Sunday, January 25, 2009

4.1 The Europeans are up against the wall: Forex Focus 26-30 January

The yen continued to strengthen as traders ran for cover. Sterling fell to record lows and some pondered if this could be the beginning of the end of the world’s oldest currency. The euro falls against the US dollar for the fourth consecutive week.

Last week’s action

The Euro opened to a double-whammy of bad news. On Monday, S&P downgraded Spain’s credit rating from AAA to AA+ and the European Commission revised its forecast for euro-zone GDP for 2009 from +0.1% (forecast in November 2008) to -1.9%. ECB President Jean-Claude Trichet confirmed the accelerating downturn and said the euro-zone’s economic outlook was “substantially” worse than what the bank had predicted only a month ago. The doom and gloom sent EUR/USD south and Tuesday morning saw it crash below 1.30 for the first time in 2009. It continued to fall as President Obama stepped up to swear in and any hopes of an Obama rally on Wall Street proved premature as the S&P 500 fell 5.3%, the largest decline on a Presidential inauguration day. Wednesday saw the pair trading within 1.28 and 1.30 as news that Portugal was the next in line to have its credit rating cut was counter-balanced by a recovery of sorts on the equities markets. US Treasury Secretary nominee Timothy Geithner gave the greenback a boost on Thursday when he opined that a strong dollar is in US interests. Thursday’s US data surveyed rising unemployment and a weakening housing sector and the dollar faltered. The euro fell further early Friday as euro-zone PMIs came in a tad less weak than expected but still at the lowest levels since records began in 1998. The pair fell to its week low of 1.2764, to recover to test 1.30 once more before closing the week at 1.2985.

Sterling had a dismal week falling to record lows against the yen and 24-year lows against the US dollar. The Royal Bank of Scotland set the tone for the week when it admitted that its 2008 losses could be as much as £28B: the biggest loss in British corporate history. This announcement came on the same day that the UK government’s latest financial sector rescue package was released to criticisms that it would not be effective. Cable dropped like a stone on this negative sentiment through Monday and the pair broke down key support at 1.4370 early Tuesday. Influential investor and financial commentator Jim Rogers added to downside pressure on the pound by urging the world to “sell any sterling that you might have” because “it’s finished”. Concern had also been growing that the UK ‘s credit rating could go the same way as Spain’s and this had brought further pressure to bear on the beleaguered currency. However, these fears might prove to be groundless according to Thursday’s report from influential credit agency Moody’s, who said that it did not think it would be revising its credit rating downwards. The UK finished the week with more bad news. Friday’s Q4 GDP saw the economy contract by 1.5% and the pound fell to 24-year lows of $1.3550, until recovering a little to close at 1.3804.

The yen strengthened against all the majors as another week of heightened risk aversion prompts more flight to the safety of the yen. After a spectacular fall as the US session opened on Wednesday, the dollar clawed back some ground due (perhaps) to the widely-held belief that the Bank of Japan will act to prevent the yen from strengthening too much. On Thursday, the Bank of Japan held interest rates at 0.1% and warned that Asia’s largest economy faces two years of recession and deflation. The bank stressed the need to get credit moving once more and announced plans to spend up to ¥3 trillion on commercial paper to achieve this. It also said it was considering buying corporate bonds with the same aim in mind. USD/JPY closed the week at 88.82

This week’s calendar notes

All eyes will be on the FOMC’s interest rate statement on Thursday. Interest rates are currently at 0-0.25% which makes a further cut unlikely. The statement should give us more of an idea of how far the Fed is ready to go to get the US economy moving. Other key US releases include news from the housing front with existing home sales on Monday and new home sales on Thursday. Thursday also sees durable goods orders numbers and the weekly unemployment claims. On Friday, we’ve got US advance GDP lined up, with the consensus forecasting a significant fall. The week also sees consumer confidence surveys from the Conference Board on Tuesday and the University of Michigan on Friday.
I’m watching German data this week as my guide to EZ action. Tuesday sees the release of the influential German IFO business surveys, Wednesday showcases German CPI and Thursday brings German unemployment change.
The UK ‘s Confederation of British Industry provides insight into UK consumer spending with their Realized Sales Index on Tuesday. On Thursday Nationwide publishes its House Price Index. I’ll also be looking out for MPC member and arch-dove David Blanchflower, who is speaking in Nottingham on Thursday. He voted for a full 1% cut at the MPC’s last outing and this speech may well prove of interest.

EUR/USD: support at 1.2500; resistance at 1.3280
GBP/USD: support at 1.3300; resistance at 1.4000
USD/JPY: support at 87.10; resistance at 90.00

Sunday, January 18, 2009

3. Uncertain week ahead as Obama takes the helm.

Recessionary gloom gathers. The week was marked by mounting concerns for the integrity of the euro and saw another round of US government action to shore up its buckling banking sector.


