Daily Forex Report – USD rebounds, consumer confidence beats expectations
Tuesday, December 29th, 2009- USD: Mixed, pares looses as consumer confidence rises more than expected
- JPY: Lower, US/Japan 10 year bond yield spread at widest level in two years
- EUR: Lower, downside limited by gains in cross trade to JPY and GBP and improving risk appetite
- GBP: Lower, concern about UK debt and election uncertainty
- CAD and AUD: AUD higher & CAD mixed, improving growth outlook, cooper prices at new highs for 2009
Overview
USD opened lower Tuesday pressured by improving risk appetite as global equities rally to their highest level for the year. As markets reopened from Christmas holiday in the UK and Australia, GBP continued to underperform pressured by concern about UK debt and AUD rallied more than 1% supported by surge in copper prices to a new high for 2009. USD consolidated recent gains versus the JPY as the US/Japan 10 year bond yield spread rose to its widest level in two years. There was limited reaction to report that Japan’s Finance Minister Fujii has been hospitalized. A Reuters report that the Fed is considering the creation of a new mechanism to withdraw money from banking system once the Fed begins to tighten policy failed to boost interest in the USD. According to the Reuters report, term deposits would be one of the tools used to drain reserves once the Fed begins its exit strategy. For most of the month the USD has been supported by speculation that the Fed would soon begin to withdraw stimulus but the Reuters report on Fed use of term deposits to drain reserves was overshadowed by the strength of global equity markets. Part of today’s USD decline may reflect profit-taking or short covering as CFTC commitment of traders for last week confirms that speculators are net long USD for the first time since May. Some of the weaker USD longs may be bailing out as the USD rally has stalled. Today’s US economic data was mixed with Case Shiller House price index reported near expectation and consumer confidence rising slightly more than expected. USD traded higher after the consumer confidence report. Fund managers Barton Biggs and Mark Farber are recommending buying US equities and the USD. They expect the USD to gain 5 to 10% versus the EUR as economies improve around the world. The direction of equity markets and US bond yields are the main drivers for this week’s FX trade.
Today’s US data:
Case Shiller house price index for October came in at -7.3%y/y, a reading of -7.2% was expected. December consumer confidence came in at 52.9, a reading of 52 was expected.
Upcoming US data:
On December 31st initial claims for week ending 12/26 will be released expected to rise by 5k to 457k, along with December Chicago PMI expected 55 compared to 56.1 last month.
JPY
JPY traded lower consolidating near a two-month low versus the USD. Recent weakness of the JPY is attributed to concern about rising budget deficit in Japan and widening of yield differential. Monday, Japan announced a record Â¥92.3trln budget for fiscal 2010/11. For the first time since World War II Japan’s bond issuance will exceed tax revenue. Ratings agencies have warned that Japan’s sovereign debt rating is at risk for downgrade if bond issuance continues to grow. In early December the BOJ held an emergency meeting and elected to increase its funding operations by Â¥10trln. This was a new monetary ease by the BOJ. BOJ and Fed policy are heading in opposite directions as the Fed begins to outline some of the potential tools that the Fed may use to drain reserves when it begins its exit strategy from quantitative ease. Today, the US Japanese 10 year yield spread was at its widest level in two years. The widening of US Japanese yield spread is a negative for the JPY. JPY traded lower after the release of better than expected US consumer confidence.
Key technical levels to watch in USD/JPY include support at 91.10 the December 24th low with resistance at 92.55 the September 21st high.
EUR
EUR traded mixed Tuesday initially supported by gains in cross trade to the JPY and GBP. EUR/JPY traded higher supported by improving risk appetite. EUR/GBP traded higher with GBP pressured by concern about UK budget outlook and rising UK government debt. There was limited reaction to a statement from ECB’s Mersch that he expects the EU economy to grow in 2010. Mersch says the recovery will be moderate and fragile. Mersch went on to say that the financial crisis has greatly impacted the EU banking sector. Russian accounts were reported as featured buyers of the EUR Tuesday. EUR remains vulnerable to speculation that recent improvement in US economic data will and encourage the Fed to move its timeframe for rate hikes forward and ongoing concern about EU sovereign debts debt risks. There is some speculation that the USD has rallied as much as it could in anticipation of a shift in Fed policy outlook and that investors are looking to cover EUR short positions before year-end. EUR traded lower into the European close pressured by report of better than expected US consumer confidence.
