• Share this:

THE STORIES IN THE CURRENCY MARKET

• FX: 3 HOTSPOTS TO WATCH THIS WEEK
• EUR: S&P CUTS EFSF RATING
• GBP: BIG WEEK FOR UK
• CAD: WHAT TO EXPECT FROM BOC
• AUD: STRONGER HOUSING NUMBERS
• NZD: CREDIT CARD SPENDING ON TAP
• JPY: HITS RECORD HIGH AGAINST EUR

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	01/25 Meeting	03/13 Meeting
NO CHANGE	66.0%	66.0%
CUT TO 0BP	34.0%	34.0%
HIKE TO 50BP	0.0%	0.0%

FX: 3 HOTSPOTS TO WATCH THIS WEEK

With U.S markets closed for Martin Luther King Jr. Day, we have had a slow start to a busy trading week.   No major economic data was released this morning and risk appetite has held up surprisingly well considering the big shocking announcement from Standard & Poor’s on Friday and the rating agency’s decision to downgrade the rating of the EFSF to AA+.   The EUR/USD and many other major currencies took the news in the stride but in our opinion, the stability of the EUR/USD is temporary.   This is a very busy trading week filled with important economic data from many parts of the world.   Although we have a tremendous amount of data scheduled for release from the U.K. as well as a monetary policy announcement from Canada, the three main hotspots to watch will be the Eurozone, China and the U.S.   We can chalk today’s muted reaction to S&P’s announcement to thin volatility but with Spanish, Greek and Belgium bills scheduled for auction on Tuesday, followed by Portuguese bills on Wednesday and Spanish and French bonds on Thursday, investor confidence will be tested repeatedly.   Weak demand or a high yield could be all the EUR/USD needs to slip onto the 1.25 handle.   If for some miraculous reason investors overlook the recent downgrades and buy European bonds in size, which we believe is extremely unlikely, then be prepared for a sharp short squeeze in the single currency. Investors should also keep an eye on the talks between the EU and Greece.   According to S&P, a default by Greece is imminent and so it will be important to see how the negotiations go.  

 

This evening is the Chinese data dump and a slowdown in Chinese growth could add pressure on the market.   Investors are already worried about recession in the Eurozone and vulnerability in the U.S. recovery.   They don’t need to add a sharp slowdown in the Chinese economy to their list of concerns.   Unfortunately slower growth seems to be inevitable.   The current forecast shows Chinese GDP growth slowing from 9.1 to 8.7 percent in the fourth quarter.   If the GDP rate comes in even lower than 8.7 percent, we could see a broad based sell-off in risk.   Of course, if growth falls less than expected, the stability in the markets today could turn into a relief rally.   Aside from GDP, industrial production and retail sales figures will also be released and these reports will play a big role in the central bank’s decision to cut interest rates this year.   From the U.S., our third hotspot to watch this week, we have inflation, housing and manufacturing sector data scheduled for release along with the Treasury International Capital flow report.   We are most interested in the TIC data because the main driver of the dollar has been safe haven flows and this report will provide info on how aggressively investors have been diversifying into U.S. dollars.   

@import url(/css/cuteeditor.css);

EUR: S&P CUTS EFSF RATING

Based on the price action of the EUR/USD this morning, Standard & Poor's decision to slash the credit ratings of most Eurozone countries and the European Financial Stability Facility did not mean the end of the world for the euro.   However the big question is whether today's muted reaction is caused by the lack of market participants or a real lack of concern about actions by rating agencies.   U.S. markets are closed for Martin Luther King Jr. day, which means that a large number of traders are off their desks enjoying the long weekend with their families.   It would be easy to blame the resilience of the EUR on thin trading but Europe rarely needs the U.S. to get things going these days.   More times than not, we have seen big swings in Europe and quieter trading in the U.S.   London is the hub for FX trading and if the European traders wanted to, they could easily drive the EUR/USD below 1.25.   In fact, EUR/USD came under heavy selling during the Asian trading session and rallied on buying in Europe.   As last week's CFTC data showed, positioning in the EUR/USD is at very extreme levels, which implies that we could be seeing short covering today. The fact that the EUR/USD did not trade on the 1.25 handle this morning is a bit surprising especially considering the downgrade of the EFSF, but we continue to believe that it should only be a matter of time before the currency pair breaks lower.   Moody's and Fitch will have no choice but to actively review their own ratings of France, Italy, Spain and other Eurozone countries.   If either rating agency follows in S&P footsteps, the pressure will increase on the EUR. As ECB President Draghi admits, the EFSF downgrade has consequences and we expect the central bank to respond with more easing measures in the coming months.   On Friday, we said the rating of the France and EFSF are joined and as S&P said, the rating of the EFSF could be cut further if there are more sovereign downgrades.   The downgrade of the EFSF means a higher borrowing cost for the facility that would undoubtedly be passed onto trouble nations, making it even more difficult for them to meet their financing needs – a slippery slope that the Europeans will have to contain quickly. The EUR should have a much more significant reaction to a downgrade of France than the USD had to a downgrade of the U.S. because of severity of the sovereign debt crisis and the global ramifications. European bonds are not the same as U.S. Treasuries – Treasuries are often perceived as some of the safest investments in the world but investors do not feel the same about German and French bonds.   The European Summit is in just a few weeks and the consequences of the downgrade could be a big topic of discussion.   The ECB will be hard pressed to reconsider their optimistic outlook and plans to increase monetary stimulus.   1.25 is the key level in the EUR/USD but 1.2625 is near term support.   The German ZEW Survey will also be released tomorrow along with Eurozone consumer prices.   We do not expect any major improvements in investor confidence.

