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EUR: Closing In On 1.30

Last updated 1/19/2012 4:54 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• EUR: CLOSING IN ON 1.30
• USD: HEALTHY IMPROVEMENT IN CLAIMS
• GBP: RETAIL SALES ON TAP
• AUD: HIT BY JOB LOSSES
• NZD: BIG MISS IN CPI
• CAD: MANUFACTURING SALES RISE
• JPY: GOVERNMENT ENCOURAGES OVERSEAS EXPANSION

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: CLOSING IN ON 1.30

The euro is closing in on 1.30. As much as experts around the world may pound the table about the significant economic risk that lies ahead, the euro continues to strengthen, shrugging off all the region’s sovereign debt worries. The EUR/USD has become completely immune to any negative comments including those from German Bundesbank President Weidmann who warned that the uncertainty in the economic outlook was unusually big. The reason why investors have been able to overlook all the warnings is because bond yields and credit spreads in Europe did not increased materially since S&P’s downgrade. In fact, the following table shows that bond yields have barely budged while 5 year credit default swap spreads increased slightly. This means that investors did not demand a significant premium to hold French, Italian and Spanish debt following Standard & Poor’s announcement. In other words, the market’s worst fears have not been fulfilled.  Spain’s 10 year bond auction was an important test of investor confidence today and the Spaniards passed with flying colors. Not only was the bid for cover ratio very strong, but the interest rate on the 10 year bonds was lower than the previous auction. ECB President Draghi shares in the optimism according to his recent comments. He said the Eurozone situation is progressing for the better and a serious funding crisis in Europe has been avoided thanks to their 3 year long term refinancing operation (LTRO).

Whether the EUR/USD exceeds 1.30 hinges largely upon the Greek PSI negotiations. According to an EU source, there is a very good chance that a deal will be reached this week. Talks resume tomorrow and there is word that the Institute for International Finance, who represents the private sector that owns Greek bonds, has proposed a gradual increase in the coupon rate on new bonds that could be more palatable to both sides. The goal is for a deal to be completed before the euro-area finance ministers meeting on Monday.  We are hopeful but as we have seen over the past year, European talks can go awry very quickly and if they do, investors would take their frustration out on the euro. German producer prices are scheduled for release on Friday – no significant changes are expected for inflation, leaving the EUR/USD at the whim of headline risk.

USD: HEALTHY IMPROVEMENT IN CLAIMS

Risk appetite continues to improve with the Dow Jones Industrial Average rising to its highest level in 5 months. The U.S. dollar lost value against the European currencies but gained strength against the Japanese Yen and the comm. dollars. According to this morning's U.S. economic reports, conditions in the labor market continue to improve. Weekly jobless claims fell to its lowest levels since April 2008 and as a survey period for the January non-farm payrolls report, it reflects a healthy improvement in the labor market. Weekly claims dropped to 352k from 402k while continuing claims fell to 3.432 million from 3.647 million. Federal Reserve officials will be relieved to see claims back off from the 400k mark and at bare minimum, we believe this week's jobless claims report points to payroll growth in excess of 150k. Although housing starts and building permits declined in December, the U.S. economy is moving in the right direction because the labor market needs to stabilize before housing can follow. Housing starts dropped 4.1 percent last month while building permits declined 0.1 percent. November was also a very strong month for both reports, so the latest decline could represent some payback. Inflation on the other hand is muted with consumer prices holding steady in December. Much of the decline had to do with lower gas prices because core CPI grew 0.1 percent. Manufacturing activity in the Philadelphia region grew at a faster pace in January but the reading was lower than expected while the December number was revised downwards. The latest economic reports may not contain enough changes to affect Fed policy, but there is enough to make them feel less concerned about the labor market and more confident in their current monetary policy stance.

