8.1 Gloomy week cues up another wave of risk aversion

It was a mixed week on the currency markets. The greenback strengthened on all fronts when the week got underway as bad news out Asia and Europe increased demand for the US dollar. The final days of trading saw a turn-around as fears that Citigroup and Bank of America were heading for nationalization sparked wide-scale dumping of the US currency.

The euro started the week’s trading by gapping down 90 pips, opening at 1.2808. It tested resistance at around 1.28 through President’s Day, before heading south in the early hours of Tuesday to find the week’s low of 1.2512. The euro then recovered to hit the week’s high of 1.2877 late Friday, before closing at 1.2835.
The euro’s early decline must be seen from the perspective of the euro-zone’s very disappointing data of late (remember those appalling GDP numbers released Friday 13^th?). This week’s developments have fed fears that the 16-nation currency is facing a battle for survival as the global recession bites. On Tuesday Moody’s flagged concerns that a collapse in the economies in Eastern Europe could have a negative impact on Western Europe’s banking giants. On Wednesday, the European Commission called on euro-zone members France, Greece, Spain, Ireland and Malta to get their houses in order by reducing their budget deficit to 3% or less as required by the EU’s Stability and Growth pact. However, the difficulties that these countries would face if they tried to cut back on spending were amply illustrated this weekend in Dublin. 100000 people marched through the Irish capital to protest against how their government is handling the economic crisis. Friday afternoon saw a reversal in EUR/USD fortunes after the head of the Senate Banking Committee told Bloomberg that he was worried that the Bank of America and Citigroup could be nationalized ‘at least for a short time’. The euro soared to above 1.2850 until White House spokesman Robert Gibbs said in a press conference that the administration believes that a well-regulated privately-held banking system was correct the way to go.

GBP/USD gapped down more than 150 pips when it opened the week at 1.4228. It spent most of the ranging between 1.41 and 1.43. It broke out of this range on Thursday and hit the week’s high (1.4482) on Friday afternoon, before closing the week at 1.4425.
Sterling received support on Tuesday on the news that consumer price inflation fell less than expected to 3.0%. Mervyn King, governor of the Bank of England, said he was still concerned about deflation and that the Bank may have to create more money (known as ‘quantitative easing’) and pump it into the economy to prevent inflation from falling below the banks inflation target of 2.0%. Wednesday’s release of the Monetary Policy Committee meeting minutes revealed that the committee had voted 8-1 to cut interest rates by 50bps last meeting. The committee’s one dissenter, arch-dove David Blanchflower, wanted to cut by a full 100bps. The committee voted unanimously to seek approval from the government to start quantitative easing soon.

A week of gloom for Japan opened with the news that the country’s GDP had slumped by 3.7% in Q4 2008. Japan’s economy minister, Kaoru Yosano said that Japan was facing its worse crisis since the Second World War. On Tuesday, the finance minister, Shoichi Nakagawa resigned amidst allegations that he had been drunk at the G7 meeting the weekend before.
The greenback spent the week on the up against the yen, hitting the week’s high of 94.45 on Thursday before falling back to close the week at 93.01

Calendar notes
The economic calendar promises to be fairly lively this week.
News from the American housing front comes on Wednesday with Existing Home Sales and on Thursday with New Home Sales. We get a snapshot of economic performance in the US regions with Tuesday’s Richmond Manufacturing Index and Friday’s Chicago PMI: while Thursday’s Durable Goods Orders and Friday’s GDP give us an insight into the nation’s performance as a whole. The Conference Board’s Consumer Confidence Index is released on Tuesday and is followed up by the University of Michigan’s Consumer Sentiment Index on Friday. The Chairman of the Federal Reserve, Ben Bernanke, is testifying to the Senate on Tuesday and the House on Wednesday.
Highlights out of the euro-zone include German IFO numbers on Tuesday, the euro-zone’s Industrial New Orders also on Tuesday and its CPI on Friday.
On Tuesday, the Confederation of British Industry releases its monthly Realized Sales index, a survey of the sales of wholesalers and retailers. The UK’s revised GDP will be published on Wednesday, and the Nationwide Building Society’s House Price Index is due out on Thursday. The Governor of the Bank of England, Mervyn King, will be testifying to Parliament on the banking crisis also on Thursday.

