Intraday Analysis by Forexsoup

[karlis09]

EURUSD: Rates in Focus as ECB’s Trichet Talks Down Outlook

Last week’s impressive Euro rally clearly looks to have owed to a parallel drop in credit-default swap (CDS) spreads from the currency bloc’s most debt-stricken periphery member states (the so-called PIIGS, meaning Portugal, Ireland, Italy, Greece and Spain). However, barring any unforeseen developments, the absence of scheduled event risk on the sovereign stress front this week may bring the monetary policy outlook back into focus. On balance, this seems to bode ill for the single currency after ECB President Jean-Claude Trichet backed off from the hawkish rhetoric accompanying the bank’s latest rate decision in an interview with the Wall Street Journal over the weekend. Preliminary German Consumer Price Index figures stand out on the economic calendar. Euro Zone Consumer Confidence and M3 Money Supply figures are also on tap.

GBPUSD: All Eyes on Bank of England Minutes for Policy Clues

Monetary policy expectations remain in focus as GBPUSD continues to track closely with the UK - US Treasury yield spread. This puts the spotlight on the Bank of England as it publishes minutes from January’s MPC meeting. The dramatic build in priced-in rate hike expectations for the year ahead (as tracked by Credit Suisse) suggests traders see the bank as likely to err on the side of price stability, stepping off the sidelines to raise rates as inflation continues to rise despite the threat that such action would pose to the nascent economic recovery, particularly as the government’s austerity program gains momentum.Indeed, the central bank argued throughout 2010 that inflationary pressure was temporary and would subside over the medium term without tightening. Clearly, this has proven wrong, hinting that putting off the issue for much longer threatens to become a credibility problem. A relatively robust fourth-quarter Gross Domestic Productreading will only add to the anticipation, with the annual growth rate set to print above its long-run average despite a shallow downtick from the prior period. With that in mind, traders will be keen to parse the meeting minutes for any clues on policymakers’ thinking ahead of February’s MPC sit-down, an event made all the more important given it coincides with the unveiling of an updated quarterly inflation forecast.

USDJPY: Spotlight Stays on US Yields, FOMC and US GDP on Tap

US Treasury yields remain most prominent in driving Japanese Yen price action, putting the spotlight squarely on the busy US economic calendar. Needless to say, the Federal Reserve monetary policy announcement and the preliminary fourth-quarter Gross Domestic Product reading stand out as top-tier event risk. For the former, traders will be most concerned with quantifying policymakers’ “threshold” for reducing or even suspending the second round of quantitative easing before its scheduled completion after hints at the existence of such a barrier suddenly emerged in Fed officials’ comments over recent weeks. Policymakers’ voting pattern ought to prove significant as well as five regional Fed presidents – including the hawkish Charles Plosser and Richard Fisher – will rotate into active positions on the rate-setting FOMC. Meanwhile, the GDP is set to show the annualized growth rate jumped to 3.5 percent, the highest in three quarters. Better yet, the outcome is expected to driven by the most robust pickup in private consumption in four years. This coupled with forecasts calling for stronger readings on Consumer Confidence, New Home Sales, and Durable Goods Orderspromise to push US yields higher, taking USDJPY along for the ride.

AUDUSD: Gold Correlation Hints Aussie Weakness to Continue

The Aussie’s bearings are best revealed via its clear correlation with gold prices, with the high yielder likely to continue following the yellow metal lower as investors’ dominant forecast for the evolution of the global recovery shifts away bullish and bearish extremes.Gold had thrivedon the back of its appeal as a store of value for bulls and bears alike, with theformer camp calling for runaway inflation courtesy of ultra-loose monetary policies while the latter projected renewed collapse as fiscal stimulus expired. However, investment demand suffered a major setback, with gold ETF holdings dropping precipitously over recent weeks. The reversal seems to owe to the combination of improving US economic data, rising sovereign stress in Europe and looming slowdown in China amounting to an environment where a back-slide into recession looks unlikely while pointing to a slow and uneven recovery over the years ahead. The increasingly apparent shift in the markets’ consensus toward this scenario bodes ill for the Aussie much the same as it does for gold. Indeed, a protracted recovery hints that major central banks will now get their chance to catch up as the RBA – until recently the leader in post-crisis monetary policy normalization – as Glenn Stevens and company look increasingly likely to sit on their hands for much of the coming year. The fourth-quarter Consumer Price Index report headlines local event risk.

