FOREX TRADING

USD Lower, Pending Home Sales Up 1%, Stocks Rally

• USD: Lower, pending home sales rise less than expected but post improvement year-over-year
• JPY: Higher, supported by gains in cross trade to AUD, Kamei calls for the Post Bank to diversify
• EUR: Higher, Greek debt default spreads narrow, PPI rises, German retail spending improves
• GBP: Mixed, UK election polls suggest possibility of a hung parliament, debt fears limit gains
• CAD and AUD: AUD lower & CAD higher RBA leaves rate policy unchanged, CAD tracks risk sentiment

Overview

USD traded mixed Tuesday with the main focus on the RBA’s decision to leave rate policy unchanged. A 25 bps hike was widely expected from the RBA and the AUD traded sharply lower in reaction to the RBA’s decision to hold rate policy steady at 3.75%. The RBA cited recent tightening of monetary policy in China as one of the key factors for the decision to hold rates steady. The RBA left the door open for future rate hikes if the Australian economy continues to improve. European currencies were mixed with the EUR supported by report of an unexpected rise in EU producer prices and in reaction to a narrowing of Greek default spreads. The Greek prime minister said that Greece will do everything necessary to end its fiscal crisis. CHF is supported by report of better than expected Swiss consumer sentiment. GDP continues to underperform pressured by uncertainty about the UK budget deficit outlook as the latest UK polls indicate a possibility of a hung parliament. A hung Parliament in the UK would make it much more difficult for the UK to address its budget deficit. GBP downside was limited by report of improvement in UK construction PMI and speculation that the BOE will signal a pause in its asset purchase program at Thursday’s BOE policy meeting. JPY traded mixed supported by sharp gains in cross to the AUD. JPY gains were limited by improving risk sentiment sparked by the RBA’s rate decision and firmer equity market trade. US economic data was mixed with pending home sales reported to have risen by less than expected, pending home sales rose in all districts during the summer. The pending home sales report suggests that US housing market continues to stabilize.

Focus turns to Wednesday’s release of ADP employment report, central bank policy meetings in Europe Thursday and Friday’s US January unemployment report. The ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive.

Today’s US data:

US pending home sales for December rose 1% to 96.6, a reading of 97.1 was expected. Since last December pending home sales are up 10.9%.

Upcoming US data:

On February 3rd January ADP employment will be released expected -54k compared to -84k last month. January ISM non-manufacturing index will also be released on February 3rd expected at 51 compared to 50.1 last month. On February 4th initial jobless claims for week ending 01/30 will be released expected at 465k compared to 470k last month. Q4 labor productivity, unit labor costs and December factory orders also be released on February 4th. Q4 productivity is expected at 5% compared to 8.1% last quarter, unit labor costs are expected at -2% compared to -2.5% last quarter and factor orders are expected to rise by 0.8% compared to 1.1% last quarter. On February 5th January unemployment rate and nonfarm payrolls will be released. The unemployment rate is expected to rise by 0.1% to 10.1% and nonfarm payrolls expected at -5k compared to -85k last month. December consumer credit will also be released on February 5th expected at -8bln compared to -17.5bln last month.

JPY

JPY traded mixed with modest gains attributed to a sharp drop in AUD/JPY cross. AUD/JPY traded 1.5% lower with the AUD pressured by the RBA’s surprise decision to hold interest rate policy steady. JPY gains were limited by improving risk sentiment as the Nikkei closed 166 points higher and the RBA policy decision helped to dampen worries about the global recovery. JPY gains were limited by a call from Japan’s banking minister Kamei for the Japanese Post bank to diversify investment and buy more US treasuries rather than Japanese government bonds. Japan’s Post Bank is the largest holder of JGB’s. JGB’s may be at risk as Japan’s national debt nears 200% of GDP. 80% of Japan’s Post bank funds go into JGB’s. JGB bond prices declined and yields rose in reaction to Kamei’s comments. The yield rise supports the JPY. Japan’s January monetary base rose by 13.4%. The report had little impact on JPY trade. JPY remains vulnerable to concern about Japan’s deficit and deflationary pressures. Monday Japan’s Finance Minister Kan said that Japan may need fresh policy efforts to stop deflation and in reaction to report of stronger than expected US ISM. Friday, Japan reported that deflation accelerated with December CPI reported to have declined by 1.3%. Kan’s statement on deflation will increase pressure on the BOJ to ease monetary policy. Japan’s sovereign bond rating may be at risk of a downgrade if Japan fails to take action to reduce its deficit. Today’s call for diversification out of JGB’s may make it harder for Japan to finance its debt.

