Daily Forex Report – USD rebounds on dovish ECB rumor, weaker commodities
Wednesday, January 13th, 2010- USD: Mixed, China’s reserve rate hike seen as minimal threat to global growth
- JPY: Lower, BOJ may succumb to government pressure to ease monetary policy further in 2010
- EUR: Higher, Greek finance minister says Greece will not need a bailout from the EU or IMF
- GBP: Higher, BOE Sentance says interest rates may have to rise this year, industrial production rises
- CAD and AUD: AUD & CAD higher, rebound in risk appetite as concern about China tightening fades
Overview
USD traded lower Wednesday pressured diminished fear that Tuesday’s tightening in China will derail the global recovery. Equity markets stabilized in the US and Europe which contributed to a slight improvement in risk appetite and a rewind of carry trades. The pace of the withdrawal of liquidity in China will be key to the outlook for growth and risk appetite. So far Chinese tightening has been limited. An official at China’s central bank said that monetary policy remains reasonably loose. His comments helped to dampen fears that China’s tightening will derail the global recovery. GBP was supported by BOE rate hike speculation. The BOE’s Sentance said that the central bank may have to increase interest rates this year. EUR was supported by Asian central bank demand and a pledge from Greek officials that they will take action on the deficit. Greece’s finance minister said that Greece will not need an IMF or EU bailout. Commodity currencies rebounded supported by stable equity market trade. JPY traded lower pressured by diminished risk aversion and BOJ ease speculation. JPY was supported Tuesday by safe haven demand and unwind of carry trades. Wednesday finds a modest rebound in carry trades as the impact of China’s tightening fades. There was limited reaction to a statement from the Fed’s Plosser that he sees the economy emerging from recession and the Fed may begin to tighten even with jobless rate high. Plosser said that he does not see inflation pressures presently but that keeping interest rates too low too long could lead to a burst of inflation or sow the seeds for the next crisis. Plosser is a policy hawk and his views may not be representative of the majority of the FOMC. USD rebounded midsession as commodity prices declined and reaction to a rumor that the ECB may signal a dovish policy bias at tomorrow’s meeting.
Today’s US data:
The Treasury budget and Fed beige book will be released after this report is posted.
Upcoming US data:
On January 14th December import prices will be released expected at 0.1% compared to 1.7% last month. Also on January 14th initial jobless claims for week ending 01/09, December retail sales and November business inventories will be released. Jobless claims are expected at 430k compared to 434k last week. December retail sales are expected to rise by 0.2% compared to 1.3% last month, ex. autos retail sales are expected to rise by 0.3%. November business inventories are expected at 0.1% compared to 0.2% last month. On January 15th December CPI, December industrial production, capacity utilization January Empire State Manufacturing and January Michigan consumer sentiment will be released. CPI is expected at 0.2% compared to 0.4% last month. Industrial production is expected at 0.4% compared to 0.8% last month and capacity use is expected at 71.6 compared to 71.3 last month. Empire manufacturing index expected at 9.45 compared to 2.55 last month and Michigan sentiment is expected at 73 compared to 72.5 last month.
JPY
JPY drifted lower Wednesday pressured by a modest rebound in risk sentiment as the impact of China’s tightening fades and by BOJ ease speculation. China’s reserve rate hike Tuesday is a minor step to curb lending and is unlikely to have much impact on rising inflationary pressures or global growth. It remains unclear if China plans to take more aggressive tightening action. If China steps up its tightening actions fresh safe haven demand for JPY could emerge along with more unwind of carry trades. JPY was also pressured by speculation that the BOJ may ease monetary policy during 2010. There is a report on Reuters that the BOJ is prepared to respond to its pressure from Japan’s new Finance Minister Kan to ease monetary policy. According to the report, Japan’s Kan has been a vocal critic of the BOJ for not supporting the economy and having a too rosy outlook for Japans recovery. The report says the BOJ will have to take action to boost growth if the economy continues to weaken. In December the BOJ announced that it was increasing its funding operation. The BOJ may consider increasing its purchase of government debt or the size of its funding operation as additional monetary easing measures to try to boost Japan’s economy and combat deflationary pressures. JPY remains vulnerable to speculation that the BOJ may expand quantitative ease during Q1 2010 and to the risk of a possible downgrade of Japan’s sovereign debt rating.
On January 14th CGPI for December will be released expected at 0.1% compared to 0.2% last month along with November machinery orders. The machinery orders are expected to rise by 8.5% compared to -4.5% last month.
Key technical levels to watch in USD/JPY include support at 90.40 with resistance at 92.43 the January 12th high.
EUR
EUR traded higher despite report of weaker than expected German GDP and a Moody’s warning about deteriorating sovereign debt outlook in the EU. German 2009 GDP was revised to -5% from an original estimate of -4.8%. Although this report is history it suggests that the German economy is recovering from a deeper economic hole which may mean that the recovery will be weaker. In addition, the German budget deficit rose to 3.2% of GDP. Moody says that 2010 will be a challenging year for EU sovereign debt. EUR was supported by Asian central bank demand and diminished fear that China’s tightening will derail the global recovery. EUR was also supported by a statement from the finance minister of Greece that Greece is on track to resolve its deficit problems and will not need a bailout from the EU. Earlier in the month the EUR was pressured by a downgrade of Greece’s debt rating and concern of possible Greek debt default. Focus turns to Thursday’s ECB policy meeting. The ECB is expected to hold monetary policy unchanged and signal a steady policy bias. The ECB is also expected to reaffirm that the central bank expects price pressures to remain contained and that the outlook for the EU recovery remains uneven. EUR remains vulnerable to concern about EU growth prospects and sovereign debt risks.
