FOREX TRADING

USD Lower, Existing Home Sales Rise 10.1%

• USD: Lower, Fed’s Bullard says Fed will maintain stimulus, existing home sales surge 10.1%
• JPY: Higher, Tokyo markets closed for holiday, gains limited by surging equity markets
• EUR: Higher, EU manufacturing and services PMI rise, ECB begins unwinding stimulus
• CHF: Higher, supported by improving risk sentiment, surge in equity markets and record price of gold
• GBP: Higher, supported by improving risk sentiment
• CAD and AUD: AUD & CAD higher, gold at record high, Australia’s auto sales & Canada’s retail sales rise

Overview

The USD starts the week sharply lower as equity markets rally and gold trades at a new record high. The initial catalyst for the surge in the equity markets and gold were linked to dovish comments from the Fed’s Bullard. Bullard called for the Fed to extend its asset purchase plan beyond Q1 2010. Bullard’s comments were seen as dovish and an endorsement of the Feds maintaining stimulus. In addition, the IMF says the global economy has passed the worst of the crisis.

The equity market surge continued after release of much better than expected US existing home sales report. US existing home sales rose to the highest level since February of 2007 reported up 10.1%. EUR traded higher supported by report of improving manufacturing and services PMI data and the start of the ECB’s exit from stimulus. EU services PMI rose to the highest level in two years. Commodity currencies traded sharply higher supported by the surge in gold with the AUD finding additional support from report of strong Australian Auto sales and the CAD supported by report of the rise in retail sales. The rise in existing home sales helped to fuel a surge in US equities and the USD remained on the defensive. Focus turns to Tuesday’s release of revised US Q3 GDP and the FOMC minutes.

Today’s US data:

October existing home sales rose by 10.1% to 6.10mln, a reading of 5.700mln was expected. The inventory of homes for sale fell 3.7%.

Upcoming US data:

FOMC minutes for the October meeting are due for release on the 24th. On November 24th Q3 preliminary GDP will be released expected at 3.3% compared to 3.5% in the advanced report. September Case Shiller house price index and November consumer confidence will also be released on November 24th. The Case Shiller index is expected at -9.9 compared to -11.3 last month and consumer confidence is expected to improve to 49 from 47.7 in October. On November 25th initial jobless claims for week ending 11/21 will be released expected at 501k compared to 505k last month along with personal income and personal consumption expected at 0.1% and 0.4% respectively. November final University of Michigan sentiment and October new home sales will be released on November 25th as well. Michigan consumer sentiment is expected unchanged at 66 and new home sales are expected at 410k compared to 401k a last month.

JPY

Japanese markets were closed for holiday Monday. JPY edged higher supported by broad USD weakness against the majors. JPY gains were limited by improving risk appetite as equity markets and the price of gold surge. The rally in the equity markets and gold helped to fuel demand for higher yielding assets and JPY traded lower in cross trade. AUD/JPY traded higher with AUD supported by a record rise in the price of gold in strong Australian auto sales. EUR/JPY traded higher supported by report of improving EU manufacturing and services PMI and indications that the ECB is beginning its exit strategy from unconventional policy measures. The trade will continue to monitor the growing rift between the BOJ and the MOF over the outlook for the Japanese economy and BOJ monetary policy. Last week, Japan reported that GDP rose at its fastest pace in over two years, the BOJ elected to hold monetary policy steady and upgraded its outlook for the Japanese economy. The BOJ is beginning to exit from its bond support plan and the MOF and Japanese government officials are pressuring the BOJ to maintain accommodative policy to help boost growth. Last week the Japanese government said that the Japanese economy is back in deflation. Deflation is a threat to the economic recovery in Japan and this is one of the main reasons that the Japanese government is keeping pressure on the BOJ to continue to provide liquidity. The BOJ monthly report will be released on Tuesday and the minutes for the BOJ policy meeting will be released on Wednesday. The trade will be looking at the monthly report and the BOJ minutes for clues to BOJ policy outlook and a time frame for BOJ’s exit strategy. Friday, Japan will release its CPI report. The CPI report will be important to the rift between the BOJ and the government over the economic outlook and inflation. The CPI report is expected to confirm that deflationary pressures continue in Japan. JPY remains range bound and is approaching the high end of its recent range. The Trade will be watching key support near 88.00 for USD/JPY. A break of this level could signal a broader rally for the JPY.

