Daily Forex Report – USD higher, jobless claims post an unexpected rise

Here are the latest Financial News:

• USD: Higher, jobless claims rise, productivity beats expectations, labor costs fall more than expected
• JPY: Higher, supported by a spike in risk aversion and EU debt troubles
• EUR: Lower, credit default spreads widen in Europe, German industrial orders drop, ECB on hold
• GBP: Lower, BOE to pause asset purchases, left open for future QE if economy deteriorates
• CAD and AUD: AUD & CAD lower, Australian retail sales decline, commodity prices slide

Overview
USD traded higher Thursday supported by EU sovereign debt risk, weaker equities and declining commodity prices. Credit default swaps widened to a record level in Portugal and continued to widen in Greece and Spain. It’s becoming more expensive to buy protection against debt defaults in Greece, Spain and Portugal. European sovereign debt risk is the main focus of FX trade. The ECB elected to hold monetary policy unchanged as expected and the BOE decided to pause its asset purchase program. In the press conference following the ECB meeting ECB President Trichet said the interest rate level remains appropriate, inflation outlook risks broadly balanced, and EU economy to grow at a moderate pace. Trichet also said that high debt puts burden on monetary policy and he thinks Greece is moving in the right direction on its deficit reduction plans. Trichet also warned that all EU countries must respect the EMU growth pact. The EMU growth pact includes restrictions on GDP debt ratio for countries that join the EMU. The EUR traded to the day’s lows as Trichet discussed European fiscal imbalances. EU debt troubles may delay ECB exit plans. The BOE left the door open for future expansion of quantitative ease if economic conditions deteriorate. Commodity currencies traded lower pressured by a spike in risk aversion as global equity markets decline pressured by global debt worries. AUD weakened in reaction to report of weaker than expected Australian retail sales and a sharp rise in New Zealand’s unemployment rate. JPY traded  sharply higher supported by safe haven demand sparked by a spike in risk aversion. US economic data was mixed with jobless claims posting an unexpected rise. Unit labor costs declined more than expected and productivity came in stronger than expected. USD remained higher after the release of the jobless claims and productivity data. Factory orders were reported slightly higher than expected. Focus turns to Friday’s release of US January unemployment and nonfarm payrolls. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive.

Today’s US data:
Initial jobless claims for week ending 01/30 rose by 8K to 480k, a reading of 465k was expected. Q4 Productivity rose by 6.2% and labor costs fell 4.4%. Labor costs were expected at -2% and productivity was expected 5%. December factory orders rose by 1%, a reading of 0.8% was expected.

Upcoming US data:
On February 5th January unemployment rate and nonfarm payrolls will be released. The unemployment rate is expected to rise by 0.1% to 10.1% and nonfarm payrolls expected at -5k compared to -85k last month. December consumer credit will also be released on February 5th expected at -8bln compared to -17.5bln last month.

JPY
JPY traded higher supported by a weaker equity trade and a spike in risk aversion sparked by sovereign debt concerns in Europe. JPY surged in cross trade with AUD/JPY -3.7% and  EUR/JPY – 2.8%.Despite EU commission approval of Greek efforts to reduce its deficit and IMF pledge to help Greece if needed, the cost of buying protection against debt default in Greece and other peripheral European countries continues to rise. The CD spread for Portugal’s bonds to German bonds widened to a record level Thursday. There was limited reaction to comments from the BOJ’s Nakamura who said that it’s important to keep BOJ policy easy, that downside risks to the economy were greater than the upside and deflationary pressures are likely to continue. Nakamura however appeared to reject government calls for more aggressive easing by the BOJ stating that the BOJ and the government must play their own roles in fighting deflation. He went on to warn about the potential negative impact of relying too much on fiscal spending by the government to boost growth.MOF flows data for week ending January 30th show that Japanese investors were large buyers of foreign bonds. The MOF report limits JPY upside as Japanese institutional investors are buyers of USD to purchase foreign bonds. JPY remains vulnerable to concern about Japan’s deficit and deflationary pressures. Last Friday, Japan reported that deflation accelerated with December CPI reported to have declined by 1.3%. Kan’s statement on deflation will increase pressure on the BOJ to ease monetary policy. Japan’s sovereign bond rating may be at risk of a downgrade if Japan fails to take action to reduce its deficit.

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

Key technical levels to watch in USD/JPY include support at 87.35 the December 9th low with resistance at 91.28 the February 4th high.

EUR
EUR traded at its lowest level since June versus the USD pressured by concern about sovereign debt risk in Europe and report of weaker than expected German industrial orders. Widening of credit default swap spreads in Europe sparked fresh concerns about the risk of debt default in Europe. German industrial orders for December declined by 2.3%. The German finance minister says the German economic recovery has lost momentum since Q3. The ECB elected to hold monetary policy unchanged as expected. European debt risks will make it more difficult for the ECB to exit nonconventional policy measures. At the press conference following the ECB policy decision ECB President Trichet said interest rates are appropriate and he gave no indication that the ECB would be in any hurry to change monetary policy. Trichet said that Greek measures to reduce its deficit are a step in the right direction and he approves of Greece’s medium term goals. He went on to say that all EU countries must respect the new growth pact. It’s difficult to predict how low the EUR may trade due to concern about sovereign debt risks in Europe. Some analysts expect EU and IMF bailouts to reduce concern about EU debt risks limiting EUR downside. Other analysts fear that the impact of the sovereign debt risk news from Europe has only scratched the surface. Developments in regard to fiscal stability in peripheral European countries will remain the main focus for EUR trade.

