FOREX TRADING

USD Lower as Stocks Rise, Risk is Back On

• USD: Lower, pressured by improving risk sentiment as Abu Dhabi comes to the rescue of Dubai debt
• JPY: Higher, manufacturing sentiment improves, CAPEX spending falls at a record pace
• EUR: Higher, Q3 employment and industrial production decline
• CHF: Higher, producer/import prices improved to flat in November
• GBP: Lower, Rightmove house prices post an unexpected drop
• CAD and AUD: AUD higher & CAD lower, commodity prices mixed, Canada’s capacity use dips

Overview

USD traded mixed to lower Monday pressured by improving risk sentiment as equity markets rally in reaction to news that Abu Dhabi has pledged 10bln rescue plan for Dubai debt. JPY outperformed despite report that the improvement in the pace of manufacturing sentiment slowed and CAPEX spending declined at a record pace. JPY was supported by report that the Japanese coalition government agreed to keep bond issuance low ¥44trln. The agreement to keep Japan’s bond issuance below this level will reduce the risk of a downgrade of Japan’s debt rating. European currencies were mixed with GBP pressured by report of an unexpected decline in UK house prices and EUR gains limited by report of a drop in industrial production and continuing uncertainty about the outlook for Greece’s sovereign debt. Commodity currencies were mixed despite the improvement in risk sentiment as crude prices trade lower. USD ended last week trading at one month high supported by improvement in US economic data including better than expected US employment and stronger than expected retail sales. Today’s FX trade seems to be re-linking price direction to risk sentiment with the USD trading higher before the Abu Dhabi news then turning lower in reaction to the Abu Dhabi rescue plan. There was no major US economic data released in today’s trade. Focus turns to Wednesday’s conclusion of a two day FOMC meeting.

Continuing USD gains will hinge on whether the Fed announces details of its exit strategy and drops language in its policy statement pledging to maintain low yields for extended period.

Today’s US data:

No major US economic data was released in today’s trade.

Upcoming US data:

This week’s US economic calendar includes the December 15th release of December Empire Manufacturing Index expected 24.00 compared to 23.51 last month. November PPI, industrial production capacity utilization and an NAHB index will also be released on December 15th. PPI is expected to rise by 0.7% compared to 3% last month. Industrial production is expected at 0.3% compared to 0.1% last month and capacity utilization is expected at 71 compared to 70.7 last month. NAHB is expected at 18 compared to 17 last month. On December 16th November CPI, housing starts and building permits and Q3 current account will be released. CPI is expected unchanged at 0.3%. Housing starts are expected at 560k compared to 529k last month with building permits at 570k compared to 552k last month. The current account is expected at -96bln compared to -98.8bln last month. On December 17th initial jobless claims for week ending 12/12 will be released expected at 470k compared to 474k last month. November leading indicators and December Philly Fed will also be released on December 17th. Leading indicators are expected to rise by 0.6% compared to 0.3% last month and the Philly Fed is expected at 16.5 compared to 16.7 last month.

JPY

JPY traded higher supported by report that Japan’s coalition government has agreed to keep bond issuance below ¥44trln. The Japanese budget is due for release Tuesday. Last week Fitch ratings agency said that Japan’s debt rating could be downgraded if Japan’s bond issuance exceeded ¥44trln. Japan’s Tankan manufacturing survey for December posted improvement but at a slower pace and October industrial output rose by 0.5%. Japan’s December Tankan was reported at -24, the trade had expected a reading of -27 this compares with last quarter’s reading of -33 in September. Japan’s Q3 CAPEX spending declined by a record 28.2%. The decline in CAPEX spending presents significant risk to Japan’s economic outlook. There’s an interesting article on Bloomberg which says that the JPY is going to replace the USD is the top funding currency because Japanese yields have fallen below the US for the first time in four months. Last week, the JPY strengthened despite improving risk appetite and firmer equity market trade. Today’s JPY price action builds on last week’s breaking of the link between risk appetite and the direction of the JPY. This week’s key event risk is Thursday’s BOJ policy meeting. Earlier in the month the BOJ elected to ease monetary policy and provide additional funding to try to weaken the JPY and combat deflation. The trade expects the BOJ to keep monetary policy unchanged and will be looking for any new efforts by the BOJ to try to weaken the JPY.

