FOREX TRADING

USD Rebounds, Factory Orders Rose by 1.1%

• USD: Mixed, Fed’s Duke says recovery to be moderate, interest rates to remain low for an extended period
• JPY: Higher, large-scale exporter repatriation, Finance Minister Fujii to resign due to health concerns
• EUR: Lower, CPI inflation accelerates, German employment outlook improves
• GBP: Lower, concern about UK debt outlook and diminished demand for UK gilts
• CAD and AUD: AUD & CAD higher, Australia’s new home sales rise, platinum at highest level since August

Overview

USD opened lower Tuesday pressured by improving risk appetite as commodity markets and equities continue to rally at the start of the New Year and in reaction to dovish comments from Federal Reserve Governor Duke. Duke said that she expects the US economic recovery to be moderate and that interest rates will remain at low levels for an extended period. JPY led the way supported by exporter repatriation and a report that SMFG plans to raise a large amount of capital by issuing new shares. The SMFG news sparked short covering in the JPY. EUR opened higher supported by report of accelerating EU CPI, a modest drop in German jobless rate and gains in cross trade to the GBP. GBP continues to underperform pressured by concern about the UK deficit and potential reduced demand for UK gilts. EUR turned lower after the release of US factory orders. Commodity currencies traded higher with the AUD supported by report of rising Australian new home sales and firmer equity and commodity markets. Commodity currency gains were limited by a Reuter’s report which states that Chinese banks have been told to control the pace of lending. If Chinese banks significantly reduce lending it could slow the Chinese recovery and reduce optimism about economic recovery in Asia. Today’s US economic data was mixed with factory orders posting a strong gain and pending home sales declined more than expected.

CFTC commitment of traders for last week show that specs increased long bets on the USD for the second week in a row. At the end of last year the USD was supported by a shift in focus to improving US economic outlook and Fed rate hike speculation. It appeared that the inverse correlation to equities had broken down. For most of 2009 USD would trade lower as equity markets rallied. At the start of 2010 USD price direction appears to have re-linked with the direction of equities and risk appetite trading lower as equity markets rally to start the year. Investors will be looking closely at Wednesday’s release of the FOMC policy minutes for further clues as to whether the Fed plans to keep yields low for an extended period and Friday’s release of US unemployment and nonfarm payrolls. The trade will be looking at the unemployment report for confirmation that the US labor market is improving. The latest estimate from JP Morgan is US nonfarm payrolls rose by 40k in December ending 23 months of decline. (Consensus is nfp declined by 23k.) If the nonfarm payrolls turn positive the report will likely fuel speculation that the Fed will raise rates sooner than forecast and demand for USD. Fed policy outlook will be a key market driver in 2010. A positive nonfarm payroll report will be a significant test of whether the inverse correlation of USD and equities remains intact.

Today’s US data:

November factory orders rose 1.1%, a 0.5% rise was expected. November pending home sales declined 16% to 96, a reading of 111.8 was expected.

Upcoming US data:

On January 6th December ADP employment and ISM non-manufacturing Index will be released. The ADP employment report is expected at -70k compared to -169k last month. The non-manufacturing ISM index is expected at 50 compared to 48.7 last month. On January 7th initial jobless claims for the week ending 01/02 will be released expected at 445k compared to 432k last week. On January 8th December nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to come in at -23k compared to -11k last month. The unemployment rate is expected to rise 0.1% to 10.1%. November consumer credit will also be released on January 8th expected at -4.40bln compared to -3.51bln last month.

JPY

JPY traded sharply higher supported by repatriation flows from Japanese exporters and short covering sparked by report that SMFG plans to raise a large amount of funds by issuing new shares. Japanese exporters bought JPY to lock in overseas profits. Sumitomo Mitsui Financial Group (SMFG) plans to raise ¥800bln by issuing new shares. There has been limited reaction to report that Japan’s Finance Minister Fujii will step down from his post due to ill health. According to a Reuters report, Japan’s prime minister has met with Fujii to discuss fiscal policy issues. Without Fujii’s leadership the new Japanese government may find it more difficult to tackle the issues of deflation, weakening economy and huge public debt. Fuji’s resignation may also weigh on Japanese bond prices. JPY remains vulnerable to concern about Japan’s sovereign debt rating. S&P warns that Japan’s sovereign debt rating may be cut if steps aren’t taken to cut Japan’s rising debt. Last week 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. Speculation that the BOJ may expand quantitative ease in early 2010 is a major risk for the JPY. The BOJ expanded its funding operations and pledged in mid-December to combat deflationary pressures in Japan. A number of analysts suggest that BOJ rate speculation is already priced into the recent decline in the JPY. Bloomberg reports that the 7.7% JPY decline last month is seen as excessive. According to the BOJ’s Tankan survey Japan’s large manufacturers expect JPY will average 91.16 USD in the first six months of 2010.

On January 8th November preliminary leading indicators will be released expected at 2.2% compared to 2.5% last month.

Key technical levels to watch in USD/JPY include support at 91.10 the December 24th low with resistance at 93.22 the January 4th high.

