Daily Forex Report – USD lower, GDP revised higher, existing homes sale drop

Here are the latest Financial News:

• 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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Daily Forex Report – USD higher, jobs claims rise, durable goods strong

Here are the latest Financial News:

• 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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Special FX Report – UK and US Q4 GDP will be released Friday

Here are the latest Financial News:

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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Daily Forex Report – USD higher, consumer confidence tanks

Here are the latest Financial News:

• 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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Daily Forex Report – USD higher, recovery hope versus rate outlook

Here are the latest Financial News:

• USD: Higher, Greek debt troubles, optimism about US economy, NABE upgrades US GDP forecast
• JPY: Higher, S&P says there is a low chance of Japan being downgraded this year
• EUR: Lower, German finance Minister denies that the EU plans a 25bln aid plan for Greece
• CHF: Lower, SNB’s Jordan ready to act on excessive CHF strength
• GBP: Lower, UK election polls point to the risk of a hung parliament
• CAD and AUD: AUD & CAD lower, Australian vehicle sales decline, commodity prices mixed

Overview
The USD traded mixed to slightly firmer Monday as focus returns to Greece and the NABE upgrades its US 2010 GDP forecast to 3.2%. There was a report in overseas trade that the EU had agreed to a 25bln aid plan for Greece. The German finance minister denied the report and the USD rebounded from early overseas lows. The NABE upgrade of its US GDP forecast and outlook for continued improvement in the housing market and jobs growth generates optimism about the US recovery. There were no major US economic reports scheduled for release today. Focus turns to Tuesday’s release of US home prices and consumer confidence with durable goods and Q4 GDP to be released later in the week. The trade will also be closely monitoring Fed Chairman Bernanke’s testimony before Congress on Wednesday and Thursday. The trade will be looking for clues to the Fed’s decision last week to hike the discount rate. Fed officials indicate that the rate hike was primarily a technical measure and not an indication of a change in policy. The USD traded lower in early overseas trade pressured by diminished Fed rate hike speculation sparked by weaker than expected US CPI report Friday and the Feds assurance that the discount rate hike was not a sign of imminent tightening of Fed policy. USD price direction is caught between recovery hopes and interest-rate outlook.

Today’s US data:
No major US economic data was released in today’s trade.

Upcoming US data:
This week’s US economic calendar includes the February 23rd release of December Case Shiller Home Price Index expected at -3.8% compared to -5.3% last month. February consumer confidence will also be released on February 23rd expected at 56 compared to 55.9 last month. 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 higher Monday despite improvement in risk sentiment and a 3% surge in the Nikkei. JPY gains were attributed to a rally in cross trade to Europe sparked by renewed concern about Greece and uncertainty about the UK election. JPY rallied against the AUD with the AUD pressured by report of weaker than expected Australian vehicle sales. JPY was also supported by a report from S&P that a downgrade of Japan’s debt rating is unlikely this year and in reaction to report that Japanese corporate bankruptcies declined to pre-crisis levels. There was limited reaction to report that the DPJ party support has dropped to 37% or a pledge from the BOJ to continue to combat deflation. Last week the BOJ elected to hold monetary policy unchanged and to not expand quantitative ease. Today’s statement from the BOJ appears to be a bit less hawkish. JPY direction appears to be more focused on Fed policy outlook then risk sentiment with JPY rallying despite today’s improved risk sentiment supported by dampened fears of an imminent Fed rate hike.

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 gave back early gains that were sparked by a Der Spiegel report which says the EU plans a 25bln bailout for Greece. The EUR was pressured by a statement from the German finance minister denying the report of the Greek aid plan. EUR failed to benefit from assurances from Greek officials that they were taking action to reduce the Greek debt. The Greek PM said that Greek borrowing needs are covered until March. According to Bloomberg derivative markets suggest that the EUR will continue to weaken even if the EU bails out Greece. George Soros says that the EU will face bigger problems than Greece. His comments add to negative sentiment towards EUR. CFTC commitment of traders for last week indicates that spec accounts have the biggest long USD position since September of 2008. EUR downside was limited by diminished Fed rate hike fears as Fed officials downplay the potential for an imminent Fed rate hike. The ECB is expected to maintain low interest rates because of concern about the impact of deficit reduction in peripheral European nations. Focus turns to Tuesday’s release of German IFO.

