Easter Holidays

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G20 summit and weak euro data could well see dollar gains

Forecast
EUR/USD: support @ 1.3075; resistance @ 1.35
GBP/USD: support @ 1.42; resistance @1.4450
USD/JPY: support @ 96.50; resistance @ 99.50

Calendar Notes
Next week’s ECB interest rate announcement and the US NFP are always big talking points and we have the added spice of the G20 summit in London on Thursday. As things stand at the moment, it seems unlikely that anything new will come out of the meeting, but there should be more detail on plans to boost the IMF’s bail-out fund.

US Treasury Secretary Tim Geithner will be speaking today (Sunday 29^th) at 22.30 GMT. If recent appearances are anything to go by, there could well be fireworks. ECB President Jean-Claude Trichet will be testifying to the European Parliament in Brussels on Monday (14:30). On Friday, Fed Chairman Ben Bernanke rounds the week off with a speech entitled “The Fed’s Balance Sheet’ (Friday 16:00).

Economic Data (My comments in italics)

US Dollar
Economic Health: Chicago PMI (Tuesday 13:45); ISM Manufacturing PMI (Wednesday 13:45); ISM Non-Manufacturing PMI (Friday 14:00). The Purchasing Managers Index (PMI) is one of the best indicators of economic health.
Housing: Pending Home sales (Wednesday 14:00). Will US housing data continue to show improvement?
Jobs: ADP Non-Farm Unemployment Change (Wednesday 12:15); US Non-Farm Payrolls (Friday 12:30); US Unemployment Rate (Friday 12:30). Wednesday’s ADP data sets expectations for Friday’s big numbers.
Consumer Confidence: Conference Board (Tuesday 14:00). Are things looking up for the US consumer?
Euro
Economic Health: German Retail Sales (Wednesday 06:00); Final Manufacturing PMI (Wednesday 08:00); Final Services PMI (Friday 08:30) The Purchasing Managers Index (PMI) is one of the best indicators of economic health.
Inflation: CPI Flash Estimate (Tuesday 09:00). Early inflation news from the European front
Monetary Policy: ECB Interest Rate Announcement (Thursday 11:45); Follow-up Press Conference (Thursday 12:00) ECB expected to cut to 1.0%, but it’s the press conference that has the potential to really move the market.
UK Pound
Economic Health: Manufacturing PMI (Wednesday 08:30); Services PMI (Friday 08:30) The Purchasing Managers Index (PMI) is one of the best indicators of economic health.
Consumer Confidence: GfK (Monday 23:01) I am slightly surprised that economic analysts expect this to hold steady
Yen
Jobs: Unemployment Rate (Monday 23:30)
Economic Health: Tankan Manufacturing Index (Wednesday 23:50) The situation darkens in the land of the rising sun.

Last week’s Action:
The week opened with the greenback losing ground against the euro but after rising to test resistance at 1.37 on Monday morning, it was downhill all the way for the pair. Monday midday saw US Treasury Secretary Tim Geithner unveil plans to use both public and private sources to make a further $1 trillion available to buy toxic assets from US banks. This last-ditch attempt to avoid nationalization and the markets loved it, with the S&P 500 rising 7%, the biggest advance for the index since Obama became president. After testing support at 1.35, the euro followed equities up and hit resistance at 1.3650 before starting to fall once more on Tuesday morning. Bad news and dispiriting forecasts out of Europe saw the pair on its way to test support at 1.35 and went on down to 1.3450 during US trading. Wednesday saw the dollar take a dive when Tim Geithner made the headlines again after casting doubt in an off-the-cuff comment on the role of the dollar as the world’s dominant reserve currency. The US enjoyed a week of not too disheartening economic data. The all-important housing sector turned in good news in the shape of new and existing home sales and the House Price Index all coming in better than expected; Durable Goods Orders surveyed its first rise in 7 months; and, although GDP was revised down, it did come in less bad than expected. EUR/USD kept banging away at support at 1.35 which it finally broke down a few hours into European trading on Friday. European Industrial New Orders in January slumped 34% compared with orders in January 2008 and were 3.4% down from December 2008. German Finance Minister Peer Steinbrueck compounded euro-misery when he noted that the single currency could be at risk if euro-zone members didn’t start taking the ECB Stability and Growth Pact seriously. EUR/USD bombed to 1.33 in a couple of hours and closed the week at 1.3282.