The technical outlook for the EUR is negative as the EUR trades below 1.4000. Expect EUR support at 1.3750 the June 16th low and 1.3690 with resistance at 1.4027 the February 3rd high.

GBP
GBP traded lower as the BOE says that it will pause on its asset purchases. The BOE elected to leave rate policy unchanged as expected and left the door open for the resumption of asset purchases should the UK economy deteriorate in the future. In its policy statement the BOE said it expected a gradual recovery in the UK economy and that the impact of aggressive fiscal and monetary policy will have impact for some time to come. In the days leading up to today’s BOE policy meeting the BOE was faced with report of a sharp increase in UK inflation and mixed to relatively positive economic data. UK December CPI rose by 2.9% and manufacturing PMI hit a 15 year high. It appears that the BOE is growing more comfortable with the UK recovery outlook to allow the BOE to begin to exit from quantitative ease. The fact that the BOE left the door open for future asset purchases sparked selling of the GBP. GBP has been outperforming of late supported by speculation that rising UK inflation and improving UK economic outlook may encourage the BOE to pause in its asset purchase plan and take a more hawkish tone. The BOE refrain from taking hawkish bias in today’s policy statement. GBP remains vulnerable to concern about UK debt outlook and upcoming general election. Reuters reports that economists see a 20% chance of a hung parliament in the UK May 6th election. A hung parliament would reduce the likelihood that the UK government will take action to reduce its budget deficit. The UK AAA sovereign debt rating is at risk for possible downgrade if the UK government does not take action to reduce its deficit. The BOE is expected to delay any significant change in monetary policy until after the election.

The technical outlook for GBP is negative as GBP trades below 1.5900. Expect near-term support at 1.5706 the February 4th low with resistance at 1.6100.

CAD
CAD traded lower pressured by weaker commodity prices and a spike in risk aversion sparked by concern over European debt. CAD was also pressured by weaker than expected US economic data The US reported an unexpected rise in jobless claims last week. The jobless claims report generates concern that the US jobs market remains stagnant and unemployment will likely remain elevated. CAD downside was limited by report of a rise in Canadian building permits and fresh pledge from China’s finance minister to maintain proactive fiscal policy. Canada’s December building permits came in right in line was expectations reported through have risen by 2.4%. CED has experienced recent selling pressure in reaction to concern that China’s plans to curb lending and withdrawal of stimulus may slow growth in China and hurt the global recovery. Canada’s January Ivey PMI came in at 50.8, a reading 52.5 is expected. Last week Canada reported stronger than expected GDP but BOC Governor Carney warned that the economic expansion may peak midyear. Carney’s comments suggest that BOC will remain on hold through midyear. CAD remains vulnerable to steady BOC policy outlook and concern that the Canadian economy may weaken midyear. CAD also remains vulnerable to concern about the impact of tightening of monetary policy in China. This week’s main focus is Friday’s release of US and Canadian unemployment reports.

On February 5th January unemployment will be released expected to rise by 0.1% to 8.5% employment growth at 15k compared to -28.3k last month.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0532 the January 25th low with resistance at 1.0722 the February 1st high.

AUD
AUD traded lower pressured by report of weaker than expected Australian retail sales, report of a sharp rise in New Zealand’s unemployment rate and by rising risk aversion sparked by European debt concern. Australia’s December retail sales dropped by 0.7%. The decline in retail sales may be an indication that the Australian domestic economy is slowing. The retail sales decline overshadowed report that December building approvals rose by 2.2%. Today’s Australian economic data suggest that the Australian economic recovery is uneven. New Zealand reported that its unemployment rate climbed to 7.3% last quarter from 6.5% previous three months. The rise in New Zealand’s unemployment will likely reduce the potential for near-term rate hikes in New Zealand and Australia. AUD downside was limited by a statement from China’s finance minister that China would maintain proactive fiscal policy. This week’s major feature for AUD trade was the RBA’s decision to hold monetary policy unchanged. AUD traded sharply lower in Tuesday’s trade pressured by an unexpected decision by the RBA to hold monetary policy steady. The trade had expected the RBA to hike rates by 25bps. The RBA cited tightening of China’s monetary conditions and tame Australian inflation as the main rationale for maintaining steady rate policy. The fact that the RBA made reference to China heightens the importance of developments in China’s monetary policy and economy for the direction of the AUD and RBA policy. The RBA left the door open for future rate hikes contingent on improving economic outlook. A number of analysts have interpreted the RBA policy statement as maintaining a hawkish bias and that the RBA is letting China due some of the tightening for the RBA. Sentiment towards the AUD has turned negative despite the fact that Australia still presents an attractive yield advantage and relatively positive domestic growth outlook.

