Greenspan Says LIBOR OIS Rates ‘Normal’

The Libor-OIS spread fell to a level that former Fed Chairman Alan Greenspan called ‘normal, indicating a thaw in credit markets. The Libor-OIS spread which is a gauge of banks reluctance to lend fell to 25 basis points, the least since January 2008. The Libor-OIS spread also affects interbank forex markets. David Keeble of Calyon stated, “It certainly is good news and indicates that some normality is returning, at least in prices. It backs up what the Fed said last night. Everything seems to be going well at the moment.”

ECB Cuts Rates to Record Low

This is good news for both interbank and retail forex markets. Also affecting currency exchange rates was the news that the Eurozone economy contracted by a less- than-forecast 0.1 percent pushing the euro upward in both interbank and retail forex markets. The ECB cut its rate to a record low of 1% and started purchasing 60 billion euros ($86 billion USD) of bonds and provided unlimited amounts of euros to financial institutions. The ECB said in its bank lending survey that banks were less aggressive about credit standards for both companies and households.

Further Euro Gains ‘Not Likely’

The euro to dollar exchange rate rose to a one week high on Thursday as the good news from the Eurozone put downward pressure on the dollar. Demand for higher yielding assets and currencies put further pressure on the dollar. Some analysts say that further euro gains are not likely.  Adam Cole of RBC Capital Markets in London stated, “What we really need to see for the euro to run any further is some evidence from leading indicators that growth is actually turning positive at the moment. So there is a limit to how far it can run until we get some convincing evidence that Q3 is likely to be positive.”

The euro to dollar exchange rate was up 0.5% on Thursday and traded at $1.4270 and against the yen traded at 137.49. Both interbank and retail forex traders are waiting for US retail sales data due late Thursday.

European Stocks Fall, Dollar Holds Gains

High yielding currencies such as the Aussie and New Zealand dollars fell on Tuesday after European stocks and oil prices fell. The US dollar held onto gains made last week after US employment figures and manufacturing showed signs the recession is easing in the world’s largest economy. Forex traders and investors are now awaiting the release of the results of the FOMC meeting which are due Wednesday. Some analysts saw signs of risk aversion which has also helped the dollar and the yen.

Trading Thin

Currency experts saw few market moving events in European markets and noted that trading is thin because of the summer holiday season. Peter Frank of Societe Generale stated, ‘Oil has dropped back from the day’s high, that could be a driver. In very thin volumes, it looks like there’s a certain amount of risk aversion going on.” The Aussie dollar fell 0.2% to $0.8355 and the Kiwi dollar fell 0.7%. The Japanese yen gained against the Aussie dollar by 0.9% to 80.63 yen while the Kiwi dollar slipped 1.5% against the yen to 64.72.

Some Have Cautious View of Dollar’s Gains

Many forex traders are starting to believe that the correlation of the US dollar to risk sentiment is fading and some remain cautious saying that the same thing happened in early June when the dollar rose on better than expected employment data. Chris Turner of ING said, “The dollar is holding onto Friday’s payroll-inspired gains, but it needs some fresh support to avoid sinking back as it did in June. The Fed is likely to keep current rates at 0-0.25% and many expect the Fed to end its $300 billion Treasury purchases program.

Treasury Auction This Week

Many experts expect currency exchange rates to be affected by the US Treasury auction of $37 billion dollars of 3-year notes on Tuesday and will auction off a total of $75 billion T notes this week. In the recent past Treasury auctions have been well received.

US Data Improving

A deceleration of US job losses and improved housing and manufacturing data lifted stocks and surprisingly the US dollar. Typically when risk sentiment rises the dollar declines against higher yielding currencies. Negative data usually caused investors to seek the safe haven of the dollar causing it to rise on global Forex markets. During the last year currency exchange rates were largely affected by stock markets. When stocks rose the dollar declined against other currencies and when stocks fell the dollar rose on safe haven demand.

Dollar Returning to Fundamentals

It appears that the stock dollar correlation is starting to change. After Fridays US jobs data the dollar changed its traditional pattern and rose against other major currencies. Earlier in the year the correlation between the euro-dollar rate and the Standard and Poor’s 500 was about 50% meaning that the euro and S&P 500 rose and fell in tandem. Some currency experts expect the link between the two to weaken further. Joseph Trevisani of FX Solutions stated that the dollar’s gains on Friday are “a sign that the currency markets are weaning themselves from the ‘good-news-is-bad-news for the dollar’ syndrome and returning to fundamental measures of economic growth and interest rate cycles.”

Many traders and investors welcome the change. Alan Ruskin of RBS Securities stated, “The idea of selling the dollar on strong U.S. data because it is risk-positive is being appropriately challenged.”

Full Economic Calendar This Week

Currency exchange rates will undoubtedly be affected by this week’s economic calendar. On Tuesday the US Federal Reserve will meet for two days and investors will be closely scrutinizing statements due to be released on Wednesday. Also on Wednesday international trade data for June is due to be released. On Thursday retail sales for July will be released and on Friday industrial production and consumer sentiment for August will be released.

Fed to Auction $75 Billion of US Debt

This coming week the US Treasury will auction $75 billion of 3 year notes, 10 year notes and 30 year bonds. The auction is expected to show investor confidence in the US’s ability to finance its debts.