FOREX TRADING

USD Higher on Surge in Chicago PMI

• USD: Higher, stock rally stalls, optimism about US recovery fuels debate over timing of Fed tightening
• JPY: Lower, fiscal worries and widening yield gap pressure JPY, fear JAL will file for bankruptcy
• EUR: Lower, EU M3 unexpectedly declined in November, Madrid downgrade by S&P
• GBP: Higher, concern about UK debt, sharp rebound in cross to EUR and JPY
• CAD and AUD: AUD & CAD lower, tracking the decline in the price of gold and equities

Overview

USD traded higher Wednesday supported by fiscal worries in Japan and the UK and optimism about the US recovery. S&P warns that Japan’s sovereign debt rating may be cut if Japan does not take action to reduce its debt. The Telegraph reports that UK debt is worse than Italy’s. Weaker equity market trade and a Moody’s downgrade of Abu Dhabi Commercial Bank rating sparked safe haven demand for the USD. JPY was also pressured by report and Japan Airlines may be on the verge of filing for bankruptcy. EUR was pressured by report of an unexpected decline in EU M3. The decline in M3 generates concern about economic recovery in the EU. GBP experienced a sharp rebound in cross trade to the EUR in reaction to report that S&P has downgraded too regions in Spain. The downgrade raises the risk of a downgrade of Spain’s sovereign debt rating. Commodity currencies were pressured by weaker equity market trade and decline to one week low the price of gold. USD is supported by optimism about the US recovery and speculation that improving outlook for the economy will cause the Fed to begin to withdraw stimulus. US economic data was positive with Chicago manufacturing PMI rising more than expected. The Chicago PMI rise fuels optimism about the recovery in the US manufacturing sector. The direction of equity markets and sovereign debt risks are the main drivers for this week’s FX trade.

Today’s US data:

Chicago December PMI came in at 60, a reading of 55 was expected.

Upcoming US data:

On December 31st initial claims for week ending 12/26 will be released expected to rise by 5k to 457k.

JPY

JPY traded at a three month low versus the USD pressured by worries about Japan’s sovereign debt rating and widening of US/Japan bond yield gap. S&P warns that Japan’s sovereign debt rating may be cut if steps aren’t taken to cut Japan’s rising debt. Monday, Japan announced a record ¥92.3trln budget for fiscal 2010/11. For the first time since World War II Japan’s bond issuance will exceed tax revenue. US/Japan ten year bond yield spread is at its widest level in two years. Improving outlook for US recovery and uncertainty about the outlook for Japan’s economy pressured the JPY as the Fed is expected to start to tighten monetary policy sometime in 2010 and the BOJ is expected to maintain current monetary policy. The divergence in the outlook for Fed and BOJ policy is a negative for the JPY. There was little reaction to report that the Japanese government has announced a long-term strategy aimed at promoting GDP growth average 2% for the next decade. Japan’s Finance Minister Fujii said he expects the Japanese economy to grow next year and downplayed the risk of double dip recession in Japan. His comments failed to boost interest in the JPY. Japanese markets will be closed Thursday.

Key technical levels to watch in USD/JPY include support at 91.10 the December 24th low with resistance at 92.55 the September 21st high and 93.30 the September 7th high.

EUR

EUR traded lower pressured by report of an unexpected decline in EU November M3, weaker equity market trade and S&P downgrade of Madrid’s debt rating. EU November M3 declined by 0.2%, a 0.3% rise was expected. Public-sector loans in the EU declined for the third consecutive month. The drop in public-sector loans is a threat to the EU economic recovery. Equity markets were pressured by the reemergence of concern about sovereign debt risks in the UK and Japan. The decline in equity markets sparked safe haven demand for the USD as risk appetite falls. There was little reaction to the release of the Swiss KOF index for December which posted an improvement to 1.68 from 1.62 last month. EUR/CHF traded below 1.4900 but there was no indication of SNB intervention to try and limit CHF gains. EUR traded to the day’s lows pressured by a wave of liquidation in the EUR/GBP cross sparked by S&P downgrade of the Aragon region in Spain.