NZDUSD: RBNZ Rate Decision to Yield Familiar, Dovish Outcome

The rising link between NZDUSD and yield spreads puts the spotlight squarely the Reserve Bank of New Zealand. The result may yet prove to carry little weight however after last week’s disappointing inflation report and pointedly dovish comments from Prime Minister John Key seemingly dashed any reason to suspect the central bank would abandon its accommodative posture.

 

[karlis09]

Dollar Shows Limited Reaction to Consumer Confidence, What about the FOMC Decision?

Though the dollar would show signs of life early in Tuesday’s trading session; the benchmark currency would ultimately end the day once again in the red. At this point, we have seen the dollar slide for the third consecutive session on a trade-weighted basis and 10 of the past 12 days against its benchmark counterpart the euro. It may surprise some that the dollar has maintained this disappointing trajectory despite promising event risk that would emerge throughout the trading day. But, the reality is that it takes a greater degree of influence to knock speculators off established trends; and the updates we have seen simply don’t meet the necessary criteria. On the other hand, the greenback may not be doing as poorly as EURUSD suggests. Over the past week, we have made the effort to differentiate the dollar’s performance against its various counterparts to garner a better sense of its individual performance. And, while the world’s most liquid exchange rate is still set up in its bull trend, we see that the dollar has held up far better against the other majors. The commodity bloc is still restrained to congestion, the disputed safe haven pairs (USDJPY and USDCHF) are trading within January’s range and GBPUSD saw its strongest dollar move in six weeks.

With prominent fundamental catalysts due later this week, there is a natural tendency to defer major positions (and thereby trend generation) until market participants are sure of the outcome to these upcoming events. With this distraction, the market would see a limited response to the scheduled event risk through the day. On the economic docket, the housing sector was given a disappointing bill of health after the S&P/Case-Shiller composite home price index saw a 1.6 percent annual pace of contract through November while the FHFA’s own home price index passed the month unchanged. However, the top economic report was the Conference Board’s consumer sentiment survey for January. The 60.6 reading was far better than expected, an eight month high and drew a distinct contrast to the disappointing University of Michigan figure. Yet, it was the details from the report that was truly encouraging. According to the statistics, the percentage of respondents that said jobs were plentiful hit its highest level since March 2009 and the fraction expecting an increase in income over the next six months rose to an eight-month high. Perhaps this economic recovery is on a far surer footing that many are expecting.

Conjecture about the return of the consumer sector is hard to translate into immediate trading. The same can be said about President Barack Obama’s State of the Union address. There was a tangible shift from monetary profligacy to conservancy; but it will take some time before stimulus measures are unwound and deficits are reined in. In the meantime, we have two events ahead that can significantly alter the course of the dollar in the short-term. Of the two, the advanced reading of 4Q GDP is top risk; but that is later down the line. Tomorrow, the market’s attention will be on the FOMC rate decision. Given the stubbornly high level of joblessness, the absence of pressing inflation and Fed members’ commentary these past weeks and months; there is unlikely to be any meaningful change in the group’s policy stance. That said, these meetings are just as much about nuance as blatant changes. If the market interprets an early end to the stimulus program, the dollar will rally.

 

[karlis09]

Euro Confidence Fading as Disputes Over Coordination Overshadows EFSF Bond Sale

The euro is riding off its own momentum at this point. If it weren’t the fundamentals of the past 24 hours would have driven the currency lower. Since the market learned of tentative proposals to coordinate the effort to solidify the region’s finances and a nascent hawkish bearing from the ECB, we have seen both drivers loose traction. Today, the EU sold a first round of 5 billion euros worth of EFSF bonds to 40 billion euros in bids. Yet, the encouraging outcome here is once again marred by Germany’s insistence that the bailout program is large enough.

 

[karlis09]

Default Headline News: Bank of England's Weale Joins Sentance in Calling For Rate Hik

Bank of England's Weale Joins Sentance in Calling For Rate Hike

The central bank's monetary policy committee split three ways in its latest meeting, with Martin Weale joining Andrew Sentance in voting for an increase in the bank rate by 25 basis points.....

