Forex - U.S. dollar slightly higher late morning in Sydney ahead of Fed decision

The U.S. dollar traded in a narrow range against the euro and the yen in afternoon trade in Asia on Wednesday, with investors preferring to stay on the sidelines ahead of the Federal Open Market Committee (FOMC) meeting.

The FOMC will announce the outcome of its two-day meet later today and investors are anxious to see if the Federal Reserve policymakers will signal the end of the interest rate cutting cycle in the United States. The Fed is widely anticipated to lower its key rates by a quarter of a percentage point to 2 percent, the smallest cut this year.

Before the FOMC's statement, which will likely give investors a clue on where rates are headed, the U.S. will release first-quarter economic data which may influence the outcome of the Fed's meeting during the day.

"We have a Fed decision tonight and it's unlikely that investors will be adding to their risks prior to the announcement," said David Mann, a currency strategist at Standard Chartered Bank.

He said the release of the economic data "will be very important for the dollar and Fed rate expectations".

At 1:00 p.m. (0500 GMT), the dollar was trading at 103.97 yen from 104.08 yen in Sydney this morning. The euro was quoted at $1.5582 from $1.5569.

While most analysts and economists expect the Fed to hold interest rates for a while after tonight's expected rate cut to ease inflationary pressures, there are others who remain skeptical.

"I don't think at this moment investors should be bullish about the U.S. economy," said Mark Wan, chief analyst at Hang Seng Investment Services Ltd. "And I don't think the FOMC will hold off rate cuts in the foreseeable future."

Standard Chartered's Mann agrees.

"It is unlikely that the Fed will signal that it's the end of the easing cycle. That would tie their hands and limit their policy action onwards," said Mann.

The Fed will likely cut rates by 25 basis points more in June and another quarter point in August, he said.

Bank of America's Tomoko Fujii shared Mann's views that the Fed may slash its key rates by another 50 basis points, a quarter point each in June and August.

"All this talk about U.S. rates bottoming out are premature," said Fujii in an earlier interview. "It is too early to judge that the Fed easing cycle is ending -- we maintain our view that there will be two more rate cuts after this week."

Since the Fed began cutting rates in September, it has lowered its rates by a cumulative 300 basis points in an effort to ease the credit crisis that stemmed from unpaid housing loans extended to borrowers with junk or no credit ratings.

"The FOMC may well use this meeting to signal that an end to the easing cycle is nearing, given the substantial easing in policy over the past six months," said Spiros Papadopoulos, head of currency strategy at NAB Capital Markets.

Currency traders are betting on an 80 percent chance that the Fed will lower rates by a quarter point and expect that it would be the last rate cut, said Papadopoulos.

Meanwhile, the Bank of Japan earlier today voted to keep its key rate unchanged at 0.5 percent, the lowest among developed countries.

Hong Kong 1:00 p.m. (0500 GMT)

U.S. dollar

yen 103.97

Swiss franc 1.0364

Euro

U.S. dollar 1.5582

yen 161.92

Swiss franc 1.6150

pound 0.7917

Pound

U.S. dollar 1.9680

yen 204.54

Swiss franc 2.0391

Australian dollar

U.S. dollar 0.9345

pound 0.4748

yen 97.10

Forex - U.S. dollar slightly higher late morning in Sydney ahead of Fed decision

The U.S. dollar traded in a narrow range against the euro and the yen in afternoon trade in Asia on Wednesday, with investors preferring to stay on the sidelines ahead of the Federal Open Market Committee (FOMC) meeting.

The FOMC will announce the outcome of its two-day meet later today and investors are anxious to see if the Federal Reserve policymakers will signal the end of the interest rate cutting cycle in the United States. The Fed is widely anticipated to lower its key rates by a quarter of a percentage point to 2 percent, the smallest cut this year.

Before the FOMC's statement, which will likely give investors a clue on where rates are headed, the U.S. will release first-quarter economic data which may influence the outcome of the Fed's meeting during the day.

"We have a Fed decision tonight and it's unlikely that investors will be adding to their risks prior to the announcement," said David Mann, a currency strategist at Standard Chartered Bank.

He said the release of the economic data "will be very important for the dollar and Fed rate expectations".

At 1:00 p.m. (0500 GMT), the dollar was trading at 103.97 yen from 104.08 yen in Sydney this morning. The euro was quoted at $1.5582 from $1.5569.

While most analysts and economists expect the Fed to hold interest rates for a while after tonight's expected rate cut to ease inflationary pressures, there are others who remain skeptical.

"I don't think at this moment investors should be bullish about the U.S. economy," said Mark Wan, chief analyst at Hang Seng Investment Services Ltd. "And I don't think the FOMC will hold off rate cuts in the foreseeable future."

Standard Chartered's Mann agrees.

"It is unlikely that the Fed will signal that it's the end of the easing cycle. That would tie their hands and limit their policy action onwards," said Mann.

The Fed will likely cut rates by 25 basis points more in June and another quarter point in August, he said.

Bank of America's Tomoko Fujii shared Mann's views that the Fed may slash its key rates by another 50 basis points, a quarter point each in June and August.

"All this talk about U.S. rates bottoming out are premature," said Fujii in an earlier interview. "It is too early to judge that the Fed easing cycle is ending -- we maintain our view that there will be two more rate cuts after this week."

Since the Fed began cutting rates in September, it has lowered its rates by a cumulative 300 basis points in an effort to ease the credit crisis that stemmed from unpaid housing loans extended to borrowers with junk or no credit ratings.

