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Forex outlook:
The Canadian dollar fell the most in 13 months as declining global stocks led investors to unwind risky bets on currencies where interest rates may be headed higher. Canada's dollar was one of 16 major currencies to drop versus the yen today. Investors have borrowed in Japan, where the benchmark rate is 0.5 percent, to buy assets in economies such as Canada where rates are higher, in a bet known as the carry trade. As stocks fall and speculation mounts that losses will climb from subprime mortgages, investors become risk averse and exit those carry-trade bets, buying back yen. Canada's currency surged 1.1 percent versus the U.S. dollar on July 24 after a report showed the nation's retail sales rose in May at the fastest pace in almost a decade, bolstering speculation the central bank will lift rates. The Bank of Canada on July 10 raised its benchmark lending rate a quarter-percentage point to 4.50 percent and said a ``modest'' further increase may still be needed. Investors in the futures market are betting on a rate increase at the central bank's next meeting on Sept. 5, and see a chance for another increase in December. Canada's yields have risen this year on signs the Canadian economy is strengthening amid a boom in commodities such as oil. In the U.S., speculation is mounting the Fed may cut interest rates to offset a housing slump and losses in subprime mortgages, home loans to riskier borrowers.
EUR/USD was buffeted by cross flows that corralled it into a comparatively close range, 1.3505/70. The pair opened near the low and traded higher as disappointing US durable goods orders at 1.4%, 0.6% less than expected, started a wave of buying that gathered steam after US new home sales were released revealing a decline of 6.6%, and a downward revision to the previous month. The pair peaked, slid back to 1.3715 on EUR/JPY sales, then rallied as other cross carry pairs were liquidated, with the EUR soaring against AUD, CAD, and NZD. EUR/USD peaked at 1.3570, commenced to slide on another wave of EUR/JPY selling, slid back to 1.3735 and held a 35/50 trading range through the close. Traders are nervous ahead of the Asian session in case another wave of EUR/JPY selling materializes following the poor close in US equity markets.
It was an exciting NY session for Cable yesterda with the pair trading in a choppy 2.0435-2.0563 range. The pair had been in a tight consolidation phase for the entire first half of the NY session by 2.0450-90, following the sharp sell-off in the late European session to 2.0426, and appeared poised to trade below 2.0500 for the remainder of the session. Cable continues to grind lower, in the face of the broad based carry liquidation, and recent data out from the UK has also been less supportive of the pair, with the latest Nationwide house prices released this morning showing prices increasing at the slowest pace since April 2006. The MPC will now likely see the release of this latest data as further indication of a general slowing in the overall activity, given the importance of house price indicators.
Gold: Gold fell from a three-month high in New York on concern U.S. economic growth will slow, reducing demand for precious metals as a hedge against inflation. Purchases of new homes fell 6.6 percent in June, more than economists predicted, and orders for durable goods unexpectedly fell for a second month, the Commerce Department said today. Some investors buy gold to preserve purchasing power in times of accelerating price increases. ``When people want to buy it as an investment, that's because they see raging growth and inflation,'' said David Hightower, president of Chicago-based research company The Hightower Report. ``It's hard to think of inflation when you have a threat against the economy.'' Gold also got caught up in the wave of selling of other metals amid concerns that defaults on subprime home loans will slow economic growth, said Paul McLeod, vice president of the precious metals department at Commerzbank Securities in New York.
Crude Oil: Crude oil fell from an 11-month high in New York on speculation prices have risen more than justified by declining U.S. inventories. U.S. supplies fell 1.1 million barrels to 351 million barrels, leaving inventories 4.6 percent higher than a year earlier. ``Crude oil is overvalued by $10 to $15 a barrel,'' said Tim Evans, an energy analyst at Citigroup Inc. in New York. ``Inventories are still higher than a year ago and higher than the five-year average. ``There's been a fascination with the stocks at Cushing,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``The wild swings over the last week are more an expression of all of the money in this market than any fundamentals. Overall crude-oil stocks are still high and no refinery near Cushing is going to be without oil.''
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