On December 30th EU November M3 will be released expected at 1.8% compared to 1.6% last month.
The technical outlook for the EUR is mixed as the EUR holds above 1.4400. Expect EUR support at 1.4323 the December 24th low with resistance at 1.4503 the December 15th high.
GBP
GBP traded lower versus the USD and weakened in cross trade to the EUR with selling sparked by ongoing concern about UK budget outlook. Today’s UK press is filled with articles which discuss concerns about the UK debt outlook with the Sunday Times carrying a lead article titled “Pounding for Brown over debt crisis.” In addition a group of economists have written a letter criticizing the UK government’s irresponsible failure to come up with a convincing plan to reduce the UK budget deficit. If the UK government fails to take credible action to reduce the budget deficit the UK is at risk of losing its AAA sovereign debt rating. In addition the UK will call a general election sometime after the end of the first quarter 2010. UK budget outlook will be a key campaign issue and election uncertainty may add selling pressure to the GBP. There was limited reaction to a Times report that says UK unemployment will peak at 2.8mln next year. In addition, the Financial Times reports that corporate optimism in the UK is at a six-year high. Monday the UK reported that holiday sales may be 15% above last year. Signs of improvement in UK economic outlook are overshadowed by UK budget and election concern.
This week’s UK economic calendar includes the December 31st release of December Nationwide house price index expected at 0.7% compared to 0.5% last month. November consumer credit and mortgage applications will also be released on December 31st. Consumer credit is expected at -0.45bln compared to -0.579bln last month and mortgage applications are expected at 58k compared to 57.3k last month.
The technical outlook for GBP is mixed as GBP struggles ahead of 1.6000. Expect near-term support at 1.5800 with resistance at 1.6164 the December 21st high.
CAD
CAD traded at its highest level since October supported by firmer equity market trade and improving risk sentiment. Equity markets edged higher in Asia and Europe and US equities traded at new high for 2009. Equity market gains fueled demand for higher yielding, higher risk currencies like the CAD. Speculation that the global economic recovery is accelerating sparks demand for growth linked currencies like the CAD. There were no major Canadian economic reports released in today’s trade. CAD has outperformed with support from improving growth outlook in North America and less dovish BOC policy bias. At the BOC policy meeting in December the BOC reaffirmed its pledge to leave interest rates at record lows through June 2010 as long as inflation remains in check. Last week BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 2010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Canada reported higher than expected CPI. Canada’s November CPI rose by 0.5% m/m and 1% y/y with core inflation at 0.4% m/m and 1.5% y/y. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount.
No major Canadian economic data is due for release this week.
The technical outlook for CAD is positive as USD/CAD drops below 1.0500. Look for near-term support at 1.0267 the October 20th low with resistance at 1.0580 the December 23rd high.
AUD
AUD traded over 1% higher supported by optimism about the global recovery as equity markets rally to new highs for 2009. The equity market rally fuels demand for growth linked currencies like the AUD. AUD was also supported by a rise to new highs for the year in copper. Copper is reported to be gaining on seasonal demand from China. Chinese demand for copper and other commodities boosts demand for the AUD. Trading conditions are reported to be thin and today’s AUD price action was likely exaggerated by the lack of volume. Short-term focus appears to have shifted from RBA policy outlook to global growth. AUD had been experiencing significant selling pressure sparked by diminished RBA rate hike speculation and concern that he recent RBA rate hikes have contributed to weaker than expected domestic growth in Australia. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. The trade now is looking for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. RBA policy outlook may have been discounted and focus appears to be shifting towards global growth.
This is week’s Australian economic calendar includes the December 31st release of November private sector credit expected up 0.1% compared to flat last month.
The technical outlook for the AUD is mixed as the AUD traded above 8950. Expect AUD support at 8783 the December 24th low with resistance at 9070 the December 16th high.
Written by Easy-Forex
