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.

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US Morning Notes – USD lower on weak US housing data, profit taking

Here are the latest Financial News:

FX Highlights

• The USD is trading lower with most of Europe closed and trading conditions extremely thin, USD is pressured by Wednesday’s report of weak US new home sales, the weak housing data will encourage the Fed to maintain low interest rates, Fed’s Bullard expects interest rates remain near zero through 2010 as central banks seek to keep the recovery on track, EUR supported by Greek budget cuts, commodities currencies supported by higher crude and gold prices
• Focus turns to today’s release of US jobless claims and durable goods
• Japan’s Q4 business survey sentiment index rises by +13.2, BOJ minutes for the November policy meeting state that deflation is a major economic risk and monetary policy will remain extremely accommodative, a number BOJ members wanted to be careful in using the term deflation, Japan’s November CPI would be released Friday, BOJ Governor Shirakawa says the BOJ will act if markets become unstable, Japan’s government is expected to cut some spending due to slumping tax revenue, JPY higher
• Fed’s Bulllard favors leaving rates at zero and addressing economic issues by adjusting the Fed’s balance sheet
• The 2010 Greek budget was approved, Greece will cut $11bln from the deficit in response to recent credit ratings downgrade of Greece’s sovereign debt, EUR higher
• VIX index declined to a 15 month low, this suggests investors are less risk averse and expect less stock market volatility
• U.S. Congress passes approval of a hike in the debt limit by $290bln, the debt limit hike is enough to keep financing the record US deficit for another two months, the Senate approves US healthcare bill, the bill must be reconciled with the House health care bill
• U.S. Treasury Department says that the TARP program has generated $16bln in profit so far
• US equity markets set to open higher, European equities 0.25% higher, Nikkei closed 159 points higher

Upcoming Events

• US- Thursday, initial jobless claims for week ending 12/19 will be release d expected at 470k compared to 480k last month along with November durable goods expected at 0.5% compared to -0.6% last month
• CAN-Thursday, no major Canadian economic data is due for release today

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