This week’s EU economic calendar includes the February 23rd release of German IFO expected at 92 compared to 91.2 last month. 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 but the EUR is ripe for a short covering rebound due to oversold technical conditions. Expect EUR support at 1.3443 the February 19th low with resistance at 1.3654 February 22nd high.

GBP
GBP traded lower pressured by the latest UK election polls which suggest the risk of a hung parliament. The UK is expected to hold a national election on May 6th. According to a Sunday Times poll Conservatives will win 290 of the 650 parliamentary seats and labor will win 280. This poll suggests that there will be no clear majority in the UK Parliament. The lack of a parliamentary majority will greatly reduce the likelihood that the UK government will take action to reduce the UK budget deficit. UK government failure to reduce its budget deficit could lead to a downgrade of the UK sovereign debt rating. Last week the UK Telegraph reported that the UK is vulnerable to a worse deficit crisis than Greece. GBP is also pressured by concern about the UK recovery. Last week the UK reported a sharp 1.8% drop in January retail sales, a rise in jobs claimant count and weaker mortgage approvals and household spending. These reports generate concern about the strength of the UK recovery and the reports may increase pressure on the BOE to take further action to boost the economy and expand quantitative ease. 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 1.5500. Expect near-term support at 1.5345 the February 19th low with resistance at 1.5683 the February 18th high.

CHF
CHF drifted lower pressured by a statement from SNB VP Jordan that the central bank is ready to act on excessive CHF strength. Jordan went on to say that recent CHF strength is no barrier to Swiss growth. CHF traded a new low for 2010 last week pressured by Fed rate hike speculation and report of a decline in Swiss investor confidence. CHF continues to strengthen in cross to the EUR supported by concern about EU sovereign debt risk. Last week Switzerland reported improvement in its trade balance despite strength in the CHF with exports reported to have risen by 3.2%. EUR/CHF continues to consolidate near the March lows around 1.4600. There were rumors that the SNB had intervened to try and weaken the EUR in cross trade late last week. The SNB intervention effort may not be as aggressive in light of Jordan’s comments about Swiss growth and improving Swiss trade balance. Focus turns to this week’s release of UBS consumption indicator on Tuesday, unemployment on Thursday and the main focus will be Friday’s release of the February KOF leading indicator. The consumption indicator is expected to rise to 1.23 from 1.19 last month, unemployment is expected at 3.4% and the KOF survey is expected to rise to 1.80 from 1.77 last month. Expect USD/CHF support at 1.0625 the February 11th low with resistance at 1.0955 the July 6th high.

CAD
CAD traded mixed to lower in a tight range with limited fresh news to move prices. A slight improvement in risk sentiment as equity markets rally and firmer crude prices failed to inspire interest in the CAD. 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. 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 long as inflation remained in check. The next BOC policy meeting will be held on March 2nd and the trade will be looking to see if the BOC makes any adjustments and 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 drifted lower despite improvement in risk sentiment with selling pressure attributed to report of weaker than expected Australian new vehicle sales. Australia’s January new vehicle sales declined by 3.4%. AUD has been benefiting from RBA rate hike speculation. 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 8848 the February 15th low with resistance at 9093 the January 22nd high.

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Special FX Report – When is a rate hike not a rate hike?

Here are the latest Financial News:

The Fed surprised the markets Thursday and hiked the discount rate 25bps to 0.75%. Stocks and commodities declined and the USD rallied to a nine month high in reaction to the Fed’s discount rate hike. Stocks and commodities rebounded from earlier losses and the dollar pared gains in reaction to Fed assurances that the discount rate hike was not a signal that the Fed is considering an imminent tightening of monetary policy. The Fed says that the rate hike was a technical action to start to normalize monetary policy. In a statement accompanying the Fed’s discount rate hike the Fed said that “the changes are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.” Thursday’s discount rate hike was the first rate hike since December of 2008. The discount rate is the emergency lending rate that the Fed charges banks. The Fed will seek to maintain a 50bps spread between the Fed funds rate and the discount rate. The Fed funds rate is currently at 0 to 0.25%. According to the Fed’s Lockhart the Fed funds rate may remain at this level throughout 2010 as the Fed remains concerned about high unemployment and the strength of the recovery.