Forecast
EUR/USD is still in a downtrend and could well fall back to 1.25 this week.
GBP/USD will continue to range between 1.41 and 1.46.
USD/JPY should find support at 91 and resistance at 94.5.

7.1 Risk aversion still reigns in the face of US rescue and stimulus packages

Pessimism stalks the markets as flight from riskier assets saw the dollar and the yen gain against most of the other majors.

European markets opened with optimism as traders anticipated the Obama administration’s new financial rescue package and the passing of its fiscal stimulus plans, both due this week. EUR/USD followed this optimism up and the euro tested 1.3092 Monday mid-afternoon before falling back to 1.30 as the US session drew to a close. The euro came under more pressure early Tuesday on a report that Russian companies were looking to restructure $400B of their outstanding corporate debt. There is a deal of concern about the euro-zone’s vulnerability to problems in emerging Europe, and the subsequent flight from risk saw the euro test support a little below 1.2850. The euro recovered as the European session got underway on Tuesday and rose above 1.30 for the second time this week, until US Treasury Secretary Tim Geithner unveiled the new US financial rescue package to allocate $2000B for cleaning up toxic assets in the financial system and restart credit markets. Geithner’s speech was described as long on rhetoric yet short on details and US markets plunged. The euro followed optimism down to test 1.2850 once more. Wednesday saw high-ranking ECB official, Juergen Stark, noting that the central bank had room to cut interest rates in March to stimulate economic activity if necessary. Meanwhile on the other side of the pond, US lawmakers finally agreed on a compromise stimulus package to pump $789B into the spluttering US economy, meaning that the package could be passed before the end of the week. Thursday saw the euro take a dive against the background of an all-time record drop in euro-zone industrial production. There was more bad news for the euro-economies on Friday, as the zone’s GDP retracted a worse than expected 1.5%. This was the third quarterly contraction in a row, and the biggest fall since the creation of the euro in 1999. Later on Friday, the US fiscal stimulus package was finally passed and all it needs now is for President Obama to sign it on Monday. President Obama also announced that he would unveil plans to save ordinary American homeowners from losing their homes. However, the atmosphere of pessimism remained pervasive as mounting problems in the global financial system seem far from resolution. EUR/USD closed the week a little below 1.29.

Sterling fell against the greenback this week as risk aversion continued to exert downside pressure on the pound. Bank of England Governor Mervyn King said on Wednesday that the UK is in a deep recession and predicted that the economy could shrink by as much as 4% in the summer. Mr. King indicated that interest rates could be cut once again in March, whilst preparing the ground for measures to increase the money supply. UK woes deepened on Friday when the malaise affecting British banks took a turn for the worse on Friday. Lloyds banking group forecast losses of £11B for its subsidiary HBOS. The news precipitated a decline in UK banking stocks and saw the pound fall more than a cent against the US dollar.

Calendar Notes
USA: Banks will be closed in the US on Monday for Presidents Day. Monday should see President Obama signing the stimulus package. We get regional snapshots of US economic activity on Tuesday with Empire State Manufacturing and on Thursday with the Philly Fed Manufacturing Index. Wednesday sees the release of FOMC meetings, always worth reading for hints to future policy. Keep your eyes open on Thursday for the weekly US new unemployment claims. Thursday also sees the Producer Price Index (PPI), while consumer prices (CPI) are surveyed the next day. Key US housing data will be out on Wednesday with Building Permits and Housing Starts.
Euro-zone: Tuesday’s ZEW economic sentiment numbers often move the market. Friday sees a raft of PMI data, giving us some insight into economic activity across the zone.
UK: The Consumer Price Index (CPI) is out on Tuesday and Retail sales are due on Friday. Wednesday’s Monetary Policy Committee meeting minutes will shed light on the voting and discussion behind February 5^th’s 50bps cut. We will also be checking for clues to future policy.

