FOREX TRADING

USD Higher, Jobless Claims Post a Sharp Drop

• USD: Higher, jobless claims post an unexpected sharp decline, few details on Greek bailout
• JPY: Higher, Japanese markets closed for holiday
• EUR: Lower, pressured by lack of details of EU Greek support plan
• GBP: Higher, supported by gains in cross trade to the EUR
• CAD and AUD: AUD & CAD higher, stronger Australian employment growth, Chinese inflation slows

Overview

USD traded mixed Thursday with the EUR pressured by report of a vague promise from the EU to help Greece and the AUD surging in reaction to report of much stronger than expected Australian employment data. According to EU officials the EU is working on a plan to help Greece avoid debt default but the details of the plan have not been released. Australia’s unemployment rate declined and jobs growth was three times stronger than expected in January. The combination of the Greek support plan and the Australian employment report contributed to improving risk appetite along with a report that China’s January consumer prices rose at a slower than expected pace. China’s January CPI rose by 1.5% the trade had expected a 2% rise. Slower inflation growth in China reduces fear of the need for aggressive tightening from China. China’s central bank signaled that it plans to maintain accommodative monetary policy. The improvement in risk sentiment was somewhat dampened by the fact that China also reported that lending was the third highest on record in January and the US Congressional oversight panel warned that 3k US banks may have to curtail retail lending because of exposure to commercial real estate loan risk. Growing risk of commercial real estate loan default may be the next looming crisis for the financial markets. US economic data was positive with jobless claims posting a sharp drop. A Bloomberg survey of economists finds that the majority of economists surveyed believe that US employment rate has peaked at 10.1% will fall to 9.5% per year end. The White House forecasts that nonfarm payrolls growth will be 95k a month in 2010 with unemployment averaging 10%. The White House expects payroll growth to accelerate by 190k per month in 2011, 251k in 2012 and 274k in 2013 with unemployment falling back to 5.5% by 2016. The USD continued to gain versus the EUR after the release of the US jobless claims report and in reaction to the statement that the German Free Democratic Party has yet to consent to the Greek bailout. EUR traded to the day’s lows in reaction to a statement from an EU official that they will deal with Greece in March.

Today’s US data:

Jobless claims for week ending 02/06 declined by 43k to 440k, a reading of 470k was expected.

Upcoming US data:

On February 12th, February University of Michigan consumer sentiment will be released expected at 74 compared to 74.4 last month

JPY

Japanese markets were closed for holiday Thursday and the JPY edged higher. The JPY rally was somewhat surprising in light of today’s improvement in risk sentiment sparked by report that the EU plans to stand by Greece and China’s January CPI came in weaker than expected. The recent drop in risk appetite has been largely attributed to concern about a Greek debt default and tightening of monetary policy in China. The details of the Greek rescue plan have not been announced and there still remains uncertainty about sovereign debt risk in the EU. The slowing of inflation growth in China will reduce the risk of China taking more aggressive measures to tighten monetary policy and curb lending. JPY traded mixed in cross trade with AUD/JPY rising more than 1% in reaction to stronger than expected Australian employment report and EUR/JPY trading lower as the EUR  weakened because of lack of details in the EU Greek rescue plan. JPY gains were limited by report of much better than expected US jobless claims. The improvement in US jobless claim supported the US equities and risk appetite. The trade will be watching to see if today’s JPY price gains are a sign that the inverse correlation to equities is beginning to break down. JPY price direction has mainly been reflecting risk sentiment in the direction of equities. Analysts at Goldman Sachs forecast that JPY will decline to 94 in six months and 98 in a year in reaction to the impact of a deceleration in US growth in the second half of 2010.

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. February 18th December leading indicators will be released expected at 3.3% compared to 1.7%. On February 19th December all industry activity will be released expected at 0.2% compared to 0.1% last month.

Key technical levels to watch in USD/JPY include support at 89.15 the February 8th low with resistance at 91.09 the February 4th high.

