The USD and the JPY were the strong performers this week. The Greenback is breaking out of its recent consolidation mode. Risk aversion kept the Japanese Yen strong as the preferred safe haven currency. Commodity currencies are subdued, coming off December strength as gold made record highs. The risk aversion also pressured pairs such as the Loonie(CAD) and Aussie(AUD).

EUR/USD: Continuation After Consolidation

Daily and 4H: The EUR/USD is showing bearish strength. It looks like the 1.40 area is after all providing some short-term support as anticipated.

In the daily, you can see a swing projection to the 1.37/38 area. This is the short/intermediate term projection.

In the near/short-term. The market is rallying. This is an expected correction rally, so the strength should be inferior to that of the declining candlesticks.

Then there might be topping action around 1.4250 early next week. A hold there as resistnace would further confirm the bearish outlook to 1.37.

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U.S. Review

Disappointing Economic Data Continue in January

• The economic data this week largely disappointed equity investors and missed analyst expectations.
• Homebuilder confidence has ebbed as new home sales remain sluggish and buyer traffic has dropped since September.
• A pull-back in the January Philly Fed index has raised concerns about the strength of the economic recovery in the first quarter.
• Expect slower economic activity in January following robust improvement in the fourth quarter.

Reality Bites

Political upheaval in Washington with the election of Republican Scott Brown to the Senate turned conventional wisdom on healthcare reform and financial sector reform on its head this week. Regulatory risk has risen against the banking industry as the Obama Administration tries to score political points off of popular anger over bank bailouts and executive compensation and bonuses. At the same time, the economic data released this week pointed to weaker expansion as the first quarter gets underway.

The NAHB/Wells Fargo builders’ sentiment index dropped another point in January to 15 from a post-bubble peak of 19 last September. The index is still seven points above where it was a year ago. Prospective buyer traffic has dropped five points since September’s first time homebuyer credit surge. Regionally, the biggest declines in the housing market index since September have come from the Midwest followed by the Northeast and South. The regional index in the West has been comparatively steady.

Housing starts took a step backward in December dropping 4.0 percent as rough weather seems to have hampered single-family starts, which dropped 6.9 percent. On a more encouraging note, multi-family starts jumped another 12.2 percent in December after a steep 70 percent increase in November. The permits data continue to point toward a sustainable recovery in housing activity. Housing permits have risen for two consecutive months, gaining another 10.9 percent in December. Total housing permits are now running 15.8 percent above year ago rates with single-family permits running a whopping 37.3 percent above last year’s rates.

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By Ahmad A Hassam

Did you find the Holy Grail in trading? If you know when to enter the market and when to exit the market at the right time, you have found the Holy Grail in trading. Fibonacci Retracement and Extensions is the Holy Grail for many traders. They trade by these Fibonacci Levels. Fibonacci sequence is a famous sequence that appears quite frequently in nature. Fibonacci sequence is obtained by adding the last two number to obtain the next number. The first two numbers are 0,1. After that just add the last two numbers to obtain the next number. Fibonacci sequence just develops like 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55,89,144,233,377 and so on.

Ratios obtained by dividing a number in the Fibonacci sequence with the number before it and with two numbers before it are always the same. These two numbers 1.27, 0.618 and 0.382 are very important and occur frequently in nature. These three ratios are used to construct Fibonacci Retracements and Extension Levels.

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Currency Currents

Quotable

“It isn’t that they can’t see the solution. It is that they can’t see the problem.”

G.K. Chesterton

FX Trading – US Dollar Index Failing? Follow-Through Would Be Nice

The week was mostly shaped by China news – go figure!

As an encore to the week prior when they increased the interest rate on one-year bills and upped the required reserve ratio on banks, they ratcheted up the rate on one-year bills again. Then top officials talked about getting tougher and stopped rampant speculation before it might become a problem. Then they reported fourth-quarter GDP numbers that blew expectations out of the water.

The market responded to the 10%+ GDP number as another sign that China will keep getting tighter on lending, effectively slowing down money flow and likely dampening future readings on GDP. And when China is widely viewed as the leader of global economic recovery, investors don’t feel quite as comfortable tossing their money into “potential” growth and “greater” risk.

Thus, money has come back into the US dollar as it typically does when risk appetite ebbs.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD made indecisive movement yesterday. Price attempted to push lower, bottomed at 1.4029 but closed higher at 1.4085. Overall sentiment remains negative for the Euro but 1.4000 area could be a strong technical support at this phase. The bias is neutral in nearest term but I still prefer a bearish scenario with sell on rallies strategy. Immediate resistance at 1.4150. Break above that level could trigger further upside correction testing 1.4200 – 1.4250 area. Initial support at 1.4000. Break below that area should trigger further bearish scenario towards 1.3750.

