FOREX TRADING

USD Gains Versus EUR, JPY Rallies on Weak US Retail Sales

• USD: Mixed, jobless claims up, retail sales down, business inventories rise
• JPY: Higher, tracking risk sentiment, machinery orders fall sharply
• EUR: Lower, Trichet calls for strong USD, EU Greek bond spreads continue to widen
• GBP: Higher, Moody’s expressed confidence UK will tackle its deficit, BOE may pause its bond buy program
• CAD and AUD: AUD & CAD higher, Australia’s employment report beats expectations

Overview

USD traded mixed Thursday with the main focus on report of improving Australian employment growth and Fed policy outlook. AUD traded higher supported by report of better than expected Australian employment growth. Australia’s employment report helped to boost demand for Asian equities and risk appetite. Growth led currencies continue to outperform. The Fed’s Dudley said that short-term interest rates in the US may rise in six months or may not rise for as long as two more years depending on the strength of the recovery and employment outlook. The ECB left rate policy unchanged as expected and the EUR traded lower pressured by ongoing concern about sovereign debt risk in Greece. In the press conference following ECB policy meeting ECB President Trichet said current rates are appropriate, price developments are expected to be subdued, data suggest improvement in economic activity, EU economy to grow at a moderate pace in 2010, unemployment expected to rise somewhat further, risk to inflation outlook broadly balanced and the ECB will keep phasing out unneeded policy measures.GBP continues to gain supported by optimism about UK efforts to tackle the record UK budget deficit. Officials at Moody’s expressed confidence that the UK will adopt a plan to reduce its deficit and maintain the UK AAA sovereign debt rating. JPY opened lower pressured by report of a sharp drop in Japan’s machinery orders but reversed and traded higher after the release of weak US retail sales report. US economic data was disappointing with jobless claims rising more than expected and retail sales posting an unexpected drop. The trend however in US jobless claims remained positive as continuing claims declined. USD drifted lower and the JPY traded higher for the day after the release of these reports.

Today’s US data:

Initial jobless claims for week ending 01/09 rose by 11k to 444k, a reading of 437k was expected. Retail sales for December declined by 0.3%, a reading of 0.4% was expected. Ex. autos retail sales declined by 0.2%. November business inventories rose by 0.4%, a 0.2% rise was expected.

Upcoming US data:

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 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 opened lower Thursday pressured by a modest rebound in risk sentiment as equity markets rally in reaction to report of better than expected employment data from Australia. JPY was also pressured by speculation that Japanese government pressure will force the BOJ to consider additional easing measures to boost the Japanese economy and combat deflation. The BOJ may consider expanding its bond purchases or increasing its funding activity as additional monetary easing measures to try to boost Japan’s economy and combat deflationary pressures. Japanese economic data was mixed with November core machinery orders reported down 11.3% in December and corporate good prices rose by 0.1%. JPY downside was limited in reaction to report of unexpected decline in US December retail sales and higher US jobless claims. JPY turned higher for the day after the release these reports as the data takes risk appetite down a notch. 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.

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 lower as the ECB elects to hold monetary policy unchanged and investors continue to focus on uncertainty about sovereign debt risk in Greece. The ECB elected to hold monetary unchanged at 1%. In the press conference following the ECB meeting ECB President Trichet painted a mixed picture for the EU economy expecting a moderate recovery with low inflation. Trichet also said he expected unemployment to continue to rise further and that the ECB would reduce unneeded liquidity measures. EUR traded lower after Triceht’s press conference. Despite a pledge from Greek officials to take action to reduce the Greek budget deficit Greek spreads continued to widen indicating investors remain concerned about credit risk in Greece. It remains unclear how the EU plans to respond to sovereign debt risk in Greece. Recent statements from EU officials suggest that Greece must tackle its deficit problems on its own. EUR price action was somewhat disappointing in light of the fact that November industrial output was reported twice as strong as expected rising by 1%. EUR traded to the day’s lows in reaction to Trichet’s call for a strong USD. EUR remains vulnerable to concern about EU growth prospects and sovereign debt risks.

