FOREX TRADING

Greenback Firms As Japanese Yen Weakens

This week, the greenback strengthened broadly. There was general risk aversion in the markets. The Japanese yen, which usually gains during risk averse periods broke that correlation this weak and its own deflationary concerns pared its recent gains.

EUR/USD Targets 1.3050

Daily and 4H: The EUR/USD declined as anticipated in last week’s post. The market declined consistently this week until Friday. The intermediate target remains at 1.30/1.31 or 1.3050.

In the short-term, there is a correction, signaled by the current price action and the bullish divergence.

Since the EUR/USD has a strong trending component, I would expect a short correction towards 1.3450/1.3470 (38.2% retracement).

Look for topping action coming out of next week’s early action, then we may have another swing down towards 1.3050.

(more…)

Weekly Economic and Financial Commentary

U.S. Review

Public Policy Grabs Center Stage

• Public policy dominated this week, with the passage of healthcare reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.
• Advance orders for durable goods rose in line with expectations, but a large downward revision to January’s nondefense capital goods orders raises a red flag as to how strong capital spending will be in the first quarter.
• Sales of new and existing homes both declined in February, raising fears the incipient recovery in housing has faltered.

Strange Days in the Credit Markets

The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.

The last few years have seen Treasury yields rise during the spring, triggering a whole new set of challenges. History looks like it will repeat itself this year, with the end of the Fed’s mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will remain a challenge, with additional money needed to pay Social Security benefits and recapitalize Fannie Mae and Freddie Mac. Sovereign credit risk and worries about growing supply also extend to municipalities, which saw yields climb sharply recently.

(more…)

Euro Gains on Greece’s Plan

The dollar consolidated strong weekly gains against its counterparts on Friday. The greenback fell as Greece’s default threat receded after EMU leaders endorsed a Franco-German proposal. US stocks pared earlier gain on increased tension between North and South Korea after a South Korean navy vessel sank near North Korea’s border. US GDP grew at a downwardly revised 5.6% annualized rate in Q4. The S&P 500 rose 0.86 to 1,166.59. The yen declined for the week after breaking its long-term trend. Japan’s consumer prices fell for a 12th consecutive month. Sterling rose for the first day in four but posted its third consecutive weekly decline. The Australian and Canadian dollars fell for the week.

The EUR/USD rose after EMU leaders agreed on a package under which Greece would receive both bilateral loans from its euro partners and funds from the IMF if the country faced severe difficulties. European Central Bank President Jean-Claude Trichet, reversing his initial opposition to an IMF involvement, said a Greek aid plan is “workable.” After peaking over 1.50 in early-December, the EUR/USD has been trading lower in a trading channel. Strong support is in the 1.30 area from the lower trading band while resistance is in the 1.35 area from the upper trading band. If this resistance is broken, the negative trend will be broken with the EUR/USD outlook improving.

(more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, topped at 1.3385 but further upside correction was rejected as price closed lower at 1.3286. Earlier today in Asian session price is traded higher around 1.3315. The bias is neutral in nearest term but the main outlook remains bearish for this pair with 1.3100 as nearest technical target. Immediate resistance at 1.3350/80. Break above that area could trigger further upside correction testing 1.3450/35 area. Only a movement above 1.3450 area could be seen as a serious threat to the bearish scenario. Initial support at 1.3250. Break below that area should continue the bearish scenario towards 1.3100 region.

(more…)

Decreasing In Consumer Prices As Expected In Japan

The annual reading of consumer prices in Japan issued with a decline that matches expectations while increased row materials and oil’s prices during the last few months, despite the reading is showing the consequence of decreasing the prices for last straight twelve months, which boosting BOJ’s pressure. BOJ has announced during the last meeting about increasing loans program with installing the lowest interest level to face the deflation which affect on economy’s momentum for the second biggest economy in the world.

The Japanese economy released the consumer price index for February with -1.1%, the same as expectations, showing the rising compared with previous reading with -1.3%, but the consumer price index that excluded fresh food for February, issued with -1.1% as expected, also the actual reading is better than previous reading with -1.2%.

(more…)

Long Dollars Are All The Rage

The Asian trading hours were flat in the currency market, but the major currencies were again showing a bearish bias at the European open, extending the selling seen throughout the prior few sessions.

The Eur/Usd plunged to new lows overnight, breaking beneath the 1.3300 area. As of December, when the current downtrend started, the Euro has lost 1800 pips, or approximately 14% of its value. Over the same time, the S/P index has gained 70 points, or just about 0.6%, even though the two have held a very high correlation over the last 12 months, something that is now getting tested.