The technical outlook for the EUR is mixed to negative as the EUR fails to holds above 1.4400. Expect EUR support at 1.4218 the December 22nd low with resistance at 1.4503 the December 15th high.

GBP

GBP opened lower pressured by concern about the outlook for UK debt and risk of possible downgrade of the UK sovereign debt rating. The Telegraph reports that UK debt position is riskier than Italy’s. Rating agencies have warned that the UK does not take credible action to reduce its deficit that the UK AAA sovereign debt rating could be cut. Moody’s says that the UK must show that it will take action to bring down its deficit to avoid a threat to its credit rating. We noted in the special report yesterday that he GBP is vulnerable to the concern about the UK debt outlook and election uncertainty. Last night UK PM Brown pledged to reduce the deficit at a reasonable pace without choking off the recovery. Brown went on to say that the recovery remains fragile. His comments failed to instill confidence in the UK fiscal outlook or the GBP. The UK will hold a general election sometime after March of 2010 and before June 3rd. There is growing concern that the UK election may result in a hung parliament with no political party gaining in the UK Parliament may make it difficult for the UK to take action to reduce its debt. Tuesday a group of economists criticized the UK government’s irresponsible failure to come up with a convincing plan to reduce the UK budget deficit. If the UK government fails to take credible action to reduce the budget deficit the UK is at risk of losing its AAA sovereign debt rating. UK budget outlook will be a key campaign issue and election uncertainty may add selling pressure to the GBP. GBP staged a sharp rebound in cross to the EUR sparked by S&P downgrade of Madrid’s debt. The downgrade shifts focus from UK debt worries to fiscal troubles facing the EU. Sterling traded higher versus the USD supported by cross gains to EUR and JPY.

This week’s UK economic calendar includes the December 31st release of December Nationwide house price index expected at 0.7% compared to 0.5% last month. November consumer credit and mortgage applications will also be released on December 31st. Consumer credit is expected at -0.45bln compared to -0.579bln last month and mortgage applications are expected at 58k compared to 57.3k last month.

The technical outlook for GBP is mixed as GBP rallies above 1.6000. Expect near-term support at 1.5708 the October 13th low with resistance at 1.6070 the December 29th high and 1.6164 the December 21st high.

CAD

CAD traded lower pressured by weaker equity market trade and a decline in the price of gold. The decline in equity markets dampens demand for growth based currencies. Tuesday the CAD traded at its highest level since October supported by firmer equity market trade and improving risk sentiment. Today’s price action reflects concern about credit risks as Moody’s downgrades of Abu Dhabi Commercial Bank and fiscal worries re-emerge for the UK and Japan. As we approach year-end investors are debating whether the rally in global equity markets will continue into 2010 and if optimism about the US and global recovery is justified. CAD has outperformed with support from improving growth outlook in North America and less dovish BOC policy bias.  At the BOC policy meeting in December the BOC reaffirmed its pledge to leave interest rates at record lows through June 2010 as long as inflation remains in check. Last week BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 2010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount.

No major Canadian economic data is due for release this week.

The technical outlook for CAD is mixed as USD/CAD traded above 1.0500. Look for near-term support at 1.0267 the October 20th low with resistance at 1.0580 the December 23rd high.

AUD

AUD traded lower tracking weaker equity markets and the decline in commodity prices. AUD price direction is closely correlated to the outlook for the global recovery and risk sentiment. Today’s decline in equity markets contributes to a decline in risk appetite and sparked liquidation selling pressure in AUD. Tuesday the AUD traded sharply higher supported by firmer equity market trade and rising copper prices. Trading conditions remain extremely thin as we approach year-end. AUD had been experiencing significant selling pressure sparked by diminished RBA rate hike speculation and concern that recent RBA rate hikes have contributed to weaker than expected domestic growth in Australia. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. The trade now is looking for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. AUD downside was limited by gains in cross trade to the JPY with JPY pressured by concern about Japan’s sovereign debt rating and declining Japanese bond yields.

This week’s Australian economic calendar includes the December 31st release of November private sector credit expected up 0.1% compared to flat last month.

The technical outlook for the AUD is mixed as the AUD traded above 8950. Expect AUD support at 8783 the December 24th low with resistance at 9070 the December 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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