EUR

EUR traded lower despite report that the EU is on the verge of announcing a Greek rescue plan. EUR was pressured by disappointment that the details of the Greek support plan were not readily available and may not be released before next Tuesday. In addition Goldman Sachs says it has cut its forecast for the EUR because the Greek debt crisis has sapped confidence in the region and permanently increased the risk of holding the EUR. EUR traded to the lows for the day after the release of stronger than expected US jobless claim. Although the improvement in the jobless claim contributed to better risk appetite the report also may encourage Fed rate hike speculation. Fed Chairman Bernanke testified before Congress yesterday outlining the potential tools the Fed may use when it begins to tighten monetary policy. The Fed chairman stated that the decision to tighten policy will be data-driven. Bernanke also suggested that a Fed rate hike was long way off. There was limited reaction to today’s report that German wholesale prices rose by 1.3%. If prices continue to rise in the EU the ECB will be faced with the challenge of balancing the risk of maintaining accommodative policy to support growth as deficits are cut in peripheral Europe nations versus the need to withdraw liquidity and exit nonconventional monetary policy to ensure price stability. EU sovereign debt risk may force the ECB to delay its exit strategy. At the same time the Fed is laying out its plans to withdraw liquidity. This suggests that yield and growth differential may move more in favor of the USD.

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 0.2% compared to 1% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3535 the May low with resistance at 1.3801 the February 11th high.

GBP

GBP traded mixed to higher supported by improving risk sentiment sparked by report of weaker than expected CPI in China and improving US jobs data. GBP was also supported by gains in cross trade to the EUR. Slower inflation growth in China reduces fear of potential aggressive tightening from China. The current reappraisal of risk and the spike in risk aversion has been in reaction to recent efforts by China to tighten monetary policy and curb lending. GBP rallied in cross trade to the EUR with the EUR pressured by disappointment that the EU has yet to announce the details of its Greek support plan. The UK has its own government deficit troubles but Greek and EU sovereign debt risk are the current focus of investors. GBP traded lower Wednesday pressured by the release of the BOE inflations report. In the quarterly inflations report the BOE lowered its inflation and growth forecasts. According to the BOE, UK inflation will fall below the BOE’s 2% target within the next two years and GDP is likely to have average just 1.2%. BOE Governor King said that it’s too soon to conclude that the asset program is finished and he left the door open for future asset purchases if needed. King also said that weaker GBP is part of the needed adjustment towards higher net exports. GBP remains vulnerable to concern about UK debt outlook, possible expansion of the BOE’s asset purchases and upcoming general election.

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 improving risk appetite and better than expected Australian employment report. The combination of report that the EU is working on a plan to bailout Greece and lower than expected inflation in China helped to boost demand for commodities and equities and fueled an improvement in risk sentiment. In addition, Australia reported much stronger than expected employment growth. The Australian employment report is positive for the global recovery. CAD was also supported by report of better than expected rise in Canada’s New Housing Price Index. Canada’s December New House Price Index rose by 0.4%. 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. Despite the improvement in Canada’s housing data and employment outlook the BOC is expected to maintain steady rate policy. In its quarterly report released Tuesday the BOC reaffirmed its low rate pledge and made no change in growth or inflation forecasts. Risk sentiment and the price of crude will remain the main driving factors for CAD trade along with speculation about monetary policy in China.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0450 with resistance at 1.0781 the February 5th high.

AUD

AUD traded near its best level for 2010 supported by report of stronger than expected Australian employment growth and slower than expected inflation rise in China. Australia’s January unemployment rate declined to 5.3%, a reading of 5.6% was expected. Australia created three times as many jobs than had been expected with employment growth at 52K, a reading of 15k was expected. The stronger Australian employment report suggests that the Australian domestic recovery is gaining momentum. The report may revive RBA rate hike speculation. The RBA surprised the markets this week and elected to hold rate policy unchanged at 3.75%. The RBA is expected to hike rates to 4.5% for the year and today’s unemployment report may encourage the RBA to bring the timeframe for its next rate hike forward. The Chinese inflation report will reduce pressure on the China’s central bank to raise interest rates. Recent monetary policy China was the catalyst for a reappraisal of risk sentiment and selling of equities and commodities. AUD price direction is closely linked to risk appetite in the direction of commodities. AUD gains were limited as the stock market recovery stalled on continued concern about the Greek fiscal outlook and lack of details in the Greek rescue plan. The latest report is that the German Free Democratic Party has not given its consent to the Greek bailout. Recent weakness in the AUD has been mainly attributed to a reappraisal of risk appetite sparked by tightening of monetary policy in China and uncertainty about the outlook for sovereign debt risk in Europe. These factors may limit the AUD rally.

The technical outlook for the AUD is mixed as the AUD rallies above 8900. Expect AUD support at 8766 the February 11th low with resistance at 8927 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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