Euro sentiment took a dive on Monday with the announcement that Spain had joined Greece and Ireland on Standard & Poor’s negative credit-watch list. The global recession has hit the euro-zone’s fourth largest economy particularly badly and any down-grading will spell trouble for the European currency. EUR/USD traded lower throughout Monday and Tuesday to test support at 1.3150. The pair climbed to test 1.3335 early Wednesday only to plunge more than 200 pips over the next few hours as the news broke that the S&P was, in fact, cutting Greece’s credit rating from A to A-. Wednesday’s US retail sales numbers for December made grim reading indeed. As stocks on Wall Street tumbled, the dollar strengthened as traders ran for cover. On Thursday the ECB cut interest rates by the consensus 50bps to 2.00%. ECB president Jean-Claude Trichet prepared the ground for further cuts and suggested that these could well happen in March. The euro fell against the dollar after the ECB press conference to make the week’s low of 1.3025. The euro recovered from this low as the news broke that the US Treasury and The Fed were throwing a $138B lifeline to troubled giant, Bank of America. This news brought some relief to EUR, which closed the week at 1.3288.

GBP (hourly)

Sterling also kicked off the week heading south against the greenback. The data out of the UK has been pretty dire of late and Tuesday’s retail sales numbers were no exception, surveying the steepest decline since records began 14 years ago. Cable fell below 1.45 late Tuesday evening and then went on to range between 1.45 and 1.47 until the US government’s latest banking bail-out saw an upside breakout falter a tad above 1.49. The pound then took a dive as British banking giant Barclays saw its value shrink by 25% amid worries about the bank’s capital and outlook. Barclays were quick to deny that there were grounds for these concerns and the GBP closed a smidgeon below 1.4750. The British PM, the Chancellor of the Exchequer (UK finance minister) and the bank of England have spent this weekend putting together another emergency package to shore up the banking system and get credit moving through the economy. We will see what they have come up with early this week, no doubt.

Everything will be on hold in the US on Monday and Tuesday. There is talk that there will be a Obama rally on Wall Street and this would translate as pound and euro strength on the Forex market. Thursday is the most significant in terms of US data with housing numbers and the weekly new unemployment claims.

Things are busier in euro-land. Tuesday has the highly-regarded German ZEW data. Thursday sees the release of the ECB’s monthly bulletin, the stats the bank perused while making last week’s interest rate cut. We’ve also got the zone’s industrial new orders to look forward to on Thursday and on Friday there’s the regular raft of PMI data.

It is a pretty hefty week for the UK. There’s consumer prices on Tuesday and jobs data on Wednesday. Friday includes preliminary GDP and Retail Sales in the line-up.

We’re currently pretty bearish on the euro, although Obama euphoria may lift it to test 1.3450. However, if the news breaks that Spain’s credit rating has been down-graded or further cracks appear on the euro-fa├žade, a clear break-down of 1.30 could see support being tested at 1.2330.

Cable is still ranging within 1.5350 and 1.4370. However, look for downside action.

USD/JPY will find support at 88.50 and resistance at 94.50

Monday, January 12, 2009

2.1 Forex Focus January 12th to 16th

Here's this week's YouTube wrap:

2. US jobs data dominates the market

The first full trading week of 2009 packed a fair punch and US jobs data were the main market movers. Sterling surprised by posting weekly gains against all the majors.

The dollar opened the week by strengthening sharply against the euro fuelled by President-Elect Barack Obama, who called on Congress to act quickly to pass his $775B fiscal stimulus plan. The plan will include a $300B tax-cut package, which could go some way to softening Republican resistance. Tuesday morning saw euro zone consumer inflation come in lower than expected, giving the ECB more room to cut interest rates on January 15th and the euro continued south.

EUR/USD (hourly)

It tested 1.3350 at midday and this proved to be the pair’s low of the week as US economic data prompted a complete about-turn. The misery continues in the US housing sector as Pending Home Sales slumped another 4.0% in November, while in the manufacturing sector factory orders plunged 4.6%. The FOMC meeting minutes which were released later on Tuesday did nothing to relieve the gloom, with predictions of a fall in GDP for 2009 and rising unemployment through to 2010. The euro rose to test 1.35 as Tuesday ended and pushed through to 1.36 as the European session opened on Wednesday morning. It powered on to 1.37 on reports that the US private sector had shed 693K jobs in December, much worse than expected. Thursday’s US jobs numbers saw new unemployment claims come in lower than expected. However, this was explained as being caused by people holding back applications because of the holidays. The news that the number of US jobless had hit a 26-year high raised concerns that Friday’s Non-Farm payrolls could hit 700K+ and the euro rose to tip 1.38. Friday saw the NFP actually survey in line with expectations, well short of the market’s fears and the dollar soared, pushing the euro down to close the week at 1.3429.

GBP/USD (hourly)

The pound saw gains across the board, including its biggest weekly rise against the euro in 10 years. On Tuesday, UK services surprised by ticking higher in December but still marked the eighth consecutive month of contraction and ended the worst year for the service sector since records began 12 years ago. The pound had just fallen back to test support at 1.45 when the discouraging US numbers gave sterling a boost. The week’s key sterling event came on Thursday when the Bank of England cut interest rates by the widely anticipated 50bps. The pound rose on the news and tested 1.5350. Friday morning’s news that UK manufacturing production fell 2.9% in December to make 2008 the worst year since the bad old days of 1981 had little effect on the pound, which rose through the European session to test 1.5350 once more. US Non-Farms saw the pair slip down to around 1.5150 and cable closed the week at 1.5165.

