FOREX TRADING

USD Higher, Jobless Claims Rise Less than Expected

• USD: Higher, equity markets decline as China hikes three months yields, jobless claims beat expectation
• JPY: Lower, new Finance Minister Kan wants a weaker JPY
• EUR: Lower, EU retail sales posted an unexpected decline, economic confidence improves
• GBP: Lower, BOE maintains current level of interest rates and bond buys
• CAD and AUD: AUD & CAD lower, tracking dip in commodity prices, Canada’s Ivey PMI disappoints

Overview

USD traded higher Thursday as equity markets decline in reaction to a surprise interest-rate hike in China and the JPY weakens in reaction to a statement from Japan’s new finance minister that he favors a weaker JPY. China hiked three months yields for the first time since last August. The surprise rate hike sent equity markets lower and sparked selling of commodities. GBP traded lower as the BOE elected to hold interest rate policy and asset purchase plan unchanged. EUR was pressured by report of a sharp drop in EU retail sales. Commodity currencies traded lower in reaction to weaker equity market trade and a dip in commodity prices. AUD downside was limited by report of strong Australian retail sales. There was little reaction to report that a Chinese scholar says the time is right for a one-off 10% appreciation of the Yuan versus the USD or a statement from Sarkozy of France that the world needs to have a multi-currency system. US jobless claims rose by less than expected and continuing claims are at their lowest level since January.

Focus turns to Friday’s release of US unemployment and nonfarm payrolls for clues to the direction of US interest rates and the USD. US December unemployment rate is expected to rise by 0.1% to 10.1% with nonfarm payrolls at -8k. The FOMC minutes for the December meeting indicate that the Fed is debating whether the economic recovery is strong enough to warrant a rate hike and Fed board members have mixed opinions about inflation risks. The FOMC minutes suggest that a strong US employment report will not lead to a near-term tightening in Fed policy. A former Fed official says there is no pressure to tighten in the near term.

Today’s US data:

Initial jobless claims for week ending 01/02 rose 1k to 434k, a reading of 445k was expected.

Upcoming US data:

On January 8th December nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to come in at -8k 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 at a four month low versus the USD pressured by a statement from Japan’s new finance minister that he would welcome a weaker currency. As noted in Wednesday’s report, Japan’s Finance Minister Fujii resigned because of health concerns and he was replaced by Naoto Kan. When Fujii became Japan’s finance minister he rattled the Forex markets with comments that suggested that he preferred strengthening of the JPY. Fujii’s comments sent the JPY sharply higher last September when he said a strong JPY is in the best interest of Japan. Fujii spent much of the following months backtracking on the strong JPY statement and this left investors unclear about the new Japanese governments JPY policy. Kan said that he would work with the BOJ to bring the JPY to appropriate level given the currencies impact on the economy. His comments suggest that the new Japanese government is returning to a weak JPY policy. In the past, Japan has relied on a weak JPY to help export competitiveness. The new Japanese government which came to power in late August appeared to be shifting focus towards domestic growth and would be relying less on exports. Because of weakening Japanese economic outlook and rising government debt burden the transition towards a focus on boosting Japan’s domestic growth has been difficult. This explains why Japan may once again favor weakening of the JPY. JPY remains vulnerable to concern about Japan’s budget outlook and sovereign debt rating.

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 91.53 the January 6th low with resistance at 94.30 the August 27th high.

EUR

EUR traded lower pressured by weaker equity market trade, ongoing concern about sovereign debt risks in the EU and in reaction to report of an unexpected drop in EU retail sales. The PBOC announced a surprise hike in three month yields and this is seen as a possible prelude for tightening by China’s central bank. The Chinese rate hike news sparked selling of global equity markets and a modest dip in risk appetite. Wednesday, the ECB’s Stark said that the EU may not bail Greece out of its deficit problems. Recent downgrades of debt ratings in Greece, Spain and Iceland generate concern about EU exposure to deficits in peripheral European countries. EUR remains vulnerable to concern about EU sovereign debt risk. EU Economic data was mixed with November retail sales reported down 1.2% and December economic sentiment improving to 91.3 from 88.8. The drop in EU retail sales generates concern that the EU faces a protracted slow recovery. High unemployment and tight credit conditions limit EU consumer demand. These reports are likely to change the outlook for steady ECB policy. The next ECB policy meeting is January 14th. EUR stabilized after the release of better than expected US jobless claims.

