Fed President Evans says extended period means 3-4 policy meetings!

• Yesterday was a light day in terms of financial data with no major economic reports released from the US. Overall the USD traded weaker, equity markets almost unchanged and commodities such as OIL and Gold closed at $81 and $1115. Fed President Evans was in the spot light and was reportedly commenting about the state of the economy and said that if economic circumstances change quickly then a change in policy could be very likely. He said that ‘extended period’ means 3-4 policy meetings. 2 year US Treasury yields traded between 0.89% and 0.87% yesterday and the USDJPY traded in a tight range as well between 90.45 – 89.75.
• In Europe we had more news coming from Fitch, a rating agency, saying that its negative outlook of Portugal remains and that a possible default should not be ruled out. Greek prime minister made a visit to Washington and met with US President Barack Obama. The meeting was not intended to ask for financial aid from the US however he did express to the President that Greece cannot continue to borrow at the current yields. IMF also said that the meeting with Papandreou was to discuss technical assistance; this can only add pressure to Germany as outside help may be considered as a blow of confidence against European solidarity. EURUSD price action yesterday was between 1.3636 – 1.3536.
•  In the UK we had Fitch again express concerns over the UK’s deficit profile however said that it still remains within the AAA rating. They also expressed concerns about UK banks and that a wave of defaults may occurs if Government support is withdrawn. BoE Posen also spoke yesterday saying that QE has helped the UK economy and that if the need arises again further operations may be resumed. 
•  Today’s the focus will turn to Germany’s consumer price index expected to drop to 0.4 yy. Manufacturing production will be released in UK where 1.4% growth is expected for the month of January. In the US we have a number of mortgage related data, the Fed budget for February expected at $-222bln and Crude Oil Inventories for the week expected to drop to 2.1 mln barrels.

 Currency to watch out for: EURUSD & USDJPY

• § The EURUSD pivot point is at 1.3650 with a preference to enter into short positions at 1.3640
• § The USDJPY pivot point is at 89.70 with a preference to enter long positions at 89.75

 Today’s calendar and market movers:

• § Germany Consumer Price index expected to drop to 0.4% for the year
• § UK Manufacturing Production for year expected to grow 1.4%
• § US Crude Oil Inventories for the week expected to be 2.1 bln barrels

 Equity Markets:

•  US equities closed positive yesterday with the DJIA and the SP500 closing 0.11% and 0.17% respectively.  The European bourses were mixed yesterday with the FTSE down -0.08% the DAX and the CAC closing positive at 0.17% and 0.17% respectively.  The NIKKEI and the HSI at the time of writing is -0.04% and 0.06% respectively.

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• USD: Mixed, US February unemployment beats expectations, stocks rise
• JPY: Lower, BOJ ease speculation, improving risk sentiment, Japans Libor rate falls below the US
• EUR: Higher, Deutsche Bank downgraded, ECB extends some liquidity operations
• GBP: Higher, PPI at 14 month high
• CAD and AUD: AUD & CAD higher, tracking improving risk sentiment, Canada to freeze spending

Overview  
US February nonfarm payrolls came in better than expected falling by 36k with the unemployment rate unchanged at 9.7%. The USD extended early gains versus the JPY, firmed versus European currencies and the commodity currencies traded higher after the release of today’s US February unemployment report. January nonfarm payrolls were revised to -26k from -20k in December and December nonfarm payrolls were revised to -109k from -150k. Temporary employment rose by 48k, jobs were created in healthcare services and government, construction and financial services continued to shed jobs in February. The long-term unemployed, those unemployed for 27 weeks or more was unchanged at 6.1mln. Wages rose 0.2% and the average workweek declined to 33.1 hours. The February unemployment report was expected to be worse because of the impact of snowstorms in February. It is unclear what the impact of the February snowstorms had on today’s report. Some analysts argue that if it were not for the bad weather in February US nonfarm payrolls report would have been positive. We may see a significant gain in nonfarm payrolls in the March report due to adjustments for the impact of snowstorms. The divergence in today’s Forex price action may reflect interest rate outlook with the JPY pressured by BOJ ease speculation and USD supported by speculation that today’s better than expected jobs report may bring the timeframe closer for a Fed rate hike. The better than expected jobs report contributes to improving risk sentiment and revives optimism about the global recovery fueling demand for commodity currencies. US traded lower and European currencies turned higher for the day as stocks rise in reaction to today’s unemployment report.

USD traded mixed ahead of today’s release of US figure unemployment with the JPY trading lower in reaction to speculation the BOJ may be considering additional monetary policy ease. Uncertainty about the outlook for Greek debt limits demand for the EUR. German press reports that Germany has no plans to financially aid Greece and Thursday ECB President discouraged Greece from seeking IMF aid. It is not clear if the Greek austerity measures will be enough to reduce concern about contagion risk in the EU. GBP traded mixed and declined to 10 month low versus the EUR despite report that UK PPI rose to a 14 month high. GBP remains vulnerable to concern about UK debt outlook. Commodity currencies traded higher supported by improving risk sentiment as global equity markets rally. In addition, the Canadian government announced a five-year plan to reduce its budget deficit.

Today’s US data:
February unemployment was unchanged at 9.7%, a rating of 9.8% was expected. Nonfarm payrolls dropped by 36k, a decline of 50k was expected.

Upcoming US data:
Next week’s US economic calendar includes the March 10th release of January wholesale inventories and sales. Wholesale inventories are expected to rise by 0.3% compared to a 0.8% decline last month. Wholesale sales are expected unchanged at 0.8%. The February Treasury budget will also be released on March 10th expected at -200bln compared to -193.9bln last month. On March 11th initial jobless claims for week ending 03/06 will released expected at 460k compared to 469k last week. January trade deficit also will be released on March 11th expected at -40.3bln compared to -40.2bln last month. On March 12th February retail sales and March University of Michigan consumer sentiment will be released along with January business inventories. Retail sales are expected flat compared to 0.5% rise last month. Michigan consumer sentiment is expected 73.5 compared to 73.6 last month and business inventories are expected to rise by 0.2% compared to 0.2% decline last month.

JPY
JPY traded sharply lower in reaction to a report in Japanese press that the BOJ is considering additional monetary policy ease and liquidity operations. BOJ ease speculation sparked a 2% rally in the Nikkei. JPY was also pressured by the improvement in risk sentiment as the Nikkei rallied. BOJ ease speculation contributes to a steepening of the Japanese yield curve. JPY Libor rates dropped below US rates for the first time since August. The narrowing of the JPY/USD yield differential makes the US less attractive as a funding currency. Yen Libor rates are at 2.51% and US at 2.52%. Japan’s Finance Minister Kan says recent strength of JPY is attributed to gains versus the EUR sparked by Greek debt worries and that the BOJ is considering further measures to combat deflation. EUR/JPY cross traded 1% higher Friday. JPY was also pressured by diminished Yuan revaluation speculation as China’s PM Wen says that China will not bow to pressure to devalue the Yuan. JPY traded to new lows for the day pressured by reported better than expected US nfp. US yields rose in reaction to the nfp report. Focus turns to next week’s release of Japan’s 1 GDP.

Next week’s Japanese economic calendar includes the March 8th release of January current account expected at ¥0.84trln compared to ¥0.90trln last month. February money supply will also be released on March 8th expected unchanged at 0.2%. On March 9th January leading indicators will be released expected at 3.7% compared to 3.6% last month. On March 10th February CGPI will be released expected to rise by 0.1% compared to 0.3% last month. January machinery orders will be released expected at -5.2% compared to 20.1% last month along with Q4 preliminary GDP expected at 1.1%. On March 12th January revised industrial output will be released expected at 2.5% compared to 1.9% last month.

Key technical levels to watch in USD/JPY include support at 89.15 March 5th low with resistance at 90.55.

EUR
EUR initially traded lower pressured by report of better than expected US February unemployment, ongoing concerns about sovereign debt risk in Greece and steady ECB policy. German press reports that Germany has no plans to aid Greece. ECB President Trichet discouraged Greece from seeking IMF aid. Tensions between Greece and the EU have yet to fully subside despite the announcement of a new Greek austerity plan and positive reception to this week’s Greek ten-year bond auction. Moody’s downgraded Deutsche Bank citing continuing fiscal concerns in the EU. The Deutsche Bank downgrade adds to selling pressure of the EUR. Thursday the ECB elected to hold monetary policy steady as expected and announced that it was extending some liquidity measures. This extension of liquidity measures coupled with today’s better than expected US employment report fuels speculation that US interest may rise sooner than the ECB. There is speculation that EU sovereign debt risks will constrain ECB monetary policy and delay the ECB exit plans. The ECB will return to a variable rate in its three month auctions next month. The ECB will extend its seven day auctions offering unlimited funds until October. EUR was pressured by the ECB decision to extend the seven day auction for this long a period. The trade ignored report that German January manufacturing orders rose by 4.3%. EUR turned higher midsession as stocks extend early gains. EUR remains vulnerable to concern about EU sovereign debt risk and ECB policy outlook.

