Obviously this type of price decrease will have some sort of negative impact on currencies like the AUD, CAD and BRL as the year progresses. The AUD/USD has slipped 15 pips, now back below .9100.

The final rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions.  

The final rule put in place requirements for retail foreign exchange products, including registration, disclosure statements, record keeping, financial reporting and minimum capital standards.  

The final regulations will be effective as of October 18, 2010.  The regulations were adopted essentially as written with the exception of two major issues:

• Leverage – while the proposed rules called for a maximum leverage of 10:1, the final rules allow the National Future Association (NFA) to determine the margin requirements for the currencies within a defined set of CFTC parameters.  Currently the parameters include 50:1 leverage for major currencies and 20:1 leverage for all other currencies.
• Forex Introducing Brokers – the proposed rules called for all forex introducing brokers to be guaranteed by a single future commissions merchant (FCM) or retain foreign exchange dealer (RFED).  The final rules allow a forex introducing broker to be either guaranteed or independent, consistent with other regulated futures introducing broker (IB).    FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million.

Major currency dealers oppose these changes.    Dealers argue that it will actually have a negative net affect on retail currency traders.   Instead of protecting the consumer, the CFTC’s actions will drive small volume retail traders to overseas dealers where leverage can be as high as 700:1!    There are also unregulated dealers overseas who will take advantage of retail traders seeking 100:1 leverage.   

More importantly, final regulation will kill retail trading in the United State.   Dealers argue that forex is a $1 billion industry that provides millions of solid jobs in the United States.     The final regulation will drive small retail customers offshore.   The result will be less fraud protection for the retail trader, a loss of millions of jobs in the United States, and no significant gain in consumer protection as a result.

Crude has fallen heavily and the CRB is down half a percent since the speech hit the wires.

EUR/JPY seems to be playing the risk on game, falling back as asset markets weaken.

Iron ore is one of Australia’s major exports, so this news could limit gains as risk aversion ebbs. AUD trades at 88.95, near session highs.

On May 6th the trading in stock market became highly volatile and within few minutes the Dow Jones Industrial Average fell nearly 1,000.   At the time, many on Wall Street were at a loss for the violent swing in stock prices.   However, later many blamed high-frequency trading firms.

The exchanges most affected by the flash crash were the New York Stock Exchange, which is operated by NYSE Euronext and the Nasdaq Stock Market, which is operated by Nasdaq OMX Group.

As the result, according to Financial Times, the Financial Industry Regulatory Association (FINRA) is undertaking a “sweep” of broker-dealers that offer market access to high-frequency traders to find out if they allowed these firms to run computerized trading programs – algorithms – without undertaking proper risk-management controls.

FINRA will try and determine whether the broker/dealers have the proper risk management controls in order to police clients that buy and sell securities quickly through computer driven algorithmic trades.

“We’re looking to find out if the brokers understood what was being done with the algorithm and whether the high-frequency trader had thought through how it would work under big market changes,” Richard Ketchum, chairman and chief executive of FINRA, told the Financial Times.

Brokers also face scrutiny of their checks on the ownership of the firms they allow – directly or through sponsorship arrangements – to access the markets.

“The brokers should be satisfied they know who’s really operating these systems,” Mr. Ketchum further told the Financial Times. “The sub-custodian chain can bury the identity of high-frequency traders in Eastern Europe and elsewhere who raise serious regulatory concerns.”

What it means to broker-dealers, there is about to be some changes in market structure as arguably more than half of the market “participants” are suddenly excluded from constant daily churning activity.   What the outcome of this will be is anyone’s guess, but definitely expect strange things if this is truly a first step towards reverting to some form of normalcy.

The probe will at the very least lead to tougher guidelines. “You can expect something to come out of it,” Mr. Ketchum said.    ”Certainly, there may be enforcement actions if we find serious cases where brokers have failed to even try to exercise their obligations to run checks on the firms before allowing them access.”

Next month, the Securities and Exchange Commission and the Commodity Futures Trading Commission will come out with their own report on the flash crash.

Some weak North American data (see above) raised risk aversion today.  US stocks sharply lower, oil off around a buck.

EUR/USD down at 1.2815 from early 1.2840.  Did try to rally initially after release of poor data but ran into strong hedge fund selling in the 1.2880/00 area.  As US stocks added to their losses, so EUR/USD came lower.  West coast US bank seen notable seller.

Market little wary though of pressing down through 1.2800.  Not really surprising given earlier reports three Asian sovereigns bought below 1.2800 during Asian session.  Stops now seen through 1.2770.  On topside stops seen through 1.2935.  It’s probably safe to say we’re still stuck in a range.

USD/JPY down at 85.35 from early 85.50.  Held up pretty well given raised risk aversion and lower US yields. Talk of buy orders down at 84.80/90 and we stopped at 84.90. Maybe the buy orders included Kampo interest.  Didn’t hear that myself.

Sell stops seen below 84.80.  On flip side, sell orders noted clustered at 85.90/00 and more at 86.30.  Buy stops seen through 86.35.

Swissy benefitted from flight to perceived quality, USD/CHF down at 1.0335 from early 1.0390, EUR/CHF sharply lower at 1.3245 from around 1.3345.

Sterling, aussie dollar and canada’s loonie all not helped by heightened risk aversion.  Cable down at 1.5590 from early 1.5640.  AUD/USD down at .8915 from early .9010 and USD/CAD up at 1.0385 from 1.0260.