Read more by Forexsoup

 

[karlis09]

FOMC Maintains Fed Funds Rate, Continues Treasury Purchase Plan

Federal Reserve policy makers held the Federal Funds Rate between 0-0.25 percent, while maintaining plans to purchase $600 billion of Treasuries through June. The accompanying statement said that the economy continues to expand, though "at a rate that has been insufficient to bring about a significant improvement in labor market conditions." The Fed also stated that inflation is too low, and unemployment too high, to be consistent in the long-run with the central bank's mandate of stable prices and full employment. Policy makers did, however, recognize upward price pressures in commodities, but said that "measures of underlying inflation have been trending downward." The FOMC decision was a unanimous vote, as new voting members Charles Plosser and Richard Fisher supported maintaing the stimulus after indicating opposition to the move in November.

The currency market was relatively unchanged following the decision, although the U.S. dollar initially fell against the euro and its commodity counterparts on the Fed's decision to continue QE2 through its scheduled expiration in June. The greenback quickly stabilized, however, with traders looking ahead to durable goods orders, pending home sales, and the U.S. fourth quarter GDP reading later on this week.

by Forexsoup

 

[karlis09]

New Zealand Dollar Falls as the Unemployment Rate Spikes

The New Zealand Dollar fell notably after the government reported that the Unemployment Rate rose to 6.8% in the fourth quarter, much higher than the 6.5% consensus estimate and the 6.4% in the third quarter. The New Zealand labor market has failed to recover from the global economic downturn, in sharp contrast to neighboring Australia where the employment landscape has steadily improved.

The latest spike in the unemployment rate was spurred by a 0.5% quarter-over-quarter decrease in employment, much worse than the 0.2% increase that was anticipated. Employment remains 1.3% higher than a year ago, but a 2% reading was expected. Finally, the Labor Force Participation Rate declined to 67.9% in the fourth quarter from 68.3%.

by Forexsoup

 

[karlis09]

U.S. Nonfarm Payrolls Rose 36K in January Amid Forecasts of 146K

Nonfarm payrolls in the world’s largest economy rose a mere 36K in January after climbing a revised 121K the month prior amid economists’ expectations of 146K. Meanwhile, the unemployment rate fell to 9.0 percent to mark the lowest level since April 2009. Indeed, there was a lackluster performance in the dollar as traders digest the report and its implications for the U.S. economy.

Winter conditions in the U.S. likely dampened the labor force as approximately 916,000 workers said that they did not attend work. Taking a look at the breakdown of the release, the labor force participation rate fell to 64.2 percent, while construction payrolls dipped 30K. The 26 year low in the labor force participation rate is worrisome due to the fact that those individuals not included in the labor force surged to 86.2 million from 83.9 million. Furthermore, hourly earnings pushed 0.35 percent higher to mark the largest gain since the end of 2008. It is also worth noting that the seasonally adjusted underemployment rate came in at 16.1 percent to post the lowest level since April 2009.

Taking a look at the reaction subsequent to the dismal Nonfarm payrolls report, after the initial rally in the dollar, currency markets showed a lackluster performance. As the EURUSD holds its key support level at the 1.36 area, traders should not rule a slight reversal to the upside. Looking ahead, focus will now shift their focus to the European leaders meeting in Brussels as uncertainty surrounding the European Financial Stability Fund ability to purchase government bonds remain.


by Forexsoup

 

[karlis09]

Forex Weekly Trading Forecast - 07.02.2011

US Dollar Sees a Bounce but Fundamental Support is Lacking

The dollar has come a long way in just a week’s time. Through the second half of this past week, the dollar was starting to find its footing in what looks to be a tentative recovery. Yet, doubt over whether this is a true, bullish reversal should be preserved considering we had similar speculative hopes dashed just a week before when a sharp rally for the dollar and the long-awaited channel break from the S&P 500 were subsequently reversed after the weekend. What led the greenback to gain ground this past week is what we need to establish. The deeper the fundamental roots to this effort, the more probable carry through will be on a true bull phase. That said, without a solid foundation, the benchmark currency could be up for another swift tumble.

