation led b y the ECB and the BOJ!

FX & Money Markets Daily: Housing Market In Focus

Majors & Scandies

The housing sector started the financial turmoil and for the time being, the focus in the FX and money markets remains among other things on the housing sector. RICS from the UK unveiled the worst figures since it started compiling data approximately 30 years ago. The pound is once again the 'victim' of the financial turmoil led by weakening housing markets and the consequence as we see it, is that the pound will be under pressure once again today.

RICS blames the fall on the tightened lending conditions, which could also be observed when BoE cut interest rates by 25bps last week. BoE's bank rate was lowered to 5%, however, the GBP Libor fixings did hardly move from before the announcement and mortgage lenders did not lower their mortgage rates either. From the US, the NAHB Housing Index is due in the evening and will give us an indication of the degree of the optimism (pessimism?) in the US housing sector. The neutral limit for the NAHB is around 50 whereas the figure was 20 last month. We are quite pessimistic about today's release and market surveys calls for a figure around 20 this month as well.

ZEW from the Eurozone and CPI from the UK will most likely draw a great deal of attention today as well. Especially, CPI from the UK will be interest to follow since the central bank cut interest rates last week even though inflation is still above target rate

Emerging Markets

Surprisingly EM currencies went off to a good start Monday. It was surprising on the back of a stronger JPY and 3 % lower equity markets in Asian. However during Monday the sentiment went negative and currencies like ISK, TRY and ZAR dropped more than 1 per cent against EUR.

Today we expect a neutral day. We have Polish CPI-data on EM today and PPI from the US. Both set of data are second tier data. However the market looks forward to an amount of more important events later this week. We look forward to interest rate meetings in Brazil (Wednesday), Turkey (Thursday) and Mexico (Friday). On the global scene we get important data from the US (CPI, Industrial production and Beige Book) and important company earnings (among others JP Morgan, Merrill Lynch and Citi).

How Many Times Will Trichet Use the Words Price Stability

The Euro has come within 50 pips of its all time record high against the US dollar ahead of the ECB interest rate decision. The latest price action suggest that the the notoriously stubborn ECB President will continue to remain hawkish and express no concern about the level of the currency. Although retail sales have dipped, industrial production and the trade balance is on the rise. The improvement in the trade picture is particularly important because it confirms that the strength of the Euro continues to have only a limited impact on the Eurozone economy.

At the last monetary meeting, Trichet used the words “price stability” 8 times in his Introductory Statement. Although the ECB lowered their growth forecasts at the time, they also upgraded their inflation forecasts, sending a strong message to the markets that interest rates will remain unchanged for some tine. Looking ahead to this interest rate meeting, as long as the tone of the press conference remains the same and price stability is used no less than 8 times, there is a decent chance that the EUR/USD could hit a new all time high.

However should Trichet acknowledge the slowdown in growth, expect the EUR/USD to top out below 1.60 once again.

The Pressure on the US Dollar

The currency market has been exceptionally quiet over the past few days with the EUR/USD and USD/JPY confined within a tight trading range. This range however was broken today as the EUR/USD came within 50 pips of its record high. Although there was no meaningful US economic data released, the move in the dollar represents the pressure that the market expects to fall upon the greenback over the next 24 hours.

The European Central Bank and the Bank of England have monetary policy announcements. The former is expected to keep rates unchanged while the latter is expected to lower them. However for the US dollar, the relative dovishness of the Federal Reserve may be the most important. The minutes from the last FOMC meeting reveals a divided Fed that is concerned about both growth and inflation. Although from here on forward, the Fed could slow down their degree of easing, the ECB's reluctance to cut interest rates and the BoE's own internal struggles (read the EUR and GBP sections for more details) could keep pressure on the US dollar.

Furthermore, the US trade balance could also turn out to be dollar negative. Even though the greenback has weakened significantly, which should help to narrow the trade deficit, manufacturing ISM also slipped that month which suggests that the contribution may have been limited. There are still a lot of inherent problems in the US economy.

