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[Jason Rogers]

China Raises Key Interest Rate; Highly Correlated Aussie Takes A Dive

Written by Jonathan Granby of DailyFX.com

The Chinese central bank, the People’s Bank of China (PBOC), raised its key interest rates for the third time since mid-October in a bid to bring inflationary pressures under control. The benchmark one-year lending rate will increase to 6.06% from 5.81%, effective tomorrow. The one-year deposit rate will rise to 3% from 2.75% the PBOC said on its website today.

A rate hike in Q1 had been expected and rhetoric suggesting so from Chinese officials had supported the idea. Li Daokui, an adviser to the central bank, had recently said that it would be “understandable” if interest rates would rise as part of adjustments to policy during the quarter. Li went on to say that he expects policy to focus more on inflation and less on maintain fast economic growth. Consumer prices rose 4.6% in December and the economy expanded 9.8% in Q4, faster than the pace of the previous quarter.

Many consumers have also expressed concern about rising prices as companies across the economy raise prices and pass on costs to consumers. In a survey released by the PBOC in December, 61% of respondents believe consumer prices will be higher next quarter (Q1 2011) than they currently are. The survey also showed confidence that prices will remain in check is now at its lowest level in 11 years.

The highly correlated Australian dollar was immediately lower against the dollar, virtually erasing today’s gains. The Australian dollar is perceived to be the most exposed to the Chinese economy with a large portion of Australia’s resource exports heading to China. Any slowdown in Chinese growth would certainly be felt by the Australian economy and its currency. The raising of interest rates in China is generally seen to be risk averse since it could slow growth, any slowdown in Chinese growth is viewed to be negative for global growth. At a time when many nations are still recovering from recessions a slowdown in global growth could knock many back into recession.

Across the wider FX market the response was muted, the commodity bloc, viewed as the most exposed to China, dipped modestly on shorter-term charts but on the day generally were little changed. Turning to the majors, the normal risk averse reaction did not follow after today’s hike, since it was largely expected and it is understood the PBOC has to act to tackle inflation, and most currencies remained bid against the USD.

 

[Jason Rogers]

Prepared by Jamie Saettele, David Rodriguez, and Ilya Spivak of DailyFX.com

British Pound / US Dollar Monthly Technical Forecast Weekly Chart

The GBPUSD continues to hold up much better than the EURUSD and a push above 16299 cannot be ruled out (although a recent key daily reversal makes a new high less likely). In such an event, resistance would be 16457. The triangle pattern (from January 2009 low) should result in weakness towards 14780 (wave D) in the months ahead regardless if that decline begins now or from above 16299. The lower triangle line intersects with 14780 in April.

GBPUSD Valuation Forecast: Bearish

The Pound remains the least overvalued major currency against the Dollar, but spot now trades at the largest premium to the PPP-implied exchange rate in a year. The disparity may grow further still until a meaningful correction is at hand, with the Bank of England increasingly under pressure to address stubbornly rising inflation. Still, US growth is expected to outpace that of the UK by a hefty 1.15 percent over the next two years, suggesting the UK – US yield spread is likely to narrow in the greenback’s favor and hinting that any near- to medium-term rally ought to be treated as a selling opportunity.

What is Purchasing Power Parity?

One of the oldest and most basic fundamental approaches to determining the “fair” exchange rate of one currency to another relies on the concept of Purchasing Power Parity. This approach says that an identical product should cost the same from one country to another, with the only difference in the price tag accounted for by the exchange rate. For example, if a pencil costs €1 in Europe and $1.20 in the US, the “fair” EURUSD exchange rate should be 1.20. For our purposes, we will use the PPP values provided annually by Bloomberg. We compare these values to current market rates to determine how much each currency is under- or over-valued against the US Dollar.

 

[Jason Rogers]

British Pound Likely to Rally Against Japanese Yen

Written by David Rodriguez of DailyFX.com

GBPJPY –Currency trading crowds remain aggressively net-short the British Pound against the Japanese Yen, giving contrarian signal to buy into sharp advances. The ratio of long to short positions in the GBPJPY stands at -6.79 as nearly 87% of traders are short. Yesterday, the ratio was at -5.02 as 83% of open positions were short. In detail, long positions are 7.8% lower than yesterday and 10.4% weaker since last week. Short positions are 24.5% higher than yesterday and 147.7% stronger since last week. Open interest is 19.1% stronger than yesterday and 89.2% above its monthly average. The SSI is a contrarian indicator and signals more GBPJPY gains.