Sterling spent the first two days of the trading week on the up against the dollar, hitting the week’s high of 1.4774, midway through US trading on Tuesday. The pair started the fall when the Governor of the Bank of England, Mervyn King, warned that Britain simply couldn’t afford another round of fiscal stimulus. Wednesday’s failed UK bond auction fuelled sterling’s decline, which continued through the rest of the week with the pair breaking down support at 1.45 on Thursday. The UK’s Q4 GDP was revised down to a final -1.6% on Friday, and cable broke through 1.44, to test support at 1.43 in a couple of hours. The pair closed the week at 1.4316.

11.4 eur/gbp lock in

Lifted stop to .9350, locking in a further 80 pip profit.

11.1 G20, IMF and TALF to boost risk appetite.

Forecast (week March 15th - 20th)
EUR/USD: support @ 1.2800; resistance @ 1.3200
GBP/USD: support @ 1.3860; resistance @ 1.4300
USD/JPY: support @ 95.75; resistance @ 100.00
EUR/CHF: look for buying opportunities ±1.51
EUR/GBP: look for buying opportunities ±0.9200

This week's outlook
This weekend’s G20 meeting has been slated as a clash between the US (increased economic stimulus) and Europe (increased financial regulation) and is unlikely to resolve anything. However, the group should announce a boost to the IMF’s resources to bail-out failing countries and this should keep risk appetite buoyant. Keep tracking the equity markets throughout the week, as rising stocks will favor higher yielding currencies. Also watch the EUR/CHF rate after the SNB’s intervention and consider buying the euro if price falls to the 1.50 region because the bank could well step in again.

Calendar
US: Wednesday’s FOMC interest rate announcement (18:15) will be the big news of the week. Although there are reports of dissent in the ranks, I’m expecting the Fed to keep up recent rhetoric. The Fed is due to launch its TALF program on March 17th, expect fireworks if there is any delay. Other US data worthy of note include regional manufacturing numbers (Empire State – Monday, 12:30 and the Philly Fed – Thursday, 14:00); industrial production (Monday, 13:15); housing data (building permits and housing starts both on Tuesday, 12:30), inflation numbers (producer prices – Tuesday and consumer prices – Wednesday, both at 12:30) and Thursday’s regular new unemployment claims (12:30).

Euro zone: There’s Inflation data on Monday (consumer prices, 10:00) and Friday (German producer prices, 10:00). Tuesday’s influential ZEW economic sentiment is out at 10:00 and often moves the market, while the zone’s industrial production (10:00) rounds off the European data week.

UK: There’s more housing data out in the early hours of Monday morning (Rightmove HPI – 00:00). Wednesday sees crucial jobs data at 09:30 and the minutes of the March 5^th’s Monetary Policy Committee meeting at the same time. The CBI’s survey of the country’s top 550 manufacturers’ expectations will be released on Thursday at 11:00.

Japan: The early hours of Wednesday morning sees the release of the Bank of Japan’s monetary policy statement, while the central bank’s monthly report is published on Thursday (05:00).

Top Central Bankers: ECB President Jean-Claude Trichet will be speaking at La Tribune conference in Paris on Tuesday (19:15) and the Governor of the Bank of England will be addressing the Worshipful Company of International Bankers Dinner in London on the same evening (20:10). Fed Chairman Ben Bernanke is speaking about the financial crisis and community banking in Phoenix on Friday (16:00).

Last week's action
The week opened in the same vein as the previous week closed, with a continuing high level of risk aversion. Asian markets fell as Japan posted its first current account deficit in 13 years, triggering a 26-year low for the Nikkei 225. The gloom continued as the European session opened and EUR/USD followed stocks down, hitting the week’s low at 1.2555 at lunchtime. The euro recovered somewhat as New York opened and found support at 1.26 as the session progressed, a level that was not to be broken down for the rest of the week. Tuesday’s disappointing data out of France and Germany did little to ruffle the euro as markets soared after Citigroup Inc reported that it had actually made money in the last couple of months. The news was enthusiastically welcomed as a sign that things might not get much worse for the US banking sector and Wall Street saw its best day of 2009. Axel Weber, a member of the ECB governing council, gave the euro further support when he said that he thought 1% refinancing rates were about as low as they should go. EUR/USD tested support a shade above 1.26 a couple of times late Tuesday/early Wednesday, but rising risk appetite soon had the pair testing resistance at 1.2850. The big news on Thursday was the Swiss National Bank’s intervention to weaken the franc against the euro. The euro retested support at $1.2750 immediately after the news; rose against the greenback throughout the US session and broke through 1.29 late Thursday to hit the high of the week of 1.2956 on Friday morning. The euro closed the week at $1.2928, with traders pondering the prospect of resistance at the key psych level of 1.30.