Looking over the past week, the dollar could have drawn its strength from two particular sources: high-level event risk or risk appetite trends. The data flow was particularly interesting for its rounded look at the broader economy. A view of the consumer and business health offered a direct look into whether the US economy was on a fast track to surpass its global counterparts for growth and returns. Where personal spending, manufacturing activity and service sector activity all carved out gains; a vigilant fundamental trader would really hone in on the disappointing employment breakdown and the PCE-based inflation figures. Where the net payrolls were a disappointment for missing their mark; the jobless rate only improved with a record frustrated American’s leaving the labor force and the participation rate tumbling dot its lowest level in 26 years. This puts growth into perspective. Without employment and wages improving, the economy will not continue to expand at its current clip. And, as for the Fed’s favored inflation indicator, a record low sets a very poor precedence for interest rate speculation.

Data was not very encouraging last week; so perhaps the dollar took the initiative to capitalize on a risk aversion move. And yet, our benchmark for sentiment (the S&P 500) was still pushing two-and-a-half year highs. Going forward, it will be exceptionally difficult for the dollar to sustain – much less leverage – its burgeoning rally if sentiment does not start to deteriorate market-wide. There are just a few prominent catalysts that can meaningfully encourage the greenback higher at this point; and risk appetite trends is at the top of the list. An ideal situation for the safe haven currency would be an aggressive and correlated tumble in equities, corporate debt and speculative commodities along with a subsequent rally in gold, money markets and the funding currencies. One or two of these factors would present limited backing. As for the data on hand, don’t expect meaningful volatility to follow the releases. Consumer credit will take measure of lending conditions, the NFIB small business optimism will gauge hiring expectations for the largest employer group, the monthly budget will track the push to the deficit cap and the University of Michigan sentiment survey will gauge Americans’ willingness to spend. None of this though materially alters the US’s relative pace of growth, risk appetite trends or the timing for rate hikes.

And, though as traders, we should take stock of the immediate threats on our radar; it is also important to keep tabs on the longer-term developments. Concerns that will weigh more heavily in the not-so-distant future are the underperformance of domestic yields, the burden of a record deficit and the eventual withdrawal of stimulus. Just keep those concerns in mind. – JK

Euro Stages Major Turnaround – is this the Reversal?

The Euro saw a potentially significant reversal against the US Dollar through late-week trade, threatening a larger correction as it failed to hold highs and finished lower through Friday’s close. Markets initially sent the downtrodden US Dollar sharply lower against the Euro and other major currencies through Monday’s open, but a later reversal suggests short-term momentum may have turned in the Greenback’s favor. Of note, the Euro/US Dollar set a potentially significant “Evening Star” reversal formation as it failed to hold fresh multi-month highs on two consecutive trading days and closed sharply lower on the third. A surprisingly dovish European Central Bank interest rate decision may have been the catalyst to force a larger move lower in the previously high-flying EURUSD.

Euro volatility expectations have dropped considerably as a highly-anticipated ECB rate decision and US Nonfarm Payrolls result have come and gone, but that hardly guarantees slower price moves in the days ahead. If this is indeed a potential reversal point, price action will almost certainly be choppy and sharp intraday swings are likely. Foreseeable European economic event risk is nonetheless limited to mostly second-tier economic releases. A potential exception comes on an often-unpredictable ECB Monthly Report due Thursday morning at 09:00 GMT. Given the euro’s sharp reactions to recent ECB rhetoric, any surprises could force important EURUSD swings

European Central Bank Governor Jean Claude Trichet surprised markets as he expressed a relatively dovish tone on inflation through Thursday’s announcement. The euro had previously rallied on expectations that the ECB may soon move to raise interest rates on growing price pressures within the EMU. Yet Trichet all but quashed such speculation as he underlined the relatively benign trend in core price inflation. Overnight Index Swaps now predict that the central bank may move rates through the second half of the year at the earliest, and the euro has fallen in kind.