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 11th low with resistance at 1.4666 the December 15th high.

GBP

GBP traded higher supported by optimism that the UK will come up with a plan to tackle its budget deficit and in reaction to speculation that the BOE may pause its asset purchase program as the UK economy recovers. Officials at Moody’s suggest that UK officials are aware that they need to have a plan to reduce the UK deficit to maintain the UK AAA sovereign debt rating. The UK announced a record £178bln budget deficit for fiscal 2010. The record budget deficit generated warnings from rating agencies that the UK AAA sovereign debt rating is at risk for downgrade if action isn’t taken to reduce the deficit. The UK will hold a general election sometime between March and June 3rd. The UK budget deficit is expected to be a significant election campaign issue. According to today’s UK press the UK election will likely be held on May 6th and whatever the result of the election that the UK government will tackle the UK deficit. UK election polls suggest that the opposition Tory party will gain a parliamentary majority after the election. The Tory party has pledged a plan to reduce the UK budget deficit. GBP is trading at its best level in a month versus the USD. Recent UK economic data has been mixed but generally points to improving outlook for the UK economy. Wednesday the UK reported that industrial production rose by 0.4% and Monday the UK reported a sharp improvement in the trade balance as UK export surged. In addition, UK inflation has been accelerating and is nearing the BOE’s target of 2%. The improvement in the UK economy and rising inflation prompted the BOE Sentance yesterday to say that the BOE may need to pause its asset purchase plan and consider the possibility of hiking rates this year. His comments have encouraged short covering in the GBP.

The technical outlook for GBP is positive as GBP rallies above 1.6300. Expect near-term support at 1.6240 with resistance at 1.6412 the December 16th high.

CAD

CAD traded higher supported by improving risk sentiment as equity markets rally in Asia and Europe and in reaction to improving employment outlook in Australia. The improvement in Australia’s employment outlook generates optimism about the global recovery. Investors are continuing to digest the impact China’s announcement to hike its reserve requirements and implications for possible rate hikes in Australia that may result from today’s Australian economic data. CAD gains were limited by weaker crude oil trade and disappointing US retail sales data. Recent CAD short-term price action has been closely tracking the outlook for the US economy as a proxy for Canadian recovery outlook. There were no major Canadian economic reports released in today’s trade. Tuesday Canada reported that its trade balance swung to deficit last month. Monday Canada reported a sharp increase in December housing starts. Recent Canadian economic data suggest that the Canadian economy is recovering. 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 and how markets react to a possible RBA rate hike in February. Sentiment towards the CAD remains positive as investors look for higher return.

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 1.0420 the January 12th high.

AUD

AUD traded higher supported by report of better than expected Australian employment data. Australia’s December unemployment rate declined to 5.5%, a reading of 5.7% was expected. Employment growth rose by 35.2k, the employment growth figure was expected to rise by 10k. The improvement in Australia’s employment outlook will likely increase the risk that the RBA will hike interest rates in February. AUD is supported by RBA rate hike speculation improving risk sentiment as equity markets rallied in Asia and Europe and technical buying as AUD breaks above recent range highs. A number of analysts expect AUD to trade at parity to USD during 2010 as focus turns to widening yield differential and continued recovery in the global economy fuels demand for commodities. As noted above, Fed officials continue to indicate that interest rates will remain low for an extended period with the Fed’s Dudley stating that short-term US interest rates may stay low as long as two more years. Australian economic data has been mixed. Monday Australia reported strong ANZ jobs ads for December. Tuesday November housing finance was reported to have dropped by 5.6%. Last week Australia reported strong retail and vehicle sales. improvement in its trade deficit and rising building approvals. These reports coupled with today’s Australian employment report suggest that the Australian domestic economy has weathered recent RBA rate hikes and puts a February RBA rate hike back on the radar screen. The RBA is expected to hike rates 50 points in February.

The technical outlook for the AUD is positive as the AUD trades above 9300. Expect AUD support at 9215 the January 14th low with resistance at 9420.

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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