Sterling’s fall on Monday was given added impetus by last weekend’s news that Lloyds bank would be nationalized in all but name and that Barclays could also be joining the UK government’s Asset Protection Scheme in return for shares. UK manufacturing and industrial data came in worse than expected and cable fell through the US and Asian sessions to a weekly low of 1.3663. A weak pound doesn’t seem to be giving UK trade a boost as the trade balance shrank more than expected on Wednesday. However, growing risk appetite saw sterling’s decline slow and cable tested 1.39. The Swiss National Bank’s intervention saw it fall to smidgeon above 1.37, only to rise on market optimism to break the key psychological of 1.40 as the G20 meeting opened in Southern England. The pair closed the week right on the button at 1.40 with sterling weakening against the dollar for the third week running.

10.1 UK banking fiasco could push euro to strengthen against sterling

Last week's wrap:
The euro opened the week by gapping down with the on-going atmosphere of risk aversion, disappointment over the non-event that was the European crisis summit and anticipation of an almost certain ECB rate cut on Thursday all adding to euro weakness.
The Reserve Bank of Australia’s decision to hold interest rates at 3.25% early on Tuesday surprised many and led to a temporary respite in risk aversion. This buoyed the euro, which tested 1.2675 before falling back in the opening hours of London trading. The Bank of Canada struck a less optimistic note later the same day. The central bank cut its rates 50 bps to 0.50% and hinted it would provide additional financial stimulus through credit and quantitative easing if required. This Canadian caution seems justified. Terrible US housing data brought further downside pressure onto the 16-nation unit and, when Australian GDP came in at -0.5%, EUR/USD hit its week low at 1.2456. The euro recovered as China’s official PMI saw manufacturing in the People’s Republic grow for the third month running. However, when a much-anticipated announcement of a fresh stimulus package from the Chinese government failed to materialize, the euro started the march south once more. Thursday’s run up to the ECB’s interest rate announcement saw more bad news out of the European powerhouse as German retail sales fell unexpectedly. The ECB cut by 50bps to 1.50% as expected and when the bank’s president, Jean-Claude Trichet, would not rule out further cuts the euro fell to 1.2480. However, the bank now seems to accept the urgency of the situation and expressed its readiness to act, so the euro could (just could) be turning the corner. Friday was NFP day. The data showed that US employers had cut more jobs than expected and the unemployment rate rose to a 25-year high. Nevertheless. although you might expect the dollar to strengthen on risk aversion, EUR/USD leapt above 1.27 during the hour after the publication of the numbers. Bloomberg put the rise down to the fact the pace of the cuts was slowing down, but perhaps it marks a shift in underlying dollar sentiment – only time will tell. The euro went on to weaken as the US session progressed and closed the week at 1.2634.

Sterling spent the week ranging between 1.43 and 1.40 and essentially tracked the euro’s ups and downs. GBP/USD fell to 1.3983 to reconfirm strong support at 1.40, on the release of Australia’s disappointing Q4 GDP. Thursday saw the Bank of England cut rates 50bps to 0.50% as expected with the central bank promising that it would now boost the money supply in a bid to revive the economy. Although the UK media widely misinterpreted this as a bid to print money, cable found support at 1.4050 after the news and then went on to recover. The pair tested 1.43 immediately after Friday’s US job numbers before closing the week at 1.4070. News broke on Saturday that the UK government is going to underwrite £260B of Lloyd TSB’s risky assets. This move will give the British government a 75% stake in the group and would not have been necessary if the bank had resisted government pressure to merge with stricken bank HBOS last September. It looks like sterling is in for a rocky ride this coming week.

Calendar notes
It promises to be a relatively quiet week in terms of economic data.