On January 14th German December CPI will be released expected unchanged at -0.1%. ECB policy meeting will be held on January 14th and no rate change is expected. On January 15th EU December CPI November trade balance will be released.
The technical outlook for the EUR is positive as the EUR holds above 1.4500. Expect EUR support at 1.4402 the January 11th low with resistance at 1.4666 the December 15th high.
GBP
GBP traded higher supported BOE rate hike speculation and better than expected UK industrial production. The BOE’s Sentance said that the BOE should consider halting its asset purchase plan and needs to assess the outlook for inflation risks. According to Sentance the UK economy is nearing a point where stimulus is enough and rates may have to be raised this year. UK November industrial production rose by 0.4%, a 0.3% rise was expected. Manufacturing output however was flat. Recent UK economic data suggests that the UK economy is emerging from recession and inflation pressures rising. Monday the UK reported a sharp improvement in its trade balance as exports surged. In addition the BRC retail sales also came in stronger than expected. The latest CPI report from the UK shows that inflation is running at 1.9%. The BOE’s inflation target is 2%. Sentence said that the BOE must assess the risk for inflation. GBP is also benefiting from UK election polls and increased optimism the UK budget outlook. The latest UK election polls show that the Tory party could gain a 60 seat majority in the UK Parliament. The UK will hold a general election sometime between March and June 3rd. One of the major election issues will be the expanding UK budget deficit. The Tory party has indicated that they plan to take greater action then the current UK government to reduce the UK budget deficit. GBP remains vulnerable to concern about UK debt outlook and election uncertainty.
The technical outlook for GBP is positive as GBP rallies above 1.6100. Expect near-term support at 1.6115 the January 12th low with resistance at 1.6412 the December 16th high.
CAD
CAD traded higher supported by speculation that China’s decision to hike its reserve requirement will have limited impact on global growth outlook. The 50bps reserve rate hike is seen as a minor tightening and is unlikely to have any great impact on China’s growth or inflation. The main question is whether the reserve rate hike is a prelude to more aggressive tightening in the future. CAD price direction is closely correlated to the outlook for global growth and commodities. China’s economic outlook is key to the global economic outlook and demand for commodities. Over the weekend China reported a sharp increase in export sales and lending. Chinese officials are trying to take action to prevent the Chinese economy from overheating and turning into a bubble. The pace of China’s withdrawal of liquidity will remain a major focus for the growth lead currencies like the CAD. Commodity price were mixed Wednesday with crude oil lower and metals higher. CAD gains were limited by weaker crude prices. No major economic reports were released in today’s trade. Tuesday Canada reported that its trade balance swung to deficit last month. Monday Canada reported a sharp increase in December housing starts. Recent Canadian economic data suggest that the Canadian economy is recovering. CAD price direction remains closely tied to the outlook for commodities and equities. Trade will be watching closely whether China takes additional steps to reduce liquidity. Today’s CAD rebound was impressive in light of the fact that crude oil prices traded lower and Canada’s trade balance was disappointing.
The technical outlook for CAD is positive as USD/CAD trades below 1.0400. Look for near-term support at 1.0175 the July 2008 low with resistance at 1.0420 the January 5th high.
AUD
AUD traded higher supported by the fading impact of Tuesday’s reserve rate hike in China as investors view the rate hike as having limited impact on China or the global recovery. As noted above, it remains to be seen if the reserve rate hike from China is the prelude to more aggressive tightening. Absent more aggressive moves from China to withdraw liquidity the action should have limited impact on China’s domestic economy or global demand for commodities. Tuesday AUD traded lower in reaction to weaker commodities weaker equities and selling across trade to the JPY sparked by a spike in risk aversion in reaction to news of the surprise reserve rate hike in China. Wednesday’s price action is the reverse of Tuesday’s with the AUD recovering and prostrate to the JPY as equity markets stabilize and Chinese officials make reassuring statements that overall monetary policy will remain loose.
AUD is experiencing choppy trade but remains well supported on breaks by RBA rate hike speculation. Australian economic data has been mixed. Monday’s Australia reported strong ANZ jobs ads for December. Tuesday November housing finance was reported to have dropped by 5.6%. Last week Australia reported strong retail and vehicle sales. improvement in its trade deficit and rising building approvals. These reports suggest that the Australian domestic economy has weathered recent RBA rate hikes and puts a February RBA rate hike back on the radar screen. Strong Australian economic data encourages speculation that the RBA may hike rates in February. Focus turns to Thursday’s release of Australian employment data.
On January 14th December unemployment will be released the unemployment rate is expected to fall by 0.1% to 5.6% from 5.7% with employment growth at 20k s compared to 31.2k is last month.
The technical outlook for the AUD is positive as the AUD holds above 9200. Expect AUD support at 9170 with resistance at 9378 the November 17th high.
Written by Easy-Forex