Next week’s EU economic calendar includes the March 8th release of the March EU Sentix index along with German industrial production. The Sentix index is expected at -7.8 compared to -8.2 last month. January industrial production is expected at -2.8% compared to -2.6% last month. On March 10th EU CPI and current account balance will be released. On March 12th EU January industrial production will be released expected at -1.5% compared to -1.7% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3435 the March 2nd low with resistance at 1.3712 the March 4th high.

GBP
GBP traded mixed to higher supported by report that UK PPI rose to a 14 month high and in reaction to stronger equities. GBP gains were limited by concern about UK debt outlook and report of better than expected US February unemployment. UK February PPI rose by 4.1% y/y. Despite the rise in UK PPI the report is unlikely to alter the outlook for steady BOE policy or reduce the odds of the BOE expanding quantitative ease because the BOE expects inflation pressures to weaken in the months ahead. Thursday the BOE elected to hold monetary policy steady and left the level of asset purchases unchanged. The BOE left the door open for expansion of quantitative ease if needed. Concern about the UK budget deficit and uncertainty about the UK election continues. The latest UK election polls show that the Conservatives will fall 11 seats short of a majority. GBP traded sharply lower Tuesday pressured by the latest UK election polls which suggest that the UK may be faced with a hung parliament and may have its first minority government since 1974. A hung parliament may prevent the UK from taking credible action to reduce the UK deficit. Rating agencies have put the UK on notice that if credible action is not taken to reduce the UK deficit the UK AAA sovereign debt rating is at risk or downgrade. GBP may find modest short-term support from the BOE steady policy decision but GBP remains vulnerable to concern about UK debt outlook and uncertainty about the UK economy.

Next week’s UK economic calendar includes the March 9th release of the January trade balance expected at -7.4bln compared to -7.2bln last month along with February retail sales expected at -0.5% compared to -1.8% last month. On March 10th January industrial production will be released and NIESR GDP estimate. The January industrial production is expected at 0.3% compared 0.5% last month. NIESR GDP estimate is expected at 0.3%.

The technical outlook for GBP is mixed as GBP trades back above 1.5000. Expect near-term support at 1.4854 the March 2nd low with resistance at 1.5205 March 2nd high.

CAD
CAD traded higher supported by improving risk sentiment as equity markets rally in reaction to report of better than expected US February unemployment and in reaction to Thursday’s announcement that Canada plans to put a freeze on spending. Thursday Canada’s PM Harper announced a five-year plan to cut spending to bring the Canadian budget back in balance by 2016. CAD is also supported by higher energy prices and shift in BOC policy statement. Crude prices are nearing $82 a barrel. CAD traded higher supported by widening of Canadian and US interest rate swaps. Canadian interest rate swaps widened to a two year high versus US Wednesday. The widening of the swap spread reflects increased speculation that the BOC will hike interest rates before the Fed. BOC rate hike speculation is fueled by last week’s report of stronger than expected Canadian Q4 GDP and Tuesday’s BOC policy statement which downgraded the risk of deflation in Canada. Fed official’s state US rates will remain low for an extended period and the Fed maintained the “extend period” language in its February policy statement.

Next week’s Canadian economic calendar includes the March 8th release of February housing starts expected at 188.8k compared to 186.3k last month. On March 11th Q4 capacity use and January trade balance. Capacity use is expected at 67.9 compared to 67.5 last quarter. The trade balance is expected at 0.50bln compared to -0.25bln last month. On March 12th February unemployment will be released expected unchanged at 8.3% with employment growth expected at 30k compared to 43k last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0249 the January 19th low with resistance at 1.0443 the March 2nd high.

AUD
AUD traded higher Friday supported by improving risk sentiment sparked by BOJ ease speculation and report of better of better than expected US February unemployment. AUD/JPY cross traded almost 2% higher in reaction to a sharp rally in Asian equity markets and report that the BOJ may ease monetary policy. AUD has been reluctant to rally this week despite Tuesday’s RBA rate hike. This reluctance may partly reflect rumors China may be considering another hike on its reserve ratio and possible new tax on property. In Friday’s trade focus has shifted back to risk sentiment and re-flation as equity markets rally and if not for bad weather the US may have seen its nonfarm payrolls turn positive last month. Tuesday the RBA hiked interest rates 25bps to 4%. In the statement accompanying the RBA rate hike the RBA appeared to have a balanced outlook towards inflation, growth and future policy decisions. This has sparked speculation that the RBA may pause its rate hike cycle in April. RBA watcher McCrann that the RBA is likely to pause its rate hike cycle in April. McCrann however still expects the RBA to hike rates to 5% by year end. AUD price direction will focus on risk sentiment in the direction of equity markets.

Next weeks Australian economic calendar includes the March 8th release of ANZ February jobs ads expected at 1% compared to -8.1% last month. On March 10th January housing finance will be released expected at 2.5% compared to -5.5% last month. On March 11th February unemployment will be released expected at 5.2% compared to 5.3% last month with the participation rate unchanged at 65.3

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8992 the March 5th low with resistance at 9093 the January 25th high.

 

 

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CURRENCY TRADING SUMMARY – 5th March (00:30GMT)

U.S. Dollar Trading (USD) was strong even as stock markets remained positive as the EUR/USD slumped after the ECB announcement and USD/JPY rallied on increasing US Bond Yields. Weekly Jobless Claims improved to 469k vs. 496k. January Pending Home Sales fell -7.2% tracking a broad set of weak housing data in January. In US stocks, DJIA +47 points closing at 10396, S&P +4 points closing at 1122 and NASDAQ +11 points closing at 2292. Looking ahead, February NonFarm Payrolls forecast at -50k vs. -20k previously and the Unemployment rate is forecast at 9.8% vs. 9.7%.

The Euro (EUR) lost ground after the ECB held rates at 1.0% and described the current levels as appropriate with economic growth uneven. EUR/JPY held its own as stock markets improved but EUR/AUD slumped back close to the key 1.50 handle. Also released, Q4 GDP confirmed at 0.1%. Overall the EUR/USD traded with a low of 1.3551 and a high of 1.3714 before closing at 1.3570. Looking ahead, January Factory Orders are forecast at 1.5% vs. -2.3% m/m.

The Japanese Yen (JPY) suffered a major reversal of fortune against the USD with the 3 month Libor turning to the dollars favor for the first time since August 2009. General USD strength and solid crosses also underpinned. GBP/JPY is beginning to rally from 9 month lows at Y132. Overall the USDJPY traded with a low of 88.12 and a high of 89.27 before closing the day around 89.10 in the New York session.

The Sterling (GBP) rallied on heavy GBP/JPY buying in New York to trade above 1.5100 but this was short lived as the Euro fell back late in the day and the pair ended on a slightly weakish footing. EUR/GBP moved lower but is still contained inside the 90-91 range. The BOE held at 0.5% and kept the Asset Purchase Program at 200bn. Overall the GBP/USD traded with a low of 1.5004 and a high of 1.5139 before closing the day at 1.5040 in the New York session. Looking ahead, February PPI input is forecast at 0.25 vs. 2% previously m/m.

The Australian Dollar (AUD) tracked the EURO lower as AUD/JPY broke down through Y80 in early Europe before heavy buying emerged later in New York to keep the AUD/USD near the 0.9000 level. January Trade Balance was at -1.2bn vs. -1.5bn forecast. Overall the AUD/USD traded with a low of 0.8977 and a high of 0.9056 before closing the US session at 0.9040.

Oil & Gold (XAU) fell back as the strong USD discouraged commodity buying. Overall trading with a low of USD$1125 and high of USD$1142 before ending the New York session at USD$1132 an ounce. Held ground as the improving sentiment countered the stronger dollar. Crude Oil was down -$0.30 ending the New York session at $80.60.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.3436	1.3552	1.3580	1.3736	1.3788
USD/JPY	87.37	87.74	89.10	89.50	90.36
GBP/USD	1.4855	1.4959	1.5030	1.5136	1.5209
AUD/USD	0.8863	0.8936	0.8995	0.9086	0.9147
XAU/USD	1121.00	1125	1132.00	1144	1161.00
OIL/USD	78.00	80	80.50	82.00	82.50

Euro – 1.3580

Initial support at 1.3552 (Mar 4 low) followed by 1.3436 (Mar 2 low). Initial resistance is now located at 1.3732 (Mar 3 high) followed by 1.3788 (Feb 17 high)

Yen – 89.10

Initial support is located at 87.74 (Dec 10 low) followed by 87.37 (Dec 9 low). Initial resistance is now at 89.50 (Feb 26 high) followed by 90.36 (Feb 23 high).

