FOREX TRADING

USD Mixed, JPY Lower, BOJ Won’t Tolerate Deflation

• USD: Mixed, overseas loses pared by news of Iran/Iraq tension
• JPY: Lower, BOJ won’t tolerate deflation, five-year bond yields hit a four-year low
• EUR: Mixed, German IFO hits 17 month high, trade balance swung to surplus, EUR/CHF declines
• GBP: Higher, mortgage approvals rise, BOE says banking system more stable, PSNCR at record high
• CAD and AUD: AUD & CAD higher, Australia’s business sales rise, Carney says low rate pledge conditional

Overview

USD drifted lower Friday pressured by a slight uptick in risk appetite as US equity markets edged higher. The EUR was supported by report that the German IFO business sentiment hit its highest level in 17 months and the EU trade deficit swung to surplus in October. GBP edged higher in reaction to report that UK mortgage approvals rose for the third month in a row and the BOE says that the UK banking system is more stable. Commodity currencies traded higher supported by improving risk sentiment and rising crude prices. AUD was supported by report of improvement in Australian business sales. CAD traded higher in reaction to a statement from the BOE’s Carney that the BOC has the flexibility to shorten the time frame for its commitment to keep rates low until mid 2010. Carney appeared to be reacting to Wednesday’s report of higher than expected Canadian CPI. JPY traded lower in reaction to a pledge from the BOJ that the central bank would not tolerate deflation. This pledge encourages speculation that the BOJ may ease monetary policy early next year. USD downside was limited by report of tensions between Iran and Iraq as Iraqi troops were reported to have crossed over the border into Iran and temporarily occupied one of Iraq’s oil fields. The Iraqi deputy minister denied the report. EUR/CHF dropped below 1.50 with CHF supported by rumors of a coup in Pakistan. The drop in EUR/CHF may encourage the SNB to intervene as the SNB has defended the 1.5100 level in the past. The Pakistan government denied the coup rumor.

USD traded at a three-month high Thursday supported by improving outlook for the US economy and speculation that the Fed will withdraw stimulus earlier than expected. US LEI and manufacturing data suggests that the US recovery is picking up pace but jobs growth remains elusive. USD is also supported by concern about sovereign debt outlook in Europe. Thursday Greece’s sovereign debt rating was downgraded.

Today’s US data:

No major data was released in today’s trade.

Upcoming US data:

Next week’s US economic calendar includes the December 22nd release of final Q3 GDP expected at 2.7%. Existing home sales for November will also be released on December 22nd expected at 6300k compared to 6100k last month. On December 23rd personal income and consumption for November will be released along with November PCE deflator, final December University of Michigan sentiment and November new home sales. Personal income and consumption are expected to rise by 0.4%. The PCE deflator is expected unchanged at 1.4%. Michigan sentiment is expected at 74 compared to 73.4 last month. Home sales are expected at 440k compared to 430k in October. On December 24th initial jobless claims for week ending 12/19 will be released expected at 476k compared to 480k last week along with November durable goods expected to rise by 0.3% compared to -0.6% last month.

JPY

JPY traded lower pressured by a pledge from the BOJ that the central bank will not tolerate deflation. The BOJ concluded a two-day policy meeting Friday and elected to hold rate policy unchanged. The BOJ said that it would not tolerate CPI at or below zero. The BOJ’s focus on combating deflation encouraged speculation that the BOJ may be forced to ease monetary policy in early 2010. BOJ ease speculation sent Japan’s five-year bond yields to a four-year low. Earlier in the month the BOJ elected to ease monetary policy and provide additional funding to try to weaken the JPY and combat deflation. JPY remains vulnerable to BOJ ease speculation and concern about Japans debt outlook. Japan says that its 2010/11 budget will be at ¥92trln. MOF officials said that Japanese government needs to cut at least 3trln from the budget to keep bond issuance below ¥44trln. The ratings agency Fitch said that Japan’s debt rating may be downgraded if bond issuance rises above this level.

Next week’s Japanese calendar includes the December 21st release of November trade balance expected at ¥395bln compared to ¥807bln last month along with October all industry activity expected to fall by 0.1% compared to -0.6% last month. On December 25th November CPI will be released expected at -0.2% compared to -0.4% last month. November household spending, employment housing starts and construction orders will also be released on December 25th. Household spending is expected to fall by 0.5% compared to 0.7 last month, unemployment is expected to rise to 5.2% from 5.1% last month, housing starts are expected to fall by 4.5% compared to 9% last month and construction orders are expected to fall by 28.9% compared to -40.1% last month.

Key technical levels to watch in USD/JPY include support at 89.35 the December 16th low with resistance at 90.86 the November 6th high.

