Daily Forex Report – USD higher, Q4 GDP expanded by 5.7%, best in six years

Here are the latest Financial News:

• USD: Higher, US Q4 GDP confirms faster growth, bond yields rise, consumer sentiment beats expectations
• JPY: Lower, Japan’s deflation accelerates, pressure on BOJ to ease, threat of intervention
• EUR: Lower, concern Greek fiscal troubles may spread, EU unemployment and CPI rise
• GBP: Lower, S&P says UK banking system less stable, UK house prices rise
• CAD and AUD: AUD lower & CAD mixed, India hikes its reserve ratio 75 bps

Overview
USD traded mixed ahead of today’s release of Q4 GDP. JPY was pressured by report of accelerating deflation in Japan and comments from the BOJ governor which suggests that the BOJ is ready to act against potential market turmoil. European currencies were mixed initially pressured by fresh concern about sovereign debt risk in non-core European countries with the GBP pressured by an S&P report which says UK banks are less stable. EUR downside was limited by report that the EU may be preparing a bailout for Greece. GDP downside was limited by report of rising UK house price. CHF rallied in reaction to report of better than expected KOF leading indicators. Commodity currencies traded higher rebounding from initial pressure sparked by weaker Asian equity market trade with support from statement from Chinese officials that they will keep monetary policy loose despite rising price pressures and better than expected GDP reports in the US and Canada. AUD gains were limited by speculation the RBA may be nearing a pause in its tightening cycle.

US economic data was positive with advanced Q4 GDP confirming faster US growth at the end of 2009 and Chicago PMI rising more than expected. Despite the acceleration of growth in the fourth quarter economists are concerned that the economic rebound may not be sustainable as fiscal and monetary stimulus is withdrawn and recent economic data shows the recovery in housing and retail demand slowing. Much of the improvement in Q4 GDP was due to increased auto production and rebuilding of inventories. Consumer spending and business investments remain weak. USD traded higher after release of stronger than expected GDP. The GDP report may have some analysts looking for an earlier FOMC rate hike. The GDP deflator however came out below expectations which suggest that inflationary pressures remain tame despite improving growth. Focus turns to central bank policy meetings in Australia Tuesday and Europe Thursday and Fridays US January unemployment report. The RBA is expected to hike rates 25 bps to 4%, the ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm payrolls may turn slightly positive.

Today’s US data:
Advanced Q4 GDP rose by 5.7%, reading of 4.5% was expected. January Chicago PMI rose to 61.5, a reading of 57.5 is expected. Final Michigan consumer sentiment rose to 74.4, a reading of 73 is expected.

Upcoming US data:
Next week’s US economic calendar includes the February 1st release of December personal income and consumption. Personal income is expected to rise by 0.3% compared to 0.4% last month and consumption is expected to be up by 0.1% compared to flat last month. January ISM index will also be released on February 1st expected at 55.5 compared to 55.9 last month. On February 2nd December pending home sales index will be released expected at 97.1 along with domestic auto sales for January. On February 3rd January ADP employment will be released expected -54k compared to -84k last month. January ISM non manufacturing index will also be released on February 3rd expected at 51 compared to 50.1 last month. On February 4th initial jobless claims for week ending 01/30 will be released expected for 465k compared for 470k last month. Q4 labor productivity, unit labor costs and December factory orders will also be released on February 4th. Q4 productivity is expected at 5% compared to 8.1% last quarter, unit labor costs are expected at -2% compared to -2.5% last quarter and factor orders are expected to rise by 0.8% compared to 1.1% last quarter. On February 5th January unemployment rate and nonfarm payrolls will be released. The unemployment rate is expected to rise by 0.1% to 10.1% and nonfarm payrolls expected at -5k compared to -85k last month. December consumer credit will also be released on February 5th expected at -8bln compared to -17.5bln last month.