Forecast
EUR/USD: EUR has closed below 1.30 for the third week running with any breaks above that level failing before 1.31. Should the pair see a breakdown of 1.2720, downside pressure could test support at 1.2330.
GBP/USD: Resistance should hold at 1.50. A breakdown of 1.40 could see support next at 1.3550.
USD/JPY: If the pair can break out of 92 then expect resistance at 94. We see support at 90.

6.1 Risk appetite increases as traders anticipate Obama’s stimulus package.

Last week saw investor confidence rise as shocking US jobs data fed hopes that Barack Obama’s financial stimulus would soon be passed. The dollar weakened against most currencies except the yen as traders left safe havens in search of riskier assets.

The euro closed the week up against the dollar for the first time in six weeks. Good news out of the US, including better than expected manufacturing PMI and Pending Home Sales, improved risk appetite and gave the euro a boost on Monday and Tuesday. However, the 16-nation currency stumbled on Wednesday as the Fitch international rating agency downgraded Russia’s credit rating to BBB. Russia is a significant partner of the euro zone and the deteriorating situation in the world’s largest country can only spell trouble for Europe’s economic health. The euro continued to fall through the afternoon, as discouraging US job data gave the market the jitters as it looked forward to Friday’s Non-Farm payrolls. The ECB met market expectations by holding interest rates at 2.00% on Thursday. Jean-Claude Trichet followed up the announcement by signaling that the bank will be cutting rates by 50 bps in March and, at the same time, more bad news from the US jobs front sent the euro to test 1.28 once more. Friday saw the much anticipated NFP and Unemployment rate both come in worse than expected. However, in a departure from the recent pattern, the markets surged, taking the euro up with them, as traders gambled that the massive jobless figure would spur Congress into passing President Obama’s stimulus package. EUR/USD rose to just shy of 1.30 before closing the week at 1.2924.

Sterling started the week off on the wrong foot and fell some 4 cents against the greenback on Monday as rating agency, Moody’s, cut the credit rating of Barclays bank. However, after testing support at 1.41 mid-Monday, cable spent the week on the up. There were some positive signs from UK data this week with PMIs across the sectors coming in better than expected and the Halifax house price survey finding that house prices rose an average of 1.9% in January. However, the news was not all positive. Downbeat releases included Wednesday’s consumer confidence, which found sentiment at record lows and Friday’s UK manufacturing production, which contracted for the tenth month in a row. On Thursday the Bank of England cut rates to an all-time low of 1.00%. The cut was widely anticipated and sterling climbed 100 pips against the dollar after the announcement. The pair closed the week a little above 1.48 at 1.4806.

The yen weakened significantly against the other majors as demand for the safe-haven currency fell and traders speculated that the passing of the US stimulus package was a done deal. Thursday saw US trading take the pair through key psychological resistance at 90.00 to close the week at 91.99

The big news this coming week will undoubtedly be the progress of Barack Obama’s financial rescue package. New US Treasury secretary Tim Geithner is scheduled to unveil full details of the revamped bail-out on Monday. However, the timing of the announcement has yet to be confirmed and The Wall Street Journal reported that it may be moved to Tuesday. The US Senate is expected to vote to slim down its version of the package on Monday and on Tuesday it will most probably pass it. Unfortunately, that won’t be the end of the story because lawmakers will have to reconcile the differences between the Senate’s and the House of Representative’s versions of the package. This could take a few days after which the Senate can vote to pass the final version and send it on to the President to sign or veto. Investor confidence could well spike at each successful stage of this process.

Other US news stories to note this week will be Fed Chairman Ben Bernanke testifying before the House Financial Services Committee and the Tim Geithner testifying on the TARP oversight before the Senate Banking Committee. US economic data releases of note this week include the trade balance on Wednesday; retail sales on Thursday and the University of Michigan’s consumer sentiment on Friday.

Things are pretty quiet data-wise in the euro-zone until Thursday brings the ECB’s monthly bulletin and industrial production numbers. Friday has GDP data for Germany, France, Italy and the euro-zone as a whole.

Tuesday is a busy day for UK data, with retail sales numbers, the house price balance and Britain’s trade balance. Wednesday includes the release of the latest jobless numbers and the Bank of England inflation report.