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In a message delivered on Thursday the President of the U.S. declared that banks will no longer be able to service, own, and run separate hedge funds, nor hold real estate investment vehicles that are reliant upon funding that is not free and clear. The response has been a staggering drop in global equity trade, with all main futures exchanges dropping upwards of 2% in midday trade. The commodity pairs have absorbed the dollar buying, Usd/Jpy has absorbed heavy dollar selling, and the European based pairs have held steady.

In Wall Street trade on Thursday, the dollar has found buyers, but today it is not out of a desire to buy into the U.S. growth story; this move is all about the move to the relative safety of U.S. Treasury notes. Equity markets have been raped and pillaged by the XLF, the Exchange Traded Fund for the financial sector, as the U.S. President’s 11:45 EST speech in regard to reform bills on financial trading gets absorbed.

Asian markets still have to take into account this move, and the currency market may retrace some of the ground lost in Wall Street trade. It will be interesting to observe the reaction coming from other countries over the next few days, if they support these decisions taken by the U.S. government. Most investors are now waiting for a reaction from EU officials. A similar decision regarding bank’s trading branches has the potential to send the market into a new wave of risk-aversion, continuing the wave of dollar-long orders.

Dollar Index Technical View: TheLFB Member Charts

Daily chart trend: Mixed. Main price points: 74.19, and 76.82. Looking for: A Long wave I/ A

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It has been a nervy afternoon’s trading after a surprise plunge in US equity indices whiplashed FX markets and particularly JPY-crosses into risk aversion mode. The S&P index rapidly dropped around 1.3% shortly after the US open, seemingly with no news headlines triggering the move. The unexpected shock sent EURJPY plummeting from 129.25 to 128.25 in a matter of seconds, and after taking out the 2 month uptrend support at 128.15, we have now touched lows of 127.54. Until that point, risk sentiment appeared to be stabilizing; early USD gains had been gradually pared back during the day after Goldman Sachs reported much better than expected earnings and an IMF spokesperson was quoted as saying there was no expectation for Greece to request financial help from the IMF which eased some concerns about sovereign default. US claims data released earlier in the session had been higher than consensus estimates, but still relatively benign in their effect on FX markets (initial claims 482k vs. 440k expected, continuing claims 4599k vs. 4598k expected). The Philadelphia Fed index missed forecasts (15.2 vs. 18.0 expected), but US leading indicators increased more than expected (1.1% vs. 0.7% expected). Also released during the afternoon was the BoC’s Monetary Policy Report, followed by the usual press conference with Governor Carney. There were very few new developments from the recent BoC meeting statement, but there was a repetition of the currency-specific comments that CAD strength combined with the absolute low level of US demand would continue to dampen exports.

Since that point however, the equity market slump has dominated price action, with EURUSD dragged back towards session lows around 1.4050, and gold taking out major support levels at $1195 to touch a low of $1089.85. We still look for gold to head towards the head-and-shoulders target of $1080 after the break of the neckline support at $1119 yesterday. Still to come, it has been announced that US President Barack Obama with speak at 17:40 CET to “offer proposals to limit financial institutions’ size and trading activities”. We expect jittery markets to persist until this event is out of the way.

AC Markets
http://www.ac-markets.com

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

BoC Monetary Policy Report – Raises 2010 Inflation Profile Though Does Not Signal Change to Policy Outlook

In the final analysis, the details of the Bank’s forecast show a mild nudge up in its expectation for growth in Canada’s economy over the next couple of years. The 2010 real GDP forecast was trimmed back to 2.9% from 3.0%, while 2011′s forecasted growth rate rose to 3.5% from 3.3%. Not significant changes on either year’s growth rate, but they balance out to a 0.1% overall increase compared to the October projection. The Bank was more aggressive in terms of upgrading its forecast for the global economy with world GDP growth forecasted to increase by 3.7% in 2010 (from 3.1% in October) and 4.1% in 2011 (from 4.0%). In terms of its outlook for inflation, the Bank boosted the 2010 headline and core forecasts. The updated forecast looks for the core rate to average 1.6% in the first-quarter 2010 (from 1.4% in October) and 1.7% for the entire year (from 1.5% in the previous forecast). The headline rate was also bumped up in 2010 and forecasted to average 1.8% (from 1.4%). Forecasts for core rate were unchanged in 2011 while the headline rate is expected to be one-tenth higher in the first quarter of 2011 and then settle back into the prior forecast.