"The FOMC may well use this meeting to signal that an end to the easing cycle is nearing, given the substantial easing in policy over the past six months," said Spiros Papadopoulos, head of currency strategy at NAB Capital Markets.

Currency traders are betting on an 80 percent chance that the Fed will lower rates by a quarter point and expect that it would be the last rate cut, said Papadopoulos.

Meanwhile, the Bank of Japan earlier today voted to keep its key rate unchanged at 0.5 percent, the lowest among developed countries.

Hong Kong 1:00 p.m. (0500 GMT)

U.S. dollar

yen 103.97

Swiss franc 1.0364

Euro

U.S. dollar 1.5582

yen 161.92

Swiss franc 1.6150

pound 0.7917

Pound

U.S. dollar 1.9680

yen 204.54

Swiss franc 2.0391

Australian dollar

U.S. dollar 0.9345

pound 0.4748

yen 97.10

Has Dollar Turned The Corner?

After relentless selling for the past month which culminated in a spike top of 1.5900 at the start of trade this week, the EURUSD dollar finally turned the corner dropping below 1.5500 by Good Friday. As we wrote in our daily, “The market appears at a standstill as EURUSD consolidates its gain in the 1.5300-1.5500 area and traders wait for the next theme to develop. The collapse of Bear Stearns has left the market wary, but with no additional news of serious trouble in the US financial system, dollar shorts have run out of fresh reasons to sell the greenback. Meanwhile evidence of a potential slowdown in EZ economy is starting to mount, raising concerns that ECB may have to shift its hawkish posture relatively soon”.

Has Dollar Turned The Corner?

After relentless selling for the past month which culminated in a spike top of 1.5900 at the start of trade this week, the EURUSD dollar finally turned the corner dropping below 1.5500 by Good Friday. As we wrote in our daily, “The market appears at a standstill as EURUSD consolidates its gain in the 1.5300-1.5500 area and traders wait for the next theme to develop. The collapse of Bear Stearns has left the market wary, but with no additional news of serious trouble in the US financial system, dollar shorts have run out of fresh reasons to sell the greenback. Meanwhile evidence of a potential slowdown in EZ economy is starting to mount, raising concerns that ECB may have to shift its hawkish posture relatively soon”.

Next week the calendar hardly looks friendly to the dollar as nearly every event from Existing Home Sales to U of M Confidence survey are expected to print lower that the prior month. However, after so much bad news, the greenback may benefit from diminishing expectations staging a rally simply if the data does not show any further deterioration. In any case the market appears to be trading less on economic news and more on risk version concerns. If currency traders see some stabilization in US financial sector some flows may return to the buck, on pure short covering dynamics alone. Therefore, while the rally in the dollar may continue, for the time being it is still nothing more than a correction in ongoing bear market.

Revisiting AUDCAD for Another Hedging Setup

We had previously noted that though AUDCAD offered a rare interest rate arbitrage opportunity with the Bank of Canada following the Fed in cutting borrowing costs and the RBA firmly on hold at 7.25%, conditions had soured as traders begin to entertain the hope that the US has seen the worst of the current housing crisis. Positive sentiment echoed across markets as Canada’s benchmark stock index rose to a monthly high and the yield on the two-year Canadian government bond reached a two-month high as the market re-evaluated the extent of BOC monetary easing.

On April 3rd, the pair broke through this trend line and settled above support at 0.9186, the 38.2% Fibonacci retracement of the 01/30–03/25 ascent. At that time, we suggested a hedge trade as the pair pulled back up towards the trend line prior to further decline. We cautioned that a trend change in AUDCAD is closely contingent on current US sentiment, and should sentiment towards the US sour again the pair may hold more upside potential. To that effect, we noted it would be important to follow price action around upcoming data releases (notably, ISM and NFP that week) to gauge the market’s mood.

Our cautionary stance was warranted. As we had expected, AUDCAD was setting up to retrace from Fib support back towards the trend line resistance level. Surprisingly, price action continued higher to close above the previously broken trend line. The NFP report had printed decidedly grim for the US economy, showing job losses of -30k more than expected as well as revising lower the previous month's result. With such a shift in fundamental outlook, we closed the trade at the hedge position’s profit target having neither lost nor gained.

The decision to close out the AUDCAD hedge position proved wise - the pair rallied substantially to close above the triple top resistance that we had been looking at. The hedging approach proved very useful in this case, allowing us to speculate on a potential trend change without significant exposure to market risk. Though the trend change did not materialize, our equity remained largely unscathed and we were left free to look to other trading opportunities.

Revisiting the pair today, AUDCAD has rallied to a high of 0.9500. The pair has not traded here since a year ago, having put in a major top at the same level last April prior to declining by 800 pips in the next 2 months. We expect price action to retrace from this resistance back to the broken triple top level at 0.9370, prior to a resumption of the upward trend in favor of the yield gap.

China yuan ends at 6.9850 to US dollar vs 7.0014 in OTC trade

The yuan finished at 6.9850 against the US dollar on the over-the-counter (OTC) market, up from 7.0014 yesterday.

On the exchange-traded market, the yuan ended at 6.9958, also up from 7.0093 the previous trading day, a Guangzhou-based trader with a foreign bank said.

The yuan traded between 6.9960 and 6.9830 on the OTC market and between 6.9958 and 6.9838 on the exchange-traded market.

The central bank set the yuan central parity rate at 6.9898 to the dollar this morning, compared with 6.9980 in the previous session.

The yuan's daily trading band is currently set at 0.5 pct.