 

[Jason Rogers]

Euro Finds Support at Measured Level

Written by Jamie Saettele of DailyFX.com

I wrote Friday that “a drop below 13507 would shift focus to the 100% extension at 13429.” The corrective channel is also serving as support. A drop below the 100% level and corrective channel is needed in order to indicate that a 3rd wave is underway towards the 161.8% level at 13234. 13570-13610 is now resistance.

 

[Jason Rogers]

U.S. Consumer Prices Rise 1.6% in January

Written by Michael Wright of DailyFX.com

Consumer prices in the world’s largest economy rose an annualized 1.6 percent in January after climbing 1.5 percent the month prior, which was in line with economists’ expectations. Subsequent to the release, the greenback lost ground against most of its major counterparts. Traders will now shift their focus to comments from Bernanke due out at 15:00 GMT.

Taking a look at the breakdown of the report, the core inflation reading rose 0.2 percent after climbing 0.1 percent the previous two months, while core prices from a year ago remain at 1.0 percent which is half of the central bank’s target. Indeed, the increase in the headline reading was fueled by higher prices for food and fuel. At the same time, prices for housing rose 0.1 percent in December.

It is also worth noting that the release trails the Federal Reserve's recent order of 19 of the largest U.S. banks to test their capital levels against the possibility of a renewed recession amid slack in the world's largest economy. The announcement is worrisome due to the fact that unemployment is unlikely to return back below 8 percent this year as businesses remain reluctant to add payrolls due to uncertainty in the U.S.'s economic outlook. As concerns remain, any dovish statement by central bank head Ben Bernanke later on today could place added pressure on the buck.

EURUSD 4 Hour
Chart

 

[Jason Rogers]

Gold Approaches Record High

Written by Ilya Spivak of DailyFX.com

Commentary: Gold moved higher on Wednesday, adding $12.57, or 0.9%, to settle at $1411.70. Like with oil, price action is being influenced by the events in Libya, with gold taking on its safe haven role. Crude obviously has much more upside under these circumstances given that supply of the commodity is actually being disrupted; on the other hand, oil also has more downside. Gold may then be seen as a more conservative way to hedge against the events taking place in Africa and the Middle East.

Technical Outlook: Prices are stalling below major triple top resistance in the $1411.75-1424.60 region having put in a bearish Harami candlestick pattern. Negative RSI reinforces the case for a downside scenario. A breakdown below initial support at $1393.30 exposes a rising trend line set from the January low, now at $1388.48. Penetration below the latter barrier is needed to confirma downward reversal.

 

[Jason Rogers]

NZDUSD: Major Trend Change Brewing

Written by Ilya Spivak of DailyFX.com

NZDUSD is on the cusp of producing a major trend change, with prices on pace to break through key rising trend line support that has guided the multi-month uptrend since June. Should the breakdown materialize, the door will open for an initial decline to 0.7340, with a subsequent move below that exposing the psychologically critical 0.70 figure. We will watch the pair closely for a short entry opportunity.

 

[Jason Rogers]

Euro at Top of Range

Written by Jamie Saettele of DailyFX.com

EUR/USD: 4 Hour Chart

3 wave patterns are dominant in the EURUSD, which suggests either a flat or triangle is underway from the early February high. In both case, 13860 could be exceeded prior to a sell off towards the bottom of the range (13428). A new month begins tomorrow and important price extremes tend to register early in the month.

 

[Jason Rogers]

Written by Joel Kruger of DailyFX.com

Although currencies continue to show relatively well bid against the buck, inability for the Euro to establish above 1.3860, has opened the door for some minor profit taking. In fact, we have already started to see some USD buying against the other safe haven currencies, with both the Franc and Yen underperforming in recent trade, as both currencies move further away from record levels. The recovery in US equities and improved risk appetite have undoubtedly helped to bolster USD/CHF and USD/JPY, and it looks as though there could be room for additional USD gains against these currencies on Tuesday. Better than expected growth data out of Switzerland, along with stronger PMIs may be capping additional gains for now, but have certainly not weighed significantly on Tuesday’s rally as of yet. Meanwhile, data specific releases in the Eurozone haven’t hurt the single currency today, with stronger German employment data, higher Eurozone PMIs and an as expected Eurozone inflation reading, managing to support any intraday dips.

