forex report

Daily Forex Report - USD and JPY higher on concern about global growth


Written by Michael J. Malpede

Wednesday, 27 January 2010 16:51 GMT

USD: Higher, spike in risk aversion as China tightens monetary policy, US new home sales decline

JPY: Higher, supported by safe haven flows as equity markets continue to weaken

EUR: Lower, Juncker says EUR is overvalued, German CPI posts an unexpected decline

GBP: Higher, hawkish comments from BOE Sentance, retail sales weak

CAD and AUD: AUD & CAD lower, Australia's inflation rose faster than expected, Flaherty warns on growth

Overview

USD and JPY continue to trade higher supported by risk aversion and concern about the global recovery. Concern that tightening of monetary policy in China may derail global growth and uncertainty about EU fiscal outlook sparks safe haven demand for the USD and JPY. Tuesday, China announced that it would raise its reserve ratios for two major banks in an effort to curb lending. Portugal announced its latest budget plans and the announcement was met with disappointment. European currencies traded mixed with GBP supported by hawkish comments from the BOE Sentance which encouraged speculation that the BOE may pause in its asset purchase program. EUR was pressured by report of weaker than expected German CPI and a statement from Luxembourg PM Juncker that the EUR is overvalued. Juncker also warned that divergences in the EU regions may threaten the cohesion of European Monetary Union. Commodity currencies traded lower pressured by weaker commodity prices and rising risk aversion. Deleveraging of carry trades remains the dominant feature of FX trade. US new home sales posted an unexpected 7.6% decline. The USD remained bid after the release of weaker than expected US new home sales as stocks fall and the data generates concern about the strength of the US and global recovery. Focus turns to FOMC announcement and President Obama's State of the Union address. The FOMC is expected to confirm that it will hold interest rates near zero for an extended period. President Obama is expected to focus on economy, jobs and the budget deficit.



Today's US data:

December new home sales declined to 342k, a reading of 355k was expected. New home sales were down 22.9% for 2009.



Upcoming US data:

On January 28th December durable goods will be released expected 2% compared to 0.2% last month along with initial jobless claims for the week ending 01/23 expected at 450k compared to 482k last week. On January 29th advanced Q4 GDP will be released along with January Chicago PMI and final January University of Michigan. The Q4 GDP is expected to have risen by 4.5% compared to 2.2% in the third quarter. Chicago PMI's expected 57.5 compared to 58.7 last month and the University of Michigan sentiment is expected unchanged at 73.



JPY

JPY traded higher supported by safe haven demand sparked by concern about the global recovery and weaker Asian equity market trade. The Nikkei closed 78 points lower and the Shanghai index was down 1.1%. Tuesday's announcement that China plans to tighten monetary policy and threat of a downgrade of Japan's bond rating dampens investor risk appetite and sparked unwind of JPY carry trades. Escalating tensions between North and South Korea contributes to diminished risk appetite and demand for JPY. Japan's December trade surplus narrowed to ¥545.3bln with exports up by 12.1% and imports down by 5.5%. The improvement in Japan's export sales is unlikely to offset concern about weaker growth and deflationary pressures in Japan. Despite these factors the JPY continues to benefit from safe haven flows. The strengthening of the JPY will increase the risk of intervention and pressure on the BOJ to ease monetary policy. JPY price direction has re-linked to risk aversion and the direction of equities and JPY continues to find support as stocks decline.



On January 28th December retail sales will be released expected to rise by 0.3% compared to 0.2% last month. On January 29th of December CPI will be released expected unchanged at -0.2%. December household spending, unemployment, industrial output housing starts and construction orders will also be released on January 29th. The unemployment rate is expected to rise by 0.1% to 5.3%. Industrial output is expected to rise by 2.5% compared to 2.2% last month. Housing starts are expected to rise by 2% compared to 4.7% last month. Construction orders are expected to fall by 24% compared to 11.6% last month.



Key technical levels to watch in USD/JPY include support at 88.35 the December 3rd low with resistance at 91.88 the January 21st high.







EUR

EUR traded at a six month low pressured by report of an unexpected decline in German CPI and comments from Luxembourg PM Juncker. German CPI declined by 0.4% as compared to a 0.9% rise in December. A 1% rise was expected for German CPI .Despite the weakness in the German CPI report the ECB's Weber interest rates are appropriate and that the ECB may take steps to further normalize monetary policy as the economy improves. EUR downside was limited by Weber's comments which suggest that the ECB will continue to unwind emergency liquidity measures. Juncker said that EUR is overvalued and he is concerned about the imbalances in the EU may threaten the cohesion of European Monetary Union. Juncker's comments have increased the debate over whether there could be a breakup of European Monetary Union. EUR was also pressured by concerns about budget deficits in Greece and Portugal. Juncker says that he does not expect Greece to default on its debt. Portugal announced its new budget and it was seen as a disappointment. The next major focus for EUR trade will be the February 4th ECB policy meeting. The ECB is expected to hold monetary policy unchanged and continue to gradually withdraw liquidity.