The top question on traders’ minds is clear: is this the start of a larger Euro/US Dollar correction? Our technical strategists certainly think that this may be the spark necessary to force a major EURUSD turnaround. The fundamental picture remains less clear, but a relatively positive result in US Nonfarm Payrolls data suggests the US recovery may be picking up steam. The headline NFP change missed consensus forecasts by a wide margin. Yet inclement weather across the country meant the survey likely understated job growth to a similarly large extent. It will be critical to see how the EURUSD starts the week’s trade, as this may set the tone for following days and subsequent weeks through February. - DR


Japanese Yen Weakness Could Be Short-Lived, Consolidation Ahead


The Japanese Yen weakened against the U.S. dollar for the first time in four weeks, with the exchange rate advancing to a high of 82.45 on Friday, but the near-term rally in the USD/JPY could be short-lived as the pair continues to trade within the downward trend channel carried over from January. The DailyFX Speculative Sentiment index continues to reinforce a bearish outlook for the dollar-yen as retail traders remain heavily net long against the pair, and the exchange rate may pare the advance from earlier this month as investors diversify away from the greenback.

Meanwhile, former Bank of Japan official Masayuki Matsushima warned that the “bond bubble” may burst over the medium-term as the government struggles to manage its public finances, and implored the administration to “increase the consumption tax rate” after Standard and Poor’s cut the region’s credit rate to AA-. As Japan holds the top seat amongst the industrialized countries for the largest budget deficit, the tepid recovery could make it increasingly difficult for Prime Minister Naoto Kan to manage the risks for the region, and the central bank may weigh different alternatives to stimulate the ailing economy as it aims to promote a sustainable recovery. As the marked appreciation in the exchange rate continues to dampen foreign demands, the BoJ may look to intervene in the currency market once again as the benchmark interest rate remains close to zero, but the technical outlook continues to reinforce a bearish outlook for the USD/JPY as the pair fails to retrace the decline from the previous month.

The USD/JPY appears to be in a small consolidation phase as the technical outlook continues to point to further decline, and the exchange rate may trend sideways over the near-term before we see another break to the downside. As the rebound in the dollar-yen tapers off ahead of the upper bounds of the downward trending channel, currency traders may take advantage of the range-bound price action over the following week, and the pair may continue to retrace the rebound from back in November as the U.S. dollar struggles to regain its footing. - DS


British Pound: Risk Trends May Undermine Gains from Hawkish BOE


Monetary policy is firmly in focus in the week ahead as the Bank of England delivers February’s much-anticipated interest rate decision. The announcement takes on special significance considering it will coincide with the creation of an updated quarterly inflation forecast, promising to bring some much-needed clarity to the ongoing debate about how policymakers plan to reconcile stubbornly high inflation with already sagging growth that is facing additional headwinds as the impact of the government’s austerity program continue to filter into the overall economy.

For their part, traders appear to be increasingly positioned for a hawkish outcome. Indeed, a Credit Suisse gauge of priced-in rate hike expectations over the coming year stands at the highest in a year. This seems reasonable. While GDP growth certainly disappointed on a quarterly basis in the three months through December, overall growth in 2010 outdid the central bank’s forecast calling for a 1.17 percent annual increase, adding 1.6 percent. Meanwhile, inflation stands at an eight-month high, challenging the central bank’s credibility as a bulwark of price stability considering Mervyn King and company spent most of last year promising that CPI would retreat on its own only to see it continue to march upward. Minutes from January’s BOE sit-down reinforced signs the likelihood that policymakers would err on the side of price stability, opting to handle the threat of a back-slide into recession when and if it materializes. On balance, this opens the door for a move higher for the British Pound.

The outlook for interest rates will not be uncontested as the top driver of Sterling price action however, with GBPUSD showing a firmly re-established correlation with trends in underlying risk appetite (as tracked by the MSCI World Stock Index). This seemingly points to weakness for the UK unit as traders digest the details of the US employment report released on Friday. Shares finished higher on Wall Street as investors opted to focus on the drop in the unemployment rate rather than the underwhelming increase in payrolls, but this may quickly dissipate as it becomes apparent that the decline owed to an exodus of discouraged workers from the labor force rather than any kind of improvement. Indeed, the labor force participation rate dropped to the lowest since March 1984. If the lackluster outcome for the world’s top economy – long the bellwether for global growth at large – rekindles risk aversion in earnest, GBPUSD may find itself facing acute selling pressure regardless of how the BOE opts to proceed.


