FOREX TRADING

China Tightening Pressures Commodity Currencies

• USD: Mixed, disappointing earnings at Alcoa, trade gap widens, China begins to curb lending
• JPY: Higher, supported by safe haven and repatriation flows
• EUR: Lower, pressured in cross trade to JPY and GBP, concern about global growth as China tightens
• GBP: Higher, trade deficit narrows as exports surged and Tories gain in election polls
• CAD and AUD: AUD & CAD lower, Australian housing finance declines, Canada posts a trade deficit

Overview

USD traded mixed Tuesday gaining on the commodity currencies and the EUR and weakening versus the JPY and GBP as investors digest news from China and risk aversion re-emerges. Global equity and commodity markets were pressured by report that China had tightened credit conditions. USD was initially supported in overseas by positive statements from a Chinese sovereign wealth fund official who said that the USD has hit bottom and the JPY will continue to fall. USD traded higher in reaction to these comments and JPY lower. China announced that it is raising its reserve requirements by 50bps. Stocks and commodity prices traded lower in reaction to the tightening move from China. The hike in China’s reserve requirements raises concern about the global recovery and demand for commodities. Growth led currencies like the AUD underperformed pressured by the tightening in China and weaker equity and commodity markets. CAD was pressured by disappointing Canadian trade data and weaker commodities. Canada posted a surprise trade deficit last month. JPY rebounded into the US session supported by safe haven flows and gains in cross trade as equity markets decline. JPY was also supported by a clarification from the Chinese sovereign fund official that his statement on USD reaching a bottom was his personal view not that of the Chinese government. GBP traded higher supported by improving UK trade balance as exports surged and in reaction to a UK election poll which indicates the Tories will gain majority control of parliament if the UK election were held today. EUR drifted lower pressured in cross trade to the JPY and GBP and in reaction to the spike in risk aversion. The US trade deficit widened more than expected in November. The trade data had limited impact on FX trade. Today’s tightening in China sparked unwind of carry trades. The pace of the withdrawal of liquidity in China will be key to the outlook for growth led and emerging markets currencies and risk appetite. So far the reaction to the Chinese tightening has been limited. An official at China’s central bank said that monetary policy remains reasonably loose.

Today’s US data:

November trade deficit widened to 36.4bln, a reading -34.3bln was expected. Exports rose by 0.9% and imports were up 2.6%.

Upcoming US data:

On January 13th December Treasury budget will be released expected at -105bln compared to -51.75bln last month. On January 14th December import prices will be released expected at 0.1% compared to 1.7% last month. Also on January 14th initial jobless claims for week ending 01/09, December retail sales and November business inventories will be released. Jobless claims are expected at 430k compared to 434k last week. December retail sales are expected to rise by 0.2% compared to 1.3% last month, ex. autos retail sales are expected to rise by 0.3%. November business inventories are expected at 0.1% compared to 0.2% last month. On January 15th December CPI, December industrial production, capacity utilization January Empire State Manufacturing and January Michigan consumer sentiment will be released. CPI is expected at 0.2% compared to 0.4% last month. Industrial production is expected at 0.4% compared to 0.8% last month and capacity use is expected at 71.6 compared to 71.3 last month. Empire manufacturing index is expected at 9.45 compared to 2.55 last month and Michigan sentiment is expected at 73 compared to 72.5 last month.

JPY

JPY experienced volatile price action initially weakening in overseas trade in reaction to comments from an official with China’s sovereign wealth fund that he expects the JPY to continue to fall and that the USD has hit bottom. JPY reversed to trade higher in US session in reaction to report that China raised its reserve requirements by 50bps. The reserve hike raises concern about the global recovery and sparked selling of commodities, stocks and increased risk aversion. The increase in risk aversion sparked safe haven demand for JPY and gains in cross trade to growth linked currencies. There was limited reaction to today’s Japanese economic data which shows that the November current account surplus widened to ¥1.03trln and December money supply rose by 3.1%. JPY rallied despite a statement from an official at Moody’s expressing concern about Kan’s appointment as Japan’s new finance minister. Moody’s has warned that Japan’s sovereign debt rating may be cut if Japan doesn’t tackle its rising budget deficit. Kan is seen as less of a hawk on the budget deficit which may make debt reduction in Japan less of a priority. Moody’s says that Kan’s appointment generates doubts about Japan’s commitment to reduce its deficit. JPY was also supported by report of repatriation flows from EU bond redemptions. JPY remains vulnerable to speculation that the BOJ may expand quantitative ease during Q1 2010 and to the risk of a possible downgrade of Japan’s sovereign debt rating.

On January 14th CGPI for December will be released expected at 0.1% compared to 0.2% last month along with November machinery orders. The machinery orders are expected to rise by 8.5% compared to -4.5% last month.

Key technical levels to watch in USD/JPY include support at 90.40 with resistance at 92.43 the January 12th high.