The technical outlook for the EUR is mixed as the EUR fails to hold above 1.4400. Expect EUR support at 1.4220 the December 22nd low with resistance at 1.4485 the January 5th high.

GBP

GBP traded lower as the BOE elected to hold interest rates unchanged at 0.5% and to maintain its current level of asset purchases at £200bln. The BOE indicated that the level of asset purchases remains under review. The BOE is expected to focus on the release of the February inflation report before it determines whether there will be any shift in monetary policy or the level of asset purchases. Recent UK inflation data has been trending higher but in previous meetings BOE officials have acknowledged that they expect inflation to rise in the near term and then fall back to target later in the year. Therefore it’s not clear how the BOE will react if the February quarterly inflation report confirms rising inflationary pressures in the UK. GBP downside was limited by improving UK housing data. The UK housing market continues to show improvement with Halifax house price index reported to have risen by 1% last month. Despite the improvement in housing the outlook for the UK economy remains mixed. Wednesday the UK reported that consumer confidence dropped at its fastest pace for the year. The December consumer confidence index declined to 69 from 74 in November. The drop in consumer confidence generates questions about the strength of the UK economic recovery. GBP remains vulnerable to concern about UK debt outlook and election uncertainty. Analysts at BNP forecast that GBP will fall 12% versus the USD in 2010 because of deteriorating UK public finances and concern about UK sovereign debt rating. BNP’s GBP/USD year-end forecast is 1.4000. UK election campaign rhetoric is expected to focus on UK budget and credit rating risk.

The technical outlook for GBP is mixed to negative as GBP fails to hold above 1.6000. Expect near-term support at 1.5832 the December 30th low with resistance at 1.6155 the January 5th high.

CAD

CAD opened higher despite weaker equity market trade, a drop in commodity prices and a rate hike in China. The Chinese rate hike may hurt demand for equities and commodities. Recent strength of the CAD has been partly attributed to speculation that growth outlook is improving in North America and that good news for the US economy is a positive for risk sentiment and the Canadian economic outlook. CAD downside was limited by report of better than expected US jobless claims. The CAD is also supported by Wednesday’s release of the FOMC minutes for the December policy meeting which confirmed that the Fed plans to maintain low yields even as they see signs of the US economy strengthening. Wednesday, Canada reported a strong rise in producer prices. The rise in Canada’s producer prices suggests that inflation pressures may be building in Canada. Continued and maintaining of low BOC yields is contingent on inflation remaining in check. Rising Canadian price pressures may encourage speculation of an earlier shift in BOC policy bias. CAD was also sported by announcement that Canada plans to issue general bonds. Canada plans to issue euro bonds to diversify FX reserves. It’s not clear what this may mean for the CAD but some analysts suggest that the issuance of Eurobond will keep Canada on investors’ radar screens. The bond issuance could also be seen as raising capital as a prelude to possible intervention. Other analysts suggest that this is another shift away from the USD which makes intervention less likely. CAD turned lower after the release of weaker than expected Ivey PMI. Ivey PMI for December came in at 48.4 a reading of 52 was expected. The employment component of the Ivey PMI showed improvement. Focus turns to Friday’s release of US and Canadian employment reports.

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 drifted lower pressured by report of a rate hike in China and weaker equity market trade. China announced that it was raising its three-month yields for the first time since last August. The rate hike is seen as a possible prelude to tightening monetary policy by the Chinese central bank. There is concern that tightening of China’s monetary policy could hurt the outlook for global growth and demand for commodities and equities. Early in the week China reported strong manufacturing data and increasing inflationary pressures. Producers in China have raised prices at the fastest pace in 17 months. At some point China may need to take action to try to cap inflationary pressures to avoid the risk of creating a new asset bubble. AUD downside was limited by report of strong Australian retail sales, a modest improvement in the trade deficit and gains in cross trade to the JPY. Australia’s November retail sales rose by 1.4%. Australia’s November trade deficit improved to 1.7bln with exports down 2% and imports down 3%. The trade deficit was expected to widen by 2.5bln. AUD/JPY traded 0.5% higher building on Wednesday’s 1% rally in the cross. Wednesday Australia reported strong gains in building approvals and vehicle sales. These reports suggest that the Australian domestic economy has weathered recent RBA rate hikes. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. This week’s strong domestic data from Australia clouds the outlook for RBA policy and makes a pause in February less certain. Financial futures are pricing the odds of a February RBA rate hike at 50/50.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 9092 the January 5th 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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