There are a number of reasons why the Fed elected to hike the discount rate. One reason for the discount rate hike is that the Fed sees the banking system strengthening. Another rationale for the discount rate hike is that the Fed wants to normalize monetary policy and begin to prepare for an eventual tightening of monetary policy. A tightening by the Fed is not likely to occur until the Fed sees employment growth and that the trend in employment growth is sustainable. The fact that the Fed hiked the discount rate was not as much a surprise as the timing of the rate hike. In testimony before Congress last week Fed Chairman Bernanke said that the Fed was considering the possibility of hiking the discount rate as one of the ways of normalizing policy and to start withdrawal of stimulus. Some argue that the Fed acted on Thursday because last week’s 10 year note auction was not well received and China sold a record amount of US debt in December. Foreign demand for US treasuries has declined. Because of the record US budget deficit the US will continue to auction a record amount bonds. If the Fed did not soon signal the start of withdrawal of stimulus, inflation fears might discourage foreign demand for US bonds and light a fire under the bond vigilantes.

Friday the US reported that CPI remains subdued with January core inflation reported to have declined by 0.1%. As long as US inflation remains subdued a tightening of Fed policy will remain far off into the future and a Fed funds rate hike is unlikely until late 2010 at the earliest. This suggests that initial selloff in the global equity markets and commodities and dollar surge was an overreaction to the Fed discount rate hike. So when is a Fed rate hike not a rate hike? when the rate hike means that no imminent tightening of policy is coming.

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US Morning Notes – USD mixed, discount rate hike not a policy change

Here are the latest Financial News:

FX Highlights

• The USD traded at a nine month high supported by the Fed’s surprise decision to hike the discount rate late Thursday afternoon, Fed officials said the rate hike is not an indication of policy direction but a move towards normalization, the rate hike is not signal of a policy change according to Fed Governor Duke, stocks and commodities declined in reaction to the Fed rate hike, the Fed’s Lockhart said that the markets belief in a high probability of a rate hikes this year is overblown, Lockhart’s comments helped to slow the USD rally and the USD pared gains into the U.S. session, EU manufacturing PMI rises and services PMI growth slows, UK retail sales post a sharp decline, AUD traded higher supported by hawkish rhetoric from the RBA
• Focus turns to today’s release of US CPI and Canada’s LEI
• Fed hiked the discount rate 25bps to 0.75%
• Japan’s finance minister says Fed rate hike is not negative for the Japanese economy because the JPY weakened, JPY lower
• RBA Governor Stevens says rates are still 50 to 100bps points below average, AUD higher
• UK Telegraph reports that the UK is vulnerable to a worse deficit crisis than Greece, UK January retail sales declined by 1.8%, BOE’s Barker to step down at the end of her term on May 31st, GBP lower
• EU February flash manufacturing PMI rose to 54.1 from 52.4 and February services PMI drops to 52 from 52.5, EUR lower
• The IMF tells the G-7 to maintain stimulus but prepare exit strategies
• Chinese officials said that President Obama’s meeting with the Dalai Lama hurts ties with China
• US equity markets set to open lower, European equities mixed, Nikkei closed 212 points lower

Upcoming Events

• US - Friday, January CPI will be released expected at 0.3% compared to 0.2% last month
• CAN – Friday, January LEI will be released expected at 1% compared to 1.5% last month

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US Morning Notes – USD higher, Italian debt troubles, IMF gold sales

Here are the latest Financial News:

FX Highlights

• The USD is trading higher in reaction to Wednesday’s FOMC minutes which state that the Fed discussed a possible discount rate hike in January and in reaction to concern about bad loans in Italy, GBP pressured by report of worse than expected UK January public sector borrowing, the UK posts its first budget deficit for January since 1993, commodity currencies trade lower pressured by report that the IMF looks to sell more gold, AUD downside limited by hawkish comments from the RBA’s Lowe and rising Australian consumer confidence, CAD supported by report of a sharp jump in Canada’s inflation
• Focus turns to today’s release of US initial jobless claims, PPI, leading indicators and Philly Fed survey and Canada’s CPI and net foreign investment flows
• IMF plans to sell 191.3 tons of gold
• The BOJ left monetary policy unchanged, says pace of recovery to remain moderate, BOJ did not announce new plans to combat deflation, BOJ governor urges the Japanese government to respect the BOJ’s independence, JPY higher
• RBA Assistant Governor Lowe says the outlook for the Australian economy is positive, he expects interest rates to return to more normal levels, RBA sold A$295mln in January, Australia’s Q4 NAB business confidence rose by two points to +18, January merchandise imports declined by 13%, AUD lower
• UK February manufacturing CBI at -36 compared to -39 last month, January public sector borrowing at 4.3bln, January M4 money supply growth at 0.6%, BOE’s Barker warns of a of another quarter of contraction in the UK economy, mortgage approvals declined to 49k from 60k last month, GBP lower
• Swiss February ZEW investor sentiment falls to 52.5 versus 56.6 last month, January exports fall by 3.6%, CHF lower
• Canada’s CPI rose by 0.3% in January with annual inflation rate at 1.9% compared to 1.3% in December, CAD higher
• Blue Gold Capital Management says China may let its currency appreciate by 5% next month
• Health insurer Humana Health Care plans to reduce its workforce by 5% and cut 2,500 jobs
• Mortgage applications declined by 2.1% in the week ending February 12th
• President Obama says the stimulus saved the US economy
• US equity markets set to open lower, European equities 0.25% higher, Nikkei closed 29 points higher

