FOREX TRADING

USD Lower on Rumor of a €20 Billion Greek Bailout Plan

• USD: Lower, equities and commodities rally, risk appetite improves on Greek rescue rumors
• JPY: Lower, tracking equities and selling in cross trade
• EUR: Higher, Greek rescue speculation and technical bounce on record net spec short on the IMM
• GBP: Higher, trade balance widens, retail sales decline, house prices rise
• CAD and AUD: AUD & CAD higher, improving risk sentiment, reduced Australian budget deficit forecast

Overview

USD traded lower Tuesday pressured by Greek rescue speculation. A report that ECB President Trichet would return one day early from a BIS meeting in Australia to attend an EU Council Meeting fueled speculation that a Greek bailout plan may be soon announced. The EUR traded at an eight-month low versus the USD late last week pressured by concern of sovereign debt default risk in Greece. Today’s speculation of Greek rescue plan sparked an improvement in risk appetite, rebound in equities and commodities prices and selling of the USD. The latest rumor is that a €20bln Greek bailout plan may be soon announced. EUR gains were limited by a statement from the ECBs Nowotny that ECB can’t bailout Greece because bailout of governments is not part of the ECB charter. The USD decline may also reflect technical factors which include last week’s CFTC commitment of trader’s report which said that spec short EUR position on the IMM was at a record high. This may be an indication that investors were getting too bearish the EUR and the EUR may have reached oversold technical conditions. In reaction to the sharp increase in EUR short positions economist Stiglitz called on Europe to teach speculators a lesson. Short covering was the main driving factor for today’s EUR trade. GBP traded higher but underperformed in reaction to report a weaker UK retail sales and new election polls which suggest the risk of a hung parliament. Commodity currencies traded higher tracking the improvement in risk appetite and higher commodity prices. AUD was supported by report that Australia’s fiscal budget deficit for 2009/10 may be 15bln less because of stronger than expected growth and hawkish comments from RBA Governor Stevens. Stevens warned that keeping rates to low for too long may make it harder to prevent asset bubbles. JPY traded lower pressured by improving risk appetite. US economic data was mixed with wholesale sales rising and inventories falling. Focus turns to Wednesday’s testimony by Fed Chairman Bernanke before the House on unwinding of liquidity measures. The WSJ reported Monday that Bernanke will lay out a plan to raise rates as the economy improves with the first focus on the interest rate on excess reserves. Main focus for FX trade remains risk sentiment and debt default risks in peripheral European countries, Greece, Spain, Portugal, and Ireland.

Today’s US data:

December wholesale inventories dropped by 0.8%, a 0.5% rise was expected. Wholesale sales rose by 0.8% a 1% rise was expected.

Upcoming US data:

On February 10th December trade balance and the Treasury budget will be released. The trade balance is expected at -36.5bln compared to -36.4bln last month. The Treasury budget is expected at -60.5bln compared to 63.5bln last month. On February 11th initial jobless claims for week ending 02/06 will be released expected at 470k compared to 480k last week. January retail sales and December business inventories will also be released on February 11th. The retail sales are expected to rise by 0.5% compared to -0.3% last month. Inventories are expected unchanged at 0.4%. On February 12th February University Michigan consumer sentiment will be released expected 74 compared to 74.4 last month.

JPY

JPY traded lower pressured by today’s rebound in risk appetite sparked by Greek rescue speculation. As noted above, ECB president Trichet’s decision to return a day early from a BIS meeting in Sydney to join the EU Council meeting sparked speculation that a Greek bailout may be in the works. JPY was also pressured in cross trade as the Greek bailout speculation sparked a sharp rally in AUD/JPY and EUR/JPY. The Nikkei closed a fraction lower but other Asian markets rallied and equity markets were stronger in Europe and the US. JPY price direction remains closely correlated to the direction of equities and risk sentiment. There were no major Japanese economic reports released in today’s trade. Monday, Japan reported improvement in January service sector index and a widening of its current account surplus. Japan’s large current account surplus is thought to be the main reason investors are attracted to the JPY as an additional safe haven to the USD in times of rising risk aversion. There was limited reaction to a statement from Japan’s Finance Minister Kan that weakness in Japanese equities reflects overseas factors. Japanese officials have downplayed the need to try and support the Japanese equity market. It’s difficult to read too much into today’s downside price action in the USD and JPY. Commodities ands equities were oversold and the big build up of new short positions in the currencies made the market’s ripe for a correction. An announcement of a Greek bailout may spark additional short term selling of the USD and this JPY.