On February 4th December building approvals will be released along with December retail sales. Building approvals are expected to fall by 2.7% compared to a 5.9% rise last month and retail sales are expected to rise by 0.6% compared to 1.4% last month.

The technical outlook for the AUD is negative as the AUD breaks trend line support. Expect AUD support at 8585 the September 28th low with resistance at 8928 the February 2nd high.

My recommended Forex Broker is Forex Yard.

Daily Forex Report – USD rebounds, jobless claims at lowest level since 2008

Here are the latest Financial News:

• USD: Mixed, jobless claims fall more than expected, continuing claims dropped by 57k, bond yields jump
• JPY: Lower, fiscal worries and widening yield gap, unexpected decline in US jobless claims
• EUR: Lower, IMF says EUR reserve holdings rose in Q3, gains limited by US jobs data, rising bond yields
• GBP: Higher, UK house prices rise at fastest pace in two years, a sign recession is ending
• CAD and AUD: AUD & CAD higher, Australia’s private sector credit growth slows, copper at 16 month high

Overview
USD traded mixed to lower on the last trading day of the year pressured by an IMF report which says that the US share of world reserves dropped to its lowest level in a decade during the third quarter of 2009. USD was also pressured by liquidation sales as investors close out long USD positions before year-end. GBP traded higher in reaction to report that UK house prices rose the most in two years and UK lenders expect credit conditions to continue to improve in Q1 2010. Commodity currencies traded higher supported by firmer equities and higher price of gold. Copper traded at a 16 month high. AUD traded higher despite report that private credit grew at its slowest pace in almost 2 decades. The Australian private sector credit report may dampen RBA rate hike speculation. US jobless claims fell sharply last week. The jobless claim drop fuels optimism about US growth in Q1 2010. Focus turns to next week’s release of US December unemployment. The trade will be looking at the unemployment report for confirmation that the US labor market is improving. Market consensus is that the unemployment rate will come in at 10.1% with nonfarm payrolls at -23k. Some economists however say that the US nonfarm payrolls may have turned positive in December. If the nonfarm payrolls turn positive the report will likely fuel speculation that the Fed raises rates sooner than forecast. Fed policy outlook will be a key market driver in 2010.

Today’s US data:
Jobless claims for week ending 12/26 declined by 22k to 432k, a reading of 457k was expected.

Upcoming US data:
On January 4th November construction spending and December ISM Index will be released. Construction spending is expected to fall by 0.4% and the ISM index is expected to improve to 54 and 53.6 last month. On January 5th November factory orders, pending home sales and December auto sales will be released. Factory orders are expected at 0.5% compared to 6% last month. Pending home sales index is expected at 111.8 compared to 114.1 last month. On January 6th December ADP employment and ISM Manufacturing Index will be released. The ADP employment report is expected at -70k compared to -169k last month. The nonmanufacturing ISM index is expected at 50 compared to 48.7 last month. On January 7th initial jobless claims for the week ending 01/02 will be released expected at 545k compared to 432k last week. On January 8th December nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to come in at -23k compared to -11k last month. The unemployment rate is expected to rise 0.1% to 10.1%. November consumer credit will also be released on January 8th expected at -4.40bln compared to -3.51bln last month.

JPY
Markets were closed in Japan for holiday. JPY traded lower in thin trade Thursday. JPY is consolidating at three month low versus the USD.JPY has been pressured by worries about Japan’s sovereign debt rating and widening of US/Japan bond yield gap. S&P warns that Japan’s sovereign debt rating may be cut if steps aren’t taken to cut Japan’s rising debt. Monday, Japan announced a record ¥92.3trln budget for fiscal 2010/ 11. For the first time since World War II Japan’s bond issuance will exceed tax revenue. US/Japan ten year bond yield spread is at its widest level in two years. Speculation that the BOJ may expand quantitative ease in early 2010 is a major risk for the JPY. The BOJ expanded its funding operations and pledged in mid-December two combat deflationary pressures in Japan. JPY gains were limited by selling in cross trade. GBP/JPY traded 1% higher with GBP supported by report that UK house prices rose the best level in two years. JPY traded lower after the release of better than expected US jobless claims report tracking higher US bond yields.

On January 8th November preliminary leading indicators will be released expected at 2.2% compared to 2.5% last month.

Key technical levels to watch in USD/JPY include support at 91.92 the December 30th low with resistance at 93.30 the September 7th high.

EUR
EUR opened higher supported by improving risk appetite as global equity markets rally and in reaction to a statement from the IMF that  holdings of EUR reserves rose in the third quarter and USD reserve holdings sank to the lowest level in ten years. French Finance Minister Lagarde said she expects French Q4 growth to be good as or better than Q3. According to a Bloomberg report EUR was also supported by short covering ahead of year end as some speculators see this month’s 5% drop in the EUR as overdone. EUR gains were limited by report that US weekly jobless claims declined to the lowest level since July 19, 2008. The decline in jobless claims fuels speculation that the US labor market is improving. Improvement in the US labor market may intensify speculation that US interest rates are headed higher in 2010. EUR remains vulnerable to concern about EU sovereign debt risk and Fed rate hike speculation.

