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THE STORIES IN THE CURRENCY MARKET

• FX: RISK RALLY LOSING STEAM?
• EUR: EZ FIN MIN REJECT GREEK PSI OFFER
• GBP: MORE QE FOR BOE?
• CAD: LEADING INDICATORS BEAT EXPECTATIONS
• AUD: PPI GROWTH SLOWS
• NZD: GOLD HITS 6 WEEK HIGH

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: RISK RALLY LOSING STEAM?

Since the beginning of the year, currencies and equities have performed extremely well.   The S&P 500 rose to its highest level in 5 months while the Dow Jones Industrial Average climbed to an 8 month high.   This contributed to the rally in currencies and the resilience of the euro in face of consistent setbacks and negative news flow.   Today, the EUR/USD continued to power higher but U.S. equities failed to extend their gains, leading investors to wonder if the risk rally is losing steam.   It has been a very quiet trading day due to the lack of U.S. economic data and Chinese New Year holiday. Many major currencies consolidated throughout the North American session, having enjoyed most of their gains in Europe. The correlation between the EUR/USD and U.S. stocks broke down at the beginning of the year and the two continue to remain disconnected.   The earnings season has just begun and so far, there have been almost as many up side as downside surprises.   This week, the EU Finance Ministers meeting, President Obama’s State of the Union Address, and the World Economic Forum in Davos are important events to watch but the U.S.’ monetary policy announcement will most likely be the biggest event risk this week. Having cleared 1.30, the next hurdle for the EUR/USD is 1.3115, where the 50-day SMA and Bollinger Band serve as resistance.   Whether this level can broken will hinge largely upon the outcome of the FOMC rate announcement.   For the first time ever, the U.S. central bank will be releasing its Fed Funds forecast.   If their forecasts call for their first rate hike in late 2013, the prospect of another year of easy monetary policy could spark further gains in equities and further weakness in the U.S. dollar.   If the Fed sees a rate hike in the beginning of 2013, or earlier, the dollar could strengthen, erasing part of the EUR/USD& #8217;s gains in the process.   Although rumors have been enough to lift the euro, we do not see any significant progress on the region’s attempts to widen their safety net.   There is little fundamental support for the rally in currencies and equities but at the same time, we cannot discount the resilience of the euro in the face of any negative news flow.   No U.S. economic reports are scheduled for release on Tuesday, leaving the media to focus on President Obama’s State of the Union address.   There is no doubt that the economy will be Obama’s key focus but the annual address to the nation is a time to make promises and the market knows well that promises can be broken.   For this reason, we don’t expect his speech to have any major impact on the market.   

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EUR: EZ FIN MIN REJECT GREEK PSI OFFER

At first glance, the rally in the EUR/USD today suggests that Europeans are making progress on stabilizing the region by alleviating the risk of a Greek default.   The reality however is that very little progress has been made on the PSI talks.   In fact, Eurozone Finance Ministers rejected the Greek PSI offer which included a lower coupon payment, forcing negotiators back to square one. Originally the hope was to have a deal in place by this week’s EU Finance Minister’s meeting.   When that didn’t happen, we looked for a deal to be reached ahead of the EU Leaders Summit but now there is word that Greece may not make an offer until February 13 ^th . This of course is dangerously close to March 20 ^th – the day that Fitch says Greece will default on its loans if additional aid is not received.   Greece is playing a dangerous of chicken because the IIF will need time to assess their offer and more likely than not, counter with their own proposal.   Time is running out and investors are betting that Europe will avoid a Greek default at all costs.   The price action of the EUR/USD today shows how much of an impact positioning can have on currencies. The roadblock in Greek deal talks and weaker growth in France should have renewed concerns about the region's sovereign debt crisis and its impact on growth but the EUR/USD remained firm because investors are still wearing their rose tinted glasses.   With the 1.3000 level cleared, the EUR/USD is quickly closing in on its year to date high of 1.3075.   EUR/USD short positions at their highest level ever and we are continuing to see short covering.   Eurozone service and manufacturing PMI numbers are scheduled for release tomorrow.   One of the greatest concerns for Europe this year is recession – if the PMI numbers show improvement in activity in January, those fears will be alleviated, helping the euro extend its gains.   However if the data is weak, we could see renewed concerns about growth that could translate into weakness for the EUR/USD.   

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GBP: MORE QE FOR BOE?

The only currency that did not participate in the rally today was the British pound and the reason is because another round of easing could be needed. Bank of England policymaker Adam Posen said that even though Britain’s economic outlook has improved, more stimulus could be necessary.   As the most dovish member of the Monetary Policy Committee, Posen’s comments are not surprising because he voted for more QE throughout 2011.   However this week’s MPC minutes will most likely show that many members within the central bank share his views.   Since the December monetary policy meeting, unemployment increased and inflation declined. The BoE believes that price pressures will fall significantly this year and if true, the central bank has plenty of room to ease.   The prospect of dovish MPC minutes as well as softer GDP growth has led to sterling’s underperformance against the euro and U.S. dollar.   If the MPC minutes show the BoE open to the idea of easing monetary policy in the first quarter, the GBP/USD could find itself trading back below 1.55.

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CAD: LEADING INDICATORS BEAT EXPECTATIONS

Despite the lack of gains in equities, the Canadian, Australian and New Zealand dollars strengthened against the greenback.   The rally in the comm dollars has been particularly strong this year as investors underweight Europe and overweight Asia.   Commodity prices also performed well with gold rising to its highest level in 6 weeks.   Canada was one of the few countries with any economic data today.   Leading indicators beat expectations last month, rising 0.8 percent against 0.6 percent expected.  Compared to the previous month, leading indicator growth slowed but the upside surprise more than made up for the difference.   Retail sales numbers may not be as kind to the Canadian dollar with the decline in wholesale sales pointing to weakness in consumer spending.   According to the latest producer price report, inflationary pressures in Australia eased in the fourth quarter.   PPI grew 0.3 percent compared to a forecast of 0.4 percent and prior growth of 0.6 percent. As indicated by our colleague Boris Schlossberg, the data was generally ignored by the market as traders awaited tomorrow’s CPI figures with Aussie rallying above the 1.0500 level for the first time since November. However, the weaker producer prices suggest that the CPI may miss to downside as well increasing the chances of another RBA rate cut at the next meeting in February. 

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EUR/CAD: Currency in Play for Next 24 Hours

EUR/CAD will be our currency pair in play tomorrow.   German PMI numbers will be released at 3:30 AM ET / 8:30 GMT followed by EZ PMI numbers at 4:00 AM ET / 9:00 GMT.   Canada retail sales numbers will be released at 8:30 AM ET / 13:30 GMT.

 

Having fallen to a one year low earlier this month, EUR/CAD is now in the range trading zone according to our Double Bollinger Bands.   Resistance is at 1.3180, the first standard deviation BB band.   Support on the other hand is at the 1 year low of 1.2879.  

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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.