FOREX TRADING

USD Higher, Jobs and Durable Goods Data Disappoints

• USD: Higher, jobless claims declined less than expected, durable goods rise less than expected
• JPY: Mixed, pressured by improving risk appetite, retail sales declined more than expected
• EUR: Lower, Greek fiscal concern, rumors of Greek bailout denied, business confidence at a 10 month high
• GBP: Mixed, Chancellor Darling says UK plans to halve its deficit over the next four years
• CAD and AUD: AUD & CAD higher, Australia may speed up spending cuts, hawkish RBNZ

Overview

USD, JPY and EUR traded lower with GBP and commodity currencies trading higher Thursday. The decline in USD and JPY is attributed to improving risk sentiment sparked by President Obama’s proposal in the State of the Union address to reduce taxes on businesses to boost growth and in reaction to the FOMC January statement which says the US economy is in recovery. The FOMC also indicated that it plans to begin withdrawal of extraordinary stimulus measures. EUR was pressured by concern about sovereign debt risk in Greece as the Greek EU ten year bond spread is at its widest level since Greece adopted the EUR in 2001 and China’s central bank says the nation should not buy Greece’s debt. GBP continued to outperform and rallied to a five month high versus the EUR supported by comments from UK Chancellor Darling that the UK has the most aggressive deficit reduction plan amongst the industrialized nations. Commodity currencies traded higher tracking improving risk appetite, firmer equity market trade and in reaction to hawkish comments from the RBNZ. RBNZ governor says that the central bank will begin to withdraw stimulus mid-year. US economic data was mixed. Jobless claims declined by less than expected and durable goods posted a smaller than expected rise. These reports may generate concern about the strength of the US recovery and raise questions about the FOMC’s optimism about the US economic recovery. USD edged higher after the release of these reports as equity markets traded lower. The trade awaits news on Fed Chairman Bernanke’s nomination and focus turns to Friday’s release of US advanced Q4 GDP.

Today’s US data:

Jobless claims for week ending 1/23 declined by 8K to 470k a reading of 450k, was expected. December durable goods rose by just 0.3%, a 2% rise was expected.

Upcoming US data:

On January 29th advanced Q4 GDP will be released along with January Chicago PMI and final January University of Michigan. The Q4 GDP is expected to have risen by 4.5% compared to 2.2% in the third quarter. Chicago PMI’s expected 57.5 compared to 58.7 last month and the University of Michigan sentiment is expected unchanged at 73.

JPY

JPY traded lower pressured by improving risk sentiment as equity markets rally and in reaction to weak retail sales data from Japan. The Nikkei closed 162 points higher with equity market gains attributed to the Fed’s January FOMC statement which says that the US economy is in recovery and in reaction to President Obama’s s State of the Union address which included proposals for tax incentives to boost jobs and growth. Japan’s December retail sales declined by 1.2%. JPY was also pressured in cross trade. AUD/JPY traded 1% higher with AUD supported by hawkish comments from the RBNZ that the central bank will begin removing stimulus around mid year and report that the Australian government may speed up spending cuts. GBP/JPY traded higher with GBP supported by a statement from the UK Chancellor Darling that the UK has a plan to cuts its deficit. EUR/JPY traded mixed consolidating near a nine-month low with EUR pressured by concern about sovereign debt risks in peripheral EU countries like Greece and Portugal. JPY price direction has re-linked to risk aversion and the direction of equities. JPY rebounded from the day’s lows after the release of weaker than expected US jobless claims and durable goods orders. These reports may generate concern about the strength of the US recovery and raise questions about the FOMC’s upbeat assessment of the US recovery.

On January 29th of December CPI will be released expected unchanged at -0.2%. December household spending, unemployment, industrial output housing starts and construction orders will also be released on January 29th. The unemployment rate is expected to rise by 0.1% to 5.3%. Industrial output is expected to rise by 2.5% compared to 2.2% last month. Housing starts are expected to rise by 2% compared to 4.7% last month. Construction orders are expected to fall by 24% compared to 11.6% last month.

Key technical levels to watch in USD/JPY include support at 88.83 the December 18th low with resistance at 91.88 the January 21st high.

EUR

EUR traded at a six month low pressured by concern about sovereign debt risk in peripheral European countries as the Greek EU 10 year bond spread was at its widest level since Greece adopted the EUR in 2001 and the Chinese central bank says that the nation should not buy Greece’s debt. EUR downside was limited by report that EU January economic sentiment rose to a 10 month high of 95.7 and a report in the economist that the EU is developing a Greek bailout plan. It’s not clear whether there will be a bailout plan for Greece and if there is investors will want to see what the costs are of the bailout and how this might impact other peripheral European nations with deficit problems like Portugal and Spain. Fitch warns of a possible downgrade of Portugal’s debt rating. Concern about sovereign debt risks in peripheral European countries offsets improving EU economic data and this will likely encourage the ECB to maintain steady monetary policy. The next major focus for EUR trade will be the February 4th ECB policy meeting. The ECB is expected to hold monetary policy unchanged and continue to gradually withdraw liquidity. EUR traded to the days lows in reaction to a statement from French officials that there denying report of a Greek bailout plan.