Pound – 1.5030

Initial support at 1.4959 (Mar 3 low) followed by 1.4855 (Mar 2 low). Initial resistance is now at 1.5136 (Mar 4 high) followed by 1.5209 (Mar 1 low).

Australian Dollar – 0.8995

Initial support at 0.8936 (Mar 1 low) followed by the 0.8863 (Feb 26 low). Initial resistance is now at 0.9086 (Mar 3 high) followed by 0.9147 (Jan 21 high).

Gold – 1132

Initial support at 1125 (Mar 4 low) followed by 1111 (Mar 1 low). Initial resistance is now at 1144 (Mar 3 high) followed by 1161 (Jan 11 high).

Oil – 80.50

Initial support at 80.00 (Intraday Support) followed by 78.00 (Intraday Support). Initial resistance is now at 82.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

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CURRENCY TRADING SUMMARY – 4th March (00:30GMT)

U.S. Dollar Trading (USD) the market reacted well to the new Greece Austerity measures in Europe and the Euro led the majors higher against the greenback. Adding to the positive sentiment was the February ISM Services PMI at 53 vs. 51 forecast. February ADP Employment report was a relief at -20k as forecast. In US stocks, DJIA -9 points closing at 10396, S&P +1 points closing at 1118 and NASDAQ -1 points closing at 2280. Looking ahead, Weekly Jobless Claims are forecast at 470k vs. 496k previously. January Factory Orders are forecast at 1.8% vs. 1.0% previously. Finally, January Pending Home Sales are forecast at 1%.

The Euro (EUR) with over $6bn in new budget cuts announced from Greece the market took another leg higher breaking above resistance at 1.3700. EUR/GBP was volatile as the market rejected 0.9100 and Pound found strength on good data. Overall the EUR/USD traded with a low of 1.3591 and a high of 1.3737 before closing at 1.3700. Looking ahead, ECB Rate Announcement forecast to remain at 1.0%.

The Japanese Yen (JPY) Euro inspired USD weakness hurt the major as it broke below support at 88.50 and the gradual decline continued. Crosses held their ground and most finished with small gains. AUD/JPY continues to hold above Y80 and is one of the most closely watch trades for overall investor risk appetite. Overall the USDJPY traded with a low of 88.30 and a high of 89.02 before closing the day around 88.45 in the New York session.

The Sterling (GBP) broke above 1.5000 in Asia as the recovery continued and Europe continued with the theme as Economic data impressed. February Services PMI jumped to 58 vs 55. Also strong, February Nationwide Consumer Confidence at 80 vs. 71 previously. Overall the GBP/USD traded with a low of 1.4974 and a high of 1.5134 before closing the day at 1.5100 in the New York session. Looking ahead, BOE rate Announcement.

The Australian Dollar (AUD) was quiet as profit taking on the major in the high 0.90’s capped gains and traders looked to the crosses for action. AUD/NZD broke to fresh decade highs above 1.3000 and quickly ran up to the 1.31 level. Q4 GDP came in at 0.9% q/q as forecast. Overall the AUD/USD traded with a low of 0.9007 and a high of 0.9088 before closing the US session at 0.9035. Looking ahead, January Trade Balance is forecast at -1.5bn vs. -2.25bn.

Oil & Gold (XAU) took advantage of USD weakness to trade above $1140 for the first time since January. Overall trading with a low of USD$1131 and high of USD$1145 before ending the New York session at USD$1139 an ounce. Crude Oil broke above $80 on Bullish US inventories data. Crude Oil was up +$1.27 ending the New York session at $80.95.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.3424	1.3436	1.3705	1.3788	1.3839
USD/JPY	87.37	88.25	88.45	89.50	90.36
GBP/USD	1.4784	1.4855	1.5100	1.5209	1.5317
AUD/USD	0.8863	0.8936	0.9055	0.9093	0.9147
XAU/USD	1104.00	1111	1139.00	1146	1161.00
OIL/USD	78.00	80	80.80	82.00	82.50

Euro – 1.3705

Initial support at 1.3436 (Mar 2 low) followed by 1.3424 (may 18 low). Initial resistance is now located at 1.3692 (Feb 23 high) followed by 1.3788 (Feb 17 high)

Yen – 88.45

Initial support is located at 88.25 (0.618 of 84.83-93.77) followed by 87.37 (Dec 9 low). Initial resistance is now at 89.50 (Feb 26 high) followed by 90.36 (Feb 23 high).

Pound – 1.5100

Initial support at 1.4855 (Mar 2 low) followed by 1.4784 (Mar 1 low). Initial resistance is now at 1.5209 (Mar 1 high) followed by 1.5317 (Feb 26 low).

Australian Dollar – 0.9055

Initial support at 0.8936 (Mar 1 low) followed by the 0.8863 (Feb 26 low). Initial resistance is now at 0.9093 (Jan 25 high) followed by 0.9147 (Jan 21 high).

Gold – 1139

Initial support at 1111 (Mar 1low) followed by 1104 (Feb 26 low). Initial resistance is now at 1146 (Jan 14 high) followed by 1161 (Jan 11 high).

Oil – 80.80

Initial support at 80.00 (Intraday Support) followed by 78.00 (Intraday Support). Initial resistance is now at 82.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

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CURRENCY TRADING SUMMARY – 3rd March (00:30GMT)

U.S. Dollar Trading (USD) was softer across the board after downside action on the Euro and GBP abated and commodities rallied in the US session. Stock markets struggled to hold gains but the damage to the USD was already done and fresh weakness can not be ruled out as positive sentiment prevails. In US stocks, DJIA +2 points closing at 10405, S&P +2 points closing at 1118 and NASDAQ +7 points closing at 2280. Looking ahead, February ADP employment forecast at -15k vs. -22k previously. Also released, February ISM Services PMI rose to 51 vs. 50.5 previously.

The Euro (EUR) hit new year lows under 1.3450 but then was bought for the rest of the day on positive developments from Greece. The Greece PM looking to sure up support for fresh Greek debt issuance stated he would be making ‘Brave Decisions’. Overall the EUR/USD traded with a low of 1.3459 and a high of 1.3659 before closing at 1.3610. Looking ahead, German Retail Sales are forecast at -0.5% vs. 0.9% previously.

The Japanese Yen (JPY) crosses did well in the ‘risk on’ environment but late USD weakness saw the the USD/JPY break down to fresh 2010 lows near 88.60. EUR/JPY found solid support under Y120 and could retrace if the Eurozone Sentiment improves again today. Overall the USDJPY traded with a low of 88.54 and a high of 89.39 before closing the day around 88.75 in the New York session.

The Sterling (GBP) encountered weakness at the start of Europe but this was contained and the pair rallied with the Euro up to 1.5000 resistance. EUR/GBP resumed its uptrend and closed at the 0.9100 level. Overall the GBP/USD traded with a low of 1.4852 and a high of 1.4992 before closing the day at 1.4980 in the New York session. Looking ahead, Service PMI is forecast at 55 vs. 54.5 previously.

The Australian Dollar (AUD) found support from the rise in Interest Rates from the RBA meeting yesterday as the central bank increased by 0.25% to 4.0%. Some traders were quick to take profit however as the statement declined to comment on the pace of further rate hikes this year. Strength was seen in the US session on the back of Gold’s move higher. Overall the AUD/USD traded with a low of 0.8957 and a high of 0.9060 before closing the US session at 0.9035. Looking ahead, Q4 GDP is forecast at 0.9% vs. 0.2% previously.

Oil & Gold (XAU) broke through resistance at $1130 as the bulls took control once again. Overall trading with a low of USD$1114 and high of USD$1138 before ending the New York session at USD$1114 an ounce. Crude Oil toyed with the $80 a barrel level as the Dollar weakened. Crude Oil was up +$0.91 ending the New York session at $79.68.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.3405	1.3424	1.3610	1.3692	1.3788
USD/JPY	88.25	88.56	88.75	89.50	90.36
GBP/USD	1.4704	1.4784	1.4960	1.5209	1.5317
AUD/USD	0.8863	0.8936	0.9035	0.9071	0.9093
XAU/USD	1104.00	1111	1133.00	1137	1141.00
OIL/USD	77.00	78	79.60	80.00	82.50

Euro – 1.3610

Initial support at 1.3424 (May 18 low) followed by 1.3405 (0.618 of 1.2330-1.5144). Initial resistance is now located at 1.3692 (Feb 23 high) followed by 1.3788 (Feb 17 high)

Yen – 88.75

Initial support is located at 88.56 (Feb 4 low) followed by 88.25 (0.618 of 1.2330-1.5144). Initial resistance is now at 89.50 (Feb 26 high) followed by 90.36 (Feb 23 high).