We have previously warned of a further deterioration in the US labor market, but more immediately, US retail sales are expected to be released on Monday. With Linens ‘n Things joining Domain, Fortunoff, and Sharper Image in filing for bankruptcy protection, there is a decent chance that consumer spending could contract for another month. Crude oil and gasoline prices have also hit a record high which will take a toll on the pocketbooks of nearly all Americans. It may not be long before gas prices hit $4 a gallon across the nation.

The Sunrise Headlines

* US equities close little changed, as early gains cannot be sustained. Good Washington Mutual news was offset by higher oil prices in a thinly traded session.
* Overnight, Asian equities, except Chinese ones, traded mostly lower
* Washington Mutual, the largest savings and loans, nears securing 5 billion $ in new capital, according to WSJ. Share rises 29%. Alcoa misses Q1 profit expectations, but markets count on higher aluminum prices going forward. AMD reports slower-than-expected Q1 revenues and slashes work force by 1680 jobs. Citigroup sells Diners club to Discover.
* Shirakawa, candidate for the BOJ governorship, might soon be confirmed by parliament.
* Oil (108.85) eases slightly overnight, after surging 3 $ on Monday following diesel supply concerns linked to a fire at European refinery
* IMF plans to sell more than 10% of its gold reserves, within the framework of the gold agreement and invest in other assets, bonds to start with. Gold little changed
* Australian business confidence drops to the lowest since September 2001, while New Zealand business confidence collapses to lowest level in 30 years.
* Minutes of the March 18 FOMC meeting highlight of the day.

Sunrise Market Commentary

• US Treasuries cannot sustain its post-payrolls gains
Treasuries slid lower, as the return of risk appetite continued in a session devoid of important data or events. A late session drop in equities helped Treasuries contain its losses.

• European bonds remain under pressure
The weak US Payrolls report failed to improve European bond sentiment. The feeling that the worst of the credit crisis is over and higher equities pushed the Bund below the 115.13 level towards the next main support level at 114.69. A break below would damage the technical picture and suggest the correction has further way to go.

• FX : Dollar struggles to extend rebound
After a correction last week, the dollar again struggles to build out its gains, especially against the euro. The latter apparently is supported by Japanese/Asian buying interest. Also sterling continues to fight an uphill battle going into the BOE interest rate decision on Thursday.

Calm Day in Europe

The US recession is continuing to deepen as the Non Farm Payrolls came out Friday showing an unexpected decline of 80,000 jobs. Investors now fear that the US economy may take longer than expected to revive. As more heat is added on the US, the greenback depreciates against major currencies losing more grounds while traders flee the US dollar currency. Today the greenback reversed to try and gain some of its losses that were witnessed after fundamentals disappointed many traders. Technical movements today are dominating the markets.

The euro gained against the greenback as they released their fundamental data showing that Germany released its industrial production for the month of February coming in at 0.4% better than the expected reading of -0.4% yet less than the revised previous reading of 1.4% from 1.8%. Also the industrial production annual reading came in at 6.1% higher than the projected reading of 5.3% but also slightly lower than the revised prior reading to the downside to 6.5% from 6.9%. As this data gave support to the single currency it helped restore some losses that we witnessed at the start of this morning's session. The EUR/USD pair is currently trading at 1.5719 while recording a high of 1.5732 and a low of 1.5626.

As for sterling, it is depreciating against the greenback on anticipations that the BoE will slash their lending rates by 25 basis points later on this week in order to help restore the UK economy. Also the economy is continuing to suffer the exists turbulence in the financial markets. We see a minor resistance at 1.9920s and a minor support at 1.9840s as the GBP/USD pair is traded at 1.9870 after recording a high of 1.9932 and a low of 1.9834.

Carry trades are seen in the markets today, in which traders buy high yielding assets and sell low yielding assets. A victim to carry trades is the yen as it losses grounds against major currencies. Also in news, the BoJ on April 9 is expected to keep their interest rates steady which helped strengthen traders' confidence. As confidence was restored, Japanese stocks soared to show the largest gain in a month. The technical indicators show the major support is at 102s in which the pair since the mornign breached to trade above it now currently trading at 102.63 while recording a high of 102.84 and a low of 101.62.