On January 29th EU December M3 will be released expected at -0.5 and 0.2% last month along with January CPI expected at 1.2% compared to 0.9% last month.

The technical outlook for the EUR is negative as the EUR trades below 1.4100. Expect EUR support at 1.3930 the January 28th low with resistance at 1.4096 the January 27th high.

GBP

GBP traded higher supported by a statement from UK Chancellor Darling touting UK deficit reduction plans and by gains in cross to the EUR inspired by Greek fiscal concern. UK Chancellor Darling said that the UK has a plan to halve its deficit over the next four years and that the UK has the biggest deficit reduction plan amongst industrialized nations. His comments appear to be soothing investor fears that the UK would not take sufficient action to reduce its deficit. Ratings agencies have warned that the UK AAA sovereign debt rating is at risk if the UK does not reduce its deficit. EUR/GBP traded at a five month low with EUR pressured by concern about sovereign debt risks in Greece, Portugal and Spain. GBP is also benefiting from speculation that the BOE may be moving closer to a pause in its asset purchase plan. Over the past few weeks the BOE’s Sentance has indicated that the BOE may have to pause its asset purchase plan consider the possibility of hiking interest rates later this year with policy outlook depended on the strength of the UK recovery. BOE pause speculation is also fueled by last week’s release of higher than expected UK CPI. UK December CPI was reported at 2.9% and the CPI is approaching the high end of the BOE’s inflation target range. The BOE’s inflation target is 2%. The CPI rise may bring the timeframe for the end of BOE asset purchase plan forward.

On January 29th, January Nationwide home price index will be released.

The technical outlook for GBP is mixed to positive as GBP holds above 1.6000. Expect near-term support at 1.6077 the January 22nd low with resistance at 1.6370 the January 20th high.

CAD

CAD traded higher rebounding from a five-week low supported by a rebound in risk appetite. The rebound in risk appetite is attributed to firmer equity trade in Asia and Europe which was sparked by optimism about the US recovery as the FOMC’s January policy statement suggests that the US economy is strengthening. The improvement in risk appetite was also attributed to President Obama States of the Union address last night which included tax proposals directed at boosting growth and generating job creation. CAD is also supported by gains in cross trade in particular to the EUR with the EUR pressured by concern about sovereign debt risk in peripheral European nations. No major Canadian economic data was released in today’s trade. CAD has been weakening pressured by concern that tightening of monetary policy in China may derail the global recovery and by diminished risk appetite as global equity markets and commodities have been under pressure. CAD has also been vulnerable to speculation that the BOC is unlikely to move forward its timetable for hiking interest rates because Canada’s CPI came in weaker than expected. The BOC has pledged to maintain low yields through June of 2010 as long as inflation remains in check. CAD price direction remains tied to the outlook for commodities and equities. Focus turns to Canada’s GDP and producer prices due for release Friday.

This week’s Canadian economic calendar includes Friday’s release of December producer price index and GDP. December IPPI is expected at 0.4% and RMPI is expected at 1.2%. November GDP is expected unchanged at 0.2%.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0465 the January 22nd low with resistance at 1.0700 the December 21st high.

AUD

AUD traded higher supported by a rebound in risk appetite and in reaction to hawkish policy bias from the RBNZ. As noted above, the Fed’s upbeat assessment of the US recovery and president Obama’s focus on jobs growth and the economy in the State of the Union address and not on US banks helped to boost demand for global equities and growth led currencies like the AUD. The RBNZ governor said that the central bank plans to begin removing stimulus around midyear. The plan to remove stimulus midyear confirms confidence in the New Zealand economic recovery and may be a prelude to future rate hikes. AUD was also supported by an AFR report that the Australian government may speed up spending cuts. It’s interesting that a number of officials meeting in Davos are warning about to rapid withdrawal of stimulus and how that may impact the global economic outlook. AUD is also benefiting from this week’s report of slightly stronger than expected Australian CPI. Australia’s Q4 CPI rose by 0.6% and 3.2% y/y. The rise in Australia’s inflation may increase pressure on the RBA to hike rates at next week’s policy meeting. AUD price direction remains tied to commodities and equities but RBA rate hike speculation should limit AUD downside. Financial markets are forecasting that the RBA will hike rates 25 bps next week. AUD gains were limited by a decline in US equities after the release of weaker the expected US jobless claims and durable goods.

On January 29th December private sector credit will be released expected at 1.1% compared to 0.8% last month.

The technical outlook for the AUD is mixed as the AUD holds above 8800. Expect AUD support at 8902 the December 30th low with resistance at 9093 the January 22nd 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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