On January 4th EU January Sentix Index will be released expected -5 compared -5.5 last month along with EU December manufacturing PMI. The manufacturing PMI is expected at 51.6 compared to 51.2 last month. On January 5th German December unemployment and CPI will be released. The German Unemployment rate is expected unchanged at 8.1%. CPI is expected at 1% compared 0.5% last month. On January 6th EU services PMI and December will be released expected 53.7 compared to 53 last month along with EU industrial new orders expected at 1% compared to 1.5% last month and November PPI expected unchanged at 0.2%. On January 7th EU December economic sentiment will be released along with November retail sales. Economic sentiment index is expected at 90 compared to 88.8 last month. Retail sales are expected to rise by 0.1% compared 0.0% last month.

The technical outlook for the EUR is mixed as the EUR traded above 1.4400. Expect EUR support at 1.4306 the December 30h low with resistance at 1.4503 the December 15th high.

GBP
GBP traded higher supported by improving risk sentiment and report that UK house prices rose at their fastest pace in two years. UK December nationwide house prices rose by 0.4% and 5.9% for the year. The rise in UK house prices fuels speculation that UK recovery is gaining momentum. The house price report may reduce pressure on the BOE to expand quantitative ease in early 2010.GBP is also supported by a report that UK lenders expect credit conditions to continue to improve in Q1 2010. GBP experienced remarkable price action rallying more than four cents from Wednesday’s lows. Much of the rally in the GBP appears to be unwind of short positions with price movements exaggerated by thin year end conditions. GBP remains vulnerable to concern about UK debt outlook and election uncertainty The UK will hold a general election sometime after March of 2010 and before June 3rd. There is growing concern that the UK election may result in a hung parliament with no political party gaining in the UK Parliament may make it difficult for the UK to take action to reduce its debt. Tuesday a group of economists criticized the UK government’s irresponsible failure to come up with a convincing plan to reduce the UK budget deficit. If the UK government fails to take credible action to reduce the budget deficit the UK is at risk of losing its AAA sovereign debt rating. UK budget outlook will be a key campaign issue and election uncertainty may encourage selling pressure to the GBP.

On January 4th November consumer credit will be released expected at -0.4bln compared to -0.579bln last month. November mortgage applications and lending will also be released on January 4th. Mortgage applications are expected at 58k and lending expected at 0.9bln. December manufacturing PMI is also due for release on January 4th expected at 52 compared to 51.8 last month. On January 6th December services PMI will be released expected unchanged at 56.6.

The technical outlook for GBP is mixed to positive as GBP rallies above 1.6100. Expect near-term support at 1.6005 with resistance at 1.6340 the December 17th high.

CAD
CAD traded higher supported by firmer equity market trade, stronger metals prices and improving US labor data. Equity markets traded higher in Asia, Europe and the US. The equity market rally fuels demand for growth based currencies like the CAD. Metals markets are strong with copper prices trading at their highest level in 16 months and $10 higher. CAD has been benefiting from speculation that improvement in the North American economy is gaining momentum. Today’s unexpected drop in US jobless claims generates optimism about economic recovery in North America. There were no major Canadian economic reports released in today’s trade. CAD has outperformed with support from improving growth outlook in North America and less dovish BOC policy bias.  At the BOC policy meeting in December the BOC reaffirmed its pledge to leave interest rates at record lows through June 2010 as long as inflation remains in check. Last week BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 2010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount. CAD gains were limited by report that Canada’s PM Harper closed Parliament for two months. Political turmoil in Canada may limit demand for the CAD.

On January 5th November I PPI and RMPI will be released. These reports will give some indication of whether Canada is experiencing inflationary pressures.

The technical outlook for CAD is mixed as USD/CAD trades above 1.0500. Look for near-term support at 1.0425 the December 30th low with resistance at 1.0580 the December 23rd high and 1.0640.

AUD
AUD traded higher despite report that Australia’s private sector credit rose by just 0.1% in November. Australia’s private sector credit growth is at its slowest pace in 17 years. Weaker private sector credit growth may slow the Australian recovery and dampen RBA rate hike speculation. Today’s AUD rally is attributed to firmer metals prices as copper trades at 16 month high and improving risk appetite as globalized markets rally with the Hang Seng index closing 1.5% higher. AUD had been experiencing significant selling pressure sparked by diminished RBA rate hike speculation and concern that recent RBA rate hikes have contributed to weaker than expected domestic growth in Australia. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. The trade now is looking for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. Today’s Australian private sector credit report will further reduce the odds of a February RBA rate hike.

On January 6th November building approvals would be released expected at 1.5% compared to -0.6% last month. On January 7th November retail sales and November trade balance will be released. Retail sales are expected to rise by 0.6% compared to 0.3% last month. The trade balance is expected at -2.5bln compared to -2.3bln last month.