This week’s Japanese economic calendar includes the November 25th release of the October trade balance expected at 165bln compared to 521bln last month. On November 27th, October CPI will be released expected at -0.4% compared to flat last month. On November 27th October household spending will be released expected at -0.5% compared to 0.1% along with October unemployment expected unchanged at 5.3% and October retail sales expected at -0.7% compared to 0.9% last month.

Key technical levels to watch in USD/JPY include support at 88.01 the October 7th low with resistance at 90.40 the November 13th high.

EUR

EUR traded sharply higher supported by report of improving EU manufacturing and services PMI and in reaction to indications that the ECB has started a gradual exit from its unconventional policy measures. EU November manufacturing PMI rose to 51 from 50.7 last month and EU services PMI rose to a two-year high of 53.ECB President Trichet warned EU banks to not become addicted to easy funding by the central bank because the extraordinary ECB policy measures will be wound down. Friday, the ECB said it would tighten requirements for banks using asset backed securities and security in its lending operations. The next ECB policy meeting will be held during the first week of December. The ECB is expected to announce details of its exit strategy. The EUR was also supported by comments from the Fed’s Bullard. The Fed’s Bullard called for the Fed to extend its MBS asset purchase plan beyond Q1 2010. As the ECB begins its exit strategy and the Fed’s Bullard confirms that the Fed will continue its mortgage asset purchase program ECB and Fed policy are about to diverge. The divergence in ECB and Fed policy outlook is a positive factor for the EUR. The tricky question is whether the gradual withdrawal of stimulus by the ECB impacts the outlook for the EU and global recovery. Focus turns to Tuesday’s release of German IFO and EU industrial orders.

On November 24th German November IFO index will be released expected at 92.1 compared to 91.9 last month. Also on November 24th, EU September industrial orders will be released expected at 0.7% compared to 1% last month. On November 25th German December GFK Index will be released expected unchanged at 4%. On November 26th,EU October M3 will be released expected 2% compared to1.8% last month along with German November CPI expected unchanged at 0.1%.

The technical outlook for the EUR is positive as the EUR rallies back to 1.5000. Expect EUR support at 1.4835 the November 23rd low with resistance at 1.5065 the October 26th high.

CHF

CHF traded higher supported by improving risk sentiment as the Fed’s Bullard signals that the Fed may expand its asset purchases beyond the planned expiration date at the end of Q1 2010. Bullard’s comments fueled demand for equities and sent the price of gold to a new record high as his statement confirmed that the Fed is not considering a withdrawal of stimulus anytime soon. Last week, Switzerland reported mixed economic data with retail sales falling for the second month is in a row reported down 1.6% and the October trade surplus improving as exports rose slightly. This week’s Swiss economic calendar includes the November 24th release of UBS consumer indicator expected at 0.651 compared to 0.632 last month along with Q3 payrolls expected at 3.96 compared to 3.94 last month. On November 27th November KOF leading indicator will be released expected at 1.49 compared to 1.45 last month. The OECD expects the Swiss economy to grow by 0.9% percent 2010 1.9% in 2011. The SNB’s Roth warned that it will take time for the Swiss economy to emerge form recession .Expect USD/CHF support at 1.0030 the October 23rd low with resistance at 1.0338 to November 3rd high.