Pound – 1.4960

Initial support at 1.4784 (Mar 1 low) followed by 1.4704 (April 30 low). Initial resistance is now at 1.5209 (Mar 1 high) followed by 1.5317 (Feb 26 low).

Australian Dollar – 0.9035

Initial support at 0.8936 (Mar 1 low) followed by the 0.8863 (Feb 26 low). Initial resistance is now at 0.9071 (Feb 23 high) followed by 0.9093 (Jan 25 high).

Gold – 1133

Initial support at 1111 (Mar 1low) followed by 1104 (Feb 26 low). Initial resistance is now at 1137 (Mar 2 high) followed by 1141.78 (Jan 20 high).

Oil – 79.60

Initial support at 78.00 (Intraday Support) followed by 77.00 (Intraday Support). Initial resistance is now at 80.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

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Pound Skids to 10 Month Low

CURRENCY TRADING SUMMARY – 2nd March (00:30GMT)

U.S. Dollar Trading (USD) had a mixed day with strength against the Pound and Euro not being replicated against risk currencies such as CAD and AUD which tracked stock markets higher. February ISM manufacturing slipped to 56.5 vs. 57.5 forecast. In US stocks DJIA +78 points closing at 10400, S&P +11 points closing at 1115 and NASDAQ +35 points closing at 2273. Looking ahead, Weekly Redbook previously at 1.6% m/m.

The Euro (EUR) enjoyed support in Asia on the back of proposed debt bailout of Greece but there was little follow through in Europe when no new information was released. The pair was subsequently pulled lower from heavy Cable Sales. Overall the EUR/USD traded with a low of 1.3459 and a high of 1.3659 before closing at 1.3570. Looking ahead, January PPI is forecast at 0.6% vs. 0.1% m/m previously.

The Japanese Yen (JPY) stayed within Friday’s range with most of the action kept to the crosses with GBP/JPY slumping to 10 month lows near Y132. AUD/JPY outperformed closing above the key Y80 level. Overall the USDJPY traded with a low of 88.71 and a high of 89.50 before closing the day around 89.10 in the New York session. Looking ahead, January Unemployment is forecast at 5.2% vs. 5.1% previously.

The Sterling (GBP) crashed as key supports were broken and buyers capitulated in a stoploss fueled 400 pip fall. GBP/AUD hit 25 year lows below 1.66 and EUR/GBP soared over 0.9000 to touch 0.9150 in major moves across the board. GBP/USD recovered during the US session but the sentiment is still very bearish. Overall the GBP/USD traded with a low of 1.4781 and a high of 1.5206 before closing the day at 1.4990 in the New York session.

The Australian Dollar (AUD) stayed close to the key 0.9000 level on AUD/USD supported on dips by strong Gold and risk appetite. Traders stayed on the sidelines ahead of the RBA meeting today and January Retail Sales. Overall the AUD/USD traded with a low of 0.8933 and a high of 0.9018 before closing the US session at 0.9005. January Retail Sales are forecast at 0.5% vs. -0.7% m/m. Also released, March RBA Meeting forecast to hike 0.25%.

Oil & Gold (XAU) kept to a quiet range tracking the broader changes in USD strength. Overall trading with a low of USD$1111 and high of USD$1124 before ending the New York session at USD$1117 an ounce. Fell back on weak US manufacturing data and the stronger Dollar. Crude Oil was down -$1.24 ending the New York session at $78.42.

TECHNICAL COMMENTARY

Currency	Sup 2	Sup 1	Spot	Res 1	Res 2
EUR/USD	1.3424	1.3451	1.3555	1.3692	1.3788
USD/JPY	88.56	88.75	89.05	90.36	91.29
GBP/USD	1.4610	1.4704	1.4980	1.5209	1.5317
AUD/USD	0.8801	0.8863	0.8995	0.9071	0.9093
XAU/USD	1088.00	1104	1117.00	1131	1141.00
OIL/USD	77.00	78	78.70	80.00	82.50

Euro – 1.3555

Initial support at 1.3451 (Feb 25 low) followed by 1.3424 (May 18 low). Initial resistance is now located at 1.3692 (Feb 23 high) followed by 1.3788 (Feb 17 high)

Yen – 89.05

Initial support is located at 88.75 (Feb 26 low) followed by 88.56 (Feb 4 low). Initial resistance is now at 90.36 (Feb 24 high) followed by 91.29 (Feb 23 high).

Pound – 1.4980

Initial support at 1.4704 (Apr 30 low) followed by 1.4610 (April 29 low). Initial resistance is now at 1.5209 (Mar 1 high) followed by 1.5317 (Feb 26 low).

Australian Dollar – 0.8995

Initial support at 0.8863 (Feb 26 low) followed by the 0.8801 (Feb 25 low). Initial resistance is now at 0.9071 (Feb 23 high) followed by 0.9093 (Jan 25 high).

Gold – 1117

Initial support at 1104 (Feb 26 low) followed by 1088 (Feb 25 low). Initial resistance is now at 1131 (Feb 22 high) followed by 1141 (Jan 20 high).

Oil – 78.70

Initial support at 78.00 (Intraday Support) followed by 77.00 (Intraday Support). Initial resistance is now at 80.00 (Intraday Resistance) followed by 82.50 (Intraday Resistance).

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• USD: Lower, pressured by a recovery in global equity markets, Q4 GDP revised up, existing home sales drop
• JPY: Higher, factory output expands and retail sales jump, Yuan revaluation speculation
• EUR: Higher, inflation falls, gains in cross to GBP, short covering
• GBP: Lower, UK Q4 revised up, Q4 government spending higher than expected
• CAD and AUD: AUD & CAD higher, strong Australian credit demand, Canada’s C/A deficit narrows

Overview
The USD traded lower Friday pressured by a modest improvement in risk sentiment as equity markets rally in reaction to report of an upward revision in UK and US Q4 GDP, stronger industrial production and retail sales in Japan and strong private sector credit demand from Australia. USD was also pressured by Yuan revaluation speculation. Yuan forwards traded higher in reaction to a newspaper report that the Chinese government is assessing the potential impact of currency gains. US economic data was mixed with Q4 GDP revised higher, Chicago PMI came in higher than expected and Michigan sentiment was revised slightly lower. Existing home sales posted an unexpected sharp decline. Existing home sales are at a seven month low. USD remained on the defensive despite mixed US economic data as US equity markets trade both sides of settlement.

Focus turns to next week’s central bank policy meetings in Australia and Canada on Tuesday and the UK and EU on Thursday and Friday’s release of US February unemployment. The BOC is expected to maintain steady rate policy, the RBA is expected to hike rates 25 bps, the ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls unchanged from last month.

Today’s US data:
Q4 GDP revised up 0.2% to 5.9%, a reading of 5.7% was expected. February Chicago PMI came in at 62.6, a reading of 60 was expected. February Michigan consumer sentiment was revised to 73.6, a reading of 74 was expected. January existing home sales declined by 7.2% to 505k, a reading a 550k was expected.

Upcoming US data:
Next week’s US economic calendar includes March 1st release of January personal income and consumption. Personal income and consumption are expected to rise by 0.4%. January construction spending and the February ISM Index will also be released on March 1st. Construction spending is expected to decline by 0.7% compared to 1.2% decline last month. The ISM Index is expected at 58 compared to 58.4 last month. On March 2nd domestic auto sales will be released. On March 3rd February ADP employment will released expected at 10k compared to -22k last month. February manufacturing ISM Index will also be released on March 3rd expected at 51 compared to 50.5 last month. On March 4th initial jobless claims for week ending 02/27 will be released expected at 490k compared to 496k last month. Q4 productivity, unit labor costs, January pending home sales and factory orders will also be released on March 4th. Q4 productivity is expected unchanged at 6.2%, unit labor costs are expected unchanged at -4.4%, factory orders are expected unchanged at 1% and pending home sales are expected at 98.4 compared to 96.6 last month. On March 5th February unemployment and nonfarm payrolls will be released along with January consumer credit. The unemployment rate is expected to rise 0.1% to 9.8%, nonfarm payrolls are expected unchanged at -20k and consumer credit is expected at -3.1bln compared to – 1.7bln last month.