The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8902 the December 30th low with resistance at 9070 the December 16th high.

My recommended Forex Broker is Forex Yard.

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.

My recommended Forex Broker is Forex Yard.

Daily Forex Report – USD mixed, JPY lower, BOJ won’t tolerate deflation

Here are the latest Financial News:

• USD: Mixed, overseas loses pared by news of Iran/Iraq tension
• JPY: Lower, BOJ won’t tolerate deflation, five-year bond yields hit a four-year low
• EUR: Mixed, German IFO hits 17 month high, trade balance swung to surplus, EUR/CHF declines
• GBP: Higher, mortgage approvals rise, BOE says banking system more stable, PSNCR at record high
• CAD and AUD: AUD & CAD higher, Australia’s business sales rise, Carney says low rate pledge conditional

Overview  
USD drifted lower Friday pressured by a slight uptick in risk appetite as US equity markets edged higher. The EUR was supported by report that the German IFO business sentiment hit its highest level in 17 months and the EU trade deficit swung to surplus in October. GBP edged higher in reaction to report that UK mortgage approvals rose for the third month in a row and the BOE says that the UK banking system is more stable. Commodity currencies traded higher supported by improving risk sentiment and rising crude prices. AUD was supported by report of improvement in Australian business sales. CAD traded higher in reaction to a statement from the BOE’s Carney that the BOC has the flexibility to shorten the time frame for its commitment to keep rates low until mid 2010. Carney appeared to be reacting to Wednesday’s report of higher than expected Canadian CPI. JPY traded lower in reaction to a pledge from the BOJ that the central bank would not tolerate deflation. This pledge encourages speculation that the BOJ may ease monetary policy early next year. USD downside was limited by report of tensions between Iran and Iraq as Iraqi troops were reported to have crossed over the border into Iran and temporarily occupied one of Iraq’s oil fields. The Iraqi deputy minister denied the report. EUR/CHF dropped below 1.50 with CHF supported by rumors of a coup in Pakistan. The drop in EUR/CHF may encourage the SNB to intervene as the SNB has defended the 1.5100 level in the past. The Pakistan government denied the coup rumor.

USD traded at a three-month high Thursday supported by improving outlook for the US economy and speculation that the Fed will withdraw stimulus earlier than expected. US LEI and manufacturing data suggests that the US recovery is picking up pace but jobs growth remains elusive. USD is also supported by concern about sovereign debt outlook in Europe. Thursday Greece’s sovereign debt rating was downgraded.

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

Upcoming US data:
Next week’s US economic calendar includes the December 22nd release of final Q3 GDP expected at 2.7%. Existing home sales for November will also be released on December 22nd expected at 6300k compared to 6100k last month. On December 23rd personal income and consumption for November will be released along with November PCE deflator, final December University of Michigan sentiment and November new home sales. Personal income and consumption are expected to rise by 0.4%. The PCE deflator is expected unchanged at 1.4%. Michigan sentiment is expected at 74 compared to 73.4 last month. Home sales are expected at 440k compared to 430k in October. On December 24th initial jobless claims for week ending 12/19 will be released expected at 476k compared to 480k last week along with November durable goods expected to rise by 0.3% compared to -0.6% last month.

JPY
JPY traded lower pressured by a pledge from the BOJ that the central bank will not tolerate deflation. The BOJ concluded a two-day policy meeting Friday and elected to hold rate policy unchanged. The BOJ said that it would not tolerate CPI at or below zero. The BOJ’s focus on combating deflation encouraged speculation that the BOJ may be forced to ease monetary policy in early 2010. BOJ ease speculation sent Japan’s five-year bond yields to a four-year low. Earlier in the month the BOJ elected to ease monetary policy and provide additional funding to try to weaken the JPY and combat deflation. JPY remains vulnerable to BOJ ease speculation and concern about Japans debt outlook. Japan says that its 2010/11 budget will be at ¥92trln. MOF officials said that Japanese government needs to cut at least 3trln from the budget to keep bond issuance below ¥44trln. The ratings agency Fitch said that Japan’s debt rating may be downgraded if bond issuance rises above this level.

Next week’s Japanese calendar includes the December 21st release of November trade balance expected at ¥395bln compared to ¥807bln last month along with October all industry activity expected to fall by 0.1% compared to -0.6% last month. On December 25th   November CPI will be released expected at -0.2% compared to -0.4% last month. November household spending, employment housing starts and construction orders will also be released on December 25th. Household spending is expected to fall by 0.5% compared to 0.7 last month, unemployment is expected to rise to 5.2% from 5.1% last month, housing starts are expected to fall by 4.5% compared to 9% last month and construction orders are expected to fall by 28.9% compared to -40.1% last month.

Key technical levels to watch in USD/JPY include support at 89.35 the December 16th low with resistance at 90.86 the November 6th high.

