Currency Trading Update

The Australian dollar, euro, and US dollar could see increased volatility over the next 24 hours:

Asian Trading Session
02/02, 22:30 ET
Reserve Bank of Australia (RBA) Rate Decision - The RBA is anticipated to cut rates in their fifth consecutive meeting at 22:30 ET on Monday, with a Bloomberg News poll of economists calling for a 100 basis point cash rate target reduction to a record low of 3.50 percent. However, only a larger-than-expected rate cut or comments suggesting they will continue to reduce rates aggressively may weigh on the Australian dollar. Overall, Australia is facing major headwinds from financial market instability, which has led to tighter credit conditions, as well as from both domestic and foreign demand. Indeed, global slowdown is hurting exports, something the Australian economy depends on for employment and broad growth. The situation has not been helped by significantly lower commodity prices, though it has served to cool inflation pressures, which leaves the RBA additional leeway to make monetary policy more accommodative in coming months.

European Trading Session
02/03, 05:00 ET
Euro-zone Producer Price Index (DEC) - Producer prices in the Euro-zone are forecasted to have fallen for the fourth straight month at a rate of 1.2 percent during December, while the annual rate could slow to 2.1 percent. We've already seen Eurostat's estimates for January CPI plunge to a nearly 10-year low of 1.1 percent, and if this upcoming release of input costs fall more than anticipated, the markets may shift to price in a rate cut by the European Central Bank on Thursday and thus lead the euro lower. As it stands, Credit Suisse overnight index swaps are pricing in a 77 percent chance of a 25bp cut, but based on comments by ECB President Jean-Claude Trichet following their last meeting, a Bloomberg News poll shows that economists expect that the ECB will hold off until March before considering reducing rate again.

US Trading Session
02/03, 10:00 ET
US Pending Home Sales (DEC) - The National Association of Realtors' (NAR) pending home sales report is forecasted to show that contract signings for the purchase of previously owned homes stagnated in December following three straight months of contraction and a 9.6 percent drop in November from a year earlier. Indeed, last week NAR reported that existing home sales actually jumped 6.5 percent in December to 4.74 million from 4.45 million as median prices tumbled 15.3 percent from a year earlier to $175,400, though new home sales continue to fall to record lows. As a result, there is potential for a better than expected result on Tuesday morning, which could help to boost investor sentiment and thus, currency pairs like USD/JPY.

Terri Belkas
Currency Strategist
Forex Capital Markets LLC

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