GBP: RETAIL SALES ON TAP

European currencies including the British pound performed very well today, rising strongly against the U.S. dollar. The Nationwide Consumer Confidence index was the only piece of U.K. data released this morning and according to the report, confidence deteriorated in the month of December. In fact, the European sovereign debt crisis and the government’s austerity program left consumer sentiment near its lowest levels ever. The 2012 Olympics and the Queen’s Jubilee Year could boost moods in Britain but confidence will continue to be undermined until the European sovereign debt crisis is resolved. As shown in this week’s report, the labor market in the U.K. also remains weak which certainly contributes to the problem. Retail sales will be released tomorrow and consumer spending is expected to rebound after falling 0.7 percent the previous month. According to the British Retail Consortium, same store sales rose 2.2 percent in December, but the rosy number was distorted by the snowstorm in 2010 that kept consumers away from the stores that year. As a result, the monthly change in the government’s retail sales report may not show the same strength as the BRC report. If consumer spending falls short of expectations, the GBP/USD could find itself failing at the 1.55 level. If spending is as strong as the BRC report suggests, 1.55 could be cleared easily.

AUD: HIT BY JOB LOSSES

Although U.S. equities ended the North American trading session in positive territory, the commodity currencies did not enjoy the same gains as the euro and British pound. The Canadian dollar held steady against the greenback while the Australian and New Zealand dollars gave up part of their recent gains. Manufacturing sales in Canada was strong, rising 2.0 percent in the month of November. Sales rose to a 3 year high due to demand for shipments of automobiles and deliveries of machinery to resource companies. Manufacturing activity has provided great support to Canada’s economy and is a key reason why the Bank of Canada upgraded its 2012 GDP forecasts. CPI numbers will be released on Friday and the decline in oil prices in the month of December along with the strong loonie should have driven inflationary pressures lower.   The Australian dollar recovered nicely after selling off on disappointing labor market numbers - more than 29k jobs were lost in the month of December. The details of the report were not as discouraging as the headline with the unemployment rate revised down to 5.2 percent and the number of full time jobs increasing by 24.5k. Even with this silver lining, the latest labor report keeps the probability of a rate cut by the Reserve Bank intact for the month of February. In New Zealand, consumer confidence increased in the month of January but consumer prices dropped 0.3 percent in the fourth quarter. The decline in CPI is particularly worrisome because RBNZ Governor Bollard had predicted last month that CPI would rise by 0.4 percent in Q4. The fact that it missed the central bank’s expectations so drastically could affect their plans for monetary policy.

JPY: GOVERNMENT ENCOURAGES OVERSEAS EXPANSION

The Japanese yen weakened across the board in a risk-on trading session. The recent decline of the yen provided a temporary relief to the central bank and finance officials. As the country’s currency lingers at the 77 handle against the dollar, the economy minister Yukio Edano encouraged business to take greater advantage of the strong yen to expand overseas. “We should use the strong yen assertively to invest and buy things, to be as proactive as possible,” Edano said. “Japan is short on resources, so we need to use this opportunity to firmly secure rights to energy and commodities.” Affirming his call, Japanese corporations have spent $69.5B buying oversea assets last year, according to Mergermarket, an increase of 142 percent over 2010. On the other hand, the finance minister Jun Azumi is reported to be watching the relationship between the euro and the yen closely. Although the euro intervention could be possible, the authorities would be wary of pulling the trigger after being criticized by the US for Japan’s solo intervention last year. In addition, the dollar remains the major settlement currency for most Japanese firms, and exports to Europe consist about 10 percent of all Japanese export. While an intervention could be detrimental to euro’s shorts, there is no clear evidence that the euro’s weakness is causing severe pain to the Japanese economy. Until more indications emerge, the possibility remains slim. We could see further strength in yen amid European debt crisis. Looking forward, we have all industries activity on the docket and the print is expected at -0.6 percent.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be our currency pair in play for the next 24 hours. From the UK, we expect the retail sales data at 4:30AM ET/ 9:30 GMT. The economic release from the US will be the existing home sales at 10:00AM ET/ 15:00 GMT.

After bouncing off one-year low, the GBP/USD currently trades range-bound, which we determined using the Bollinger Bands. The nearest resistance is at the upper first std. dev. Bollinger Band, 1.5583. Further up, the psychologically significant 1.57 handle could provide major resistance. On the flip side, the lower first std. dev. Bollinger Band could provide support at 1.5363. A break below, the pair could target 1.5233, the lowest level since July 2010.

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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.