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.

Source: Easy Forex

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Posted on Tuesday, February 23, 2010 by admin in Financial News | Leave a Comment  
Tags: Forex News, Inflation, Unemployment