EUR
EUR rebounded from a three month low supported by report of improving German business sentiment and better than expected EU export sales. German December IFO business climate improved to 94.7 compared to 93.9 last month with current conditions improving to 90.5 compared to 89.1 last month. EU October trade balance swung to surplus of 8.8bln as exports declined less than expected. These reports suggest that the EU economy is recovering. The improvement in today’s economic data from the EU is unlikely to change the outlook for ECB policy as the reports are overshadowed by concerns about sovereign debt risks in Europe. EUR traded at a three-month low versus the USD Thursday pressured by S&P downgrade of Greece’s debt rating and speculation that upbeat assessment of US economic outlook by the Fed sets the stage for the beginning of the Fed’s tightening cycle. 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. There was some interesting price activity in EUR/CHF cross which traded below 150 with the CHF supported by safe haven demand sparked by rumors of a coup in Pakistan and report that Iranian troops had crossed over the border into Iraq. The SNB has defended the 1.5100 level in EUR/CHF and today’s price action in the cross spark SNB intervention. The Pakistan coup rumor has been denied. More information is awaited on the Iranian news.

Next week’s EU economic calendar includes the December 22nd release of German January GFK index expected four compared to 3.7 last month. December 23rd EU October industrial orders will be released expected it 1% compared to 1.5% last month.

The technical outlook for the EUR is negative as the EUR breaks trend line support. Expect EUR support at 1.4304 the December 17th low with resistance at 14535 to December 17th high.

GBP
GBP edged higher supported by report that UK mortgage approvals rose for the third month in a row and in reaction to the release of the BOE financial stability report. The rise in mortgage approvals suggests that the UK housing market has stabilized. GBP was pressured in Thursday trade by report of weaker than expected UK retail sales. The drop in UK retail sales offsets the improvement in the UK housing sector and the outlook for the UK recovery remains uncertain. The BOE Financial Stability report said that the UK banking system is more stable but warned that challenges remain. There was limited reaction to report that the UK public sector borrowing for November rose to a new record high. November sector borrowing rose to 14.67bln which was much better than the anticipated rise of 17.5bln. GBP remains vulnerable to uncertainty about BOE policy outlook and UK budget outlook. Last week the BOE left interest rate policy unchanged and said it will maintain its current level of asset purchases. The BOE left interest rates unchanged at a record low 0.5% and the level of asset purchases at £200bln. The BOE is expected to wait until the release of the February inflation report before it decides to make any adjustments in monetary policy or in the size of its asset purchase plan. The BOE’s Barker said the BOE must be cautious of how much farther to expand its bond purchase plan. Today’s rise to new record high for the UK net public-sector borrowing will likely continue to weigh on the outlook for GBP.

Next week UK economic calendar includes the December 22nd release of final Q3 GDP expected at-0.3% along with the Q3 current-account expected at -11.80bln.

The technical outlook for GBP is negative as GBP trades below 1.6100. Expect near-term support at 1.6020 with resistance at 1.6340 the December 17th high.

CAD
CAD traded higher supported by a rise in crude oil prices, a slight improvement in risk appetite as US equity markets rally and in reaction to comments from the BOC Governor Carney. The BOC Governor Carney said that the BOC’s pledge to keep rates low until mid to 1010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Wednesday Canada reported higher than expected CPI. BOC pledge to maintain low yields is dependent on whether inflation remains in check. Canada’s November CPI rose by 0.5% m/m and 1% y/y with core inflation at 0.4% m/m and 1.5% y/y. Carney’s comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount. Canada’s wholesale sales for October came in below expectation reported up 0.3%, a 0.6% rise was expected. This report suggests that at the wholesale level Canadian price inflation remains in check. Carney went on to say that he doesn’t expect a double dip global recession. Yield differential is emerging as the key short-term driving factor for Forex trade and the CAD.

Next weeks Canadian economic calendar includes the December 23rd release of October GDP expected at 0.5%.

The technical outlook for CAD is negative as USD/CAD consolidates trades above 1.0700. Look for near-term support at 1.0552 the December 15th low with resistance at 1.0780 the November 9th high and 1.0855 November 3rd high.

AUD
AUD rebounded from Thursday’s sharp drop supported by report of improving business sales. Australia’s November business sales rose by 0.6%. AUD traded as low as 8910 and in overseas trade pressured by rumor of a coup in Pakistan. This rumor sparked selling of higher risk currencies. The AUD rebounded after the Pakistan government denied the rumor. AUD traded sharply lower Thursday pressured by weaker global equity market trade and speculation that US and Australian yield gap is set to narrow as the Fed lays the foundation for future rate hikes and the RBA moves towards steady policy. Although the RBA was the first major industrialized central bank to hike interest rates this year recent statements from the RBA suggest that further rate hikes are less certain. Wednesday the RBA’s deputy governor Battelino said that Australian interest rates are back in the normal range and he sees less need for a rate hike if loan rates keep rising. His comments follow Tuesday’s release of the RBA policy minutes for December. The RBA policy minutes were seen as less hawkish and dampen speculation that the RBA will hike rates aggressively at the start of 2010. The minutes for the December RBA policy meeting said that arguments for a rate hike are finely balanced and that the current rate structure is less accommodative. AUD remains vulnerable to diminished RBA rate hike speculation and speculation that Fed is moving closer to the end of its ease cycle.