Fear Continues To Ease

The yen and Swiss franc are liable to weaken further in the short term, although residual caution will limit the scope for aggressive selling pressure

Risk tolerances have continued to improve at the beginning of this week. Measures of credit risk have eased with the European iTraxx crossover index, for example, falling by around 20 basis points to levels significantly below the 470 basis point level, maintaining the decline from peak levels above 550 basis points at the time of the Bear Stearns collapse

Asian equity markets advanced on Monday and European markets also secured modest gains even though there was evidence of profit taking from initial levels.

While fears remain at lower levels, there will be an unwinding of safe-haven demand and demand for defensive currencies will also tend to ease. In this environment, the Japanese yen and Swiss franc have weakened. Market fears are liable to remain lower in the very short term on hopes that credit-related panic has eased even though the mood of caution will continue.


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Bernanke Testimony Sinks The Dollar Before NFP Lull

The tentative dollar rebound from Tuesday was stalled today by an ominous forecast for the economy from Fed Chairman Bernanke during his testimony before Congress. For the majors, the policy official’s remarks led EURUSD to hold a long-term rising trend and rally over 100 points to 1.57. The pound, despite disappointing data of its own, took advantage of the weakened greenback to confirm a triple bottom and rally back to 1.99.

Risk considerations proved to have an influence on the benchmark currency’s direction as well. The yen actually lost ground against the dollar through the early New York session to extend the notable break from yesterday, while the Swiss franc rose nearly 90 points to 1.0070. The high-yielding pairs had the benefit of the risk rebound and weak US currency, sending AUDUSD and NZDUSD back to 0.9150 and 0.79 respectively. Finally, the range bound Canadian dollar pair was able to extend a reversal to around 1.0150.

While technicals and sentiment seem to be firmly set against a significant dollar rebound, scheduled event risk would ultimately trigger the dollar’s downturn Wednesday. Topping fundamental concern for greenback traders was Fed Chairman Ben Bernanke’s prepared testimony before the Joint Economic committee in Washington. Within his remarks, the policy authority altered speculators’ outlook for the health of financial markets and the economy. Weighing in on the ongoing credit crunch, the central banker said the credit market was still under considerable pressure; and that if the Fed had not bailed out Bear Stearns it may have resulted in a “chaotic” reaction. While these were colorful remarks, traders were more concerned with the outlook for economy. While Bernanke was quick to ensure policy officials the second half of 2008 would see positive growth before expansion returned to trend in 2009, he had also offered predictions of negative growth through the first half of this year. Two consecutive quarters of economic contraction would satisfy the loose interpretation of a recession – which the US has not seen since 1990/1991.

After setting the record for the eighth largest rally on record, the stock market was due for a modest correction. The DJIA ended a back-and-forth session down a modest 48.53 points at 12,605.83. Following suit, the tech-heavy Nasdaq Composite slipped 0.19 percent to 1,367.53 and the broad S&P 500 edged 0.06 percent lower to 1,367.53. Though it isn’t clear through today’s price action, the Fed’s dour outlook for the economy may influence price action for some time, especially with NFPs due Friday and earnings session starting in earnest next week.

Despite the official warning of an impending economic recession, investors weren’t interested in parking their capital in the typically safe haven treasuries. The rate on the two-year note surged 31 basis points to 1.895 while the 10-year bond’s rate rose 19 basis points to 3.596.

For Thursday, the scheduled economic docket is relatively light – good conditions for the usual quiet-before-the-storm seen in the lead up to NFPs. Initial jobless claims will offer a last readjustment to payroll expectations and the ISM services gauge will offer fundamental weight to Bernanke’s outlook.

Source : dailyfx.com

Is the US Dollar Recovery Here to Stay?

The US dollar made a solid recovery after manufacturing activity unexpectedly picked up, and strengthened against most of the major currencies as investors increased their risk appetite. Consequently, the US dollar picked up the biggest gains against the Swiss Franc and Yen as investors pulled out of the lower yielding currencies. Against the European currencies, the US dollar recouped previous losses against the euro and British pound as the pairs fell toward the 1.56 and 1.975 levels, respectively. The recovering dollar also soaked in gains against the Australian and New Zealand dollar as commodity prices declined. The Canadian dollar was the sole currency to rise against the US dollar - with market participants turning bullish as Canada's biggest trading partner begins to show signs of recovery.