Australian Dollar Rally May Gather Pace As Growth Prospects Improve


The Australian dollar fell back from a fresh monthly high of 1.0199 on Friday as investors scaled back their appetite for risk, but the economic event risks scheduled for the following week could fuel a another short-term rally in the exchange rate as the outlook for future growth improves. The AUD/USD extended the rally from January as the Reserve Bank of Australia raised its 2011 growth forecast in its quarterly report, and speculation for another round of monetary tightening could drive the exchange rate higher over the near-term as investors weigh the prospects for future policy.

The RBA expects economic activity to expand at an annual pace of 4.25% this year amid an initial forecast for a 3.75% expansion, and sees “a strong recovery in the June quarter as coal production picks up and the rebuilding effort gets under way.” In addition, the central bank held a slightly hawkish tone as it anticipates a “gradual increase in wage growth,” and the board may continue to raise its economic assessment over the coming months as the recovery gathers pace. According to Credit Suisse overnight index swaps, investors are pricing at least one more 25bp rate hike for the next 12-months, and interest rate expectations may accelerate going forward as the outlook for growth and inflation improves.

The economic docket for the following week is expected to show retail sales advancing another 0.1% in the fourth-quarter following the 0.7% expansion during the three-months through September, while household spending is forecasted to increase 0.5% in December after increasing 0.3% in the previous month. Moreover, employment in Australia is projected to climb another 20.0K in January, while home loans are projected to increase 1.0% in December after rising 2.5% in the month prior. As private sector activity improves, the batch of positive data could spark another near-term rally in the AUD/USD, and the exchange rate may make another run at 1.0200 as the economic outlook brightens. However, as the region copes with the worst flood in half a century, the natural disaster could dampen the recovery in Australia, and we may see a short-term reversal in the aussie-dollar if the slew of economic developments fails to meet market expectations. - DS


New Zealand Dollar Outlook Points to Additional Losses


The New Zealand dollar fell 0.76 percent against the U.S. dollar this past week and may continue its southern journey against the greenback during next week’s trade as growth expectations push lower amid weak fundamental developments in the region. As the kiwi is expected to come under increased pressure, currency traders will look for the NZDUSD to test 0.7640, with a break below exposing 0.7590.

Adding weight to the New Zealand this past week was a dismal employment report paired with a bout of risk aversion as uncertainties surrounding the global recovery resurface. With regards to the former, employment in the fourth quarter tumbled 0.5 percent after climbing 1.1 percent during the three months through September amid economists’ expectations of 0.2 percent. At the same time, the unemployment rate increased to 6.8 percent. The reading does not bode well for the region and suggests that the economy is struggling to recover from its September earthquake. Growth concerns paired with the governments’ difficultly to tackle stimulate export growth and investments are the key drivers behind the decrease in interest rate expectations. As recent fundamental developments paint a bearish picture for the kiwi, dismal economic releases next week may only add color to the dour outlook in New Zealand.

Home prices data highlights the economic calendar in New Zealand next week. Indeed, house prices fell 0.9 percent in December. As the housing market throughout 2011 is expected to remain sluggish, market participants should not rule out a dismal release. Developments hinting a disappointing release include a high unemployment rate, subdued property price growth, and weak consumer spending. Taking a look at price action, the pair has extended its two day loss and now looks poised to head lower as the weekly chart remains capped by a descending channel that has remained intact since November. So long as the pair remains capped by the 10-day SMA, downside risks remain. A clear break and close below 0.77 exposes the 0.7610 area. -MW

By Forexsoup

 

[karlis09]

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

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. However, it is our opinion that the rate of growth in China at present is unsustainable and a slowing of growth toward a more sustainable annual rate of 8.5-9% would in fact be better for global growth since it will remove the risk of over-heating.

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.