JPY
JPY traded higher supported by Yuan revaluation speculation and positive Japanese economic data. A newspaper report suggests that the Chinese government is assessing the potential impact of currency gains and this report fueled Yuan revaluation speculation. JPY sometimes trades as a proxy for Yuan revaluation. Japan reported that January industrial production rose by 2.5% and January retail sales rose by 2.6%. Core CPI declined by 1.3%. Japan’s Finance Minister Kan said that Japan still faces deflation but the CPI decline appears to be slowing. The improvement in Japan’s industrial production and retail sales and a slowdown in the CPI decline will reduce pressure on the BOE to expand quantitative ease. This marks the fifth day in a row that the JPY traded higher with the JPY supported by safe haven demand sparked by diminished risk appetite as global equity markets struggle due to concern about the outlook for global recovery. JPY also has benefited from this week’s Japanese economic data which showed improvement in export sales and stronger retail sales and industrial production. In addition, the JPY has been supported by diminished Fed rate hike fears as Fed Chairman Bernanke says that it is not clear if the US recovery self-sustaining and that interest rates will have to remain low for an extended period. Analysts at J.P. Morgan Chase forecast JPY will trade at 87 next month as traders reduce bets that the Fed will raise interest rates sooner than expected. There was limited reaction to a Bloomberg report which states that the chief global economist for Goldman Sachs O’Neill sees Japan facing the biggest crisis risk in the G-10. According to O’Neill Japan is running out domestic savings and this will make it difficult for Japan to finance its rising budget deficit. O’Neill went on to say that he thinks that the JPY is highly overvalued.

Next week’s Japanese economic calendar includes the March 2nd release of January household spending expected at -0.5% compared to 1% last month. The January unemployment rate will also be released on March 2nd expected unchanged at 5.1%.

Key technical levels to watch in USD/JPY include support at 88.55 the February 4th low with resistance at 90.29 the February 25th high.

EUR
EUR traded higher supported by a modest recovery in risk sentiment as global equity markets rallied in Friday’s trade and by gains in cross trade to the GBP. An upward revision in UK and US GDP, positive industrial and retail sales data from Japan and strong private sector credit demand from Australia helped to fuel today’s improvement in risk sentiment. EUR rallied in cross trade to the GBP with GBP pressured by report of higher than expected UK Q4 government spending. The trade ignored report that EU January inflation declined by 0.8% compared to a 0.3% rise last month. EUR rallied despite ongoing concern about the Greek debt crisis. Greece suspended a bond sale today because of continued market turmoil. There is an interesting report on Bloomberg quoting Goldman Sachs chief economist O’Neill that the Greek debt crisis may make EMU stronger as EU officials seek closer political ties between its members. According to O’Neill, German officials are pressing for greater political union. Focus turns to next Thursday’s ECB policy meeting. No policy change is expected as the ECB is restricted by concern that the sovereign debt risk in Europe will be a drag on the EU recovery. Analysts at Deutsche Bank suggest that the EUR could decline to 1.2750 in the months ahead pressured by speculation the Fed will raise rates before the ECB. EUR remains vulnerable to concern about EU sovereign debt risk and ECB policy outlook. EUR downside may be limited because the EUR is oversold.

Next week’s EU economic calendar includes the March 1st release of EU February manufacturing PMI expected at 52 compared to 52.4 last month. EU January unemployment will be released on March 1st expected unchanged at 10%. On March 2nd February HICP will be released expected at 1.1% compared to 1% last month. On March 3rd EU February services PMI will be released expected at 52.3 compared with 52.5 last month along with January retail sales. January retail sales are expected at 0.2% compared to flat last month. ECB policy meeting will be held on March 4th, no change is expected.

The technical outlook for the EUR is negative. Expect EUR support at 1.3443 the February 19th low with resistance at 1.3627 the February 24th high.

GBP
GBP traded lower with initial support sparked by a report of an upward revision in UK Q4 GDP giving way to selling pressure sparked by report of higher than expected UK Q4 government spending. UK Q4 GDP was revised up to 0.3% from an original report of 0.1% rise. UK Q4 government spending rose by 1.2%, a 0.2% rise was expected. The improvement in UK GDP will likely encourage the BOE to hold monetary policy steady next week but concern about UK debt trumps the improvement in UK economic growth and the GBP traded lower. There was limited reaction to report that UK February GFK consumer confidence improved to -14 from -17 last month. GBP is trading at a nine-month low versus the USD pressured by concern about UK debt and in reaction to report of a sharp decline in UK business investment. As we approach the May 6th national election in the UK there are two major concerns about how the election may impact the UK deficit. Rating agencies have put the UK on notice that if the government does not take action take credible action to reduce the deficit the UK AAA sovereign debt rating may be cut. The most recent UK election polls suggest that the election may result in a hung parliament. A hung parliament could lead to gridlock and lack of credible effort to reduce the UK deficit. The other concern is that the new UK government will be under intense pressure to take immediate action to reduce the UK deficit. A premature withdrawal of the UK stimulus while the UK economy is still struggling could lead to more significant deterioration not only in the economic but the long-range deficit outlook. Analysts at UBS said that GBP could fall below parity with the EUR and 1.05 versus the USD if the UK government prematurely withdraws stimulus and tightens fiscal policy.

Next week’s UK economic calendar includes the March 1st release of February manufacturing PMI expected at 56.4 compared to 56.7 last month. January consumer credit, mortgage applications and mortgage lending will also be released on March 1st. Consumer credit is expected at 0.150 compared 0.052 last month, mortgage applications are expected at 52K compared to 59K last month and mortgage lending is expected at 1.102bln compared to 1.165bln last month. On March 3rd February consumer confidence index will be released expected at 68 compared to 69 last month along with February services PMI expected at 54 compared to 54.5 last month. BOE policy meeting will be held on March 4th, no policy change is expected but there is increased pressure on the BOE to expand quantitative ease.

The technical outlook for GBP is negative as GBP trades below 1.5300. Expect near-term support at 1.5115 the May 18th low with resistance at 1.5327 the February 26th high.

CAD
CAD traded higher supported by a slight improvement in risk sentiment as global equity markets rebound. The rebound in the equity markets is attributed to positive economic data from Japan which reported improvement in retail sales and industrial production, upward revisions in UK and US GDP and strong Australian private sector credit growth. These reports help offset some of this week’s concern about the outlook for the global recovery. CAD was also supported by report of a narrowing of Canada’s current account deficit. Canada’s Q4 current-account came in at -8.75bln compared to a revised -13.8bln deficit last quarter. CAD spent most of the week on the defensive pressured by a spike in risk aversion and weaker commodity and equity markets. Recent action in China to curb lending and concern about sovereign debt risk in Europe are the primary drivers of the uptick in risk aversion. The next major focus for CAD trade will be the BOC policy meeting scheduled for March 2nd. The BOC has pledged to maintain record low yields through June of 2010 provided inflation remains in check. Last week Canada reported above expectation inflation with CPI rising close to the 2% BOC target. Despite the rise in Canada’s inflation the BOC is expected to maintain steady rate policy. The BOC’s decision to maintain steady rate policy could be a mild negative for CAD.

Next week’s Canadian economic calendar includes March 1st release of January IPPI and RMPI along with December GDP. BOC policy meeting will be held on March 2nd, no policy change is expected. On March 4th January building permits will be released.

The technical outlook for CAD is mixed to negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0510 the February 24th low with resistance at 1.0780 the February 5th high.

AUD
AUD traded higher supported by a rebound in risk appetite and in reaction to report of strong Australian private sector credit demand. As noted above, most of today’s economic data from Japan. Europe and the US came in above expectation and this helped to fuel a rebound in equities and risk sentiment. Australia’s January private sector credit rose by 0.4%. The private sector credit report follows yesterday’s report of much stronger than expected Australian Q4 CAPEX spending. The strong private sector credit rise and CAPEX spending revives RBA rate hike speculation and tilts the odds in favor of an RBA rate hike at next Tuesday’s policy meeting. This week the AUD has been under significant pressure as investors unwind carry trades because of uncertainty about the global recovery. Tightening in China, Fed rate hike fears, weaker than expected US consumer confidence housing and employment data and sovereign debt risks in Europe fuel concern about the outlook for the global recovery. Concern about the global recovery has overshadowed RBA rate hike speculation and RBA rate hike speculation has been less supportive for the AUD. Focus turns to next Tuesday’s RBA policy meeting. RBA watcher McCrann says there’s nothing standing in the way of the RBA from hiking rates 25bps at next Tuesday’s policy meeting. In light of this week’s US disappointing US economic reports and China’s tightening of credit the RBA may be less inclined to hike rates.

