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Risk On! EUR Breaks 1.3250, Stocks on a Tear

Last updated 2/7/2012 4:59 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

• RISK ON! EUR BREAKS 1.3250, STOCKS ON A TEAR
• USD: DRIVEN LOWER BY BERNANKE
• GBP: NO SIGN OF LIFE IN SPENDING
• AUD: NO RATE CUT BY THE RBA
• CAD: STRONGEST RISE IN PERMITS IN 4.5 YRS
• NZD: EMPLOYMENT NUMBERS ON TAP
• JPY: STEALTH INTERVENTION

EXPECTATIONS FOR UPCOMING FED MEETINGS

RISK ON! EUR BREAKS 1.3250, STOCKS ON A TEAR

Currencies and equities performed extremely well today with the EUR/USD rising to its highest level since December. The S&P 500 also hit an 8 month high but the performance of technology stocks was the most spectacular with the Nasdaq composite reaching levels last seen in December 2000. The rally in risk was sparked by hope that this will be week that Greece finally announces a PSI deal. Bernanke’s bearish comments also helped by driving the U.S. dollar lower. The head of the U.S. central bank has not been swayed by the latest non-farm payrolls report and based on his continued concerns, QE3 is still on the table. The prospect of more stimulus and the continuation of easy monetary policy helped U.S. equities turn positive for the day. As much as we can point out that today’s rally is based on nothing more than hope, the EUR/USD has performed extremely well, breaking out of its weeklong consolidation. The fact that the U.S. dollar weakened against every major currency except for the Japanese Yen confirms that today’s rally is supported by an improvement in risk appetite. Whether the EUR/USD is able to hold onto its gains will be largely determined by developments in the coming days. According to the Greek government, officials are working on a final draft of austerity measures. The Trioka has met with the Prime Minister with the IIF Bank Group saying that talks have been constructive. The next step is for Greek Party leaders to meet – which was supposed to happen on Monday, but was postponed to Tuesday and has now been pushed out to Wednesday.  The talks were delayed because of missing paper work, the same reason given for all of the postponements this week. In our opinion, when it comes to Greece, there is very little reason to get excited until an announcement is actually made. The creation of a final draft reflects progress but the document still needs to be discussed by party leaders who can derail the talks at anytime by opposing key measures. Party leaders don’t seem to fully understand how little time they have left. Far-right LAOS leader George Karatzaferis said, “There is time. When it comes to the future of the country, we will find the time.” Expect the volatility in the EUR/USD to increase further over the next 48 hours – talks in Greece will continue as the ECB gears up for its monetary policy announcement.  With the next 3 year LTRO scheduled for the end of the month, the ECB will most likely opt to forgo a rate cut on Thursday. Meanwhile earlier this morning, we learned that German industrial production declined 2.9 percent in December. The decrease was a surprise considering that the PMI report and factory orders increased which reflected improvement in manufacturing activity. On Wednesday German trade and current account numbers are scheduled for release. The Swiss Franc weakened slightly against the euro on the heels of Swiss National Bank acting Chairman Thomas Jordan’s pledge to aggressively enforce the 1.20 EUR/CHF floor. With limited risk of inflation and continued uncertainty in Europe, the SNB will do all that they can to keep monetary policy easy. 

USD: DRIVEN LOWER BY BERNANKE

The only major currency that performed worse than the U.S. dollar today was the Japanese Yen and the main reason for that aside from risk appetite was a report by the Japanese government that showed stealth intervention in the Yen throughout the fourth quarter. Although the Federal Reserve’s commitment to easy monetary policy has deterred investors from buying dollars, it is the hope for a Greek deal that has made investors willing to take on risk. If the talks break down and Greece is forced to default, demand for dollars will return. In the meantime, there was very little enthusiasm in Bernanke's voice when he testified before the Senate Budget Committee. The Fed Chairman refused to be swayed by Friday's strong non-farm payrolls report, opting instead to warn that we have a "long way to go" before the job market returns to normalcy. With the economy recovering at "frustratingly slow" pace and "inflation remaining subdued," the Federal Reserve hasn't written off the need for QE3. However signs of improvement in job growth and consumer sentiment will encourage the Fed to wait a few months before increasing stimulus. The IBD index rose for the sixth month in a row to 49.4 from 47.5. According to the Labor Department, job openings in the U.S. also increased in December from 3.118 million to 3.38 million positions. These reports are consistent with a gradual improvement in the labor market which is encouraging even if the Fed isn’t buying it for the time being. With no U.S. economic data on the calendar tomorrow or speeches by Federal Reserve officials, risk appetite and developments in Europe will determine the price action of the U.S. dollar.

