FOREX TRADING

USD Higher, Chinese Rate Hike Sparks Risk Aversion

• USD: Higher, China hikes reserve rates, stocks and commodities decline
• JPY: Lower, Nikkei closes higher before the China rate announcement
• EUR: Lower, doubt about the Greek rescue, EU growth slows
• GBP: Lower, downside limited by gains in cross to EUR
• CAD and AUD: AUD & CAD lower, pressured by spike in risk aversion, China rate hike

Overview

USD traded at a seven-month high Friday supported by a spike in risk aversion sparked by news that China’s central bank raised its reserve ratio by 0.5% and in reaction to doubt about a Greek rescue. The Chinese reserve ratio hike was a surprise and the second rate hike from China this year. Tightening of monetary policy in China sparked selling of equity and commodity markets and generates fear about the global recovery. There are conflicting reports from Europe about whether or not there will be a rescue package for Greece with the latest report that German Chancellor Merkel has rejected a call for Germany to fund the Greek rescue package. Other EU sources indicate that it is unlikely that the EU will add additional measures to support Greece at this time. The EUR was also pressured by report of slowing growth as EU industrial output falls more than expected and Q4 GDP posted a small rise. GBP traded lower but remains range bound with downside limited by gains in cross to the EUR. CHF traded lower pressured by rumors of SNB intervention. Commodity currencies traded lower pressured by a spike in risk aversion and concern that the Chinese rate hike will hurt the global recovery. US economic data was mixed with retail sales slightly stronger than expected and Michigan consume sentiment came in slightly lower than expected. Business inventories posted an unexpected drop.

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:

Next week’s US economic calendar includes the February 16th release of February Empire State Manufacturing index expected at 16 compared to 15.9 last month. February NAHB index will also be released on February 16th expected unchanged at 15. On February 17th January housing starts will be released expected at 580k compared to 557k last month along with January building permits expected at 650k compared to 653k last month. January import prices, capacity utilization and production will be released on February 17th. Import prices are expected to rise by 0.8% compared to flat last month, industrial production is expected unchanged at 0.6% and capacity utilization is expected to rise to 72.5 compared to 72 last month. Initial jobless claims for  week ending to 02/13 will be released on February 18th expected at 430k compared to 440k last week along with January PPI leading indicators  and  the February Philly Fed survey. PPI is expected to rise by 0.7% compared to 0.2% last month, leading indicators are expected to rise by 0.6% compared to 1.1% last month and the Philly Fed is expected at 17 compared to 15.2 last month. On February 19th January CPI will be released expected at 0.3% compared to 0.1% last month.

JPY

JPY traded lower pressured by a broad USD rally against the majors sparked by news of a surprise rate hike from China. This marks the second session in a row that the inverse correlation of JPY price direction and risk sentiment has broken down. It’s not clear why the JPY is not attracting safe haven flows as equities traded lower and risk appetite is dampened by uncertainty about the outlook for the global recovery in light of today’s rate hike from China and ongoing uncertainty about sovereign debt risk in Europe. JPY traded to the day’s lows after the release of better than expected US retail sales. The better US retail sales report may fuel speculation about possible earlier Fed rate hike. The prospect for higher US yields appears to be the main factor pressuring the JPY. JPY traded mixed in cross trade gaining marginally versus EUR and AUD and weakening versus GBP. 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 89.59 the February 12th low with resistance at 91.09 the February 4th high.

EUR

EUR traded lower pressured by doubt about a Greek rescue plan, in reaction to a spike in risk aversion as China tightens and by disappointing EU economic data. There is a report that German Chancellor Merkel has rejected a call for Germany to fund the Greek rescue package and EU officials indicate that they are unlikely to take any near-term action on the Greek debt situation at this time. The announcement of China’s tightening of monetary policy was a surprise and generates concern about the outlook for the global recovery. EU Q4 GDP rose by just 0.1%. The EU Q4 GDP report shows that the EU economy is slowing. EU December industrial output declined by 1.7%. The decline in industrial output adds to concern about the EU recovery. The Greek debt crisis and concern about sovereign debt risk in peripheral European nations add additional risk to the EU recovery. The EU will continue to press for reduction of deficits in southern Europe and the reduction of spending is a threat to growth. Today’s Greek rescue news, Chinese tightening and EU economic data have implications for ECB policy and will likely force the ECB to delay its exit strategy and maintain accommodative bias for longer period. Goldman Sachs 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.