EUR/GBP (hourly)

The yen saw steady gains against the greenback as investors became more risk averse. Notice how USD/JPY almost tracks the Dow Jones Industrial Average. The pair closed the week at 90.22, a tad above the key psychological level of 90.

JPY (hourly) with DJIA

Calendar and outlook
This week’s important US data includes producer price inflation numbers on Thursday and consumer prices on Friday. US manufacturing activity will be surveyed for New York State on Thursday and on Friday we’ve industrial production for the States as a whole. Unemployment is a growing concern around the world at the moment, so you should pay careful attention to Thursday’s Unemployment claims. This could be a higher than expected if people were holding off registering as unemployed over the holidays as was suggested. Wednesday’s retail sales and Friday’s consumer sentiment could also move the market.

The highlight of the week will undoubtedly be the ECB’s interest rate announcement. A cut of 50bps is widely expected and remember, the follow-up press conference often causes high volatility. Jean-Claude Trichet has a couple of public speaking engagements in the run up to Thursday. There’s also European industrial production on Wednesday and consumer prices on Thursday.

The UK sees retail sales and housing data released in the early hours of Tuesday morning. The deputy governor of the Bank of England will be speaking in Manchester on Friday.

The governor of the Bank of Japan will also be speaking on Friday.

I see EUR/USD finding resistance at 1.3550 and support at 1.3250, with further downside action to 1.2330 a possibility in the near future.

GBP/USD still looks pretty range-bound and should move between 1.5350 down to 1.45.

USD/JPY should encounter support at 87.50 and resistance at 91.50.

Monday, January 5, 2009

1. Dark Times Indeed.

The holiday fortnight was marked by thin markets, bad news and predictions of more pain to come.

[a video of this post is at the bottom of the page]

The IMF set the tone as Christmas week opened with a warning against the dangers of inadequate fiscal stimulus. President-Elect Barack Obama followed through with a promise that his stimulus package would create or save half a million more jobs than had been previously projected. With the price-tag on the stimulus package at $800B and rising, the euro (see eur chart) started the week testing resistance at 1.41. It then fell back below 1.40, perhaps on the realization that things were also looking grim in euro-land; a fact amply illustrated by a report warning that Germany’s economy could shrink by 2.7% in 2009.

Tuesday’s US data brought more bad news with home sales continuing to disappoint but the EUR settled into a 100-pip range in the run up to Christmas Day. Trading resumed on Friday and while most of Europe was still closed for the holiday, the euro rose to test 1.41 once again and closed the week at 1.4059. The following Monday saw the euro smash through 1.41 to hit 1.4350 as the escalating situation in the Middle East renewed concerns of a spike in the price of oil. EUR/USD fell back again as US markets opened and the dollar eventually closed the day slightly up on the euro. Tuesday saw US consumer confidence fall to record lows. However, fundamental news had little impact on this holiday market and the pair fell to below 1.39 for the first time during the holiday period to close the week at 1.3851

Sterling (see GBP chart) fell some 27% against the dollar in 2008 and managed to hit a fresh yearly low in the final week. Britain’s Q3 GDP was revised down to -0.6%, the worst contraction since 1990, making further Bank of England rates cuts very likely on January 8th. The pair went on to range between 1.48 and 1.4650 over Christmas, before breaking on the 29th to test 1.44,a level it tested twice more before the week was out. It rallied to 1.47 during thin trading on New Year’s Eve and closed on the first day of trading in 2009 at 1.4599.

USD/JPY (chart above) spent most of the holidays trading within 90 – 91. An upside breakout followed by a classic pullback saw the dollar hit 92.40 before closing the week at 92.26

USD/CHF fell on Middle East tension and the franc was widely reported as having regained its safe-haven status. It formed a morning star reversal pattern at 1.0400 and rose to close the week at 1.0828.

This week is the first full trading week after the holidays, traders all over the world are returning to their desks and a full-bodied trading week is anticipated. It is also a week cram-packed with economic data. In the US on Tuesday, there’s more housing numbers, the services PMI and the minutes of the meeting where the Fed cut close to zero. The focus then turns to employment with ADP jobs data on Wednesday, the weekly review of unemployment claims on Thursday and on Friday we’ve got the unemployment rate and the much-anticipated Non-Farm payrolls.

The euro-zone sees consumer prices and services PMI on Tuesday. We’ve German factory orders on Thursday and French industrial production on Friday. Friday also sees the release of retail sales data for Germany and the zone as a whole.

All eyes will be on UK interest rates on Thursday. A cut of at least 50bps is widely anticipated with many market analysts pricing in a 75bps cut. Tuesday sees more housing data and Services PMI and Friday has Producer Prices.

Israel launched a ground offensive into the Gaza strip this weekend and traders will need to keep close tabs on how the situation affects oil prices and, in consequence, dollar strength.

EUR/USD resistance: 1.4050; support: 1.35.

GBP/USD resistance: 1.4700; support at 1.41.

USD/JPY resistance: 94; support: 91

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