On the economic front, fresh manufacturing data improved the economic outlook for the US as the ISM Manufacturing index unexpectedly rose to 48.6 from 48.3. Amid the mild increase, the index remains in a state of contraction but helped market sentiment to pick up as many speculated manufacturing activity to decline. However, the ISM Prices Paid index raised inflationary concerns as it rose to 83.5 from 75.5 - reflecting the highest level of inflation since Hurricane Katrina. The outlook for the housing sector remains unclear as Construction Spending fell for the fifth consecutive month, but declined at a slower pace of minus 0.3 percent from minus 1.7 percent.

The securities market continued yesterday's advance as liquidity fears eased with Lehman Brothers netting a total of $4B from stock sales while Blackstone raised a record $10.9B for its property fund. As a result, the DJIA picked up a whopping 391.47 points to bring the average to 12,654.36, with all of the big 30 advancing. The broader S&P500 rose 47.48 points to 1,370.18 points, with the amount of advancing issues more than tripling the amount of declining issues. However, repercussion effects from the credit crunch are showing signs overseas as financial giant UBS projected a first quarter loss of $11.9B, with Chairman Marcel Ospel announcing his resignation.

Investors left the safe haven of US Treasuries as improved data stoked an increase in risk appetite, and pushed bond prices lower. As a result, the benchmark 10-Year yield jumped to 3.56 percent from 3.41 percent, while the 2-Year yield surged to 1.80 percent from 1.59 percent.

Looking ahead, all eyes will be on Fed Chairman Bernanke tomorrow as he testifies before the joint economic committee at 13:30 GMT, and will be followed by the Factory Order index at 14:00 GMT. Prior to Bernanke's testimony, the ADP Employment Change is expected to add downward pressures for the US dollar as we expected the index to fall to minus 30K from minus 23K.

Danske Bank's ISM Monitor

Comments on recent developments

Following a short rebound in January, ISM fell to 48.3 in February. According to the details, the decline was driven by important sub components such as production, new orders and employment.

This month, the signals from the local indices have been generally positive. Richmond and Chicago rose significantly, while Dallas and New York saw modestly higher readings. However, data from Philly Fed and Kansas have been soft.

Our monthly model forecasts a modest decline of one index point to 47.3 - fairly close to the consensus expectation of 47.5. According to the local indices, the risk may be slightly on the upside. On the other hand, demand for consumer and investment goods has softened considerably in recent months. Moreover, the tendency has recently been for the ISM to lead the local indices. In the next 3-6 months, the ISM is set to grind lower, reaching 45.0 in May/June - just above the recession threshold of 42.

Major Market Mover: The First Shot... ISM

A busy day for the manufacturing sector world wide, Japan took the first shot announcing their Tankan survey for the first quarter showing a greater decline than Forecast, Europe and UK will release the Manufacturing PMI while the U.S. are releasing the Manufacturing ISM index.

The Institute of Supply management will announce today the manufacturing index for the month of March, with expectations to show a deeper contraction than any other in the last five years, it is expected to see a reading of 47.5 down from 48.3 in February, while we all know that a reading just below 50 is a sign of an economic contraction.

Well, with less spending less sales, less hiring how do you expect factories to produce, in times of recession factories tend to reduce their production levels, cut unnecessary jobs, maybe cut some product lines from its variety, with rising input prices that rhythm is expected to be faster in this recession, it is not only that people reduced the demand on the final goods, but the raw materials are actually corrupting production and reducing all profit margins from producers all over the world, and yes the problem is all around the world, the global slow down is not giving a chance to producers to even do and send, the markets are dead inside and outside...

Manufacturing was one of the first sectors to suffer the current crisis, it was the fist to sense the leak from the housing sector, then was followed by the services industry, and now we are interested the most with level of contribution it has on the jobs' market, as it is still our main concern for this week, and to tell you the truth, maybe it is the main concern in the economy overall, as everybody might still see or looking at least to see the hope there.

Dollar regained some of the strength after Mr. Paulson explained a new blueprint for the economy and the financial sector in general, but this is like a very long term plan, lets wait and see how much is it gonna be able to support the dollar and for how long...