This week’s Japanese economic calendar includes the February 10th release of January CGPI expected at -0.1% compared to 0.1% last month. December machine orders will also be released on February 10th expected at 8.8% compared to -1.3% last month. On February 16th December revised industrial output will be released expected unchanged at 2.2%. On February 17th December tertiary activity will be released expected at -0.4% compared to -0.2% last month.

Key technical levels to watch in USD/JPY include support at 88.90 the February 5th low with resistance at 91.09 the February 4th high.

EUR

EUR traded sharply higher supported by rumors of a Greek bailout and short covering. Greek bailout rumors were fueled by ECB president Trichet’s decision to leave a BIS meeting early to attend an EU Council meeting Wednesday. There is speculation that the EU will decide at Wednesday’s EU Council meeting to announce a Greek bailout plan. The latest rumor is that the EU is preparing a €20bln bailout for Greece. ECB officials appear to be distancing the central bank from talk of a Greek bailout. ECB’s Nowotny said there is no bailout clause in the ECB charter to allow intervention for Greece. Bloomberg news reports that the ECB may be forced to delay its exit from conventional monetary policy because of Greek fiscal troubles. Trichet sounded hawkish and said that anchoring inflation expectations is key as the global economy recovers. In addition ECB spokesperson said that Trichet’s change of plans was due to logistics. Tuesday’s EUR rally was also fueled by heavy short covering sparked by the improvement in risk sentiment and Greek bailout rumors. The technical outlook for the EUR had reached an extreme in negative sentiment and oversold as last week’s CFTC commitment of traders finds a record net spec short position in the EUR on the IMM. The Financial Times reports that specs have made the equivalent of an $8bln bet against the EUR on the IMM. Today’s Greek bailout rumors overshadowed report that German final CPI declined by 0.6% January and EU December trade balance narrowed to 13.3bln from 17.2bln last month. The narrowing of the trade balance reflects a 4.5% rise in imports. Developments in regard to fiscal stability in peripheral European countries will remain the main focus for EUR trade. An announcement of a Greek bailout plan may add additional support to the EUR in the short term but it may not be enough to offset concern about debt default risks throughout southern Europe.

On February 12th EU Q4 GDP will be released expected at 0.3% compared to 0.4% last quarter along with December industrial production expected at the 0.2% compared 1% last month.

The technical outlook for the EUR is negative but indicators suggest that EUR is oversold in the short run. Expect EUR support at 1.3650 the February 9th low with resistance at 1.3905 the February 4th high.

GBP

GBP traded higher supported by the broad improvement in risk sentiment sparked by Greek rescue rumors with gains limited by report of weaker than expected retail sales and widening in the UK trade deficit. GBP gains were also limited by the latest UK election polls and demand for EUR/GBP. UK January BRC retail sales declined by 0.7% and the UK trade deficit widened to 7.27bln from 6.79bln last month. The unexpected widening of the trade deficit reflects increased import demand and weaker export sales. Imports rose by 5.2% and exports by 4.5%. Not all the UK economic news was negative as RICS house price balance improved to 32 from 30 last month. The latest UK election polls suggest the risk of a hung parliament. A hung parliament basically would mean gridlock and make it much more difficult for the political parties in the UK to address the UK budget deficit. Failure to address the UK budget deficit could lead to a downgrade of the UK’s AAA debt rating. GBP remains vulnerable to BOE policy outlook. EUR/GBP gains are attributed to Greek rescue speculation. Last Thursday, the BOE elected to pause its asset purchases but left the door open for future expansion of quantitative ease if the economy deteriorates. BOE decision to leave the door open to future bond purchases contributes to negative GBP sentiment. This week’s main focus will be Wednesday’s release of the BOE’s inflation report. Based on the recent jump in UK CPI and output prices the BOE is expected to raise its near-term inflation outlook in the inflation report. The BOE may be forced to take a more hawkish bias if the BOE inflation report confirms continuing upward pressure in UK inflation. The BOE is also expected to cut near-term growth forecasts. GBP remains vulnerable to concern about UK debt outlook and upcoming general election.