Next week’s Australian economic calendar includes the March 1st release of Q4 company profits expected 4% compared to -2.1% last month along with Q4 business inventories expected at 0.5% compared to 0.8% last month. Q4 current account will also be released on March 1st expected at -17bln compared to -16.2bln last month. On March 2nd January building approvals will be released expected at -4% compared to 2.2% last month along with January retail sales expected at 1% compared to -0.7% last month. RBA policy meeting will be held on March 2nd. A 25bps rate hike to 4% is expected. On March 3rd Q4 GDP will be released expected at 0.3% compared to 0.2% last quarter. On March 4th January trade balance will be released expected at -2.5bln compared to -2.25bln last month.

The technical outlook for the AUD is negative as the AUD failed to hold above 8900. Expect AUD support at 8750 the February 11th low with resistance at 8953 the February 24th high.

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• USD: Higher, concern about Greek debt troubles and weaker US jobs data fuels risk aversion
• JPY: Higher, supported by safe haven demand and gains in cross trade
• EUR: Lower, S & P may downgrade the Greek debt rating, Greek rescue may be at risk
• GBP: Lower, UK Q4 business investment dropped sharply
• CAD and AUD: AUD & CAD lower, pressured by a spike in risk aversion, RBA rate hike speculation ignored

Overview
The USD traded  higher and the JPY surged supported by a spike in risk aversion sparked by report of a sharp rise in US jobless claims and fresh concern about the Greek debt crisis. Wednesday the US reported that January new home sales fell to a record low. The decline in home sales follows Tuesday’s release of a sharp drop in US consumer confidence consumer confidence. These reports and today’s jobs claims report generate concern about the outlook for the US recovery. A report in the UK telegraph that the Greek rescue plan may be in jeopardy because of comments made by the Greek Deputy PM about Germany’s Nazi war atrocities coupled with increased risk of a downgrade of the Greek debt rating sent European currencies lower. The JPY traded at a one-year high versus the EUR. GBP traded at a nine month low versus the USD pressured by concern about UK debt and report a sharp drop in UK Q4 businesses investment. Commodity currencies traded lower pressured by a spike in risk aversion sparked by weaker equity market trade. AUD weakened despite RBA rate hike speculation. RBA watcher McCrann says there’s nothing standing in the way of a 25bps rate hike next Tuesday. US economic data was mixed with jobless claims posting a sharp rise. Jobless claims are at their highest level since last November. Durable goods came in almost 3 times as strong as expected. The jump in durable gods reflects a sharp increase in civilian aircraft orders. USD extended its gains and the JPY traded at a new high for the day after the release of the unexpected spike in US jobless claims. Fed Chairman Bernanke suggested that weather may be impacting the jobs report but his comments had limited impact and stocks traded sharply lower in reaction to jobless claims report.

Today’s US data:
Jobless claims for week ending 02/20 rose by 22k to 496k, a reading of 460k was expected. January durable goods rose by 3%, a 1% rise was expected.

Upcoming US data:
On February 26th Q4 preliminary GDP will be released expected at 5.5% compared to 5.7% in the original report. February Chicago PMI and final Michigan sentiment will also be released on February 26th. The PMI is expected at 60 compared to 61.5 last month and Michigan consumer sentiment is expected at 74 compared to 73.7 last month. Finally on February 26th, January existing home sales will be released expected at 550k compared to 545k last month.

JPY
JPY traded sharply higher supported by safe haven demand sparked by weaker equity market trade, fresh concern about the Greek debt crisis and uncertainty about the outlook for the US recovery. This week’s release of weaker than expected US consumer confidence and the home sales data generates concern about the outlook for the US recovery. JPY extended gains after the release of an unexpected rise in US jobless claims. In his testimony before Congress, Fed Chairman Bernanke said it is still uncertain whether the US recovery self-sustaining. Bernanke’s comments add to the deterioration in risk sentiment. S&P says that it may downgrade the Greek sovereign debt rating by the end of March. Concern about a possible Greek debt downgrade and report in the European press that a Greek aid package may be in jeopardy sent the EUR/JPY cross to a one-year low. GBP/JPY cross traded almost 2% lower with GBP pressured by report of a sharp decline in UK Q4 business investment. AUD/JPY cross traded sharply lower with the AUD pressured by today’s decline in global equity markets and spike in risk aversion. JPY price direction is expected to continue to track risk sentiment and diminished Fed rate hike speculation. Analysts at J.P. Morgan Chase forecast JPY will trade at 87 next month as traders reduce bets that the Fed will raise interest rates sooner than expected. In his testimony before Congress Fed chairman Bernanke said that US interest rates will remain low for an extended period.

On February 26th January CPI will be released expected at -0.2% compared to -0.5% last month along with January industrial output, retail sales, housing starts and construction orders. Industrial output is expected at 2.2% compared to 0.7% last month. Retail sales are expected to fall by 1.2% compared to 0.2% last month. Housing starts are expected to rise by 3.3% compared to 2.5% last month and construction spending is expected to rise by 0.6% compared to 24.5% last month.

Key technical levels to watch in USD/JPY include support at 88.55 the February 4th low with resistance at 90.29 the February 25th high.

EUR
EUR traded lower pressured by concern over Greece and a spike in risk aversion. The UK Telegraph reports that a rescue plan for Greece may be in jeopardy because of comments made by the Greek Deputy PM on Germany’s Nazi past. In addition, S&P says that it may cut Greece’s BBB+ plus rating by one or two notches within a month. Speculation of a possible downgrade to the Greek debt rating sparked selling of the EUR. EUR has declined by almost 10% since its December high primarily pressured by concern about sovereign debt risk in peripheral EU countries. EU economic data was mixed and had limited impact on today’s EUR trade. EU February business confidence index improved to -0.98 from -1.13 last month and economic sentiment posted an unexpected decline to 95.9 from 96 last month. German unemployment for February rose less than expected with job losses at 7k, a reading of -16k was expected. These reports suggest that the outlook for the EU recovery remains mixed and the data is expected to encourage the ECB to maintain steady monetary policy. To address sovereign debt risk in peripheral EU nations these nations will be required to cut spending. The spending cuts will likely be a drag on the EU economic recovery. Because of the sovereign debt crisis the ECB may delay implementation of its exit strategy from nonconventional monetary measures. EUR remains vulnerable to concern about EU sovereign debt risk and steady ECB policy outlook.

On February 26th EU January CPI will be released expected at 1.2% compared to 1.1% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3425 the May 18th low with resistance at 1.3627 the February 24th high.

GBP
GBP traded at a nine-month low versus the USD pressured by concern about UK debt and in reaction to report of a sharp decline in UK business investment. As we approach the May 6th national election in the UK there are two major concerns about how the election may impact the UK deficit. Rating agencies have put the UK on notice that if the government does not take action take credible action to reduce the deficit the UK AAA sovereign debt rating may be cut. The most recent UK election polls suggest that the election may result in a hung parliament. A hung parliament could lead to gridlock and lack of credible effort to reduce the UK deficit. The other concern is that the new UK government will be under intense pressure to take immediate action to reduce the UK deficit. A premature withdrawal of the UK stimulus while the UK economy is still struggling could lead to more significant deterioration not only in the economic but the long-range deficit outlook. Analysts at UBS said that GBP could fall below parity with the EUR and 1.05 versus the USD if the UK government prematurely withdraws stimulus and tightens fiscal policy.  UK Q4 business investment declined by 5.8%, a 0.1% rise was expected. The decline in business investment generates concern about the outlook for the UK economy and may intensify speculation that the BOE will be forced to expand quantitative ease. This week a number of BOE officials opened the door for possible expansion of quantitative ease if needed. BOE’s Posen said that he expects UK inflation to remain subdued and that the BOE will expand quantitative ease if needed. Posen’s comments follow a statement from BOE Governor King Tuesday that it may be necessary to expand quantitative ease. King made his comments in testimony before Parliament and his comments followed Tuesday’s report of weaker than expected January UK mortgage lending. This week’s main focus will be Friday’s release of UK GDP. An upward revision in GDP could help to slow the rate of the GBP decline.

This week’s UK economic calendar includes the February 26th release of Q4 GDP expected at 0.2% compared to 0.1% in the prior report. January GFK survey and nationwide home prices will also be released on the 26th. The GFK is expected unchanged at -17 and house prices are expected to rise by 0.4% compared to 1.2% last month.

The technical outlook for GBP is negative as GBP trades below 1.5300. Expect near-term support at 1.5200 with resistance at 1.5475 the February 23rd high.