The other notable change in the forecast was oil prices, which are assumed to be higher over the forecast horizon, averaging $83.50 in 2010 (from $76.5) and $88.00 in 2011 from ($80.00). The assumed level of the Canadian dollar was unrevised at 96 U.S. cents, and the Bank still expects non-energy commodity prices to increase “progressively” and credit conditions to “gradually improve.”

The report presented changes to the quarterly profile for growth in Canada’s economy throughout 2010 and the first quarter of 2011. Growth is expected to be slightly milder in the first quarter of 2010 but to accelerate at a faster pace in the following four quarters. The combination of a strong Canadian dollar and weak U.S. demand will weigh on net exports, which are forecasted to trim 1.2% from the 2010 growth rate. Imports are expected to increase at a faster pace than exports this year likely helped along by the stronger currency making purchases from abroad less expensive. In 2011, however, higher commodity prices and a stronger U.S. economy will see net exports contribute to growth in this update, a switch from the October outlook, which forecasted that the sector would restrain overall growth in 2011.

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EUR/USD

Current level-1.4061

EUR/USD is in a downtrend, after peaking at1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169.

The downtrend from 1.4410 is intact ad the pair is in a minor consolidation pattern above 1.4000-39 sentiment zone. Further depreciation is to be expected, towards 1.3740 daily frame support area. The intraday bias is negative and 1.4135 should limit the upside for the next leg downwards, to 1.3924 initial target.

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News and Events:

EURUSD finds itself under relentless selling pressure this week (touching a low of as Greek bond yields continue to rise and the cost of insuring against sovereign default in Greece creeps further upwards. The yield on Greek Sovereign 2yr bond has surged to 4.96% having been around 1.70% at the end of September, and the cost of CDS (insurance premium to protect against default) has risen to 344 basis points. In layman’s terms, that means for every EUR 1m of Greek government bonds, an investor would have to pay EUR 344k to insure their investment. And unlike the Dubai debt crisis, this problem will not have any quick or simple solutions. Indeed, it seems that the worries over sovereign default are starting to spread within the Eurozone. With other economies like Ireland, Portugal, Spain and Italy also seeing increasing distrust from CDS markets and the contagion even beginning to affect UK and French CDS, we may be beginning to see the emergence of a new driver of FX markets for 2010. Currencies are often noted to follow the performance of other asset classes, and often currency markets will tend to track certain markets more than others. In 2008, commodities were the predominant focus as oil soared higher above $147 per barrel, and EURUSD powered to new highs above 1.6000 – indeed the correlation of the two assets was over 0.9. In 2009, equities and credit markets took the reins as the driver of USD trends. For 2010, it seems plausible that the single most important driver of currency trends will be sovereign credit spreads. The extraordinary measures that were undertaken by governments around the globe to prop up the economy during the financial crisis have certainly stabilized equity markets, but at the cost of monstrous budget deficits. Government debt will be under scrutiny this year, raising the possibility of sovereign default to significant levels, and investors will likely shift their attention from analyzing so-called ‘risky assets’ as they did in 2009, to analyzing ‘risk-free assets’ i.e. government bonds in 2010. (more…)

The declining equity market was fully reflected in the value of the dollar index in midweek trade. The dollar index, which tracks the performance of the greenback against a basket of six currencies, gained 85 basis points throughout the day breaking above the 78.00 benchmark level. The major currencies started weakening from the early hours of Wednesday’s session, and to some extent continued to decline throughout the U.S. session. Since December, the market had a strong desire for dollar long positions, however, today’s major currency sell-off had a first; the major currencies moved lower as one, something not often seen over the last few weeks of trading.

Dollar Index Technical View: TheLFB Member Charts

Daily chart trend: Mixed. Main price points: 74.19, and 76.82. Looking for: A Long wave I/ A

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Daily Technical Analysis

EURUSD Outlook

As I had expected, the EURUSD continued its bearish momentum yesterday, bottomed at 1.4080 and closed at 1.4104. The combination of triangle and 1.4250 key support level breakdown produced significant power to the bearish pressure. The bias remains to the downside targeting 1.4000 psychological level. Break below that area should trigger further bearish scenario towards 1.3750 in longer term point of view. Immediate resistance at 1.4150. Break above that area should trigger further bullish correction testing 1.4250 area but I prefer a bearish scenario at this phase and stay with sell on the rallies strategy.