Friday sees the start of the G7 meeting in Rome where they are due to discuss a number of currency related issues as well as the provision of a global banking agency.

I see EUR/USD finding support at 1.2746 and resistance at 1.3330.
GBP/USD should find support at 1.43 and resistance at 1.53
I expect USD/JPY to encounter support at 90.70 and if this support holds, the pair should rise to test resistance at 94.60

5.2 Do BRICS (and Germans) eat PIGS

A very interesting read for all those musing on the fate of the euro from Absolute Return Partners.

5.1 Confidence crumbles as week progresses

European markets started the week on the up. The rally was sparked off by UK banking giant Barclays’ open letter which said it had made profits of more than £5.3B last year and would not have to raise fresh capital. The good vibes swept over the Channel when BNP Paribas made equally reassuring noises and ING revealed a package of support measures courtesy of the Dutch government. This growth in risk appetite led to a strengthening of the euro against the dollar and EUR/USD got a further boost from the release of positive data from the other side of the pond. US Existing Home Sales came in better than expected as falling house prices tempted buyers and investor confidence rose accordingly. EUR tested resistance at 1.33 after German business confidence was surveyed better than expected. The rise of the euro then faltered as US consumer confidence slipped to a record low. German consumer confidence came in better than expected on Wednesday and the euro climbed to test $1.33 once more. The pair started heading south in earnest after the FOMC’s monetary policy statement added little to last month’s Fed statement. Thursday’s raft of disappointing US data did little to make investor’s less risk averse and the greenback strengthened as durable goods orders, new home sales and unemployment change all disappointed. It was downhill all the way from there as Friday saw euro-zone unemployment hit two-year highs of 8%, and with the EZ inflation rate coming in at its lowest since 1999, pressure is mounting for the ECB to cut interest rates. However, ECB president Jean-Claude Trichet has made it clear that they planned to hold out at 2.00% until their March meeting. US GDP rounded off a recession-racked week by coming in at -3.8%. Although this was not as bad as many had predicted, it still marked the steepest decline since 1982 and the euro fell to test support at 1.28 and closed the week at 1.2804

Barclays bank’s reassuring open letter kicked off a week of steady strengthening for sterling, despite worries that the UK government’s £2.3B bail-out for car makers would prove insufficient. In a departure from the recent norm, UK data came in better than expected except for Friday morning’s consumer confidence which slumped close to all-time lows. The pound’s rise met resistance at 1.4350, and it fell back from this level after the FOMC’s monetary policy statement. It went on to range within 1.41 and 1.4350 before making an upside breakout at the end of the week’s trading to close just below 1.45 at 1.4491. All eyes will be on the Bank of England, which looks set to cut interest rates by at least 0.5% next Thursday.

It’s a big week for economic data with no less than 3 central banks making interest rate announcements. On Tuesday, Reserve Bank of Australia look set to cut by up to 1% to 3.35% a 45-year low. The Bank of England steps up first on Thursday and economists expect a cut of at least 50 bps to 1%. The ECB will make its announcement 45 minutes later on Thursday, with the bank widely expected to hold at 2% until March. Don’t forget that the follow-up press conference is often the big market mover.
US data includes the Purchasing Managers Index (PMI), with manufacturing numbers on Monday and non-manufacturing on Wednesday. There’s more housing data on Tuesday, with Pending Home sales. Wednesday includes the ADP jobs stats which will guide expectations for the big daddy of data releases: Friday’s Non-Farm Payrolls and the US unemployment rate.
The UK’s PMI numbers are also out this week, with manufacturing on Monday, construction on Tuesday and services on Wednesday. The action continues after Thursday’s MPC interest rate announcement with Producer Prices and Manufacturing Production in the mix on Friday.
The euro-zone is also releasing its PMI numbers on Monday (manufacturing) and Wednesday (services). German Retail Sales are out on Tuesday, with Retail Sales for the euro-zone as a whole are out on Wednesday. Friday rounds the week off for the euro with German Industrial Production.

We see more downside action for EUR/USD with resistance at 1.31 and support at 1.25. GBP/USD should meet resistance at 1.4600 and support at 1.38.

USD/JPY will most likely range within 87.00 and 93.00.