CAD
CAD traded sharply lower pressured by the spike in risk aversion and weaker commodity and equity markets. The spike in risk aversion is attributed to this week’s release of weaker than expected US consumer confidence, new home sales and jobs claims data along with Wednesday’s report that China was taking additional measures to curb lending and concern about a possible Greek downgrade. The US reported an unexpected sharp drop in consumer confidence in January, with new home sales declining at a record pace and jobs claims posted an unexpected rise last week. These reports generate concern about the US and global recovery. According to a Reuters report China’s banking regulator told banks to restrict funding to local governments. China raised its bank reserve requirements by 50bps twice this year to try to curb lending. Tightening in China contributes to recent weakness in global equity and commodity markets and has generated a reappraisal of risk appetite. Tightening in China may discourage demand for commodity-based currencies if the tightening leads to slower global growth. There were no major economic reports released from Canada today. The next major focus for CAD trade will be the BOC policy meeting scheduled for March 2nd. The BOC has pledged to maintain record low yields through June of 2010 provided inflation remains in check. Last week Canada reported above expectation inflation with CPI rising close to the 2% BOC target. Despite the rise in Canada’s inflation the BOC is expected to maintain steady rate policy. The BOC’s decision to maintain steady rate policy could be a mild negative for CAD.

On February 26th Q4 current account will be released expected at -8.75bln compared to -13.12bln last quarter

The technical outlook for CAD is mixed to negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0514 the February 25th high with resistance at 1.0780 the February 5th high.

AUD
AUD traded sharply lower pressured by a spike in risk aversion as stocks decline pressured by concern about possible Greek downgrade, weaker than expected US jobs claims data and China’s tightening of credit conditions. AUD was also pressured by a report in the UK Telegraph which says that a Greek aid rescue may be in jeopardy because of comments made by the deputy Greek Deputy PM about German war atrocities. US equities traded sharply lower after the release of today’s unexpected rise in US jobless claims. The spike in US jobless claims follows this week’s disappointing US consumer confidence and housing data and contributes to concern about the global recovery. The sharp decline in the AUD was all the more striking in light today’s release of strong Australian CAPEX spending data and increased speculation that the RBA will hike rates next week. Australia’s Q4 CAPEX rose by 5.5%, a 2% rise was expected. CAPEX spending is generally considered the fuel for economic growth and this report suggests that the Australian domestic recovery is sound. RBA watcher McCrann says there’s nothing standing in the way of the RBA from hiking rates 25bps at next Tuesday’s policy meeting. In light of this week’s US disappointing US economic reports and China’s tightening of credit the RBA may be less inclined to hike rates. RBA policy uncertainty adds to today’s AUD decline.

On February 26th January private sector credit will be released expected unchanged at 0.3%.

The technical outlook for the AUD is negative as the AUD failed to hold above 8900. Expect AUD support at 8750 the February 11th low with resistance at 8953 the February 25th high.

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UK GDP
Recent UK economic data has been mixed with the jobs claimant count posting an unexpected rise last month and mortgage lending declined to its lowest level since last July. These reports generate uncertainty about the strength of the UK recovery and have prompted a number of BOE officials including the BOE Governor King to state that quantitative ease may be extended if needed. GBP has been underperforming pressured by speculation that the BOE may be forced to expand quantitative ease. As the UK economy appears to be struggling UK inflation has been rising with January inflation approaching the high end of the BOE’s inflation target range. UK January was reported to have risen by 2.9%. Slowing of the UK recovery and the rise of UK inflation complicates the outlook for BOE policy. The BOE’s Tucker said that the BOE must monitor the rise in inflation and he warned that if stimulus is withdrawn to slowly it could increase the risk of inflation in the UK. On Friday February 26th UK revised Q4 GDP will be released. This report will be key to investor perception of the strength of the UK recovery and the outlook for BOE policy. The initial UK Q4 GDP release showed that the UK economy barely pulled out of recession with Q4 GDP reported to have risen by just 0.1%. The trade had expected UK Q4 GDP to have risen by 0.4%. Improvement in the GDP report was primarily fueled by a modest gain in the service sector along with improvements in auto and retail sales. UK GDP growth is constricted by continued tight credit market conditions, weak labor market and high household debt. The revised UK Q4 GDP is expected to come in slightly better at 0.2%. An upward revision in UK GDP could help to slow the rate of the GBP decline and dampen fears that the BOE will soon expand quantitative ease.

US GDP
Recent US economic has been disappointing with consumer confidence posting a sharp decline,   jobless claims rising more than expected and January new home sales declined by a record 11.2% in January. US consumer confidence fell to a 10 month low in February and nonfarm payrolls growth has yet to turn positive. These reports generate concern that the sharp improvement in US Q4 GDP growth may not be sustainable as high unemployment and tight credit conditions limit US consumer demand. US Q4 GDP was reported at 5.7%. The Q4 GDP report helped to fuel speculation that the US economy is growing faster than expected and that the recovery will be stronger. Most of the Q4 growth was due to inventory rebuilding and the impact of government spending and incentive plans like the cash for clunkers, tax credit for first-time homebuyers. The restocking of inventories added 3.39 points to Q4 GDP. Without the rebuilding of inventory the US economy grew by just 2.3% in the fourth quarter. Consumer spending however slowed in Q4. 70% of US GDP is made up of consumer spending.  Consumer spending is needed to fuel GDP growth along with private investment spending. The Fed raised the discount rate 25bps points to 0.75% last week. There is uncertainty about whether the discount rate hike sets the stage for earlier tightening by the Fed. US Q4 preliminary GDP will be released on Friday, February 26th. Analysts are split on whether the Q4 GDP will be revised down slightly because of weaker consumer spending or revised slightly higher supported by the adjustment of low inventories. In testimony before Congress on Wednesday Fed Chairman Bernanke said that the US recovery is not yet self-sustaining and that interest rates will remain low for extended. Any change in Fed policy will be determined by economic data. The timing of the Fed’s withdrawal of stimulus will be key to US GDP outlook. The GDP report will be key to the Fed’s policy outlook. The consensus is the US Q4 GDP will be revised to 5.6%. This would confirm the strongest US quarterly GDP growth in over three years and the report may fuel Fed rate hike speculation.

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• USD: Higher, house prices fall less than expected, consumer confidence falls sharply, stocks decline
• JPY: Higher, supported by spike in risk aversion and gains in cross trade
• EUR: Lower, IFO unexpectedly declines, German growth may have contracted in Q1, Greek bank downgrade
• GBP: Lower, weak mortgage approvals, BOE’s King says QE may be expanded
• CAD and AUD: AUD & CAD lower, crude oil prices drop, hawkish comments from the RBA deputy governor

Overview
The USD traded higher Tuesday in reaction to weaker economic data from Europe and a sharp drop in US consumer confidence. The EUR was pressured by report of an unexpected drop in German IFO and ongoing concern about the outlook for sovereign debt risk in Greece. EUR was also pressured by report that Fitch has downgraded Greek banks. GBP was pressured by report of weaker than expected UK mortgage lending and comments from a number of BOE officials which suggest that the BOE may have to expand quantitative ease if the UK economic outlook weakens. There was active trade in the EUR/CHF cross with the CHF trading near two week low versus the EUR pressured by rumors of SNB intervention. Commodity currencies traded lower in reaction to a sharp drop in the price of crude and weaker equity market trade. AUD downside was limited by hawkish comments from the RBA deputy governor that strong AUD is helping contain inflation. US economic data was mixed with the Case Shiller home price index coming in near market expectation and consumer confidence posted a sharp decline. USD and JPY rallied to the day’s highs after the release of the weak US consumer confidence supported by weaker equity market trade and a spike in risk aversion. Focus turns to Fed Chairman Bernanke’s testimony before Congress Wednesday and the release of US home sales. The trade expects Bernanke to downplay the risk of an imminent tightening by the Fed. Late Monday the Fed’s Yellen said the US economy still needs low interest rates. New home sales are expected to post a modest gain.

Today’s US data:
December case Shiller HPI came in at -3.1%, a reading of -3.8% was expected. February consumer confidence declined to 46 from 56.5 in January, a reading of 56 was expected.

Upcoming US data:
On February 24th January new home sales will be released expected at 360k compared to 342k last month. On February 25th January durable goods will be released expected at 1.5% compared to 1% last month along with initial jobless claims for the week ending 02/20 expected at 460k compared to 473k last week. On February 26th Q4 preliminary GDP will be released expected at 5.5% compared to 5.7% in the original report. February Chicago PMI and final Michigan sentiment will also be released on February 26th. The PMI is expected at 60 compared to 61.5 last month and Michigan consumer sentiment is expected at 74 compared to 73.7 last month. Finally on February 26th, January existing home sales will be released expected at 550k compared to 545k last month.