GBP

GBP traded higher supported by firmer equity market trade and improving risk sentiment. GBP continues to underperform with gains limited by uncertainty about the outlook for the BOE’s asset purchase plan. The minutes for the November BOE policy meeting released last week indicated a split over whether to expand or maintain the current level of BOE asset purchases. BOE board member Myles called for a £40bln expansion in asset purchases to help ensure UK economic recovery. BOE board member Dale warned about the risk of expanding purchases and how it may be costly to undo the impact of the additional stimulus. The OECD says that the BOE should hold rates at record low level until 2011 to ensure a sustainable recovery. As noted above in the discussion about the divergence between ECB monetary policy and the Fed there is also emerging divergence between ECB policy and the BOE as the BOE may consider another expansion of its asset purchase plan as ECB begins a gradual exit. GBP was also pressured last week by concern about rising UK debt and risks to the UK debt rating. The UK public sector borrowing rose to £11.4bln in October, a rise to 6.1bln was expected. Earlier in the quarter ratings agencies warned that the UK AAA debt rating may be at risk if debt continues to rise. UK budget data may revive fears about the UK government debt rating. Officials at the Confederation of British Industries (CBI) are calling on the UK government take aggressive steps to reduce the budget deficit. The CBI warns that if the UK government does not take action to reduce its debt, the UK debt rating will be at risk of a downgrade and the BOE may not be able to maintain yields at record low levels. Focus turns to Wednesday’s release of revised UK Q3 GDP. The GDP is expected to confirm the UK economy is continuing to contract albeit at a slower rate.

This week’s UK economic calendar includes the November 25th release of revised Q3 GDP expected at -0.4%.On November 26th November CBI distributive trade will be released on November 26th expected at 5% compared to 8% last month.

The technical outlook for GBP is mixed as GBP trades back above 1.6600. Expect near-term support at 1.6400 the November 3rd low with resistance at 1.6745 for November 19th high.

CAD

CAD traded sharply higher supported by a record rise in the price of gold, higher crude prices and firmer equity market trade as risk is back on. A statement from the IMF that the worst of the global recession has passed and confirmation from the Feds Bullard that the Fed plans to maintain monetary stimulus fueled strong gains in equity and commodity markets. CAD was also the supported by report that Canada’s September retail sales rose 1%. A 0.5% rise was expected for the retail sales report. The rise in Canada’s retail sales reflects strong auto sales. Last week Canada reported that core inflation rose for the first time in five months and that investment flows to Canada rose sharply. Canada’s Finance Minister Flaherty however said that the Canadian economy has not yet recovered and Canada does not plan additional stimulus in the next budget. Flaherty went on to say that the unemployment rate in Canada appears to have stabilized. BOC officials also said last that CAD strength could cause further setbacks in Canadian recovery. CAD price direction remains closely correlated to the price of commodities and risk sentiment.

On November 27th Q3 current account will be released expected at 9.2bln compared to 11.2bln last month.

The technical outlook for CAD is mixed to positive as USD/CAD trades below 1.0600. Look for near-term support at 1.0415 the November 12th low with resistance at 1.0735 the November 20th high.

AUD

AUD traded sharply higher supported by a surge in global equity markets, record high in the price of gold and report of strong Australian auto sales. A statement from the IMF that the worst of the global recession has passed and the comment from the Fed’s Bullard that he favors extending the Fed’s purchase of mortgage-backed securities beyond Q1 2010 fueled gains in equities and commodities and sparked a fresh round of risk appetite. Australia’s October new car sales rose by 3.7%. The rise in Australia’s new car sales confirms improving domestic demand in Australia. AUD traded lower most of last week pressured by deleveraging sparked by weaker equity markets and lower commodity prices and uncertainty about RBA policy outlook. The RBA policy minutes released last Tuesday appeared to have a less hawkish bias. The RBA policy minutes suggest that the pace of tightening is open to question. The direction of equity markets and commodities remain key to the AUD. Focus turns to Thursday’s release of Australia’s CAPEX spending.

On November 26th Q2 Capex will be released expected at 4% compared to 3.3% last month.

The technical outlook for the AUD is positive as the AUD drops rallies above 9200. Expect AUD support at 9110 the November 22nd low with resistance at 9405 the November 16th high.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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