@import url(/css/cuteeditor.css);

GBP: BIG WEEK FOR UK

Over the past 24 hours, there has been very little movement in the British pound, which ended the day virtually unchanged against the euro and U.S. dollar.   Although the currency has had a quiet start, it should be a busy trading week with a number of important economic data scheduled for release.   U.K. consumer prices will be released on Tuesday followed by employment numbers on Wednesday and retail sales figures on Thursday.   High inflation has long been one of the Bank of England’s greatest challenges. As of November, annualized CPI was running at a rate of 4.8 percent, which is well above the central bank’s 2 percent inflation target and their 3 percent pain threshold. Month after month, the Bank of England has said that inflation will come crashing down in 2012 when the VAT tax increases are pared back and demand contracts.   They used this rationale as a reason to increase monetary stimulus and keep policy easy throughout the past year.   Although CPI is expected to rise at a faster pace on a monthly basis in December, on an annualized basis growth should slow.   The decline in producer and shop prices confirm that inflationary pressures most likely eased last month, validating the central bank’s forecasts.   The labor market on the other hand is not expected to see any major improvement but the holiday shopping season should have boosted consumer demand.

@import url(/css/cuteeditor.css);

CAD: WHAT TO EXPECT FROM BOC

The Canadian dollar strengthened against the greenback ahead of the Bank of Canada’s monetary policy announcement.   The BoC is widely expected to leave interest rates unchanged at 1.00 percent but the main question is whether the uncertainty in the financial markets and Europe are significant enough for them to tone down their optimism.   The last time they met in December, they were surprisingly optimistic.   They acknowledged the troubles in Europe but found Canadian and U.S. growth slightly stronger than expected.   With inflationary pressures higher than forecast at the time, the BoC did not feel the need to grow more dovish or hint about the possibility of lower rates.   For the most part, we have continued to see improvements in the U.S. economy with some upticks in Canadian data as well but Europe is the main problem and unfortunately their troubles have intensified over the past month.   Whether the BoC is fazed by the uncertainty will be the main question tomorrow.   Canada does not rely as heavily on European demand than other countries around the world and for this reason, they have less to worry about.   In our opinion, the BoC will probably keep most of the monetary policy statement unchanged, making little mention of additional easing until there are more significant signs of weakness in the U.S. economy and strain in the financial markets.   Meanwhile the Australian and New Zealand dollars ended the North American trading session virtually unchanged against the greenback.   Australian economic data was better than expected with home loans rising 1.4 percent in the month of November.   New Zealand credit card spending numbers are due for release this evening along with the NZIER’s fourth quarter business opinion survey.   The commodity currencies in general have held up extremely well and their continued strength will largely hinge upon the outcome of this evening’s Chinese data.

@import url(/css/cuteeditor.css);

JPY: HITS RECORD HIGH AGAINST EUR

All of the Japanese Yen crosses traded lower today with the exception of CAD/JPY, which could be benefitting from the prospect of reassuring comments from the Bank of Canada.   Although U.S. equity markets were closed today, the sell-off in the Yen crosses implies that investors are risk averse and weary of taking on any positive carry positions.   In fact, Yen traders are so worried about the situation in Europe that they drove EUR/JPY to a record low.   USD/JPY on the other hand weakened but remains trapped between 77.30 and 76.60 – creating little interest for active currency traders.   The rally in the Yen can also be partially attributed to stronger Japanese data.   Machinery orders rose 14.8 percent in the month of November, which was stronger than expected and a sign that investment in capital goods have increased.   This rise was the strongest in four years and explains why the Japanese government has been relatively nonchalant about the Yen’s persistent strength.   Although local policymakers still believe that demand for machinery orders are at a standstill, the director of Macroeconomic Analysis at the Cabinet Office was relieved to see the rebound because had it been weaker “we might have to reconsider revising the assessment.”   According Jiji Press, the Bank of Japan could cut its growth forecast anyway which would not be a major surprise considering the damage caused by the strong currency. The Tertiary Industry index is the only piece of Japanese data scheduled for release this evening, leaving the market’s focus on the Chinese data dump during the Asian session. 

@import url(/css/cuteeditor.css);

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play tomorrow.   The U.S. Empire State manufacturing index will be released at 8:30 AM ET / 13:30 GMT followed by the Bank of Canada rate decision at 9:00 AM ET / 14:00 GMT.

 

USD/CAD has been trading in a tight range for the past 6 weeks.   The following chart shows that a triangle is forming which usually points to a breakout.   The BoC rate decision would be the perfect catalyst for an expansion in volatility.   The levels to watch are 1.0280 on the upside because the second standard deviation Bollinger Band serves as resistance.   On the downside, 1.0115, the January low will be support. 

@import url(/css/cuteeditor.css);

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.