This week’s Japanese economic calendar includes the February 5th release of December preliminary leading indicators expected 2% compared to 1.7% last month. On February 8th December current account will be released along with January money supply.

Key technical levels to watch in USD/JPY include support at 89.58 the January 29th low with resistance at 91.88 the January 21st high.

EUR

EUR edged higher supported by report of an unexpected rise in EU December PPI and in reaction to better than expected German retail spending report. EU December PPI rose by 0.1%. The PPI rise shifts focus to potential building inflation risks in the EU and the report may have implications for ECB policy outlook. German retail spending rose 0.8% in December. The rise in German retail spending suggests continued improved outlook for the German economy. The German retail spending report follows Monday’s report that EU manufacturing PMI rose to a two-year high. EUR was also supported by a narrowing of Greek default spreads and a statement from the Greek prime minister that Greece will do everything necessary to fix the fiscal crisis. In addition there was a report from Nomura which said that Poland’s plan to cut its budget deficit could lead to adoption of the EUR by 2014. The Nomura report on Poland’s deficit outlook may dampen fears of potential breakup of European Monetary Union which may result from sovereign debt risks in peripheral European countries. Not all the news was positive however as the ECB Constancio said that he was relatively pessimistic about the short-term prospects for Portugal’s debt. This week’s main focus is Thursday’s ECB policy meeting. The ECB is widely expected to hold monetary policy unchanged and confirm that a gradual exit from nonconventional policy matters will continue. ECB’s Bini Smaghi said that the timing of exit strategies depends on the strength of the economic recovery. Concern about sovereign debt risks in peripheral European countries is the main risk for the EUR.

On February 3rd EU January services PMI will be released expected 52.3 compared to 53.6 last month along with December retail sales expected at 0.4% compared to -1.25 last month. ECB will hold a policy meeting Thursday, February 4th. No policy change is expected. The ECB is expected to confirm the continuing drawdown of unconventional liquidity measures. German industrial production for December will be released on Friday expected at -3.8% y/y compared to -8% last report.

The technical outlook for the EUR is negative as the EUR trades below 1.4000. Expect EUR support at 1.3830 the June 22nd low with resistance at 1.4053 the January 28th high.

GBP

GBP traded lower pressured by the latest UK election polls which suggest the election could result in a hung parliament. A hung parliament would reduce the likelihood that the UK government will take action to reduce its budget deficit. The UK AAA sovereign debt rating is at risk for possible downgrade if the UK government does not take action to reduce its deficit. GBP downside was limited by report of improving construction PMI and improvement in risk sentiment as global equity markets posted modest gains. UK January construction PMI improved to 48.6 from 47.1 last month. The construction PMI follows Monday’s report that UK manufacturing PMI surged to its highest level in 15 years. These reports may impact BOE policy outlook, reduce fears about the pace of the UK economic recovery and encourage the BOE to pause in its asset purchase plan. This week’s main focus will be Thursday’s BOE policy meeting. The BOE is expected to pause in its asset purchase plan and leave the door open for possible expansion of its asset purchases should the economic recovery in the UK weaken. Recent UK economic data has been mixed with improvement in housing prices, manufacturing PMI and rising inflation. These reports confirm indicators that the UK economy is improving. The trade will be monitoring the BOE policy meeting to see if the BOE thinks that the economy needs further support from the central bank. GBP has been outperforming of late supported by speculation that rising UK inflation and improving UK economic outlook may encourage the BOE to pause in its asset purchase plan and take a more hawkish tone. UK December CPI rose by 2.9%. BOE’s Sentance said that the BOE may have to consider raising rates sometime this year.