EUR

EUR rebounded from a three month low supported by report of improving German business sentiment and better than expected EU export sales. German December IFO business climate improved to 94.7 compared to 93.9 last month with current conditions improving to 90.5 compared to 89.1 last month. EU October trade balance swung to surplus of 8.8bln as exports declined less than expected. These reports suggest that the EU economy is recovering. The improvement in today’s economic data from the EU is unlikely to change the outlook for ECB policy as the reports are overshadowed by concerns about sovereign debt risks in Europe. EUR traded at a three-month low versus the USD Thursday pressured by S&P downgrade of Greece’s debt rating and speculation that upbeat assessment of US economic outlook by the Fed sets the stage for the beginning of the Fed’s tightening cycle. Uncertainty about sovereign debt risks in the EU generates concern about the stability of European monetary Union and the credibility of the EUR. The EUR looks much less attractive as an alternative to USD as a reserve currency in light of sovereign debt worries in the EU. There was some interesting price activity in EUR/CHF cross which traded below 150 with the CHF supported by safe haven demand sparked by rumors of a coup in Pakistan and report that Iranian troops had crossed over the border into Iraq. The SNB has defended the 1.5100 level in EUR/CHF and today’s price action in the cross spark SNB intervention. The Pakistan coup rumor has been denied. More information is awaited on the Iranian news.

Next week’s EU economic calendar includes the December 22nd release of German January GFK index expected four compared to 3.7 last month. December 23rd EU October industrial orders will be released expected it 1% compared to 1.5% last month.

The technical outlook for the EUR is negative as the EUR breaks trend line support. Expect EUR support at 1.4304 the December 17th low with resistance at 14535 to December 17th high.

GBP

GBP edged higher supported by report that UK mortgage approvals rose for the third month in a row and in reaction to the release of the BOE financial stability report. The rise in mortgage approvals suggests that the UK housing market has stabilized. GBP was pressured in Thursday trade by report of weaker than expected UK retail sales. The drop in UK retail sales offsets the improvement in the UK housing sector and the outlook for the UK recovery remains uncertain. The BOE Financial Stability report said that the UK banking system is more stable but warned that challenges remain. There was limited reaction to report that the UK public sector borrowing for November rose to a new record high. November sector borrowing rose to 14.67bln which was much better than the anticipated rise of 17.5bln. GBP remains vulnerable to uncertainty about BOE policy outlook and UK budget outlook. 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. The BOE’s Barker said the BOE must be cautious of how much farther to expand its bond purchase plan. Today’s rise to new record high for the UK net public-sector borrowing will likely continue to weigh on the outlook for GBP.

Next week UK economic calendar includes the December 22nd release of final Q3 GDP expected at-0.3% along with the Q3 current-account expected at -11.80bln.

The technical outlook for GBP is negative as GBP trades below 1.6100. Expect near-term support at 1.6020 with resistance at 1.6340 the December 17th high.

CAD

CAD traded higher supported by a rise in crude oil prices, a slight improvement in risk appetite as US equity markets rally and in reaction to comments from the BOC Governor Carney. The BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 1010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Wednesday Canada reported higher than expected CPI. BOC pledge to maintain low yields is dependent on whether inflation remains in check. Canada’s November CPI rose by 0.5% m/m and 1% y/y with core inflation at 0.4% m/m and 1.5% y/y. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount. Canada’s wholesale sales for October came in below expectation reported up 0.3%, a 0.6% rise was expected. This report suggests that at the wholesale level Canadian price inflation remains in check. Carney went on to say that he doesn’t expect a double dip global recession. Yield differential is emerging as the key short-term driving factor for Forex trade and the CAD.

Next weeks Canadian economic calendar includes the December 23rd release of October GDP expected at 0.5%.

The technical outlook for CAD is negative as USD/CAD consolidates trades above 1.0700. Look for near-term support at 1.0552 the December 15th low with resistance at 1.0780 the November 9th high and 1.0855 November 3rd high.

AUD

AUD rebounded from Thursday’s sharp drop supported by report of improving business sales. Australia’s November business sales rose by 0.6%. AUD traded as low as 8910 and in overseas trade pressured by rumor of a coup in Pakistan. This rumor sparked selling of higher risk currencies. The AUD rebounded after the Pakistan government denied the rumor. AUD traded sharply lower Thursday pressured by weaker global equity market trade and speculation that US and Australian yield gap is set to narrow as the Fed lays the foundation for future rate hikes and the RBA moves towards steady policy. Although the RBA was the first major industrialized central bank to hike interest rates this year recent statements from the RBA suggest that further rate hikes are less certain. Wednesday the RBA’s deputy governor Battelino said that Australian interest rates are back in the normal range and he sees less need for a rate hike if loan rates keep rising. His comments follow Tuesday’s release of the RBA policy minutes for December. The RBA policy minutes were seen as less hawkish and dampen speculation that the RBA will hike rates aggressively at the start of 2010. The minutes for the December RBA policy meeting said that arguments for a rate hike are finely balanced and that the current rate structure is less accommodative. AUD remains vulnerable to diminished RBA rate hike speculation and speculation that Fed is moving closer to the end of its ease cycle.

Next week’s Australian economic calendar includes the December 21st release of November new car sales expected 4% compared to 3.7% last month.

The technical outlook for the AUD is negative as the AUD drops below above 9100. Expect AUD support at 8755 the October 6th low with resistance at 9010 the December 17th 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.

Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.