Next week’s Australian economic calendar includes the December 21st release of November new car sales expected 4% compared to 3.7% last month.

The technical outlook for the AUD is negative as the AUD drops below above 9100. Expect AUD support at 8755 the October 6th low with resistance at 9010 the December 17th high.

 

My recommended Forex Broker is Forex Yard.

Daily Forex Report – USD lower, stocks rise after US housing data & CPI

Here are the latest Financial News:

• USD: Lower, CPI posts slight rise, housing starts jump, current account deficit widens
• JPY: Mixed, Kamei says more government stimulus is needed to combat deflation
• EUR: Higher, manufacturing and services PMI improve, Nowotny says no rate hike in first half of 2010
• GBP: Higher, UK jobless claims fall for the first time since February 2008
• CAD and AUD: AUD lower & CAD higher, Australian GDP disappoints, strong Canadian mfg. shipments

Overview
USD traded mixed ahead of today’s Fed policy announcement. The Fed is expected to confirm that yields will remain low, that inflation is not a threat and that the economy is improving. Fed Chairman Bernanke was chosen as the Man of the year by Time magazine. European currencies traded higher with GBP supported by report of an unexpected drop in UK claimant count and the EUR supported by report of improving manufacturing and services PMI. EUR gains were limited by a statement from ECB’s Nowotny that he sees no need for an interest-rate hike in the first half of 2010. The AUD traded lower pressured by report of weaker than expected Australia Q3 GDP and a statement from the RBA’s Battelino that interest rates are back in the normal range and there’s less need to raise rates if loan rates keep rising. CAD firmed in reaction to report of strong Canadian manufacturing shipments. US economic data was mixed with CPI reported in line with expectations, housing starts rose sharply but came in slightly below market expectation and the US current account deficit widened for first time in five months. Bloomberg reports that investors have turned positive USD for the first time since March with USD supported by signs of sustained US economic recovery. Princeton University economist Alan Blinder says the US economy may expand by as much as 4% in 2010. FOMC rate announcement is expected at 2:15 PM ET.

Today’s US data:
November CPI rose by 0.4%, a reading of 0.3% was expected. Core CPI was unchanged. November housing starts rose 8.9% to 574k, a reading of 580k expected. Building permits rose 6% in November to 584k, a reading 570k was expected. US current account deficit widened to 108bln.

Upcoming US data:
On December 17th initial jobless claims for week ending 12/12 will be released expected at 470k compared to 474k last month. November leading indicators and December Philly Fed will also be released on December 17th. Leading indicators are expected to rise by 0.6% compared to 0.3% last month and the Philly Fed is expected at 16.5 compared to 16.7 last month.

JPY
JPY drifted lower pressured by a statement from the FSA’s Kamei. Kamei said that the Japanese economy and deflation are worsening and the fiscal budget could top ¥95trln in 2010/11. Kamei went on to say that more government stimulus is needed to combat deflation. JPY is pressured by concern that the rising Japanese budget deficit puts Japan’s debt rating at risk for a downgrade. Investors are concerned that increased bond issuance from Japan to fund the deficit could encourage rating agencies to downgrade Japan’s debt rating. Yesterday’s twenty-year Japanese bond auction was met with weakest demand  in three years and the yield spread between Japan’s five year and twenty-year bonds steepened the most in seven years. Investors are wary of buying Japanese bonds because of the threat to Japan’s sovereign debt rating. There was limited reaction to today’s economic data from Japan which included report that Japan’s October tertiary index rose by 0.5%. Japan also announced that it plans to drop its consumption tax for years. The Japanese government is trying to boost Japan’s domestic economy by cutting the consumption tax and boosting spending. Focus turns to the conclusion of the FOMC policy meeting Wednesday and Thursday’s BOJ policy meeting. Earlier in the month the BOJ elected to ease monetary policy and provide additional funding to try to weaken the JPY and combat deflation. The trade expects the BOJ to keep monetary policy unchanged and will be looking for any new efforts by the BOJ to try to weaken the JPY.

On December 18th revised October leading indicators will be released expected at 2.5 compared to 4.2 last month.

Key technical levels to watch in USD/JPY include support at 88.32 the December 14th low with resistance at 90.40 the December 7th high.

EUR
EUR traded mixed consolidating near 2 1/2 month low versus the USD pressured by ongoing concerns about sovereign debt outlook in Austria, Greece and Spain and in reaction to comments from the ECB’s Nowotny. Investors are focused on Monday’s report that Austria nationalized its sixth-largest bank and last week credit ratings for Greece and Spain were downgraded. Uncertainty about sovereign debt risks in the EU generates concern about the stability of European monetary Union and the credibility of the EUR. The ECB’s Nowotny said that prolonged EUR strength will hurt exports and he sees no need for an interest rate change as long as prices are stable. Nowotny said he sees no need for an interest rate hike in the first half of 2010. EU November inflation rose by just 0.1% and the core CPI declined to 1%. Today’s EU inflation report confirms that inflation remains in check. EUR downside was limited by firmer equity market trade and report of improvement in EU manufacturing and services PMI. December Manufacturing PMI improved to 51.6 compared to 51.2 last month and the December flash services PMI index was at 53.7 compared to 53 last month. EUR traded mixed after the release of strong US housing data and a reaction to report that the Norges bank unexpectedly hiked rates 25 bps.