On February 10th December industrial production will be released expected at 0.6% compared to 0.4% last month.

The technical outlook for GBP is negative as GBP trades below 1.5700. Expect near-term support at 1.5515 the May 21st low with resistance at 1.5775 the February 5th high.

CAD

CAD traded higher supported by a rebound in equity markets, commodities and risk appetite sparked by Greek rescue rumors. Equity markets firmed in Europe and traded stronger in the US. Gold rallied sharply for the second day in a row and crude prices were also up a little bit more than 1%. Some would argue that the gains in commodity prices reflect the lower dollar but in the case of the CAD the commodity price gains contributed to the CAD rally. CAD continues to closely track the price of crude. CAD has firmed over the last few trading sessions supported by improving Canadian economic data with Monday’s report of a 5.8% jump in Canadian housing starts and last Friday’s report that Canada’s unemployment rate declined by 0.2% to 8.3% with 43k new jobs created. The impact of the rise in employment growth in Canada was partly muted by the fact that most of the jobs creation were in temporary jobs. There was no reaction to yesterday’s release of the BOC quarterly report. In the quarterly report the BOC reaffirmed its low rate pledge and made no change in growth or inflation forecasts. Despite the improvement in Canada’s housing data and employment outlook the BOC is expected to maintain steady rate policy. BOC Governor Carney warned that the economic expansion may peak midyear and that inflation would remain below the BOC’s 2% target. Risk sentiment and the price of crude will remain the main driving factors for CAD trade with concern about the impact tightening monetary policy in China the main risk for the CAD. Focus turns to Wednesday’s release of Canada’s trade balance.

On February 10th December trade balance will be released expected at -0.2bln compared to 0.3bln last month. On February 11th December housing price index will be release expected unchanged at 0.4%.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0597 the January 4th low with resistance at 1.0754 the February 9th high.

AUD

AUD traded sharply higher supported by a rebound in commodity prices and an improving risk sentiment sparked by rumors that the EU may be planning a bailout for Greece. AUD was also supported by report that Australia’s budget deficit maybe 15bln smaller than expected because of growth and hawkish comments by RBA Governor Stevens. Stevens talked about keeping rates too low for too long would make it difficult to prevent future asset bubbles. Recent weakness in the AUD has been mainly attributed to a reappraisal risk appetite sparked by recent tightening of monetary policy in China and uncertainty about the outlook for sovereign debt risk in Europe. Tightening of monetary policy in China coupled with the uncertain outlook for sovereign risk in Europe sparked selling of equities, commodities and risk aversion. In Tuesday’s trade risk was back on as US equities post strong rally and investors seem to be relieved that something may soon be done about fiscal debt risk in Greece. AUD rallied despite a Chinese press report which denies that Australia has secured a large 20 year coal deal with China. Part of Monday’s rally in AUD was attributed to report of a huge Australian coal deal with China. According to Chinese press China has signed a letter of intent to a 20 year deal to import Australian coal but the deal has not been finalized. The coal deal is estimated the worth about AUD69bln. In addition the trade appears less concerned about Monday’s rise in Chinese mortgage rates. The rise in Chinese mortgage rates seen as additional effort to curb lending in China and this could reduce liquidity and demand for global commodities. The impact of last week’s surprise decision by the RBA to hold monetary policy steady appears to be fading. Last week the RBA unexpectedly elected to hold rate policy steady at 3.75%. The RBA cited recent tightening in China and tame inflation as the primary rationale for maintaining current level of interest rates in Australia. RBA officials indicate that interest rates are likely to rise to 4.5% by the end of 2010. CFTC commitment of traders released Friday showed that AUD spec long positions were at their lowest level since December. The spec positioning AUD makes the AUD right for fresh demand as many analysts remain long-term positive for the outlook of the AUD.

This week’s Australian economic calendar includes the February 10th release of December housing finance expected 2% compared to -5.6% last month. On February 11th January unemployment and employment growth will be released. The unemployment rate is expected unchanged at 5.5% with employment growth at 25k compared to 35.2 last month.

The technical outlook for the AUD is negative as the AUD breaks trend line support. Expect AUD support at 8632 the February 9th low with resistance at 8827 the January 28th 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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