US stocks did well, oil up about half a buck. Risk sentiment in ok shape.  Not too much movement in forexland though.  Infact it was pretty boring when all said and done.

EUR/USD up at 1.2880 from early 1.2860.  BIS has been a notable buyer all day and this has provided the single currency with decent underpinning. 

Talk buy orders 1.2820/35, stops below before more buy orders 1.2790/00.  More stops below there.  Buy stops gathered up at 1.2915/20 before sell orders at 1.2930/40.

USD/JPY marginally firmer at 85.50 from early 85.35, garnering some much-needed support from improved risk sentiment and firmer US yields.  Buy orders noted 84.95/85.15, stops through 84.90.  Sell orders seen up at 86.00/20.

Aussie and canadian dollars did ok against the risk-on backdrop.  AUD/USD up at .9065 from early .9020, while USD/CAD is down at 1.0325 from early 1.0380.

Sterling, despite better risk sentiment, has had a fairly poor day. Cable is down at 1.5565 from early 1.5620, while EUR/GBP is up at .8270 from around .8230. 

 I think there is some focus on tomorrows BOE minutes. There is speculation two members of the MPC voted to extend QE. We’ll see soon enough. 

Buy orders noted at 1.5540/60 have so far contained the sell-off, session low 1.5554.

China was seen buying EUR/USD earlier today in Europe, as was the BIS.  Not sure of China levels, but BIS was seen buying as high as 1.2885/90 area on way to session high 1.2915. 

On the flip side, UK clearer notable seller of the pairing, offloading very large amounts (rumours a yard) starting around 1.2890. 

US data today:

12;30 GMT: Building permits for July expected 580k from previous 583k. -0.5% m/m from +1.6%

12:30 GMT: Housing starts for July expected 560k from previous 549k. +2.0% m/m from previous -5.0%

13:15 GMT: Producer price index for July expected +0.2% m/m, +4.2% y/y; ex food & energy +0.1% m/m, +1.3% y/y

13:15 GMT: Capacity utilization for July 74.6 from previous 74.1%

13:15 GMT: Industrial production for July expected +0.5% m/m from previous +0.1%

21:00 GMT: ABC consumer confidence for August.

Busy day, but at the end of it all there’s not a huge amount of change in the majors.

EUR/USD at 1.3190 from early 1.3165.  Inbetween the pairing came under fairly intense pressure as general risk aversion picked up.  Stops tripped through 1.3100 on way to session low 1.3075.  Much talk of buy orders lying in wait at 1.3050/70 and that helped recovery.

We sat just above 1.3100 as FOMC announced the results of its’ deliberations.  News of QE lite undermined the dollar and we got above 1.3200 in double quick time.  China then stepped in and sold above 1.3210 and that really was pretty much that.

Talk of decent sell orders out of Asia lying in wait up at 1.3250.

Cable up at 1.5855 from early 1.5755.  At once stage cable got as low as 1.5712, but talk of decent buy orders at 1.5700/10 lent support.  The pairing will have to survive event risk double whammy tomorrow in form of BOE quarterly inflation report/King press conference and JUne jobs report.

USD/JPY down at 85.30 from early 85.90. In between got as high as 86.24.  BIS sold above 86.20 and then large US automaker sold decent amounts helping send the pairing back under 86.00.

The announcement of QE lite by the Fed hit the pairing as US yields came lower.  We reached session low of 85.19 before marginal recovery.  Defence of 85.00 barrier interest still alive and kicking so it would seem.

USD/CAD rallied early. Started around 1.0330 and got as high as 1.0388.  However a large US custodial was seen very notable seller around the highs and that was that.  Then the same US automaker who sold USD/JPY turned up and clumped USD/CAD and we finish down at 1.0320.  Obviously the Fed’s QE lite weighed on the pairing as well.

The economic analysts said the 2009 damages dwarfed the level recorded for 2008 – 9.9bn yen – and represented more than the total amount of securities litigation for the whole previous decade.

The reason for such increase was because a few particularly big cases were settled, which involved unusually large payouts.  According to Nera, there was little change in the number of cases settled in 2009 compared to 2008.

However, the report emphasizes an underlying trend: the number of securities law cases has been increasing since 2004, when the rules requiring a plaintiff to prove the extent of damages were eased and the powers of the market regulator, such as the Securities and Exchange Surveillance Commission, were increased.

On the plus side, AUD is getting a lift from several factors:

• Generally improved risk appetites
• Growing global demand for grains as Russia experiences major drought
• A freer trading domestic gold market in China

On downside:

• Hopes for RBA rate hikes down the road were dashed by the RBA statement: The current setting of monetary policy is resulting in interest rates to borrowers around their average levels of the past decade. With growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the Board judged this setting of monetary policy to be appropriate.
• Selling of AUD/JPY as the JPY continues its grind higher, hurting Japanese investors who have heavy exposure to the higher yielding currencies.
• Retail sales and building approvals data was soft overnight.

Looks like AUD in particular and commodity currencies in general will relinquish their leadership position and take a backseat to European currencies over the near-term as the market downshifts global growth expectations for the next few quarters. That is not to say the rally is done, just that it will unfold at a slower pace amid a broad dollar downtrend.

AUD/USD has shrugged off its early weakness and extended it bounce to 0.9150 so far, the highest in three months.