FOREX TRADING

USD Higher, ADP Job Cuts Smaller than Expected

• USD: Higher, ADP employment beats expectations fueling recovery hope, non-manufacturing ISM rises
• JPY: Lower, pressured by improving risk sentiment and selling in cross trade
• EUR: Lower, EU commission endorses Greek debt proposals, services PMI revised higher, retail sales flat
• GBP: Lower, UK consumer confidence improves, services PMI posts an unexpected decline
• CAD and AUD: AUD & CAD lower, Australia trade deficit improves, China’s mortgage rates rise

Overview

USD traded mixed to firm Wednesday supported by report of above expectation January ADP employment report. EUR initially traded higher supported by report that the EU has endorsed the Greek proposal to reduce its deficit. EUR was also supported by report of stronger than expected EU January services PMI. GBP traded mixed with early support from report of a jump in UK consumer confidence. GBP gains were limited by report of an unexpected decline in UK services PMI. Commodity currencies were mixed with AUD posting a modest improvement in overseas as Australia reports improvement in its trade balance. CAD drifted lower despite report that economists have upgraded Canada’s 2010 GDP forecast with selling attributed to a modest setback in crude and the price of gold. A report that some Chinese banks have hiked mortgage rates dampens demand for commodities. JPY weakened in reaction to improving risk sentiment and selling in cross trade. US economic data was mixed. The challenger job survey said job cuts increased for the first time since July with January layoffs 59% higher than December of 2009. The surge in layoffs is due to downsizing in retail and telecommunications. The ADP employment report for January shows that employment dropped slightly less than expected and the decline in December was also revised lower. The ADP report suggests that US January nonfarm payrolls will turn positive. The USD edged higher after the release of the ADP report. Non-manufacturing ISM for January came in higher but slightly below market expectation. The non-manufacturing ISM index came in above 50 which suggests the service sector of the US economy is entering an expansion phase. USD consolidated its ADP gains after the non-manufacturing ISM release. FX markets remain range bound.

Focus turns to 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:

ADP January employment declined by 22k, a reading of -30k was expected. January ISM non-manufacturing came in at 50.5, a reading of 51 was expected.

Upcoming US data:

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 lower pressured by report of better than expected US ADP January employment report and selling in cross trade. The above expectation ADP report suggests that US January nonfarm payrolls will likely soon turn positive. This contributes to improving risk sentiment and diminished safe haven flows to the JPY. Improving risk sentiment is also attributed to report that the EU commission has endorsed the Greek proposal to deal with its deficits. EUR/JPY traded higher in reaction to the Greek deficit news and report of an upward revision in EU January services PMI. GBP/JPY traded higher with GBP supported by report of improvement in UK consumer confidence. AUD/JPY traded higher with AUD supported by report of improving Australian trade balance. There appeared to be limited reaction to a report that some Chinese banks have hiked mortgage rates. Over the past few weeks tightening of monetary policy in China has contributed to weaker commodity and equity market trade and diminished risk appetite. 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. Last 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.

This week’s Japanese economic calendar includes the February 5th release of December preliminary leading indicators expected at 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 opened higher supported by report that the EU commission has endorsed the Greek proposal to deal with its deficits and in reaction to an upward revision in EU January services PMI. Recent EUR weakness has been attributed to concern about the risk of a debt default in Greece. Today’s news generates hope that Greece is coming to grips with its deficit troubles. Economist Roubini says the IMF and EU will likely rescue Greece from default. The trade will continue to monitor developments in the other peripheral European countries with Portugal the next likely hotspot for concern about fiscal default. ECB’s Constancio said Monday that he was relatively pessimistic about the short-term prospects for Portugal’s debt.  EU January services PMI was revised to 52.5 from 52.3. EU December retail sales were flat. These reports are unlikely to change the outlook for steady policy decision at Thursday’s ECB policy meeting with the flat reading on retail sales confirming that the EU recovery is likely to be uneven and protracted. EUR turned lower after the release of better than expected January ADP employment report as the report fuels US recovery hopes and higher bond yields. 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.

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 mixed initially supported by report of a jump in UK consumer confidence. GBP turned lower with gains limited by report of a drop in UK services PMI. UK January nationwide consumer confidence index rose to 73 from 70 last month. UK January services PMI dropped to 54.5 from 56.8 last month. The rise in consumer confidence is likely to bolster BOE hawks and encourage a call for the BOE to pause in its asset purchase plan. The decline in the services PMI is fodder for BOE doves and could encourage the BOE to leave the door open for expansion of its asset purchase plans. Despite today’s mixed UK economic data, general consensus is that the BOE will pause in its asset purchase plan and signal the beginning of normalization of monetary policy. This consensus partly reflects the fact that UK inflation is rising above target. (See our special report released Tuesday titled “BOE may pause QE at Thursday’s meeting”.) 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 the weaken. 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%. GBP remains vulnerable to concern about UK debt outlook and upcoming general election. Reuters reports that economists see a 20% chance of a hung parliament in the UK May 6th election. 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.

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 13th low with resistance at 1.6180 the January 29th high.

CAD

CAD drifted lower pressured by weaker commodity prices and report that some Chinese banks have hiked mortgage rates and tightened lending conditions. Today’s news of fresh tightening of monetary conditions in China dampens demand for commodities and limits the improvement in risk appetite. Chinese officials are trying to curb lending and reduce the risk of the formation of asset bubbles in China. Investors will continue to monitor how aggressive China tightens lending conditions as China’s growth is key to the outlook for the global recovery and demand for commodities. CAD failed to benefit from report of better than expected US ADP January employment report. As noted above, the ADP report suggests that Friday’s US nonfarm payrolls will likely turn positive. A positive US nonfarm payrolls report cuts two ways for the CAD trade. CAD may benefit from improving growth outlook in US the CAD may weaken in reaction to speculation that improving US labor situation brings us closer to timeframe for Fed tightening of monetary policy. Overall we suspect that positive news for the US economy will generally be a positive for the CAD. There was little reaction to report that economists have lifted Canada’s 2010 growth forecast. Private-sector economists in Canada have raised their 2010 Canadian GDP forecast to 2.6% from 2.3% and left the 2011 growth forecast unchanged at 3.2%. The upgrade of Canada’s growth forecasts by private economists is at odds with BOC growth projections. BOC Governor Carney sees growth of around 2% next year unless there’s a sharp increase in productivity. No major Canadian economic data was released in today’s trade 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 15k 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 lower pressured by report of additional tightening of lending conditions in China and in reaction to the report of better than expected US January ADP employment. AUD traded sharply lower in Tuesday’s trade pressured by an unexpected decision by the RBA to hold monetary policy steady. The trade had expected the RBA to hike rates by 25bps. The RBA cited tightening of China’s monetary conditions and tame Australian inflation as the main rationale for maintaining steady rate policy. The fact that the RBA made reference to China heightens the importance of developments in China’s monetary policy and economy for the direction of the AUD and RBA policy. The RBA left the door open for future rate hikes contingent on improving economic outlook. A number of analysts have interpreted the RBA policy statement as maintaining a hawkish bias and that the RBA is letting China due some of the tightening for the RBA. There was limited reaction to the report that Australia’s December trade deficit narrowed slightly to 2.25bln, a reading of 2.4bln was expected. Exports rose by 4% and imports were reported up 6%. Australia’s January PSI declined by 2.6 points. This marked the first contraction in four months. AUD price direction will likely re-link to the direction of commodities and equities. Sentiment towards the AUD has turned negative despite the fact that Australia still presents an attractive yield advantage and relatively positive domestic growth outlook.

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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