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EUR: EU Summit Skirts Around Key Issue

Last updated 1/30/2012 4:04 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: EU SUMMIT SKIRTS AROUND KEY ISSUE
• USD: STOCKS CLAW BACK
• GBP: CONFIDENCE, LENDING AND HOUSING DATA ON TAP
• NZD: BOLLARD ANNOUNCES RESIGNATION
• CAD: GOLD AND OIL PRICES LITTLE CHANGED
• AUD: BUSINESS CONFIDENCE ON TAP
• JPY: STRONG YEN ONLY ONE OF THE PROBLEMS

EXPECTATIONS FOR UPCOMING FED MEETINGS

EUR: EU SUMMIT SKIRTS AROUND KEY ISSUE

Today’s EU Summit was nothing more than another opportunity for European officials to disappoint the market.  European leaders stuck to script, providing very little in the way of innovation.  They failed to reenergize the market, leaving investors wondering exactly how much longer European leaders will avoid addressing the real problems at hand.  EU leaders are doing a great job of laying the ground work for preventing future crises and promoting growth in the long run but what the region desperately needs is for EU leaders to deal with Greece and Portugal’s default risks.  Contagion is happening whether they choose to acknowledge it or not and EU Leaders need to become more involved in the Greek PSI negotiations if they want to avoid having to support two countries simultaneously.  With each passing day, Greece is holding the market hostage by refusing to reach an agreement with the Institute of International Finance and investors are getting tired of talks being dragged out week after week.  Greek Prime Minister Papandreou said “important progress has been made on debt talks,” but at this point, few people are listening.  The EU Summit ended with no Greek deal in place, even though there was widespread hope that one would be announced over the weekend. EU Leaders simply agreed to repurpose unused European funds to promote growth by stepping up efforts to get young people employed quickly and to support small businesses.  There is now talk that a special summit on Greece will be held in February but like many rumors that have come before this one, it has not been substantiated.  Yet even with the latest pullback in the EUR/USD, the currency pair and the market’s risk appetite in general remains surprisingly resilient.  Part of the reason is because the clock is ticking and everyone knows that Greece must reach a deal with her creditors by March.  They may be biding their time hoping for a better deal, but as the money in the bank starts to evaporate, they will have to buckle.  Also, short EUR/USD positions rose to a fresh record high last week and when positioning is this heavily skewed it doesn’t take much to trigger a short squeeze. If Tuesday’s German retail sales and unemployment reports surprise to the upside, the EUR/USD could resume its rise.  Good data has provided underlying support for the euro by easing concerns about recession.  Unfortunately it hasn’t been enough to convince members of the ECB that a recession will be avoided.  ECB policymaker Nowotny said he believes there could be “stagnation in the euro region as a whole or recession in certain phases” of the year, a view that we share as well.  At the same time, we will be watching Portugal closely because CDS spreads are pricing in a 70 percent chance of default.  This story could gain momentum if Portugal’s 10 year which are quickly nearing 16 percent bond yields continue to rise.

Meanwhile there is also some interesting action in the Swiss Franc.  The franc has slowly been gaining ground against the euro in recent weeks as the euro zone crisis continued to weigh on financial markets.  With the central bank lacking a permanent head following the resignation of Philipp Hildebrand this month, many in the market see the SNB as easier to take on, even though interim chief Thomas Jordan has stressed his commitment to the cap.  Technically, the level can be held and the SNB is in a position to print as many francs as needed to defend it.  At this point credibility is really key and the SNB has a lot of it.  More recently, some politicians have called on the SNB, whose independence is protected in the constitution, to shift the cap to 1.30 or 1.40 to the euro to help exporters.  Switzerland’s Chief Economist Brunetti, however, warned that the central bank must remain free from political interference. The government said in December it expects economic growth to slow to 0.5 percent this year, from between 1.5 and 2.0 percent in 2011, citing the euro zone crisis and its effects on Swiss exporters.

