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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EU Morning Forex Report

Here are the latest Financial News:

Ben Bernanke outlines possible exit strategy scenarios but sticks to ”extended period” rhetoric!

• The main focus in the US session yesterday was Ben Bernanke’s testimony on the Feds exit strategy. Bad weather conditions prevented Bernanke from attending the testimony however his written report was released at 15:00 GMT. The statement outlined several steps on how it may exit from emergency monetary policies however on the timing of a policy shift the ”extended period” rhetoric remained. Overall the USD benefited from the testimony as it provided clarity to the market as to future policy. Bernanke said that that he may rise the discount rates soon but that would indicate a return to normal spreads over the fed funds are as banks do not need access to emergency funding as much as before. US trade deficit increased to $40.2 bln for the month of December which was larger than anticipated and this could way on Q4 GDP. USDJPY price action was between 89.22 – 90.13.
• In Europe optimism is mounting on a Euro wide Greek bail out, German Finance minister Shaeuble says that such reports are speculative. However other sources say that a German led package could entail more than just loan guarantees. As the EU summit is approaching an end this morning a series of national press briefings will follow throughout the day. EURUSD price action was between 1.3675 – 1.3811.
• In the UK the BoE released its quarterly inflation report which was extremely dovish projecting that inflation would fall back down to 1.2%. This indicates the BoE QE program will remain on pause rather than come to an end and that leaves the door open for further asset purchases. Governor King highlighted that excess capacity in the economy was one of the main factors behind the dovish report. He brushed aside fears of UK losing its AAA rating. Overall the GBPUSD weakened following the report and the respective price action was between 1.5763 – 1.5570.
• Today the financial calendar will turn its focus to US weekly jobless reports and to further developments coming from the European summit which just took place. The markets are eagerly optimistic about a collective aid package to Greece and any press conferences by European officials today will likely be market moving events.

Currency to watch out for: EURUSD & USDJPY

• The EURUSD pivot point is at 1.3840 with a preference to enter into short positions at 1.3830
• The USDJPY pivot point is at 89.60 with a preference to enter long positions at 89.65

Today’s calendar and market movers:

• US initial jobless claims for the week expected at 465K
• US jobless continuous claims for the week expected at 4.59 mln
• Canada new housing price index for December forecasted at 0.5%

Equity Markets:

• US equities closed negative yesterday day with the DJIA and the SP500 closing -0.20% and -0.22% respectively.  The European burses were positive yesterday with the FTSE up 0.39% the DAX and the CAC closing up at 0.69% and 0.63% respectively.  The NIKEI and the HSI at the time of righting is 0.31% and 1.0% respectively.

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Special FX Report – USD direction less dependent on risk appetite

Here are the latest Financial News:

The USD and equities have been trading in tandem over the last few weeks with equities at a new high for 2009 and the USD at its best level since September. This suggests that USD direction is less dependent on risk appetite. There was an interesting report on Bloomberg Monday which suggests that the recent breakdown in the inverse correlation for USD direction and equities may be a sign that the worst is over for the USD. Negative sentiment towards the USD has diminished over the past two months with USD supported by improving optimism about the US economic recovery and speculation that the Fed will move its timeframe forward for raising interest rates to mid-2010. Many analysts have forecast that the Fed would hold rates at ultralow levels through all of 2011 but improving US unemployment and strong retail sales coupled with a new high in the US equity market for 2009 encourages speculation that the US may experience a more rapid and stronger recovery in 2010. A stronger and more rapid US recovery could bring the timeframe for Fed rates hikes forward. A Fed rate hike would reduce the attraction of USD as a funding currency.

The USD is currently trading at a three-month high versus the Euro. Much of the USD rally reflects unwind of USD carry trades sparked by speculation that US yields will not remain at current low levels. The EUR is pressured by speculation that the Fed will raise rates before the ECB. EU inflation remains low and there is concern about the fiscal outlook in the EU as Greece’s debt rating has been downgraded and Ireland, Spain and Portugal also face rising debt risks. Uncertainty about sovereign debt risks in the EU generates concern about the stability of European Monetary Union and the credibility of the EUR. The EUR looks much less attractive as an alternative to USD as a reserve currency in light of sovereign debt worries in the EU. EU debt default risk offsets some of the concern about rising US budget deficit.

The shift in sentiment in favor of USD is confirmed by last Friday’s release of the CFTC commitment of traders for the IMM which showed that noncommercial traders are net short the EUR for the first time since May. In addition, a Bloomberg survey of its users shows that there is a slight positive bias towards the USD. The Bloomberg survey says users turned bullish the dollar for the first time since March as the U.S. economy showed evidence of a sustained recovery. The Bloomberg sentiment index for the USD rose to 51.9 from 42.42 in November and 31.23 in October. A reading above 50 indicates that users expect the dollar to strengthen.

The breakdown of correlation for USD and risk appetite suggests that FX focus is shifting to growth and yield differential. While it is too soon to tell whether the current rally in USD is a temporary correction or significant shift in trend the outlook for the US and global economy will be key to USD direction in 2010. According to a Barclay’s survey the most underestimated risk in the financial markets is the risk of a double dip recession. According to Barclays the USD may benefit from fresh market turbulence if the global market falters. Tuesday a Nobel prize-winning economist from Columbia University Stiglitz said there is a significant chance that the US economy will contract in the second half 2010 as the government and Fed begin to withdraw stimulus. Analysts increasingly expect the Fed to hike rates in the first half of next year rather than the second half.