JPY
JPY traded lower pressured by a number of factors that include report of accelerating deflationary pressures in Japan, BOJ ease speculation threat of intervention and stronger than expected US Q4 GDP. Japan’s economic data was mixed with December core CPI reported to have declined by 1.3%. The drop in Japan’s core CPI confirms acceleration of deflationary pressures and elicited comments from the new Japanese government that the BOJ must take action to combat deflationary pressures. Japan’s Finance Minister Kan says the BOJ should work in line with government policies to fight deflation. BOJ Governor Shirakawa said that all options are open but the current level of bond purchases is appropriate. Japan’s December industrial production rose by 2.2%, December unemployment was at 5.1%, household spending rose 1% and December housing starts fell by 15.7%. January manufacturing PMI declined to a seven month low at 52.5. BOJ minutes for the December 17th – 18th policy meeting indicate that a number of board members favor lowering interest rates as a way to support growth. BOJ Governor Shirkawa said that the central bank is prepared to fight market turmoil. Shirakawa’s comments increase the risk of intervention. JPY traded to the lows for the day after the release of stronger than expected US Q4 GDP. The GDP report sparked demand for equities and reduced safe haven flows to the JPY.

Next week’s Japanese economic calendar includes the February 5th release of December preliminary leading indicators expected 2% compared to 1.7% last month. On February 8th December current account will be released along with January money supply.

Key technical levels to watch in USD/JPY include support at 89.58 the January 29th low with resistance at 91.88 the January 21st high.

EUR
EUR traded lower pressured by ongoing concern about the fiscal outlook in non core European countries and in reaction to report of stronger than expected US Q4 GDP. The cost to insure against Greek debt default continues to rise and this is raising concern about sovereign debt risk in Greece generating fears that these risks may spread to other European countries. Greek EU 10 year bond spread was at its widest level since Greece adopted the EUR in 2001. EUR downside was limited by report that the EU may be preparing a bailout for Greece. EU economic data was mixed with January CPI reported up 1%, December unemployment at 10% and December M3 reported to have declined by 0.2%. These reports are unlikely to change the outlook for steady ECB policy. ECB’s Bini Smaghi said that the timing of exit strategies depends on the strength of the economic recovery. EU turned lower after release of stronger than expected US Q4 GDP which posted its largest rise since Q3 of 2003. For the time being it looks as though FX markets are returning focus to fundamentals as the correlation between improving risk appetite and weaker USD broke down in Friday’s trade. Concern about sovereign debt risks in peripheral European countries is the main risk for the EUR. The next major focus for EUR trade will be the February 4th ECB policy meeting. The ECB is expected to hold monetary policy unchanged and continue to gradually withdraw liquidity.

Next week’s EU economic calendar includes the February 1st release of EU January manufacturing PMI expected at 51.3 compared to 51.6 last month. ECB will hold a policy meeting Thursday, February 4th. No policy change is expected. The ECB is expected to confirm the continuing drawdown of unconventional liquidity measures.

The technical outlook for the EUR is negative as the EUR trades below 1.4000. Expect EUR support at 1.3830 the June 22nd low with resistance at 1.4096 the January 27th high.

GBP
GBP traded lower pressured by S&P report that the UK banking system is less stable. GBP rebounded in reaction to report of stronger than expected UK house price rise. The S&P report on UK banks is troubling because it may make it more difficult for the BOE to exit quantitative ease and could discourage demand for UK bonds making it more difficult for the UK to finance its deficit. UK January house prices rose by 1.2% and January GFK consumer confidence was at -17 compared to -19 last month. GBP has been outperforming of late supported by speculation that rising UK inflation and improving UK economic outlook may encourage the BOE to pause in its asset purchase plan. UK December CPI rose by 2.9%. BOE’s Sentance said that the BOE may have to consider raising rates sometime this year. GBP has also been benefiting from statements by UK Chancellor Darling that the UK has a plan to reduce its deficit by half over the next four years. Ratings agencies have warned that the UK AAA sovereign debt rating is at risk if the UK does not reduce its deficit. GBP turned lower after release of better than expected US Q4 GDP failing to benefit from rising equities or improving risk sentiment.