The technical outlook for the EUR is negative as the EUR breaks trend line support. Expect EUR support at 1.4480 the October 2nd low with resistance at its 1.4686 the December 11th high.

GBP
GBP traded higher supported by report of an unexpected drop in UK claimant count. UK claimant count declined by 6,300. GBP was also supported by gains in cross trade to the EUR. This marks the first drop in UK claimant count since February 2008. The report suggests that the UK labor market is stabilizing. The UK unemployment rate came in at 7.9% and average earnings rose by 1.5%. GBP traded a four week high versus the EUR supported by today’s UK jobs report.  GBP was also supported by report of unchanged US core CPI. Today’s US CPI report contributes to speculation that the Fed will maintain low yields because inflation is not a threat. GBP is also supported by yesterday’s release of UK CPI. UK November CPI rose by 0.3%, a 0.2% rise was expected. The annualized rate rose by 1.9%. The BOE’s annual inflation target is 2% and the CPI report brings UK annual inflation close to the BOE’s target. Last week the BOE left interest rate policy unchanged and said it will maintain its current level of asset purchases. The BOE left interest rates unchanged at a record low 0.5% and the level of asset purchases at £200bln.The BOE is expected to wait until the release of the February inflation report before it decides to make any adjustments in monetary policy or in the size of its asset purchase plan. The BOE’s Barker said the BOE must be cautious of how much farther to expand its bond purchase plan. Focus turns to Thursday’s release of UK retail sales. The BOE’s Miles said that there is remaining slack in the UK economy but the BOE’s asset purchase plan has helped to reduce the risk that UK inflation while undershoot BOE’s 2% inflation target.

On December 17th November retail sales would be released expected at 0.8% compared to 0.4% last month.

The technical outlook for GBP is mixed as GBP trades above 1.6300. Expect near-term support at 1.6190 the December 14th low with resistance at 1.6480.

CAD
CAD traded mixed with downside limited by report of better than expected Canadian manufacturing shipments report. Canada’s December manufacturing shipments rose 2%, the trade had expected a 1% rise. The rise in Canada’s manufacturing shipments reflects improvement in aerospace, energy and auto industries. Today’s strong Canadian manufacturing shipments report follows yesterday’s report of better than expected jump in Canada’s leading indicators. These reports suggest that Canada’s economy is improving. The stronger economic data from Canada coupled with improving US economic data generates demand for the CAD on speculation that the economic recovery is taking hold in North America. The trade will be closely monitoring what the Fed has to say about the outlook for the US economy and whether the Fed sees faster than expected growth. Stronger growth forecast from the Fed for the US economy may boost demand for the CAD. CAD was also supported by higher crude prices. Crude prices firmed in reaction to yesterday’s report that OPEC has increased its forecast for oil demand in 2010 by 70k barrels a day. Focus turns to the conclusion of the FOMC policy meeting later today. The trade expects no change in Fed policy.

On December 17th November CPI will be released expected at 0.4% compared to -0.1% last month. Net foreign investment for October will released release on the 17th expected at 5bln compared to 13.6bln last month.

The technical outlook for CAD is mixed as USD/CAD consolidates near 1.0600. Look for near-term support at 1.0480 the December 10th low with resistance at 1.0780 the November 9th high.

AUD
AUD traded lower pressured by report of weaker than expected Australian Q3 GDP and in reaction to dovish comments from RBA deputy governor Battelino. Australia’s Q3 GDP rose by 0.2% q/q and 0.4% y/y. The trade had expected a 0.4% rise for the quarter and annual rise of 0.7%. The GDP report generates concern that Australia’s domestic economy is not as strong as some had expected. AUD was also pressured by dovish comments from the RBA’s Battelino. Battelino said that Australian interest rates are back in the normal range and he sees less need for a rate hike if loan rates keep rising. His comments follow Tuesday’s release of the RBA policy minutes for December. The RBA policy minutes were seen as less hawkish and dampen speculation that the RBA will hike rates aggressively at the start of 2010. The minutes for the December RBA policy meeting said that arguments for a rate hike are finely balanced and that the current rate structure is less accommodative. The RBA went on to caution that the employment situation may not have bottomed and pledged flexibility in future policy decisions. Earlier in the month investors and concluded that the RBA may hike rates as much as 50 bps in February because of report of much better than expected Australian employment growth. The RBA minutes and Battelino’s rate comments dampen RBA rate hike speculation. AUD remains vulnerable to diminished RBA rate hike speculation and speculation that Fed is moving closer to the end of its ease cycle.

The technical outlook for the AUD is negative as the AUD drops below above 9100. Expect AUD support at 8906 the November 2nd low with resistance at 9197 the December 11th high.

My recommended Forex Broker is Forex Yard.