USD: STOCKS CLAW BACK

The recent improvement in risk appetite has driven the U.S. dollar sharply lower against all of the major currencies.  Today however was a day of recovery for the greenback which rose against everything except for the Japanese Yen.  In fact, the weakness of USD/JPY is quite significant because the pair tumbled for 3 days straight, falling to a 2 month low in the process. This would not be as big of a deal if USD/JPY was trading at 80 but it is moving dangerously close to its record low which means Bank of Japan and Ministry of Finance officials must be shaking in their seats.  This is a big week for both Europe and the U.S. – U.S. stocks have performed extremely well, recovering nearly all of its intraday losses. Everyone seems to have the buy on dip mentality with strong earnings from tech companies such as Apple driving the enthusiasm in the market.  This morning’s U.S. economic reports were mixed.  Personal income rose 0.5 percent last month which was stronger than expected. Personal spending growth was flat, which is terrible news for the retail sector but incredibly good news for personal finances. Americans need to stop spending and start saving and this is exactly what the latest personal income / spending numbers imply. The core PCE deflator, a measure of inflation rose slightly by 0.2 percent. House prices, consumer confidence and the Chicago PMI index are scheduled for release tomorrow.  Given the acceleration in manufacturing in the NY and Philadelphia regions, we have good reasons to believe that the sector also experienced gains in Chicago.  Consumer confidence should have also increased because a similar report by the University of Michigan showed sentiment reaching its highest level in almost a year.  Good data should prove to be more positive for risk than for the U.S. dollar.  The Federal Reserve has committed to a long period of easy monetary policy which effectively gives investors better reasons to sell dollars.

GBP: CONFIDENCE, LENDING AND HOUSING DATA ON TAP

The British Pound strengthened against the euro but weakened against the U.S. dollar.  No new economic data was released over the weekend; however the GfK consumer confidence index is scheduled for this evening followed by net consumer credit, lending and mortgage approvals tomorrow morning.  The GfK index printed at -33 in November and is expected to come in at -31 as financial markets stabilize.  U.K. house prices were unchanged in January, according to property researcher Hometrack Ltd., which said downward pressure on prices will continue amid a squeeze on consumers.  From a year earlier, values fell 1.6 percent in January.  Indicators of new properties coming on the market and demand both declined and the underlying trend is one of tightening supply and weaker demand.  The housing market is shrouded by uncertainty and an unstable outlook for the economy as a whole.  Royal Bank of Scotland’s Chief Executive Officer Stephen Hester decided to waive his 963,000-pound ($1.5 million) bonus after the U.K.’s opposition Labour Party said it would ask Parliament to vote on the award.  The announcement of the bonus enraged the U.K.  Britain’s biggest taxpayer-controlled bank fell 36 percent in 2011 to about half what the government paid for its stake.  Prime Minister David Cameron, whose government holds 82 percent of the bank, was criticized for allowing Hester’s bonus.  The award comes at a time when unemployment is at a 17-year high, wages for many are being frozen and the economy stands on the brink of a second recession in less than three years.