(more…)

Deflation Continues In Japan

Japan’s core CPI rate has declined for 11 straight months. The core CPI declined by 1.3% in January. The decline in January CPI confirms that deflationary pressures continue in Japan. The Bank of Japan (BOJ) has been under intense pressure from the Japanese government to take action to combat deflation and boost growth. At an emergency meeting in December the BOJ elected to ease monetary policy. The BOJ increased its lending operation to ¥10trln offering fixed rate loans to commercial banks at 0.1%. Last week the BOJ elected to ease monetary policy again and double its short-term lending operation to ¥20trln. The increase in the lending operation is unlikely to have any major impact on deflationary pressures in Japan. The Japanese government has called on the BOJ to do more to combat deflation and would like to see the BOJ buy Japanese bonds. BOJ purchase of Japanese bonds would effectively be printing of money and could boost the money supply and slow deflationary pressures. BOJ officials have rejected the government’s call for the purchase of more bonds. The BOJ policy board was split at last week’s meeting and the split decision to expand lending operations reflects concern by some of the BOJ board members that it’s more difficult to justify easing monetary policy as Japan’s economy shows signs of improvement. Recent Japanese economic data shows that exports posted the third biggest monthly gain on record last month and imports rose for the first time in 15 months. Japan’s manufacturing and business confidence has been rising and unemployment posted a modest decline. Q4 GDP however rose at a slower pace reported at 3.8% compared to 4.6% in the preliminary report. Japans quarterly tankan business sentiment will be released on April 1st. The tankan report is expected to confirm improvement in Japan’s business sentiment for the fourth straight quarter.

(more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD dropped significantly on Portugal downgrade yesterday. Price break below 1.3450/35 key support area, confirms technical bearishness targeting 1.3100 this week. Trichet is going to speak today and it make sense for me that probably he will say something ‘positive’ about the Euro zone or the Euro to prevent further and faster drop. Whether market will believe it or not is something I’d like to see. Immediate resistance at 1.3380 area. Break above that area could trigger further bullish correction testing 1.3450 as correction after significant bearish move should not be a surprise and the fact that price already in extreme oversold area, but I am in bearish mode for this pair. Initial support at 1.3250/70 area. Break below that area could trigger further bearish momentum towards 1.3100/50 area.

(more…)

All Hail the Mighty Greenback

Today’s European session was a watershed moment for the greenback. Already moving to the stronger side in Asian trading, the USD really hit its stride across the board when Fitch came out with a downgrade of Portuguese debt (from AA to AA-, a move that was presaged by a recent surge in bond yield spreads and CDS prices) that knocked equity markets and general risk sentiment for quick losses. Ahead of the NY open, EURUSD swooping to new lows no t seen since last May, and the USD index also headed to new highs since that period as almost all currencies fell against the resurgent greenback today.

The very strong IFO release today (highest number since mid-2008) couldn’t do anything to reverse the Euro’s slide today, as Euro weakness may actually be a driver for improved German sentiment.

Chart: USDJPY

USDJPY finally broke out of its torpor and pulled above the line of resistance created by day after day of range trading. Curiously, the bond market has come completely derailed today despite rising risk aversion in other markets today, and this is adding to the potential for this break higher in USDJPY to hold. The move has even taken the pair above the 200-day SMA which had previously held on the last two attempts at that MA in January and February. This is an important development for USDJPY as we move into the final few trading days of the Japanese financial year.

(more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD had a volatile movement yesterday but still able to maintain its bearish momentum as further upside pressure was rejected at the trendline resistance, closed lower at 1.3494 and keep moving lower around 1.3467 at the time I wrote this comment. We are now in critical technical phase where price ready to test the 1.3450/35 key support area. However, no matter how strong the downside pressure is, I believe we need a consistent and clear movement below 1.3450/35 to confirm further bearish scenario targeting 1.3100 this week. Above 1.3450/35, any upside pullback is still open wide. Immediate resistance at 1.3530 area. Break above that area could trigger further upside correction testing 1.3600/50 region.