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U.S. Dollar Trading (USD) accelerated recent gains as US stocks came under heavy selling pressure and the Euro plunged to 20 week lows. Data was mixed with December Housing starts at 557K vs. 580k expected while Building Permits were at 653k vs. 590k forecast. DJIA -122 points closing at 10603, S&P -12 points closing at 1138 and NASDAQ -29 points closing at 2291. Looking ahead, Weekly Jobless Claims are forecast at 440k vs. 444k previously. Also released, Weekly Crude Oil Inventories forecast at 2.2m vs. 3.7m previously.

The Euro (EUR) broke through 1.4250 in early Asia and the rout continued in Europe with markets turning aggressively bearish on the single currency. Momentum to the downside is accelerating and the major 1.4000 level is on the radar. December German PPI -0.1% vs. 0.2% forecast. Overall the EUR/USD traded with a low of 1.4079 and a high of 1.4291 before closing at 1.4110. Looking ahead, January PMI services forecast at 53.9 vs. 53.6 previously. January PMI manufacturing forecast at 51.8 vs. 51.6.

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The dollar rallied sharply across the board, popping to a 5-month high against the euro to 1.4089 and climbing just shy of the 1.05-level versus the Canadian dollar. A combination of heightened risk aversion and skepticism over the viability of the global economic recovery dragged US equities sharply lower, also pulling down oil and gold prices on the session. By afternoon trading, the Dow Jones and Nasdaq were both down by over 1.8% while the S&P 500 tumbled by 1.6%.

The economic reports released from the US earlier today included December PPI, building permits and housing starts. The headline producer price index increased by 0.2% on a monthly basis from 1.8% in November and on an annual basis higher by 4.4% from 2.4%. The core PPI reading was flat in December compared with a 0.5% increase in November and up by 0.9% versus 1.2% a year earlier. Meanwhile, housing reports were mixed with building permits up sharply to 10.9% in December from 6.9% while housing starts declined by 4.0% compared with an 8.9% increase previously. (more…)

Risk aversion from both Asian and European factors aiding USD and weighing upon equity sentiment

ECONOMIC DATA

(JP) Japan Cabinet Monthly Economic Report: Leaves economic assessment unchanged (6th straight month)

(GE) Germany Dec Producer Prices M/M: -0.1% v 0.2%e; Y/Y: -5.2% v -5.1%e

(JP) Japan Dec Convenience Store Sale Sales Y/Y: -5.5% v -6.3% prior

(TT) Taiwan Dec Export Orders: 52.6% v 49.6%e

(MA) Malaysia Dec CPI Y/Y: 1.1% v 1.0%e

(IT) Italy Nov Industrial Orders M/M: 2.6% v 0.4%e; Y/Y: 0.0% v -8.7%e
(IT) Italy Nov Industrial Sales M/M: 1.5% v -1.6% prior; Y/Y: -8.9% v -18.4% prior

(UK) BOE Minutes: Voted 9-0 to maintain interest rates and Quantitative easing measures at current levels
(UK) Dec Claimant Count: 5.0%% v 5.0%e; Jobless Claims Change: -15.2KK v -4.6Ke
(UK) Nov Avg Earning (incl bonus) 3M/Y: 1.6% v 1.6%e; Ex bonus 3M/Y: 1.6% v 1.7%e
(UK) Nov ILO Unemployment rate: 7.8% v 8.0%e

(SA) South Africa Nov retail Sales Y/Y: -6.6% v -5.0%e

(IT) Italy Nov Current Account: -€4.6B v -€3.3B prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities: Equity markets in Europe opened on a heavy theme following equity rotations in Asia. Asian markets, specifically China traded down sharply on further speculation regarding monetary tightening. This sentiment weighed on European banking shares throughout the morning session. Expectations ahead of a plethora of financial earnings from Bank of America [BAC], Morgan Stanley [MS], US Bancorp [USB] and State Street [STT] amongst others added to this sentiment. Despite blockbuster production figures from BHP Billiton [BHP.AU], specifically for iron ore, concerns out of China and USD strength sent the resource sector broadly lower. Fertilizer names, specifically potash names (K+S [SDF.GE]) moved significantly lower following a profit warning from Honk Kong listed Sinofert [297.HK]. Names that moved against the broader trend and traded higher have been highlighted by Merck Kga [MRK.GE] following reports that the firms Q4 figures may beat expectations. The broader tech sector has taken a lift from earnings from giant IBM [IBM] and European name ASML [ASML.NV]. Trading ranges have remained choppy through the session with a downside bias. Volumes have been in-line to light as markets prepare themselves for US corporate earnings.

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