Next week’s UK economic calendar includes the February 1st release of January CIPS manufacturing PMI expected 54.4 compared to 54.1 last month along with December consumer credit, money supply, mortgage approvals and mortgage lending. Consumer credit is expected at -0.345bln compared to -0.376bln last month, mortgage applications are expected at 61,000 compared to 60,518 last month and mortgage lending is expected at 1.479bln compared to 1.459bln last month. Money supply is expected -0.8% compared to -1.1% last month. BOE will hold a monetary policy meeting on February 4th. No policy change is expected. The trade will be looking to see whether the BOE elects to pause in its asset purchase plan.

The technical outlook for GBP is mixed to positive as GBP holds above 1.6000. Expect near-term support at 1.5900 the January 7th low with resistance at 1.6277 the January 28th high.

CAD
CAD traded higher supported by improving risk appetite as equities rally in reaction to report of  stronger than expected US and Canadian GDP. Canada’s November GDP rose by 0.4%. The trade had expected a 0.2% rise. CAD was also supported by report that China plans to continue with loose monetary policy despite rising prices. CAD had been weakening in reaction to concern that tightening of monetary policy in China could hurt demand for global exports and slow the global recovery. Thursday the Baltic Freight Index declined by 5% which may be an indication global demand is slowing. CAD gains were limited by report of weaker than expected Canadian producer prices. Canada’s December IPPI declined by 0.1%, a 0.4% rise was expected and RMPI declined by 1.7%, a 1.2% rise was expected. The decline in Canada’s producer prices fits with last weeks report of weaker than expected Canadian CPI and reflects lower energy prices and the impact of strong CAD. Weaker than expected inflationary pressures in Canada will limit the risk of an earlier BOC rate hike. The BOC has pledged to maintain low yields through June of 2010 provided inflation remains in check.

Next week’s Canadian economic calendar includes the February 4th release of December building permits.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0465 the January 22nd low with resistance at 1.0696 the January 29th high.

AUD
AUD traded mixed to lower initially pressured by weaker Asian equity market trade. AUD posted a modest rebound in reaction to a statement from a Chinese official that China will continue with loose monetary policy despite rising price pressures and in reaction to report of stronger than expected US Q4 GDP.US Q4 GDP encouraged a rally in US equities and uptick in risk appetite. The rebound in the AUD was limited as US bond yields rise in reaction to the stronger GDP data and USD benefits form improving fundamentals. The rise in US bond yields helps to close the AUD yield gap advantage. Today’s AUD price action was somewhat disappointing in light of the fact that there is the potential that the RBA will hike rates next week and that US Q4 GDP is positive for the global recovery outlook. The AUD was pressured by concern about the impact of tightening in China and uncertainty about government efforts to impose new regulations and taxes on banks. In addition India raised its reserve requirements today to 5.7%. The hike in India’s reserve requirement may be another headwind for commodity prices and global growth. Focus turns to Tuesday’s RBA policy meeting. The RBA is widely expected hike rates 25bps to 4%. There is an increased risk that investors may want to take profits and sell the AUD after the RBA announcement.

Next week’s Australian economic calendar includes the February 1st release of Q4 house prices expected at 4.7% compared to 4.2% last month. On February 2nd the RBA will hold a policy meeting and are expected to raise rates 25bps to 4%. On February 3rd December trade balance will be released expected at -1.98bln compared to -1.70bln last month. On February 4th December building approvals will be released along with December retail sales. Building approvals are expected to fall by 2.7%, compared to a 5.9% rise last month and retail sales are expected to rise by 0.6% compared to 1.4% last month.

The technical outlook for the AUD is mixed as the AUD holds above 8800 but is breaking trend line support. Expect AUD support at 8830 the December 28th low with resistance at 9048 the January 28th high.

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