EUR

EUR traded mixed initially pressured by weaker equity markets and a spike in risk aversion as China raised its reserve requirement by 50bps. The hike in China’s reserve requirement is confirmation that China is beginning to take measures to curb lending and to try to prevent overheating of China’s economy. Monday, China reported a sharp jump in exports and that lending in the first week of January was twice that of the monthly average of the second half of 2009. The EU economy and the EUR have benefited from improved outlook from China. The EU recovery has been highly dependent on export demand. If Chinese measures to reduce liquidity hurt export demand from China it could be an additional risk for the EUR. EUR was also pressured by selling in cross trade to the JPY and GBP with JPY supported by repatriation flows from EU bond redemptions and GBP supported by report of improving UK trade deficit. This week’s main focus will be Thursday’s ECB meeting. The EU reported that unemployment rate rose to an 11 year high of 10% in December. The worsening of the EU employment outlook suggests that the EU recovery will be weak and the ECB will remain on hold. EUR remains vulnerable to concern about EU growth prospects and sovereign debt risks. Monday Moody’s warned that Portugal’s debt rating may be downgraded. EUR edged higher for the day after the release of a larger than expected widening of US November trade deficit.

This week’s European calendar includes January 13th release of EU November industrial production expected at -0.3% compared to -0.6% last month. On January 14th German December CPI will be released expected unchanged at -0.1%. ECB policy meeting will be held on January 14th and no rate change is expected. On January 15th EU December CPI November trade balance will be released.

The technical outlook for the EUR is positive as the EUR holds above 1.4500. Expect EUR support at 1.4402 the January 11h low with resistance at 1.4610.

GBP

GBP traded higher supported improving UK trade deficit and in reaction to UK election polls. UK trade balance narrowed to 6.78bln from 7.016bln last month. Improvement in the UK trade balance reflects the impact of improving global economy and a sharp increase in UK exports. The rest of today’s UK economic data was mixed with improving retail sales and disappointing house price balance. December BRC retail sales rose by 4.2%. December house price balance declined to +30, reading a +36 was expected. The rise in UK retail sales was the best since August of 2009. The decline in the house price balance marked the first drop since February 2009. The latest UK election polls show that the Tory party could gain a 60 seat majority in the UK Parliament. The UK will hold a general election sometime between March and June 3rd. One of the major election issues will be the expanding UK budget deficit. The Tory party has indicated that they plan to take greater action then the current UK government to reduce the UK budget deficit. Today’s election poll from UK supports demand for GBP. The BOE elected to hold monetary policy and the current level of asset purchases unchanged last week. GBP remains vulnerable to concern about UK debt outlook and election uncertainty.

On January 13th of November industrial production is due for release along with NIESR GDP estimate for December. Industrial production is expected at 0.3%.

The technical outlook for GBP is positive as GBP rallies above 1.6100. Expect near-term support at 1.6045 the January 11h low with resistance at 1.6242 the January 4th high.

CAD

CAD traded lower pressured by weaker equity and commodity prices, disappointing Canadian trade data and concern about the global recovery outlook as China hikes reserve requirements. The combination of disappointing earnings at Alcoa and report that China had raised its reserve requirements sent global equity markets and commodities lower. There is concern that Chinese efforts to curb lending could reduce demand for commodities. Canada’s November trade balance swung to deficit of 344mln, the trade had expected a surplus of 600mln. Exports rose by 1.1% and imports were up 3.9%. Canada’s new home price index came in line with expectations at 155.4 which was up 0.4% in November. The trade was looking for 0.3%% rise in the home price index. Monday Canada reported a sharp increase in December housing starts. Canada’s housing starts rose 174.5k in December, a reading 171.4k was expected. Building permits however declined by 4.6% in November, a reading of -3.3% was expected. CAD price direction remains closely tied to the outlook for commodities and equities. Trade will be watching closely whether China takes additional steps to reduce liquidity.

The technical outlook for CAD is positive as USD/CAD trades below 1.0400. Look for near-term support at 1.0250 the January 11th low with resistance at 1.0517 the January 4th high.

AUD

AUD traded lower pressured by a decline in risk sentiment and weaker equity market trade sparked by a report that China raised its reserve requirement by 50bps points. The tightening of liquidity conditions in China generates concern about the sustainability of the global recovery and may reduce demand for Australian exports. The AUD was also pressured by report of much weaker than expected Australian housing data. Australia’s November housing finance declined by 5.6%, a 0.5% decline was expected. Australian economic data has been mixed. Monday’s Australia reported strong ANZ jobs ads for December. Last week Australia reported strong retail and vehicle sales improvement in its trade deficit and rising building approvals. These reports suggest that the Australian domestic economy has weathered recent RBA rate hikes and puts a February RBA rate hike back on the radar screen. At the end of 2009 the AUD came under significant pressure partly due to diminished speculation that the RBA would hike rates in February. Strong Australian economic data encourages speculation that the RBA may hike rates in February. Focus turns to this week’s release of Australian employment data.

On January 14th December unemployment will be released the unemployment rate is expected to fall by 0.1% to 5.6% from 5.7% with employment growth at 20k s compared to 31.2k is last month.

The technical outlook for the AUD is positive as the AUD holds above 9200. Expect AUD support at 9170 with resistance at 9378 the November 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.

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