EUR/USD:The market remains very well bid, with key short-term resistance by 1.3745-65 being easily cleared to now put the focus on next topside barriers at 1.3860. The 1.3860 level represents the current yearly high, and a break above will then open the door for a fresh upside extension towards psychological barriers by 1.4000 which also guard against the more significant medium-term resistance at 1.4285 from November 2010. There is still however the risk that the market stalls out in the 1.3800’s, but a failure at or near 1.3860, and break back below 1.3700 would be required at a minimum to relieve current topside pressures.

 

[Jason Rogers]

Written by Joel Kruger of DailyFX.com

EUR/USD: The market has since stalled out after breaking above 1.4000 and the latest topside failure should not be taken lightly, with the price stalling around some key resistance at the 78.6% fib retrace off of the major November-January high-low move and by the psychological round number barrier. Tuesday’s bearish close helps to reaffirm topping prospects and from here, deeper setbacks are seen towards 1.3700 over the coming sessions. Any intraday rallies should be well capped below 1.4000.

EUR/USD Technical Outlook

 

[Jason Rogers]

Euro Focus on 13740 and 13650

Written by Jamie Saettele of DailyFX.com

I wrote yesterday that “the decline from yesterday’s high is in 5 waves therefore I favor the downside. 13742 is an initial support area.” The EURUSD has declined a bit more and focus remains on 13742 (March low and 20 day average). A drop below there would shift focus to the 161.8% extension at 13650. Near term resistance in the event of a bounce is 13850/85.

 

[Jason Rogers]

Could the 1995 Kobe Earthquake Give Traders Insight on the Direction of the Yen?

Written by Christopher Vecchio of DailyFX.com

In the immediate hours following the devastating 8.9-magnitude earthquake on Friday, traders rushed in long-Yen positions amid speculation that a repatriation of assets could occur. However, as the dust settles and early calculations are made about the cost of recovery, is Yen strength what Japan needs?

The Yen rose across the board against the other seven major currencies in the hours following the earthquake on speculation that significant investment would be needed to rebuild the devastated country. In fact, the Yen had depreciated 0.80 percent against the U.S. Dollar for the week headed into Friday, but after the natural disasters, gained 1.37 percent against its American counterpart. Investors cited the bull rally that occurred following the 1995 earthquake outside of Kobe, Japan, as a historical point of reference for the reason behind the Yen rally.

Charts prepared by Jamie Saettele​

Following the 1995 earthquake, the Yen rose to historical highs against the Dollar, dropping below the psychologically significant 80.000 level in the wake of the disaster. The Nikkei fell 6.18 percent today following 1.70 percent losses on Friday, after a weekend of assessment left traders disparaged. In the next six months, the Nikkei fell another 24.7 percent; in the following ten months, the Nikkei jumped 52.2 percent.

Charts prepared by Jamie Saettele​

However, the Japanese economy is in a significantly different place today than where it was in 1995. Primarily, the Bank of Japan recognizes that a stronger yen will significantly a recovery from the financial crisis that is still struggling to find footing. A weaker Yen would be beneficial: strong exports and foreign direct investment would aid the rebuilding process as well as speed up the recovery from the recession. The Bank of Japan, in a move that clearly exhibits their belief that the funding needed to rebuild is enormous, it injected ¥15 trillion, or $184 billion, into Japanese capital markets, and expanded its asset-purchase program to ¥40 trillion. This may not be the last of such moves: the Yen is up 14 percent against the Greenback over the past 12-months, which has reduced exporters’ profits margins significantly already. Thus, while the Yen gained over 20 percent against the U.S. Dollar in the wake of the 1995 Kobe earthquake, further liquidity injections to weigh down the Yen might make a similar breakout unlikely.

 

[Jason Rogers]

U.S. Housing Market Data Disappoints; Housing Starts to Lowest Since April 2009

Written by Christopher Vecchio of DailyFX.com

More evidence emerged that the U.S. housing market remains a laggard in the recovery, as demand for new construction continues to struggle to find footing. Housing starts in February declined by 22.5 percent from January, coming in at 475,000, well below the estimated 566,000, according to a Bloomberg News survey. Housing starts advanced by 618,000 in January, growth of 18.5 percent from December. Similarly, building permits for February also declined more than expected, falling by 8.2 percent to 517,000. 570,000 permits were forecasted to have been approved following 563,000 in January. The housing data, coupled with producer prices data from February, initially sent the Greenback lower against the major currencies. However, the Dollar Index has since fallen, to as low as 76.36 following the news.

