Currency Trading Update - 12/3/08

The leader board line-up hasn't changed too much over the past day of trading, as contestants 1, 2, and 4 have held on to their spots. As usual, they have stuck to trading GBP/JPY. However, they are in the minority as only 9% of all contestants traded the pair on Tuesday, while the majority have stuck to EUR/USD (32.56%), USD/JPY (14.45%), and GBP/USD (11.19%).

Event risk will pick up significantly during the next 24 hours, including two major rate decision by the Bank of England and European Central Bank:

Asian Trading Session
12/03, 18:50 ET
Japanese Capital Spending (3Q) – Capital spending by Japanese businesses is forecasted to have contracted for the sixth consecutive quarter during Q3 and by the most in six years at a rate of -9.9%. The news would suggest that businesses are feeling the impact of slowing export demand and anticipate that growth will slow further, limiting the need for investment. This particular release doesn’t tend to be very market-moving for the Japanese yen, but can affect Asian stock markets and thus, risk trends.

European Trading Session
12/04, 01:45 ET
Swiss GDP (3Q) – Economic growth in Switzerland is likely to have stagnated completely during Q3, as GDP is expected to be released at 0.0 percent down, from 0.4 percent in Q2. If GDP cools in line with forecasts, it will be the first time expansion failed to accelerate since Q1 2003. Indeed, with the Euro-zone already in recession, demand for Swiss goods has waned and the Swiss National Bank (SNB) has already responded with two unexpected rate cuts last month: a 50 basis point reduction on November 6 and a 100 basis point reduction on November 20. Going forward, the SNB sees a “higher risk of a marked slowdown” in 2009, and a disappointing Q3 GDP report will only darken the central bank’s outlook. As a result, the Swiss franc could fall back on Thursday morning.

US Trading Session
12/04, 07:00 ET
Bank of England Rate Decision - The British pound could pull back even further this week as Bloomberg News is forecasting that the Bank of England will cut rates by 100 basis points at 7:00 ET on Thursday. This is well within the realm of possibilities since the UK has already tipped into recession and the BOE thinks that things will only get worse. In fact, monetary policy action will be just one of many efforts put forth in an attempt to prevent the UK economy from falling into a prolonged recession, as Chancellor of the Exchequer Alistair Darling downgraded growth forecasts during his pre-budget report on November 24 to 0.75 percent in 2008, between -0.75 and -1.25 percent in 2009, and between 1.5 to 2 percent in 2010. Chancellor Darling also announced a £20 billion fiscal stimulus plan, which calls for a cut to the Value Added Tax (VAT) to 15 percent from 17.5 percent, boosts to state pensions and child benefits, extensions of employment support, and a housing support package, among other things.

12/04, 07:45 ET
European Central Bank Rate Decision – A record drop in Euro-zone CPI and rising unemployment leaves the odds in favor of rate cut by the European Central Bank on Thursday at 7:45 ET. In fact, Credit Suisse overnight index swaps are now fully pricing in a 50 basis point reduction by the ECB, and a 66 percent chance of an even more aggressive 75 basis point cut. Meanwhile, a Bloomberg News poll shows that economists expect the former. This easily leaves the decision as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference at 8:30 ET. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that recession will last longer than previously expected in the Euro-zone has the potential to lead the euro far lower. On the other hand, indications that the ECB may leave rates unchanged during their next meeting could actually lead the euro higher.