NZD: BOLLARD ANNOUNCES RESIGNATION

The Canadian, Australian and New Zealand dollars all weakened against the U.S. dollar as concerns over the progress of Greece’s bailout talks pushed investors into safer assets.  The biggest news from the commodity producing countries over the past 24 hours came from New Zealand, where central bank Governor Alan Bollard says he plans quit in September, ending a decade-long tenure in which he raised interest rates to a record high before cutting them last year to their lowest ever.  Bollard will not seek another 5-year term when his current term ends on September 25, the Reserve Bank said.  The announcement leaves New Zealand searching for a new central bank chief during a period of slowing global growth and a sluggish domestic economy that is motivating a brain drain of college graduates. He leaves an economy weaker than where he found it. The latest PMI report shows service sector activity grinding to a halt. Building consents for New Zealand will be release later tonight.  They fell 6.4 percent in November, and are expected to have recovered following reconstruction efforts from the earthquake.  Meanwhile over the weekend Bank of Canada Governor Mark Carney said U.S. efforts to prevent deposit-taking banks from trading with their own money could damage markets in government bonds and other securities.  U.S. regulators are still working out the implications for the new Volcker rule.  The Australian dollar is the most overvalued in two decades versus the Canadian dollar, while slower Chinese growth amid higher inflation may lessen the attraction of countries that depend on selling raw material to Asia’s biggest economy.  Australian farmers are selling their fields as a 20 percent price slump attracts an influx of global funds.  Investors are lured by fresh rain, the prospect of better crops, and land prices that have lost a third of their value.  As a result, foreign ownership of Australian land has doubled since 1984.  The unprecedented interest comes at a time when investors are very bullish on agricultural commodities including everything from sugar to rice, to wheat to corn.

JPY: STRONG YEN ONLY ONE OF THE PROBLEMS

The Japanese yen traded higher against all the major currencies as safety has been the theme across the board today.  No new economic data was released over the weekend; however Japan does have a nice amount of data scheduled for later tonight.  Releases include the manufacturing purchasing managers’ index, household spending, the unemployment rate and preliminary industrial production.  TonenGeneral agreed to buy partner Exxon Mobil’s Japanese business in a $3.9 billion deal that may force the oil refiner to seek new alliances.  The deal comes at a time when refiners in Japan are grappling with rising operating costs after a 2010 order from the government to upgrade their oldest plants to extract more fuel from crude oil.  Recent trends are hurting this move as Japan’s consumption is declining due to a shrinking population and greater use of hybrid and electric cars.  JFE Holdings, Japan’s second-largest steelmaker, is predicting its first-ever yearly net loss as the nation’s steel industry suffers from the yen’s strength and a slowing global economy.  Demand for steel products is already slowing in Asia and the outlook could get even worse if Europe’s debt crisis adds pressure on China’s economy.  The yen may weaken as it nears levels of past intervention and some traders view it as fundamentally overvalued.  There is an increasing public retaliation against a strong yen and Japanese businesses have turned to buying and building assets outside Japan.  However, Japan has a few obstacles as it moves toward a weaker yen.  It has a major difficulty in attracting foreign direct investment and at least for now posts a trade deficit.  The country also has an aging population resulting in an elderly boom.  Furthermore, Japan has the largest fiscal deficit of any developed country.  As for the economic data coming up tonight, the unemployment rate is expected to hold steady at 4.5 percent.  Household spending is also expected to improve from -3.2 percent in November to -0.1 percent in December partly driven by an expansion in retail sales.

EUR/USD: Currency in Play for Next 24 Hours

Our currency pair in play for Tuesday is EUR/USD.  Economic data we expect from Germany includes December retail sales figures and January unemployment numbers at 2:00 AM ET / 6:00 GMT and 3:55 AM ET / 7:55 GMT, respectively.  The Eurozone unemployment rate for the month of December will be released at 5:00 AM ET / 9:00 GMT.  From the United States, we expect the January Chicago purchasing managers’ index at 9:45 AM ET / 13:45 GMT.  Also scheduled for release from the U.S. is consumer confidence for the month of January at 10:00 AM ET / 14:00 GMT.

EUR/USD has been on the rise over the past few trading sessions and is currently in an uptrend, which we determined using double Bollinger bands.   The nearest level of support can be found at 1.3075, the convergence of today’s low, the upper first standard deviation Bollinger band, and the 50-day SMA.   Should the pair fall below this price, significant support will be found at the lower first Bollinger band price of 1.2735.   Looking up, the nearest level of resistance is at todays and yesterday’s high of 1.3230.   This level has been watched very closely all day and is the price of significant lows in the past.   Should the pair breakout from there, heavy resistance will be found at the 100-day SMA price of 1.3370.

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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.