Upcoming Events

• US - Thursday, initial jobless claims for the week ending 02/13 will be released expected at 430k compared 440k last month along with January PPI expected at 0.8% compared to 1% last month, January leading indicators expected at 0.5% compared to 1.1% last month and Philly Fed survey for February expected at 17 compared to 15.2 last month
• CAN - Thursday, January CPI will be released expected to rise by 0.3% compared to -0.3% last month along with December net foreign investment expected at 8bln compared to 10.5bln last month

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EU Morning Report – EURUSD rallies as a lack of further developments in Greece causes a round …

Here are the latest Financial News:

EURUSD rallies as a lack of further developments in Greece causes a round of short covering!

• Yesterday’s trading saw some exciting rallies across the major asset classes, majors in FX, commodities and Equities. Risk appetite was elevated as NY Fed Empire State index leaped to 24 vrs an expectation of 16. We also had a positive NAHB housing Market index coming in at 17 vrs an expectation of 15. US stocks ended the session 1.68% higher Crude made a high of $77.01 following the reports. Yields on the 2 year US government bond traded between 0.8 – 0.9% with price action indicating a possible support has been built in the area and a swing upwards maybe expected. USDJPY price action yesterday was between 89.70 – 90.50.
• Yesterday we had the European Union’s Economic and financial council meeting which was mainly focused on finding resolve for the Greek issues. No final concrete measures were announced on how the EU may help Greece in case of a default however the Greek finance minister did highlight that Greece will not be requiring any assistance from the EU. Given the event the EURUSD actually managed to rally from 1.3588 – 1.3781. The move indicates that despite a lack of positive news coming out of the EU the market seems to be oversold and unwilling to take new short positions in the pair as rhetoric indicates that the chances of a Greek default are indeed low. In regards to economic data we saw the ZEW come in much better than expected at 45.1 which also added momentum to the rally and sparking further short covering of EURUSD shorts.
• In the UK the highlight of the day was the Consumer price index report which came in at 3.5% year on year, the BoE CPI target is 2% and such inflationary figures are an indication to future BoE policy. However Governor King’s letter to the chancellor noted that the jump is only temporary and the CPI will drift lower in the medium term. The market is still awaiting an explanation as to why the QE program was suspended given the weak outlook the BoE has on the UK economy. GBPUSD price action was between 1.5727 – 1.5794.
• Today’s financial calendar will have a number of important data starting with the UK ILO unemployment report for December expected at 7.8%. Building Permits and Housing starts in the US will paint a picture regarding how the housing sector is performing. We will also have industrial output for January expected at 0.7% and finally the FOMC releasing its 26-27 January minutes.

Currency to watch out for: EURUSD & USDJPY

• § The EURUSD pivot point is at 1.3700 with a preference to enter into long positions at 1.3710
• § The USDJPY pivot point is at 90.00 with a preference to enter long positions at 90.05

Today’s calendar and market movers:

• § UK ILO Unemployment for December
• § US Housing starts for January expected at 0.58 mln.
• § FOMC Minutes for 26-27^th of January are expected as well.

Equity Markets:

• US equities closed positive yesterday day with the DJIA and the SP500 closing 1.68% and 1.80% respectively.  The European burses were positive yesterday with the FTSE up 1.48% the DAX and the CAC closing negative at 1.47% and 1.66% respectively.  The NIKEI and the HSI at the time of writing is 2.72% and 1.76% respectively.

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