The timing of Fed withdrawal of stimulus and rate hikes will be a major focus of FX trade in 2010. There is a risk of a double dip recession as fiscal and monetary stimulus measures are withdrawn and global markets could experience significant downturn in second half of 2010. Investors have become used to borrowing in USD and using the funds to invest in commodities, stocks and emerging markets. This reflects the fact that US interest rates remain near zero. Recent USD weakness has primarily been a function of selling USD for carry trades. In theory, as the Fed begins to hike rates and withdraw stimulus the USD should become less attractive for carry trades. Anticipation of the Fed’s exit strategy and rising yields could boost the USD in early 2010 and the current USD rally is a preview of the unwind of the USD carry trade. USD may find additional support from re -linking to risk aversion from safe haven flows if the withdrawal of stimulus leads to a double dip recession. US unemployment outlook will be key for Fed policy expectations. If unemployment remains elevated the Fed may be forced to extend the timeframe for maintaining low yields and USD rebound will be limited.

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EU Morning Report – Risk aversion prevails on Moody’s downgrades

Here are the latest Financial News:

Risk Aversion prevails as Moody’s downgrades Greek sovereign debt and states that the UK and the US is testing the boundaries of their Aaa status.

• The US dollar and the Japanese Yen strengthened all day yesterday and the momentum followed through in to the Asian session. Risk aversion seemed to be the main driver behind the moves and not interest rate differentials. Moody’s, a rating agency, issued a report downgrading Greece’s sovereign debt and also said that the sovereign rating of US and UK are testing the boundaries of their ”Aaa” status. Moody’s also downgraded several Dubai Government Related entities. The USDJPY price action yesterday was between 89.15 – 88.15.
• Greece has informed the EU group of finance ministers saying that it is determined to restore its public finances; however Greece stated that a difficult situation in one Euro zone country is a matter for concern for the Euro Zone as a whole. We are likely to see plenty of political haggling over this in the coming weeks and as a consequence we may see the EUR and Greek Government Bonds vulnerable to the tone of the ECB and the Euro Group finance ministers. The EURUSD yesterday traded between 1.4866 – 1.4670
• The GBPUSD also suffered some losses yesterday again on the back of Moody’s report calling UK sovereign debt as ”resilient” as opposed to ”resistance”. The GBPUSD was also weighed down by disappointing industrial and manufacturing reports. Investors are concerned about the fiscal health of the UK and are highly anticipating the pre budget release by the UK Chancellor Alistair Darling to gain some clarity over the situation. The GBPUSD price action yesterday was between 1.6480 – 1.6220.
• Also worse mentioning the Bank of Canada kept interest rates unchanged yesterday at 0.25% which was widely expected by the market Governor Carney also reiterated that the BoC is committed to keeping rates unchanged at least until Q2 of 2010. The USDCAD traded between 1.0490 – 1.0670!
• Today the main event to look out for is the pre budget report by Alistair Darling which will have crucial key proposals by the Chancellor so as to address the largest UK deficit since war time. There will also be a number of bond auctions today by the US, Germany and Canada which can offer us a glimpse in to the current appetite by the market for government bonds as well. We will have CPI inflation data out of Germany plus Trade balance figures by Germany and the United Kingdom. In the Asian session will we have the all important RBNZ Rate call expected to keep rates unchanged at 2.5%.

Currency to watch out for:  EURUSD & GBPUSD

• The EURUSD pivot point is at 1.4800 with a preference to enter into short positions at 1.4790
• The GBPUSD pivot point is at 1.6325 with a preference to enter into short positions at 1.6315

Today’s calendar and market movers:

• Germany Consumer price Index for November % expected to come in at -0.2 from a previous reading of 0.1
• Germany Trade Balance October expected to come in at EUR10.7bln from a previous reading of EUR9.9bln
• United Kingdom Trade balance for October expected to come in at GBP-6.85 from a previous reading of GBP-7.19bln
• New Zealand Reserve Bank of New Zealand Rate call for December expected to remain unchanged at 2.5%

Now onto Stocks: 

• Equity markets in the US closed the session in the red at -1.00% for the DJIA, following Moody’s sovereign debt ratings. European equity markets closed the session negative overall with the DAX -1.66% the CAC -1.43% and the FTSE -1.65%. And in the Asian equity markets we see the NIKEI225 trading at -1.34% and the HSI at -1.03% at the time of writing

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Economic For The Fundamental Analysis

At the beginning of 2008 I think is time for few words about Fundamental Analysis.

For the fundamental analysis on Forex, just as on any goods market, traders use the information from analytical reviews of specialists published in newspapers as well as charts and tables of many numerical indicators serving this purpose.

All fundamental indicators generally released on a monthly basis, except of the Gross Domestic Product and the Employment Cost Index, which are released quarterly.

All economic indicators are released in pairs. The first number reflects the latest period. The second number is the revised figure for the month prior to the latest period. For instance, in July, economic data is released for the month of June, the latest period. In addition, the release includes the revision of the same economic indicator figure for the month of May. The reason for the revision is that the department in charge of the economic statistics compilation is in a better position to gather more information in a month’s time. This feature is important for traders. If the figure for an economic indicator is better than expected by 0.4% for the past month, but the previous month’s number is revised lower by 0.4%, then traders can draw a justified conclusion about the economy situation.

Economic indicators are released at different times. In the United States, economic data is generally released at 8:30 and 10 AM ET. It is important to remember that the most significant data for foreign exchange is released at 8:30 AM ET. In order to allow time for last-minute adjustments, the United States currency futures markets open at 8:20 AM ET.

Sources of information. Information on upcoming economic indicators is published in all leading newspapers, such as the Wall Street Journal, the Financial Times, and the New York Times; and business magazines, such as Business Week. More often than not, traders use the monitor sources— Bridge Information Systems, Reuters, or Bloomberg — to gather information both from news publications and from the sources’ own up-to-date information.