U.S. Housing Starts: April 2007 to Present

Source: Bloomberg​

New construction continues to be constrained as a high supply of foreclosed homes continues to weigh on prices and add to already ‘over-stocked’ inventories. The Federal Open Market Committee noted the continued struggles of the housing market, calling the situation “depressed”; the FOMC used this data as evidence to maintain plans to purchase U.S. Treasuries in order to boost growth. The housing market will likely to be depressed until there is a substantial rebound in the jobs market.

 

[Jason Rogers]

Japanese Yen: A Tectonic Shift in Progress?

Written by Ilya Spivak of DailyFX.com

The Yen has strengthened considerably in the immediate aftermath of the Tohoku earthquake – the largest in recorded Japanese history –as rising uncertainty spurred repatriation flows, with Japanese investors cashing out across the asset spectrum. The process seems likely to continue until the full impact of the disaster is ascertained and a forecast-able set of variables emerges.

FX Intervention – Will They or Won’t They?

This presents a clear challenge for Japanese authorities: on one hand, a stronger Yen threatens the critical export sector that will be seen as instrumental in helping the economy recover; on the other, the Yen's increasing purchasing power will help to dull the cost of recovery efforts for individual as well as public and private entities considering so many goods and resources in Japan are imported. On balance, this means policymakers (who have a well-documented penchant to intervene into FX markets) will be tempted to manage Yen volatility rather than push prices in a given direction, with as-yet unknown results. It can be said however that a period of knee-jerk volatility is likely ahead.

Is an End to Deflation in Sight?

Over the longer term, the most significant question concerns the quake’s implications for Japan's persistent deflation problem. On balance, prices are likely to be pressured higher. The disaster severely damaged the ***ushima Daiichi nuclear power plant and the government has acknowledged that the threat of radiation leakage is increasing. Regardless of how the endgame to this aspect of the crisis plays out, Japan is likely to be far more skeptical about the use of nuclear power in the future, hinting at a shift toward traditional sources such as oil and coal for more of its energy needs. Additional demand will nudge up prices, which ultimately promises to spill over into overall CPI inflation.

Meanwhile, the government has already signaled that it will divert a large bit of the funds that had been marked for a variety of services (from child care to toll-free roads) toward reconstruction efforts. This along with private-sectorreconstruction will stoke economic activity, adding to inflationary pressure. The Bank of Japan’s record-setting liquidity injections in the immediate aftermath of the quake certainly encourage this trajectory. While the extent to which these price gains are temporary or otherwise is uncertain, they could potentially alter the deflationary reality that Japan has lived with for two decades, permanently changing the currency’s trading dynamics. In the most extreme scenario, this foreshadows rapidly rising interest rates and a Yen that structurally changes from a carry trade funding currency into something of a high-yielder.

 

[Jason Rogers]

Japanese Yen Could Continue Higher Despite G7 Forex Intervention

Written by David Rodriguez and Ki Kim of DailyFX.com

Central banks across the Group of Seven major industrialized economies have joined the Bank of Japan in a joint effort to push down the soaring yen. Yet previous G7 intervention in the Euro/US Dollar exchange rate suggests that such actions may not halt Japanese Yen advances, and outlook remains uncertain despite official action.

Japan’s catastrophic earthquake and potential nuclear disaster had pushed the value of the nation’s currency sharply higher, following expectations of liquidations of foreign assets to pay for the cost of the destruction. Since a stronger yen would be an even greater blow to Japanese exporters and bring negative impact on world markets, the G7 has decided to support the Japanese authorities in a globally coordinated FX intervention.

US Dollar/Japanese Yen Exchange Rate Reacts to G7 Intervention

Traders are understandably skeptical at monetary authorities’ ability to stem Japanese Yen gains. The Bank of Japan unilaterally intervened in forex markets in September, 2010 as the US Dollar/Japanese Yen exchange rate crossed below the ¥83.00 mark. Yet the chart below shows that said intervention had very little effect beyond the initial USDJPY jump. Instead markets pushed the Japanese Yen consistently higher (USDJPY lower) and to fresh 15-year lows in the following two months.

