FOREX: Optimism goes beyond the limit!

We cannot say that we got a lot of favorable news about the US and European economies during this week, from which it would follow that the risks to see a double-dip recession are fully exhausted. On the contrary, on Monday we got new home sales data for June from overseas, which appeared to be worse than was expected. In addition on Wednesday – weak data for durable goods orders (DGO) for the last month. Nevertheless, we see that the US yield curve in 2010-2011 has considerably moved upwards.

US yield curve (Federal funds futures, CBOT, %)
It seems this is a reaction towards the general normalization of situation on the financial markets and the economy after the last week’s stress-test results’ publication in Europe. This entails that the “thaw” on the financial markets continues. We, however, have a feeling that investors are playing too long and overestimate the seemingly improving situation, that’s why we cannot fully trust the recent trends on the federal funds futures market. The main indicator for us will be, first of all, this Friday’s preliminary US GDP data publication for the 2q10 (estimate 2.5%, previous 2.7%), and secondly, the data for US region’s nonfarm payrolls that will be released next week. Markets behave as if all this is not a problem, as if Ben Bernanke hasn’t warned about the downside risks for the US economy. Shortly saying, if the data, sooner or later, shows that the Fed’s chairman was right, we will have stronger investors’ “hangover” towards the currently ruling optimism and till the end of 3q10 will see a correction in S&P500 and EUR/USD towards the strong increase observed in the past two months

Yield curve in Eurozone (3M Euribor, Eurox, %)
In Europe’s case, an increase in the probability of rising interest rates in the region next year looks clearer. We have seen the data in the region indicating acceleration of monetary growth, as well as a good data from Gfk.

Yield curve in Great Britain (3M Sterling, %)
Concerning the expectations in terms of the dynamics of interest rates in Britain, then here we can see that the current week’s yield curve remains practically unchanged. It seems, the statement of NIESR representatives, as well as the comments of the Bank of England Chairman, Mervyn King, have done its part and also appeared to be somewhat “dovish”. Basically, all this can mean that sterling looks somewhat worse than euro on FOREX or may show signs of weakness in the cross-rates.

Konstantin Bochkarev, currency strategist
of company Admiral Markets.

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