More By Forexsoup

 

[karlis09]

Forex Weekly Trading Forecast - 14/02/2011

# US Dollar May Have Set Important Low versus Euro
# Euro Confidence May Collapse if GDP Figures Feed Financial Concerns
# Yen Outlook Points to Further Losses
# British Pound Weakness To Be Short-Lived on Higher Growth, Inflation
# Australian Dollar Weakness Ahead As RBA Curbs Rate Expectations
# New Zealand Dollar Vulnerable as Rate Expectations Falter

Read more by Forexsoup

 

[karlis09]

U.K. Inflation Rises 4.0 Percent in January, GBP Tumbles Against Most Major Currencie

Consumer prices in the U.K. rose an annualized 4.0 percent in January after climbing 3.7 percent the month, which was in line with economists’ expectations. At the same time, core prices increased 3.0 amid forecasts of 3.1 percent. The gain in inflation marks the highest level since November 2008 and will lead Bank of England Governor Mervyn King to write a letter to the Exchequer George Osborne, explaining why prices are so high.

Looking, inflation is expected to stay stubbornly above the central bank’s target as the increase in value added taxes (VAT) places upward pressure on price growth. Meanwhile, gains in cocoa, cotton, and sugar will also lead to gains in prices going forward.

Taking a look at price action, the British pound pushed lower against most of its major counterparts as the data was already priced into the markets. GBP traders will now shift their focus to the Bank of England inflation report which will be released tomorrow at 9:30 GMT. As inflation concerns remain, an increase in the inflation report could lead the pound to pare some of its recent gains, while a downbeat tone pared with a dismal jobless claims release could extend Tuesday’s selloff. The last report suggested that prices would ease to around 1.5 percent by the end of 2012.
The GBPUSD reversed course at its overnight high of 1.6104 to currently trade 1.6037 following the U.K. inflation report. As technical indicators begin to paint a bearish picture, bears will look for aclose below 1.36 for confirmation of a reversal in the pair.

by Forexsoup

 

[karlis09]

Bank of England Inflation Report Shows Inflation, Growth to Moderate

The Bank of England said this morning that inflation will likely remain high over this year and higher than the MPC thought three months ago. However, they do expect inflation to fall back next year, though uncertain unto what extent but possibly falling below the 2% target. Bank of England Governor Mervyn King said that there are large risks on both sides of the inflation outlook but it is “reasonable” to consider inflation easing in 2012.

On growth the central bank said that their outlook for GDP growth is lower than in November, the forecast remains for moderate growth in 2011. The central bank did, however, lower their 2011 GDP forecast on weak Q4 growth noting that the outlook for growth remains “highly uncertain”. Adding that there was a wider than usual range of forecasts and opinions among the MPC amid such uncertain times.

On balance then the inflation report mirrored what was said in Governor King’s letter to Chancellor Osborne, acknowledging the latest acceleration in inflation but maintaining that the MPC must steer monetary policy based on the CPI outlook over the medium-term. He added that there is no pre-commitment on rates, noting that some are ahead of the curve in terms of tightening expectations and timing. In short, with such a high degree of uncertainty the central bank is cautious in trying to predict exactly how things are going to play out and are keeping all the options open.
The pound was immediately weaker across the board, and against the buck it extended its morning declines, on the not-so-hawkish inflation report. With the central bank standing by its estimations that inflation will moderate into 2012 and even fall below target waning expectations of imminent rate hikes have taken some wind out of the pound’s sails. We remain dip buyers of the pound at this stage given that the Bank of England is still likely to be the next major CB to move on rates ahead of the ECB and of course the BoJ and Fed.

By Forexsoup

 

[karlis09]

Breaking News: FOMC Upgrades 2011 GDP Forecast to 3.4%-3.9%

Breaking News: FOMC Upgrades 2011 GDP Forecast to 3.4%-3.9%

 

[karlis09]

Pound Surges on Retail Sales Strength; Headwinds to Economy May Not Slow Gains

UK retail sales leapt higher in January according to the Office for National Statistics (ONS) climbing 1.9% from December, when freezing temperatures and snow kept shoppers home and retail sales fell by 1.4% The ONS said that the sharp downward revisions to December’s numbers are attributed to the harsh weather delaying data collection.

The stronger than expected numbers will certainly help allay fears after the UK economy contracted by 0.5% in Q4 2010, the strong January numbers will help traders see the contraction as a temporary weather-driven setback. It appears also that the introduction of a higher value-added tax (VAT) hasn’t crimped demand as many expected it to do.