On January 28th German December unemployment will be released expected at 8.2% compared to 8.1% last month along with EU January business climate expected at -1.1 compared to -1.2 last month. On January 29th EU December M3 will be released expected at -0.5 and 0.2% last month along with January CPI expected at 1.2% compared to 0.9% last month.



The technical outlook for the EUR is negative as the EUR trades below 1.4100. Expect EUR support at 1.4007 the July 29th low with resistance at 1.4195 the January 26th high.







GBP

GBP traded higher supported by hawkish comments from the BOE's Sentance with gains limited by report of weaker than expected UK CBI retail sales. Sentance said that may be difficult for the BOE to maintain its inflation target and that the UK economic recovery was stronger then the Q4 GDP report suggests. Tuesday, the UK reported that Q4 GDP rose by just 0.1%. The UK Q4 GDP report confirms that the UK recession has ended but suggests that the recovery will be weak. Sentance went on to say that he believes that the UK will avoid a double dip recession and that tightening of monetary policy depends on the strength of the recovery. Some investors have read into Sentances comments that the BOE may be moving closer towards a pause in its asset purchase plan. GBP was also supported by report of demand from quarterly dividend payments by a UK oil company. UK CBI retail sales were quite weak, reported at -8 compared to +13 last month. GBP outperformed last week partly in reaction to report of higher than expected December consumer price index. The GBP outperformance was impressive in light of the weakness in global equity markets late last week. The CPI rise may bring the timeframe for the end of BOE asset purchase plan forward. UK December CPI was reported at 2.9% and the CPI is approaching the high end of the BOE's inflation target range. The BOE's inflation target is 2%. Earlier in the month of BOE Sentance indicated that the BOE may need to pause its asset purchase plan consider the possibility of hiking rates this year. Sentance today indicated that there may be less spare capacity in the UK economy and this could increase upward pressure on inflation.



On January 29th, January Nationwide home price index will be released.



The technical outlook for GBP is mixed as GBP holds above 1.5900. Expect near-term support at 1.5900 the January 7th low with resistance at 1.6370 the January 20th high.







CAD

CAD traded lower pressured by weaker equity market trade, concern about the global recovery and deleveraging of carry trades. Concern that tightening of monetary policy in China may derail the global recovery and weaker commodity prices are the main negatives for CAD. Concern about global growth sparked selling of Asian equities and a spike in risk aversion. The weaker equity market trade and spike in risk aversion sparked unwind of growth led and high-yield currencies like the CAD. There has been little fresh economic news from Canada to drive CAD price action and the recent weakness in crude oil prices and concern that China's efforts to slow growth will hurt the global recovery are the main negatives for the CAD. There was little reaction to a report Market Watch that a consensus of analysts expects the CAD to trade at parity with the USD this year. These analysts are positive the CAD because Canada's economy is seen as stronger than the US and countries like Russia are looking to diversify some USD reserves to CAD. These analysts note that the CAD is vulnerable to swings in commodity prices and slower growth should tightening in China reduce demand for commodities. CAD has also been underperforming because of diminished speculation that BOC will move the timeframe for its tightening cycle forward. The BOC elected to hold monetary policy steady last week and monetary policy is likely to remain on hold as Canada reports a larger than expected decline in inflation. There were no major Canadian economic reports released in today's trade. CAD price direction remains tied to the outlook for commodities and equities. The trade will be watching closely whether China takes additional steps to reduce liquidity. Focus turns to Canada's GDP due for release later in the week. Canada's Finance Minister Flaherty warned about being overly optimistic about swift economic recoveries and he said he did not favor imposing new taxes on Canadian financial institutions or limits on executive compensation according to a report on Reuters.



This week's Canadian economic calendar includes Friday's release of December producer price index and GDP. December IPPI is expected at 0.4% and RMPI is expected at 1.2%. November GDP is expected unchanged at 0.2%.



The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0438 the January 21st low with resistance at 1.0700 the December 21st high.







AUD

AUD traded lower pressured by a spike in risk aversion and weaker equity market trade. AUD price action has been closely tracking the Shanghai index which was down 1.5% today. AUD decline was somewhat of a surprise in light of the fact that Australia reported faster than expected CPI growth in Q4. Australia's Q4 CPI rose by 0.6% and 3.2% y/y. In addition Australia's Westpac leading economic index rose by 7.6%. The rise in Australia's inflation and stronger economic index may increase pressure on the RBA to hike rates at next week's policy meeting. RBA watcher in McCrann says that the CPI report will determine whether the RBA hikes rates at the February 2nd Policy meeting. AUD traded lower last week pressured by a spike in risk aversion as global equity markets weakened in reaction to China's tightening of liquidity, uncertainty about Bernanke's job tenure and President Obama's proposal of new US bank regulations. AUD price direction remains tied to commodities and equities but RBA rate hike speculation should limit AUD downside. Financial markets are forecasting that the RBA will hike rates 25 bps next week.



This week's Australian economic calendar includes a January the 27th release of Q4 CPI expected at 0.4% compared to 1% last quarter. On January 29th December private sector credit will be released expected at 1.1% compared to0.8% last month.



The technical outlook for the AUD is mixed as the AUD holds above 8800. Expect AUD support at 8902 the December 30th low with resistance at 9093 the January 22nd high.