BOE will hold a monetary policy meeting on February 4th. No policy change is expected. The trade will be looking to see whether the BOE elects to pause in its asset purchase plan.

The technical outlook for GBP is negative as GBP trades below 1.5900. Expect near-term support at 1.5708 the October 13ht low with resistance at 1.6180 the January 29th high.

CAD

CAD traded mixed to slightly higher supported by a modest improvement in risk sentiment as global equities trade higher and by gains in cross trade to AUD as the RBA surprises and leaves interest rate policy on hold. CAD was also supported by a modest rally in commodities. The commodity price rally was attributed to the RBA decision to hold rate policy steady. Recent declines in equity and commodity markets have been attributed to tightening of monetary policy in China and fears that the tightening of monetary policy China will reduce global demand for exports and slow the global recovery. The RBA specifically cited tightening in China as primary reason they elected not to hike rates. The timing and pace of withdrawal stimulus will be key to the outlook for the global economy and commodities. CAD remains vulnerable to steady BOC policy outlook and concern that the Canadian economy may weaken midyear. Last week Canada reported stronger than expected GDP but BOC Governor Carney warned that the economic expansion may peak midyear. Carney’s comments suggest that BOC will remain on hold through midyear. CAD also remains vulnerable to concern about the impact of tightening of monetary policy in China. This week’s main focus is Friday’s release of US and Canadian unemployment reports.

This week’s Canadian economic calendar includes the February 4th release of December building permits expected at 2.5% compared to -4.6% last month along with January Ivey PMI expected at 52.5, compared to 40.4 last month. On February 5th January unemployment will be released expected to rise by 0.1% to 8.5% employment growth at 15, compared to -28.3k last month.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0555 the January 28th low with resistance at 1.0722 the February 1st high.

AUD

AUD traded sharply lower pressured by the RBA’s surprise decision to hold monetary policy unchanged. The RBA elected to hold monetary policy unchanged at 3.75% and cited concern about the recent tightening of monetary policy in China as one of the major factors for the decision to hold rate policy steady. The RBA was widely expected to have hiked rates 25bps to 4%. The RBA left the door open for future rate hikes contingent on improving economic outlook. The RBA also indicated that there was not enough recent economic data to determine the impact of prior RBA rate hikes. Australia’s PM said that interest rates will continue to rise from record lows as the global economy recovers. It appears the RBA policy decision caught the Australian government off guard as well. It’s not clear what the lasting impact of the RBA policy decision may be for the AUD or risk sentiment. It could be argued that the RBA’s hesitation hike rates is a sign of concern about global outlook and this could contribute to diminished risk appetite and weaker AUD. It could also be argued that the RBA’s decision to hold rate policy steady will improve demand for commodities and diminish the risk to the global recovery helping to offset the impact of recent tightening in China. There was limited impact from the release of Australia’s December NAB business conditions index which was reported unchanged at 10. AUD price direction will likely quickly re-link to the direction of commodities and equities. Australia still presents an attractive yield advantage and relatively positive domestic growth outlook.

On February 3rd December trade balance will be released expected at -1.98bln compared to -1.70bln last month. On February 4th December building approvals will be released along with December retail sales. Building approvals are expected to fall by 2.7% compared to a 5.9% rise last month and retail sales are expected to rise by 0.6% compared to 1.4% last month.

The technical outlook for the AUD is negative as the AUD breaks trend line support. Expect AUD support at 8735 the December 23rd low with resistance at 8928 the February 2nd 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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