EUR

EUR opened higher supported by improving risk appetite, report of accelerating EU inflation, a slight improvement in German employment outlook and gains in cross trade to the GBP. Global equity markets traded cautiously higher Tuesday contributing to the improvement in risk appetite. It’s important to note that sharp equity market gains in Monday’s trade had only limited impact on the EUR. EU December CPI rose by 0.9% compared to 0.5% last month. The acceleration in EU CPI is unlikely to alter the outlook for steady ECB monetary policy because of concern about debt risk in the EU. A number of peripheral EU countries are taking action to cut back government spending. Greece announced today that it plans to reduce its budget deficit to 3% of GDP by 2012. German jobless declined by 3k in December, a 5k decline was expected. The German unemployment rate remained unchanged at 8.1%. EUR gains in cross to the GBP are attributed to concern about UK debt. EUR rally stalled in US trade as equity markets drift lower and the JPY recovers in cross trade. EUR traded 5% lower in December pressured by concern about EU sovereign debt risk and speculation the Fed may hike interest rates sooner than expected. EUR remains vulnerable to concern about EU sovereign debt risk. Investors may have over aggressively priced the odds of Fed rate hike. Diminished Fed rate hike speculation may limit EUR downside. EUR traded lower after the release of mixed US economic data pressured by weaker US stock market trade.

On January 6th EU services PMI and December will be released expected 53.7 compared to 53 last month along with EU industrial new orders expected at 1% compared to 1.5% last month and November PPI expected unchanged at 0.2%. On January 7th EU December economic sentiment will be released along with November retail sales. Economic sentiment index is expected at 90 compared to 88.8 last month. Retail sales are expected to rise by 0.1% compared 0.0% last month.

The technical outlook for the EUR is mixed as the EUR holds above 1.4400. Expect EUR support at 1.4257 the January 4th low with resistance at 1.4503 the December 15th high.

GBP

GBP traded lower versus the USD and weakened in cross trade pressured by fresh concern about UK debt outlook and report that Berkshire Hathaway votes no on Krafts Cadbury offer. The Financial Times reports that there is a growing rift between UK Chancellor Darling and PM Brown over the UK deficit. Darling expressed concern Monday that reducing the UK deficit too quickly could hurt the UK recovery. He expects the UK economy to recover from recession in 2010 and grow by 1.5%. GBP was also pressured by concern about demand for UK gilts and speculation that the BOE will eventually be forced to expand quantitative ease. UK failure to take credible action to reduce its budget deficit may dampen demand for UK gilts because of fear inaction will lead to a reduction in the UK sovereign debt rating. The BOE will hold a policy meeting Thursday and are expected to hold monetary policy and the current level of asset purchase is unchanged. There was some talk in the UK press today that the BOE may consider expanding its asset purchases. As other major central banks begin their exit strategies from quantitative ease, the BOE may elect to continue its asset purchase plan. The BOE is expected to wait to see inflation figures in February before deciding whether a pause in its asset purchase plan is justified. GBP remains vulnerable to concern about UK debt outlook and election uncertainty. UK December construction PMI rose to 47.1 from 47 last month.

The technical outlook for GBP is mixed as GBP struggles to hold above 1.6000. Expect near-term support at 1.5832 the December 30th low with resistance at 1.6242 the January 4th high.

CAD

CAD traded higher supported by report of stronger than expected Canadian IPPI and RMPI for November. IPPI rose 1% and RMPI rose by 2.7%. The IPPI was expected to rise by just 0.5% and RMPI was expected to rise by 1.2%. The gain in these indices suggests improving demand for Canadian exports and suggests inflationary pressures may be building. The BOC reaffirmed its pledge and its December policy meeting to maintain yields at record low levels through June of 2010 as long as inflation remains in check. BOC Governor Carney said that the pledge to keep rates low until mid 2010 is conditional and that the BOC has flexibility to shorten the time frame for the rate commitment. Today’s producer prices data from Canada encouraged speculation that the BOC will shorten its timeframe for maintaining low yields. CAD was also supported by firmer commodity prices and improving risk appetite. Crude prices stabilized limiting demand for the CAD. CAD price direction remains closely correlated to the price of crude and the direction of equities. Crude prices are consolidating near 14 month high and the CAD is trading at its best level in over two months. Continued strengthening of CAD may increase the risk of BOC intervention.

On January 7th December Ivey PMI will be released expected at 52 and 55.9 last month. On January 8th December unemployment and employment growth will be released. December unemployment is expected unchanged at 8.5% with employment growth at 20k compared to 79k last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0400. Look for near-term support at 1.0207 the October 15th low with resistance at 1.0517 the January 4th high.

AUD

AUD traded higher supported by firmer Asian equity market trade, rising commodity prices and in reaction to report of improving Australian new home sales. Some Asian equity markets traded at 17 month high. Although the rally in commodity prices slowed a bit Tuesday platinum traded at its best level since August of 2008. Australia’s November new home sales rose by 0.3%. AUD gains were limited by selling in cross trade to the JPY. AUD/JPY cross traded about 1% lower with JPY supported by rumors of exporter repatriation. AUD gains were also limited by a report that China’s PBOC says that Chinese banks need to control the pace of lending. On Monday, China reported a sharp increase in manufacturing PMI and producers in China have raised prices at the fastest pace in 17 months. Acceleration of growth in China increases the risk of inflation and Chinese officials appear to be considering efforts to clamp down on inflation risks. If China takes aggressive action to tighten lending it could diminish optimism about growth outlook in Asia. The growth outlook in Asia is key to the demand for commodities and exports from Australia. AUD traded sharply higher Monday with focus shifting from RBA policy outlook to optimism about global growth. 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 looks for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. AUD is supported by improving risk sentiment and positive outlook for commodity prices.

On January 6th November building approvals would be released expected at 1.5% compared to -0.6% last month. On January 7th November retail sales and November trade balance will be released. Retail sales are expected to rise by 0.6% compared to 0.3% last month. The trade balance is expected at -2.5bln compared to -2.3bln last month.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8990 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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