US Dollar/Japanese Yen Exchange Rate Falls Despite to Bank of Japan Intervention

Many naturally question whether yesterday’s intervention will be enough to stem USDJPY declines beyond the initial rally. Unlike the Bank of Japan’s last unilateral foray into the open market, however, the more recent intervention was a multilateral effort from the Group of Seven (G7) Finance Ministers. This was the first such joint move since the G7 intervened to stop Euro declines in September, 2000. A bit of historical perspective is subsequently in order.

Concerns over the one-year-old Euro currency prompted the G7 to hold joint intervention and force Euro advances against the US Dollar and other major counterparts. Actions clearly sparked a sharp short-term recovery, but the more medium-term effect was anything but clear.

Euro/US Dollar Exchange Rate on G7 Forex Intervention in September, 2000

More news and analysis can be found on DailyFX.com

 

[Jason Rogers]

Euro Stalls Before November High

Written by Jamie Saettele of DailyFX.com

Given the proximity of the EURUSD to 14282 however, one must consider a complex alternate count in which the decline into 12873 is an X wave. A pop above 14282 would shift focus to 14360 (61.8% extension of rally from 11875) and 14413 (100% extension of 12873-13855 rally). At this point, a break of the short term support line is needed in order to suggest that a top is in place. A trendline extended off of the 2008 and 2009 highs intersects with the November high this week. 14138 and 14000 are short term supports.

 

[Jason Rogers]

Euro Strength at Clear Risk Ahead of Portugal Austerity Vote

Written by David Rodriguez and Ki Kim of DailyFX.com

The Euro continues to hit fresh highs against the US Dollar, but a standoff on a key legislative vote in Portugal threatens to push the euro zone periphery nation into insolvency and derail Euro/US Dollar strength.

The Portuguese government plans to introduce new fiscal austerity measures as it tries to avoid a European Union bailout and tapping the European Financial Stability Fund (EFSF). The government insists that the additional measures will be sufficient to avoid emergency funding and instead meet the government’s goal of cutting its budget deficit from 7.3 percent of GDP last year to 4.6 percent in 2011. Yet discord from an opposition threatens the key measure, and failure to pass the proposed austerity measure could force Portugal into insolvency and make an EFSF-led bailout inevitable.

One only need look at yields on Portugal’s benchmark government bonds to see perceived default risk for the EU’s 18th-largest country. Portugal's benchmark 10-year bond yield rose to 7.69 percent from Monday's 7.53 percent, taking the premium investors demand over German Bunds to 443 basis points—just short of a record-high.

Portugal Benchmark 10-Year Government Bond Yield

Source: Bloomberg​

Finance Minister Fernando Teixeira dos Santos told parliament that a 10-year yield above 7 percent is unsustainable for Portugal in the medium and long term. In fact, Greece and Ireland were forced to seek bailouts soon after their respective bond yields crossed the 7 percent mark. Mr. Teixeira further warned this week that failure to enact the austerity measure would push the country closer to following Greece and Ireland to an EU-led bailout package. Risks to the Euro are relatively clear. The Euro’s reaction to the Ireland bailout warns that similar action on Portugal could sink the fast-rising currency.

Euro Falls Sharply as Ireland Sought Bailout from European Financial Stability Fund

Traders are understandably cautious on the Euro headed into tomorrow’s pivotal vote on Portuguese austerity measures. Although we do not know exactly when the bill may go to full vote, we will keep a close eye on newswires and keep traders posted on the DailyFX Real Time News feed. Risks to the Euro are clear, and the single currency could fall sharply on a ‘no’ vote. We view sharp rallies on a successful vote somewhat less likely, and risks seem weighed to the downside through tomorrow’s trade.