On December 17th October tertiary activity will be released expected at -0.3% compared to -0.5% last month. On December 18th revised October leading indicators will be released expected at 2.5 compared to 4.2 last month.

Key technical levels to watch in USD/JPY include support at 88.20 the December 11th low and 87.35 the December 9th low with resistance at 90.40 the December 7th high.

EUR

EUR traded mixed initially supported by improving the sentiment sparked by news that Abu Dhabi plans to bail out Dubai World debt. EUR gains were limited by report of mixed EU economic data and continuing concern about the Greek budget crisis. EU Q3 employment declined by 0.5% and October industrial production dropped by 0.6%. EU’s Alumnia said that Greece must solve there debt problems by themselves. His comments generate concern about what level of support the EU will take in regard to supporting Greek debt. The Sovereign debt rating of Greece was cut last Tuesday. Over the past few weeks there has emerged a breakdown in the strong correlation between risk sentiment and the direction of the USD. Stronger than expected US economic data and speculation of possible earlier Fed withdrawal stimulus has sparked a rebound in the USD. This week’s FOMC meeting which concludes Wednesday will be key to whether the USD continues to benefit from Fed rate hike speculation. Yield differential appears to be emerging as a short-term driver for EUR traded with US data fueling speculation that the Fed may withdraw stimulus before the ECB. There appears to be a short-term change in sentiment towards the EUR. CFTC commitment of traders released for last week’s trade show that the spec trade was net short the EUR for the first time since April.

On December 15th Q3 labor costs and wages will be released along with the German Zew index for December. Labor costs are expected at 3.8% and wages are expected at 3.9% the CEW index is expected at 51.6 compared to 51.1 last month. On December 16th November EU manufacturing and services PMI along with HICP will be released. Manufacturing PMI is expected at 53 compared to 52.4 last month in the services PMI is expected to 53.3 compared to three last month. HICP is expected at 0.3% compared to 0.4% last month.

The technical outlook for the EUR is mixed to negative as the EUR breaks trend line support. Expect EUR support at 1.4573 the September 28th low with resistance at its 1.4776 the December 11th high.

CHF

CHF edged higher supported by modest gains in cross trade to the EUR and in reaction to report that Swiss November important producer prices were flat. The November import and producer prices compared to a decline of 0.4% in October. EUR /CHF drifted lower with the EUR pressured by ongoing concern about EU exposure to the Greek debt crisis and report of a decline in EU October industrial production. Last week the SNB elected to hold monetary policy unchanged and end its corporate bond purchase plan. The SNB also reaffirmed its plans to stop CHF appreciation versus the EUR. Tuesday SECO will release its December economic forecast and industrial production will be released. Industrial production is expected to fall 0.1%. On December 17th December Zew index is due for release expected at 57 compared to 56.4 last month. On December 18th December KOF will be released. Expect USD/CHF support at 1.0220 the November 9th low with resistance at 1.0490 the September 9th high.

GBP

GBP traded lower pressured by report of an unexpected decline in UK house prices. UK December Rightmove house prices declined by 2.2%. The decline in UK house prices generates concern about the strength of the UK recovery and confirms that UK inflation remains in check. GBP showed little reaction to a statement from BOE officials that the UK job market has survived the recession better than forecast and that low UK yields are helping consumers deal with debt. Last week the BOE left interest rate policy unchanged and said it will maintain its current level of asset purchases. The BOE left interest rates unchanged at a record low 0.5% and the level of asset purchases at £200bln.The BOE is expected to wait until the release of the February inflation report before it decides to make any adjustments in monetary policy or in the size of its asset purchase plan. Last week the GBP was pressured by warnings about the risk to UK debt rating. Investors will continue to monitor any new news in regard to the UK budget and debt rating. Focus turns to Tuesday’s release of UK CPI. According to the BOE policy statement monetary policy decisions will be tied to inflation outlook. Higher UK CPI could increase pressure on the BOE to begin to consider an exit plan from extraordinary monetary stimulus.