(more…)

USD Pares Gains as Stocks Rally

• USD: Higher, Greek bailout doubts, existing home sales come in slightly better than expected
• JPY: Lower, BOJ March minutes suggest deflationary pressures may be stronger than forecast
• EUR: Lower, no Greek aid plan yet, EU summit March 25th and 26th
• GBP: Lower, CBI retail sales disappoint, CPI falls more than expected
• CAD and AUD: AUD & CAD mixed, China may post an 8bln trade deficit in March, Canada LEI as expected

Overview

The USD traded higher Tuesday supported by worries that the EU will not agree on a plan to aid Greece and the increased threat of SNB intervention as EUR/CHF cross trades at a 10 year low. Ahead of the EU summit scheduled for March 25th and 26th there are conflicting reports about whether EU officials will come up with an aid plan for Greece. The latest report suggests that EU officials may be leaning towards some form of loan arrangement with Greece but skepticism abounds about whether the EU will come up with a credible plan to aid Greece. SNB president Hildebrand says that the central bank is ready to take decisive action against excessive CHF gains versus the EUR.CHF traded higher despite the threat of intervention. GBP traded lower pressured by report of weaker than expected UK annual CPI and soft UK retail sales. Commodity currencies were pressured by weaker CRB and a statement from China’s Premier Wen that China may run an 8bln trade deficit in March. This would be the first monthly Chinese trade deficit since April 2004.Wen’s comments may increase worries about global trade tensions. JPY traded mixed to lower with selling pressure attributed to the release of the BOJ minutes for March which state that Japan’s CPI may be weaker than forecast. Today’s dollar strength is impressive in light of the fact that the Fed’s Evans and Lockhart made dovish comments. Evans said that interest rates may stay at historic lows for at least another six months and accommodative policy may be needed into 2011. Lockhart warned against lifting the Feds extended rate pledge to soon. US existing home sales declined by 0.6% compared to 2% decline in December. USD pared early gains in reaction to stronger US equity market trade.

(more…)

Kathy Lien

The one factor that is sure to move the currency markets is interest rates. Interest rates give international investors a reason to shift money from one country to another in search of the highest and safest yields. For years now, growing interest rate spreads between countries have been the main focus of professional investors, but what most individual traders do not know is that the absolute value of interest rates is not what’s important – what really matters are the expectations of where interest rates are headed in the future.

Familiarizing yourself with what makes the central banks tick will give you a leg up when it comes to predicting their next moves, as well as the future direction of a given currency pair. In this article, we look at the structure and primary focus of each of the major central banks, and give you the scoop on the major players within these banks. We also explain how to combine the relative monetary policies of each central bank to predict where the interest rate spread between a currency pair is headed.

(more…)

Consumer Prices in United Kingdom Unexpectedly Decline

Today, we have full support that inflation is indeed inline with the Bank of England expectations as Governor of the central bank, Mervyn King stated before that the rise in inflation rates is temporarily and a result of APF program, higher energy prices and the reversal of the VAT.

CPI for the year ending in February today we saw ease from the 14-month high of 3.5% to 3.0% which is lower than the projected 3.1% while on the month rose to 0.4% from the prior decline of 0.2%, which is worse than the expected 0.5%.

(more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push lower yesterday, bottomed at 1.3463 but further bearish momentum was rejected as price whipsawed to the upside and closed at 1.3566. The bias is neutral in nearest term. I am still expecting further downside pressure after violation of the bullish channel re-testing key support area around 1.3545/35 area before targeting 1.3100 this week. However, I will pay attention to 1.3600/10 resistance area today. Break above that area could trigger further bullish testing 1.3700/50 region. Initial support at 1.3500. Break below that area should trigger further bearish momentum re-testing 1.3450/35.

(more…)

A Big Risk Rebound – More To Come?

A big rebound in risk after the market started the week on back foot after a chaotic triple witching for US equities on Friday and a weak opening this week on the passage of the historic US health care bill. Today’s rally basically erased the risk aversion brought on by these developments and brought the market back approximately to its Thursday closing levels. EURUSD likewise recovered from a bout of weakness below 1.3500 after the Greek Deputy Prime Minister lashed out with aggressive language against the Euro and especially Germany, which he said was enjoying the destabilization brought on by Greece and profiting from the weak Euro and whose banks are speculating in Greek debt.

A Bloomberg article discusses the PBOC ‘s Zhou’s suggestion that US and China may engage in bilateral talks to address the pressing yuan issue since the political ‘noise’ isn’t helping the situation. Consensus is firming for some kind of revaluation of the yuan in coming months. It will most likely be the slow revaluation model that it employed consistently in 2005-08 and to the tune of about 5% per year, unless China experiences some kind of trouble. Others believe the odds for a step revaluation initially are high, including Goldman Sachs’ economicst Jim O’Neill. The kneejerk response to any move toward revaluation will likely be risk negative because it is an effective tightening on growth, and this market is enjoying a speculative bubble brought on by low interest rates and won’t like the news.. Now that the Obama administration is over its massive campaign to get healthcare passed, it can spend more political attention and time to the yuan issue. Any steps the Chinese take are likely to be cautious ones, so this may prove less of a market mover than many anticipate would be the case.

(more…)