 

[Jason Rogers]

New Zealand Dollar Trade Opportunities

Written by Jamie Saettle of DailyFX.com

NZDUSD Weekly

Do not dismiss the bearish implications from the AUDUSD / NZDUSD divergence that was detailed early in the year. From an Elliott perspective, I maintain that the NZDUSD completed wave B of a flat in late 2010 (those unfamiliar with Elliott wave click here). The drop under 7342 reinforces the bearish bias. The wave count is getting exciting as the drop from 7975 is unfolding in a series of 1st and 2nd waves (see short term chart below for details). Looking out, an objective is defined by the 161.8% extension of wave A at 6192. This level intersects with a former trendline in late June (week of June 24th). Equality in time between waves A and C reinforces early summer as a point in time to expect a NZDUSD bottom. Wave A consumed 31 weeks and 31 weeks from wave C suggests a low during the week of June 10th.

NZDUSD 480 Minutes

I mentioned that the wave count is getting excited and it’s not just because a 3rd of a 3rd decline is expected to begin in April or May. Second waves are also sharp and worthy of trading consideration. A close look at the structure of the advance from 7114 reveals that the rally is unfolding as an impulse (5 waves). The advance will be complete following a push above 7446 (complete wave a of 2’). Resistance comes in at 7475/7505. The former is a recent pivot high and the latter is where wave v would equal wave i of the same degree (wave a) and former support. A b wave decline would then be expected for the remainder of March and into April. An estimated support zone is 7360-7260 for the b wave low. Yet another strong rally in wave c would then be expected to complete wave 2’ of 3; probably near 7550 (61.8% retracement and wave 2 of 5 with then decline from 7823 – this is a common area for retracements to end following extended 5th waves). My best estimate as to the path of the NZDUSD over the next month is displayed on the chart. Markets are dynamic and just as there are varying degrees of trend, there are also varying states of market predictability. The main requirement for higher pattern predictability is higher volatility, which permits a clear view of wave structure. Do understand that there is never a time in which market predictability is 100% or even close to perfection. Rather, it is a relative phenomenon and wave practitioners should have a better idea of what will happen now as opposed to before (which was a lower volatility environment). I’ll be publishing updates to the NZDUSD pattern (and other patterns of course) in real time through the DailyFX Forex Stream.

 

[Jason Rogers]

GBPUSD: Bears to Challenge 1.60 Again

Written by Ilya Spivak of DailyFX.com

As we suggested last week, GBPUSD rallied after putting in a Bullish Engulfing candlestick pattern above familiar support at the 1.60 figure. The advance found resistance at a rising trend line connecting major highs since early February, with prices reversing sharply lower and now on pace to test the 1.60 juncture to the downside over the coming days. Current positioning doesn’t offer an actionable entry opportunity from a risk/reward perspective at present and we will monitor how the pair behaves at 1.60 to see if a more attractive setup presents itself.

 

[Jason Rogers]

UK GDP Declines Less Than Expected; Outlook for Pound Remains Bearish

Written by Jonathan Granby of DailyFX.com

The final release of UK Q4 GDP reversed the second prints downward revision to -0.6% and confirmed the flash reading of -0.5% quarter-on-quarter. The final reading showed upward revisions in the services and factory output sectors which aided the headline figure. The Office of National Statistics (ONS) said that excluding the impact of the coldest winter weather in a century growth was “broadly flat”. These comments underscore the OBR’s lowering of their growth forecast for the UK as the overall picture remains lackluster. Additionally, the Bank of England has held off raising interest rates to combat accelerating inflationary pressures (last in at 4.4% y/y more than double the central banks 2% target) to help provide support for the faltering recovery, saying that there was “merit in waiting” to understand the full impact of government budget cuts and rising oil prices on the economic recovery.

Production output growth was revised to 0.8% in Q4 from 0.7% and the drop in services was pared to 0.6% from 0.7% according to the ONS breakdown. Consumer spending continues to be highlighted for its weakness, and declined 0.3% in Q4 after being flat in Q3. This weakness comes as a result of steep government budget cuts are set to cost 330,000 public-sector workers their jobs. Amid spiraling consumer confidence and insecurity about jobs UK consumers are keeping their wallets firmly shut.

Source: Bloomberg​

The pound failed to draw any support from the better than expected release, instead it fell back to 1.6005 from the 1.6030 region pre-release. After yesterday’s bearish break and close below the psychologically important 1.6000 level some bulls are likely to have thrown in the towel after repeatedly failing to push the pair above the 1.6300 level convincingly. As Cable takes on a more bearish tone bears will be looking down toward the 1.5800 region as an initial target area. It remains to be seen if the interest rate speculation that has been driving gains, and keeping dips well bid, can contain the downside.