Currency Pair Overview

Overall: The dollar and the yen continued to advance during the European session, as the market remained in risk-aversion mode. The strong declines have been seen in the pound and aussie, the two currencies out of three that the market expects the central banks to cut the interest rates later this week. The third currency with a rate-cut decision this week is the Euro.

In U.S. economic news, the Institute for Supply Management said that manufacturing contracted at the fastest pace in 25 years during November. It was the fourth straight month of declines for the sector.

The NBER announced the U.S. economy entered a recession in December 2007. “The committee determined that the decline in economic activity in 2008 met the standard for a recession,” the group said in a statement on its Web site. The 1.2 million drop in payroll employment so far this year was the biggest factor in determining that start of the contraction, the group said.

Federal Reserve Chairman Ben Bernanke outlined some of the options the Fed could use to support liquidity and credit during a speech today. One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”

Last week, the Fed announced a new facility which will buy as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. Mortgage rates fell last week after the announcement and Bernanke was careful to note that in his speech today. “It is encouraging that the announcement of that action was met by a fall in mortgage rates,” Bernanke said.

The Euro (Eur/Usd) moved approximately 80 pips overnight, trading below Friday's closing price. The pair bottomed at the 1.2620 area in the Asian session, but again tested the same level during the European trading hours. The pair declined further as S&P futures and cash markets declined, but found a measure of support after Bernanke's speech.

The PMI release shows the euro-area manufacturing side of the economy has contracted for six consecutive months. The release number of 35.6 is slightly smaller than analyst expectations of 36.2. The Euro-zone PMI survey is now standing at a record low, pointing out that the economic contraction may be stronger and even more prolonged than previously thought. This release adds pressure for a 75 basis points rate cut at the ECB's meeting this week.

The Pound (Gbp/Usd) fell 200 pips during the overnight session and broke below the 20-day moving average. The pound found a base near TheLFB S2 (1.5165). Most of the moves came during the European session, as traders start to look ahead to Thursday's interest rate decision and expect a rate cut. The pair declined with the S&P futures and cash markets but as with the euro, found some support after Bernanke's speech.

Net lending to individuals fell in October from one month earlier. The number came in at £1.3B, under analysts' expectations of £2.4B. The number released for the month of September was also revised lower, to £1.8B. The UK Manufacturing PMI contracted for a seventh consecutive month in November, indicating a strong recessionary period the U.K. economy is facing. According to the PMI report, the 34.4 read shows the manufacturing sector is in the biggest contraction phase seen in the last decade

The Aussie (Aud/Usd) has posted strong declines since the new trading week began. So far, the pair has fallen 100 pips, down to TheLFB S2 (0.6440) as traders get ready for the RBA to announce its interest rate decision later tonight, in which it is expected to cut 75 basis points.

The inflation estimate for Australia, released this evening by TD Securities, decreased by 0.6 percent month over month for November. The annual inflation rate is now at 3.0 percent which is below the Australian Bureau of Statistics current 5.0 percent inflation level. The manufacturing sector in Australia has fallen to 32.7 in November from the previous reading of 40.4 in October. This is the lowest level the index has seen in 2008. Five out of the seven components have declined with the sharpest decrease seen in exports and production

The Cad (Usd/Cad) traded just below the 1.2450 area overnight, where the pair ran into strong resistance in the recent past. During the overnight session, the pair traded mostly flat, after advancing immediately after the Asian session opened. The pair rose in N.Y. as crude futures declined almost 9.5%, finding resistance at 1.2525.

The Swissy (Usd/Chf) could not muster any momentum during the overnight session and traded along the neutral pivot point (1.2100). Some analysts are saying the SNB may cut rates with the BoE and ECB, like it has done in the past, even though it is not scheduled. The pair fell in N.Y. as equities were sold, finding support in the 1.2020 area.

The Purchasing Managers Index shows the industrial sector contracted in Switzerland for the third consecutive month. The PMI number was released at 35.2, versus analyst's estimates of 45.5. The Swiss PMI confirms that the economy is taking a similar path as the Euro-area and the U.S. economies, which are near the recession level. The index sits at multi-year lows, showing that inflationary pressures dry up very fast.

The Yen (Usd/Yen) moved in a tight range during the Asian trading hours, and only after the London open was the pair able to break below the support, falling to TheLFB S3 (94.55). In the last few days, the yen has traded with a very small ATR (average trading range), and almost no momentum. The pair declined below 94 in N.Y. trading as stocks fell, but looked to finish above session lows.

The Japanese cash earnings decreased in October by 0.1 percent which was below expectations of a 0.1 percent increase following Septembers 0.2 percent increase. The Japanese Ministry of Health, Labor, and Welfare in Tokyo also reported that overtime pay was down 3.1 percent while bonuses also decreased by 6.2 percent from one year earlier.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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