This week’s UK economic calendar includes the December 15th release of November CPI expected at 0.4% compared to 0.2% last month. On December 16th November claimant count average earnings and unemployment will be released. Claimant count is expected at 10k compared to 12.9k last month with average earnings unchanged at 1.2% in the unemployment rate at 7.7 compared to 7.8 last month. On December 17th November retail sales would be released expected at 0.8% compared to 0.4% last month.

The technical outlook for GBP is negative as GBP trades below 1.6300. Expect near-term support at 1.6120 with resistance at 1.6516 the December 7th high.

CAD

CAD traded lower despite improving risk appetite and higher equity market trade. As noted above, global equity markets firmed in reaction to report that Abu Dhabi pledged to bail out Dubai debt. The bail out appears to have reduced fears of contagion impact from the Dubai world debt crisis. CAD was pressured by weaker crude oil prices and speculation that recent improvement in US economic data will encourage the Fed to consider an earlier withdrawal stimulus. Canada’s Q3 capacity utilization came in at 67.5, compared to 67.7 last quarter. Last week the BOC elected to hold monetary policy unchanged and reaffirmed commitment to keep interest rates low through mid-2010 as long as inflation remains in check. Canada’s economic data was mixed with report of better than expected trade data as exports rise and lower import prices as CAD keeps inflation in check. The BOC appeared to tone down its rhetoric expressing concern about the impact of the strength of the CAD on Canada’s economic recovery. CAD price direction appears to be re-linking with yield outlook. Yield outlook is moving in favor of the USD as the trade looks for an earlier than expected withdrawal of stimulus by the Fed.

This week’s Canadian economic calendar includes the December 15th release of leading indicators expected at 0.5% compared to 0.7% and Q3 labor production release expected at -0.4% compared to flat last quarter. On December 16th October manufacturing shipments will be released expected at 1% compared to 1.4% last month. On December 17th November CPI will be released expected at 0.4% compared to -0.1% last month. Net foreign investment for October will released release on the 17th expected at 5bln compared to 13.6bln last month.

The technical outlook for CAD is mixed as USD/CAD trades below 1.0600. Look for near-term support at 1.0406 the Decmber1st low with resistance at 1.0780 the November 9th high.

AUD

AUD traded higher supported by improving risk sentiment as equity markets rally. AUD gains were limited as commodity prices trade mixed and investors look for the Fed to begin an earlier withdrawal stimulus. AUD has been one of the best performing currencies in 2009 supported by RBA rate hikes and improving growth outlook in Australia and Asia. There’s an article on MarketWatch that suggests that the AUD may weaken in 2010 even if the global economy does well because the USD may benefit from the start of a rate hike cycle in the US. US yield outlook appears to be emerging as key market driver for Forex trade. Last week Australia reported much better than expected jobs growth the report sparked speculation that RBA may hike rates 50 bps in February. Friday’s release of better than expected US retail sales and stronger consumer confidence generates speculation that of the more difficult for the Fed to maintain yields at low-level for extended period. This week’s main focus will be Wednesday’s conclusion of the two-day FOMC policy meeting. The trade will be looking to see whether the Fed signals the beginning of an exit strategy from monetary stimulus.

This week’s Australian economic calendar includes December 15th release of Q3 dwelling unit commencements expected at -1% compared to -4% last month. On December 16th Q3 GDP will be released expected at 0.4% compared to 0.6% last quarter.

The technical outlook for the AUD is positive as the AUD holds above 9100. Expect AUD support at 9015 the December 9th low with resistance at 9295 the December 4th 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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