However, headwinds may be on the horizon with the governments spending cuts set to cost 330,000 public-sector employees their jobs lowering the number of people willing to open their wallets and spend on consumer goods if their jobs are in question. This coupled with rising inflation in the UK, which hit 4% in January and will rise further according to the Bank of England Inflation Report earlier in the week, could sap demand for goods if retailers pass on too much of rising costs to the consumer.

By Forexsoup

 

[karlis09]

Currency Markets Hit By A Deluge of Risk Negative Developments; Kiwi Shaken !!

Currencies have been hit with a deluge of risk negative developments over the past several hours and no currency has been hit harder than the New Zealand Dollar which has been crushed on the back of a devastating earthquake in Christchurch. The quake has resulted in many deaths, while several of the city’s buildings have been compromised and the local airport has been shut down. Our thoughts and prayers go out to those close to the disaster and we wish all of New Zealand a quick and healthy recovery.

From a price action standpoint, the break below 0.7500 is critical, with the market breaking to fresh yearly lows and opening the door for a more significant decline towards next key support which comes in by 0.7340 further down. We had already been projecting Kiwi weakness before the quake on a technical and fundamental basis (expectation for a narrowing of yield differentials), and unfortunately, this latest development should only exacerbate the situation. To add further fuel to the fire, a combination of elevated risk aversion on geopolitical fears, and some isolated downside pressures in the Euro have not helped matters.

The elevated geopolitical tensions have certainly been playing their part, with oil prices skyrocketing on Monday on heightened tensions in North Africa and the Middle East. Most recently, two Libyan planes landed in Malta in an effort to defect rather than follow orders to bomb protestors, while the Libyan ambassador to India has resigned and called for the UN to act to protect the Libyan people. Moreover, Libya’s mission to the UN has abandoned the regime and is calling for an international intervention to stop the genocide. Of course, the Iranians are taking full advantage of the chaos with wires reporting 2 Iranian war ships entering the Suez Canal and heading towards the Mediterranean.

Moving on, there have been some Eurozone specific factors that have been weighing on the Euro, with the larger than expected defeat of German PM Merkel in the state election fueling speculation that any positive consensus on sovereign debt will erode. Any change in sentiment towards policy which shifts to a focus on a broader national fiscal adjustment rather than on simply eliminating the tail risk, specifically from the beleaguered Eurozone economies, acts as a major weight on the Euro and opens the door for additional downside risks to the currency. The latest article from Weber which outlines a call for a more nationalized fiscal adjustment could therefore make waves if this now becomes the majority opinion in Germany.

Finally, the Yen has also managed to make headlines for its own specific merits, with the single currency trading lower on the day despite safe haven bids, after Moody’s came out and downgraded Japan’s Aa2 government rating outlook to negative. Technically, USD/JPY is attempting to put in a bullish outside day and could be getting set for an eventual break above critical topside resistance by 84.50 over the coming sessions. Fresh bids are seen on intraday dips below 83.00.

On the data front, the Australian Dollar which has already been weighed down by the negative risk environment, has found some additional offers on a lower NAB business confidence reading. Looking ahead, German GfK consumer confidence (5.8 expected) is due out at 7:00GMT, along with the Swiss trade balance, and Swiss UBS consumption indicator. UK public finances (-6.0B expected) and public sector net borrowing (-0.3B expected) then rounds things out for the European session at 9:30GMT. US equity futures are getting hit hard, while gold is also a good deal lower. Oil on the other hand remains well bid and consolidates its massive gains above $93.00.

By Forexsoup

 

[karlis09]

New Zealand Dollar Drops to 2-Month Low as Prime Minister Calls for Rate Cut

The New Zealand Dollar has dropped dramatically against all of its major counterparts, hitting a two-month low against its US namesake and after Prime Minister John Key spoke out in favor of an interest rate cut in the aftermath of the worst earthquake in 80 years that rocked the city of Christchurch last week. Key said the government would “welcome” a decrease in benchmark borrowing costs. He added that “the market has priced in a cut [and] that would probably be my expectation.” The Reserve Bank of New Zealand is scheduled to hold their regular policy meeting on March 10.

by forexsoup