GBP: NO SIGN OF LIFE IN SPENDING

While the British pound rose to a fresh 2.5 month high against the U.S. dollar, it weakened against the euro. U.K. economic data was disappointing with retail sales falling 0.3 percent in January according to the British Retail Consortium. Although this is not the official report from the Office for National Statistics, it provides early clues on the state of consumer spending. Retail sales rose strongly in the month of December thanks in large part to heavy discounting but now that the holidays are behind us, the BRC report indicates that consumers are cutting back. January is typically a quiet month for spending and for this reason, it will be more important to see if things pick up in February. The only piece of U.K. economic scheduled for release over the next 24 hours will be shop prices. After that, volatility should pick up with industrial production, the trade balance, BoE rate decision and producer prices set for Thursday and Friday. Since the middle of January, the GBP/USD has appreciated approximately 4.5 percent which is a remarkable move considering that the economy contracted in the fourth quarter. The sustainability of these gains will hinge upon the central bank’s monetary policy decision on Thursday.  If the BoE opts to increase stimulus, sterling could give up part of its gains. If they stand pat, the GBP/USD could crack above 1.60. 

AUD: NO RATE CUT BY THE RBA

The Australian dollar rose to its highest level in 6 months following the Reserve Bank’s decision to leave interest rates unchanged at 4.25 percent. In yesterday’s daily report, we wrote about how a rate cut by the RBA was not a done deal because activity in the manufacturing and service sectors accelerated last month. After cutting rates two months in a row, the central bank opted to wait before doling out another round of stimulus. The RBA was encouraged by the signs of improvement in the U.S. economy and the moderate slowdown in China. As indicated by our colleague Boris Schlossberg, “The uplift in Asia and North America has offset the problems caused the European sovereign debt crisis and convinced Australian monetary officials to keep rates steady for the time  being as “information on the Australian economy continues to suggest growth close to trend.” The central bank went to note that, “With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially the inflation outlook would provide scope for easier monetary policy.” A sharp increase in building permits in December helped to drive the Canadian dollar higher. Permits rose to the highest level in 4.5 years on applications for multiple-unit housing and commercial buildings. Low interest rates have kept the Canadian housing market supported and according to the BoC, housing should contribute 0.3 percentage point to output growth this year. Canadian housing starts are scheduled for release on Wednesday along with New Zealand employment numbers. The jobless rate in New Zealand is expected to fall from 6.6 to 6.5 percent in the fourth quarter.

JPY: STEALTH INTERVENTION

If you think the Japanese government has done nothing but sit on their hands for the past few months - think again. The Japanese Yen weakened against all of the major currencies today after the Ministry of Finance released a report detailing their foreign exchange intervention operations in the fourth quarter.  On October 31 ^st , the Bank of Japan bought U.S. dollars and sold 8.07 trillion yen, driving USD/JPY from a low of 75.57 to a high of 79.53 intraday. This round of intervention made a lot of noise in the market with the central bank quickly admitting that they have come into the market to artificially weaken the Yen. However according to the MoF data the central bank sold Yen again in the days that followed. Between November 1 ^st and November 4 ^th , they sold another 1.02 trillion yen which helped to keep USD/JPY above 78 for the next few days. Unfortunately their efforts proved futile because once they stopped selling the Yen, it began to strengthen. The Japanese government is obviously very concerned about the strength of the Yen and their ability to stop it from rising is limited but the latest MoF report suggests that they will continue to try to curb the currency’s gains through overt, stealth and verbal intervention.  Japanese current account and trade numbers are scheduled for release this evening along with the Eco Watchers survey – slightly stronger data is expected all around. 

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency pair in play over the next 24 hours with German trade and current account numbers scheduled for release at 2:00 AM ET / 7:00 GMT.

The EUR/USD broke out of a recent consolidation to rise to its highest level since December.  Thanks to today’s rally, the EUR/USD is comfortably in an uptrend. At this point, there is no major resistance until 1.3365, where the 100-day SMA and second standard deviation Bollinger Band are converging. If this level is broken, the next resistance level will be 1.3515, which is the 38.2% Fibonacci retracement of the May 2011 to January 2012 sell-off. Should the rally in the EUR/USD begin to fade, there will some modest support at 1.3175, where we have the first standard deviation Bollinger Band converging with the 23.6% Fib retracement of the same move mentioned earlier. Below that will be the psychologically and technically significant 1.30 level.

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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.