Next week’s EU economic calendar includes the February 16th release of German February Zew index expected at 48 compared to 47.2 last month. On February 17th EU trade balance will be released expected at 4bln compared to 4.8bln last month. On February 19th, February manufacturing and services PMI will be released. The manufacturing PMI index is expected at 52.8 compared to 52.4 last month and the services PMI is expected at 52.7 compared to 52.5 last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3532 the February 12th low with resistance at 1.3689 the February 12th high.

GBP

GBP traded lower pressured by a spike in risk aversion as China’s tightens monetary policy. GBP downside was limited by gains in cross to the EUR sparked by doubt about the Greek rescue plan and in reaction to comments from the UK’s Brown that he expects the UK’s Q4 GDP to be revised higher. GBP is range bound but hovering near the bottom of its range. The trade will be looking for a possible downside breakout of this range. Focus turns to next Wednesday’s release of BOE policy minutes for the February meeting. The trade will be looking for clarification on the BOE’s decision to pause in its asset purchases and to leave the door open for future asset purchases if needed. The trade will also be looking for further insight into the BOE’s growth and inflation forecast. Earlier in the week the BOE released its quarterly inflation report and in that report the BOE said that inflation would come back below the 2% target over the next two years and that growth would be slower than expected averaging 1.2% over the next two years. GBP rallied in cross trade to the EUR with the EUR pressured by disappointment that the EU has yet to announce the details of a 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 remains vulnerable to concern about UK debt outlook, possible expansion of the BOE’s asset purchases and upcoming general election. Focus turns to next Tuesday’s release of UK inflation and BOE policy minutes Wednesday.

Next week’s UK economic calendar includes the February 16th’s release of January CPI expected at 0.8% compared to 0.6% last month. On February 17th December unemployment will be released expected at 7.6% compared to 7.8% along with January claimant count expected at -10k compared to -15.2k last and December average earnings expected unchanged at 1.6%. On February 18th January money supply will be released expected at -0.8% compared to -1.1% last month along with January net public-sector borrowing expected at 16bln compared to 15bln last month and January CBI orders expected at -36 compared to -39 last month. BOE policy minutes will also be released on February 17th.  January retail sales will be released on February 19th expected at 0.6% compared to 0.3% 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 lower pressured by China’s tightening, weaker commodity and equity prices and a spike in risk aversion. Crude prices traded 1.5% lower as the rate hike in China generates concern about global recovery and global demand. CAD closely tracks the price of crude. There were no major economic reports released from Canada today. Most of this week’s Canadian economic data has been positive with Thursday’s release of higher House Price Index and Monday’s report of a sharp jump in Canadian housing starts. Last week, Canada reported better than expected employment growth. Despite the improvement in Canada’s housing data and employment 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.

Next week’s Canadian economic calendar includes the February 16th release of December manufacturing shipments expected at 0.4% compared to 0.1% last month. On February 17th of December wholesale sales will be released expected at 2% compared to 2.5% last month. On February 18th January CPI will be released expected at -0.1% compared to 0.3% last month along with December net foreign investment and January leading indicators. Net foreign investment is expected at 6bln compared to 10.5bln last month and the leading indicator is expected at 1.6% compared to 1.5%. On February 19th December retail sales will be released expected at 0.6% compared to -0.3% last month.

The technical outlook for CAD is mixed to positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0480 the February 4th low with resistance at 1.0630 the February 4th high.

AUD

AUD traded sharply lower giving back most of Thursday’s gains pressured by report of a rate hike from China. China raised its reserve rate by 0.5% in an effort to try to curb lending and slow the pace of China’s economy. China’s is a major export destination for Australia and there is concern that the Chinese rate hike could hurt the outlook for the global recovery and demand for Australian exports. There was little impact to a statement from the PBOC that the reserve rate hike does not signal a change in monetary policy and that monetary policy in China will remain moderately accommodative. AUD was also pressured by uncertainty about the outlook for a Greek rescue package as there are reports that German officials are rejecting calls to fund the Greek bailout. AUD traded sharply higher Thursday supported by report of stronger than expected employment growth and weaker inflation growth 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 the 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 Chinese rate hike caught the trade by surprise but the rate hike may have been taken because China reported lending in January rose at its third fastest pace on record. 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.

There are no major Australian economic reports scheduled for the week.

The technical outlook for the AUD is mixed as the AUD fails to hold 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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