JPY
JPY traded sharply higher supported by concern over Greece, speculation that US interest rates will remain low and by Yuan revaluation speculation. JPY rallied in cross trade to Europe supported by spike in risk aversion as the EU has yet to confirm a plan to aid Greece and in reaction to weaker than expected economic data from Europe and the US.  German IFO posted an unexpected decline and UK mortgage approvals came in weaker than expected. Fed Chairman Bernanke will testify before Congress Wednesday. The trade expects Bernanke to downplay the risk of an imminent tightening by the Fed. Last week the Fed surprised the markets and hiked the discount rate by 25bps. Fed officials indicated that the rate hike was technical. Investors will be monitoring Bernanke’s testimony for his explanation of why the Fed hiked the discount rate. Pimco’s EL-Erian joins the recent chorus of a number of analysts predicting that China will soon allow Yuan appreciation. JPY sometimes benefits as a proxy for Yuan revaluation. There was limited reaction to the release of the BOJ policy minutes for January 25th-26th meeting. The minutes state that the economic outlook in Japan was more balanced but weak consumption points to a slow recovery. The government’s overall economic assessment for last month was unchanged but the government expressed concern about deflation and worsening employment outlook in Japan. JPY price direction appears to have re-linked with risk sentiment. JPY traded to the day’s highs after the release of a sharp drop in US consumer confidence. The drop in consumer confidence may temper Fed rate hike fears and sparked safe haven demand for the JPY.

This week’s Japanese economic calendar includes the February 24th release of the January trade balance expected at ¥545bln compared to ¥-40bln last month. On February 26th January CPI will be released expected at -0.2% compared to -0.5% last month along with January industrial output, retail sales, housing starts and construction orders. Industrial output is expected at 2.2% compared to 0.7% last month. Retail sales are expected to fall by 1.2% compared to 0.2% Last month. Housing starts are expected to rise by 3.3% compared to 2.5% last month and construction spending is expected to rise by 0.6% compared to 24.5% last month.

Key technical levels to watch in USD/JPY include support at 90.14 the February 17th low with resistance at 91.90 the February 22nd high.

EUR
EUR traded lower erasing early overseas gains pressured by report of an unexpected decline in German IFO and ongoing concern about EU sovereign debt risk. EUR traded to new lows for the day after the release of weaker than expected US consumer confidence. The decline in US consumer confidence sparked selling of equities and a spike in risk aversion. German February IFO declined to 95.2 from 95.8 last month. IFO officials state that the German economy may have contracted in Q1. The trade ignored the future expectations component of the IFO which rose slightly to 100.9 from 100.6. Weaker than expected growth outlook in Germany adds to concern that deficit cuts in peripheral Europe will lead to a protracted economic recovery. The German economic minister said that the German recovery may not yet be self-sustaining. Concern about the outlook for Greek sovereign debt continues to pressure the EUR. German Chancellor Merkel said the EU must do everything necessary to ensure Greece reduces its deficit and that the stability of the EUR is at stake. ECB’s Bini Smaghi said that any aid to Greece will be lower than earlier reports. Yesterday German press reported that the EU plans a 25bln bailout for Greece. This bailout report was denied by the German finance minister. Analysts at Goldman cut their target for EUR citing concern that the Greek deficit troubles have sapped confidence in the EU and permanently increased the risk of holding the single currency. According to Goldman the current sovereign debt crisis is the most threatening since the EUR came in existence and the crisis exposes the problems of coordinating fiscal policy with currency union. EUR was also pressured by concern about Spain’s debt outlook. ECB’s Ordonez said that bad loans will continue to rise in Spain as the labor market deteriorates and Spain must take aggressive action to reduce its deficit. EUR remains vulnerable to concern about EU sovereign debt risk and speculation that the US economy will recover faster than the EU.

On February 25th EU business climate will be released expected at 98 compared to 97.1 last month. On February 26th EU January CPI will be released expected at 1.2% compared to 1.1% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3425 the May 18th low with resistance at 1.3692 the February 23rd high.

GBP
GBP traded lower pressured by report of weaker than expected UK mortgage approvals and revived speculation that the BOE may expand quantitative ease. GBP decline accelerated after the release of weaker than expected US consumer confidence. UK mortgage lending rose by 2.7bln in January, this marks the lowest level since last July. The housing sector has been one of the main bright spots in the UK recovery and today’s disappointing mortgage approvals report generates concern about the strength of the housing market recovery. A number of BOE officials testified before UK Parliament today. The BOE’s Miles said that quantitative ease may be expanded if the economy weakens and the BOE Governor King said it may be necessary to expand quantitative ease. The BOE’s Tucker however expressed concern about the recent rise in UK CPI and warned that if stimulus is withdrawn to slowly it will increase the risk of inflation in the UK. Tucker said that the BOE cannot ignore the rising risk of UK inflation. UK January inflation was reported to have risen by 2.9%. The rise in January inflation is near the high end of the BOE 1 to 3% inflation target range. Tucker’s comments helped to limit the GBP downside. GBP remains vulnerable to concern about UK debt, economic outlook and possibility of an expansion of the BOE’s quantitative ease. This week’s main focus will be Friday’s release of UK GDP. An upward revision in GDP could help to slow the rate of the GBP decline.

This week’s UK economic calendar includes the February 26th release of Q4 GDP expected at 0.2% compared to 0.1% in the prior report. January GFK survey and nationwide home prices will also be released on the 26th. The GFK is expected unchanged at -17 and house prices are expected to rise by 0.4% compared to 1.2% last month.

The technical outlook for GBP is negative as GBP trades below 1.500. Expect near-term support at 1.5345 the February 19th low with resistance at 1.5683 the February 18th high.

CAD
CAD traded lower with selling pressure attributed to a decline in the price of crude oil and a spike in risk aversion as global equity markets decline in reaction report of weaker than expected US consumer confidence. Crude prices traded about one dollar lower. Equity markets weakened in reaction to ongoing impact of sovereign debt risk in Europe and uncertainty about Fed policy outlook. There were no major Canadian economic reports scheduled for release today. CAD is consolidating near one-month high versus the USD supported by recent economic data from Canada which indicate that the domestic economy is improving and gains in cross trade to Europe. Last week Canada reported higher than expected retail sales and above expectation inflation with CPI rising close to the 2% BOC target. The BOC has pledged to maintain low yields through June of 2010 as long as inflation remains in check. The next BOC policy meeting will be held on March 2nd. The trade will be looking to see if the BOC makes any adjustments in its policy outlook because of the recent improvement in Canadian economic data and rising inflation.

On February 26th Q4 current account will be released expected at -8.75bln compared to -13.12bln last quarter

The technical outlook for CAD is mixed to positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0350 January 19th low with resistance at 1.0580 the February 12th high.

AUD
AUD traded both sides of settlement with early overseas gains giving way to a sharp selloff sparked by weaker commodity and equity prices. AUD downside was initially limited by hawkish comments from RBA Deputy Governor Battellino. Battellino said that a strong AUD helps to contain inflationary pressures. His comments are seen as an endorsement of recent tightening of RBA monetary policy. Tighter RBA monetary policy helps to generate demand for the AUD and high-yield currencies continue to outperform gaining against the European currencies and the USD. AUD turned sharply lower after the release of an unexpected sharp drop in US consumer confidence with selling attributed to weaker equity market trade and a spike in risk aversion. AUD was also pressured by selling in cross trade to the JPY. AUD/JPY cross this traded almost 2% higher gaining against all the majors supported by safe haven demand. Last week RBA Governor Stevens said that interest rates are still 50 to 100bps below average and that future policy changes will be made if the economy improves as expected. RBA Deputy Governor Lowe said that the outlook for the Australian economy is positive and he expects interest rates return to more normal levels. Lowes’ comments follow last Tuesday’s release of the RBA minutes which suggest that the RBA is considering future rate hikes. RBA watcher McCrann said that he expects the RBA to hike interest rates 200bps this year with a 25bps rate hike expected in March. AUD should remain well supported on breaks by RBA rate hike speculation and improving outlook for the global recovery.

On February 24th Q4 labor costs will be released expected unchanged at 0.7%. On February 25th Q4 capital expenditures will be released expected at -3.9% compared to 5% last month. On February 26th January private sector credit will be released expected unchanged at 0.3%.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8879 the February 19th low with resistance at 9093 the January 22nd high.

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