US: Tuesday sees Fed Chairman Ben Bernanke delivering a speech about financial reform. There’s the federal government budget balance on Wednesday, while Thursday has retail sales numbers and new unemployment claims lined up. Friday brings the US trade balance and the University of Michigan’s preliminary consumer sentiment.
Euro-zone: Expect important data out of Germany including the trade balance on Tuesday, producer price inflation and factory orders on Wednesday and industrial production on Thursday. The ECB monthly bulletin is also released on Thursday as is the euro-zone’s PPI. Friday 13^th sees EZ retail sales.
UK: Retail sales and house price numbers kick things off for the UK in the early hours of Tuesday. The trade balance will be released on Wednesday.
Japan: Keep your eye out for Japan’s final GDP, which is expected to be revised down.
Switzerland: The Swiss National Bank is expected to cut rates another 25bps to 0.25% on Thursday afternoon.
New Zealand: The Reserve Bank of New Zealand is expected to cut its interest rates 75bps to 2.75%.

Forecast
EUR/USD support: 1.2330; resistance: 1.2730 with an upside breakout seeing further resistance at 1.2830.
GBP/USD: support 1.3525; resistance 1.4300
USD/JPY: support 94.50; resistance: 99.70

EUR/GBP: The Lloyds TSB fiasco could well push this pair to an upside breakout of 0.9000. You’ll find some technical background on this here.

9.1 Dollar reigns supreme in risk-averse world.

EUR/USD followed up a relatively strong close above 1.28 the previous week, with a buoyant open. The euro had received a further boost the EU leaders’ meeting in Berlin (Sunday 22^nd). The meeting, chaired by German Chancellor Angela Merkel, agreed on broad principles for bolstering the regulation of global finance in advance of a summit of the G20 meeting scheduled for April 2^nd in London. The euro tested resistance a little below US$1.30 before settling into a range of 1.27-1.29 for most of the rest of the week. Fed Chairman Ben Bernanke told the Senate on Tuesday that he doesn’t believe any major banks are on the verge of failure and tried to dampen down speculation that banks would need to be nationalized. He also stressed the need for strong fiscal stimulus and strong government action to shake off the recession in 2009 and make 2010 a year of recovery. The markets responded positively and the euro followed them up to test 1.29 on Wednesday morning. The 16-country currency unit then came under some pressure after Moody’s downgraded the outlook for Greece’s government bonds from ‘positive’ to ‘stable’. The downgrade was far from being a surprise and although the euro weakened, support held at 1.27. There was more bad news out of the US on Thursday, with new unemployment claims, durable goods orders and new home sales all coming in worse than expected. Friday saw a higher than expected EU unemployment rate and lower than expected consumer inflation add to the already powerful arguments for an ECB interest rate cut next Thursday (March 5^th) and EUR/USD pushed below 1.27. The pair fell further to test 1.26 on the news that the US GDP had shrunk by an alarming 6.2%. This was the sharpest contraction since 1982 and fuelled fears that the White House’s projections for economic recovery are a tad too rosy. EUR/USD closed the week at 1.2676.

Cable spent the first two days ranging between 1.46 and 1.44. On Wednesday, UK GDP for Q4 2008 came in at -1.5%, the steepest contraction since 1980 and the pound started to weaken. It broke down support at 1.44 and came under further pressure when BoE policy maker David Blanchflower said that the UK’s recession will probably deepen “significantly”; adding that there were no signs of recovery as yet. The Bank of England is due to announce new interest rates on Thursday and a further cut looks very much on the cards. GBP/USD fell to test support at 1.42 until recovering to 1.4350. Bad news out of the US brought more support to the greenback and saw cable hitting a low of 1.4109 until rising to close at 1.4315.

The greenback rose above ¥95 for the first time in three months against a background of a deteriorating economic and political situation in the land of the rising sun. The yen has lost some of its safe-haven luster of late. However, I expect any further rise to meet strong resistance at ¥100. USD/JPY closed the week at 97.56.

Calendar Notes
It’s a big week next week and your mantra should continue to be buy the dollar on bad news and sell it on good.
Stateside, the big day is Friday, which has top market movers Non-Farm Payrolls and the unemployment rate in the mix (both at 13:30). As a run up to this, we’ve got the ADP job numbers on Wednesday (13:15) and Thursday’s weekly unemployment change data (13:30). Other releases to be aware of include are Monday’s and Wednesday’s PMI stats (both at 15:00) and Tuesday’s pending home sales (15:00). I’ll also be watching Ben Bernanke testify to the US Senate on Tuesday (15:00).

As I write this (Sunday March 1^st), European leaders are holding a crisis summit aimed at preventing the crisis causing deep rifts within the EU. Keep an eye on the news for announcements from the summit before markets open this evening.

The ECB will be making its interest rate announcement on Thursday (12:45). After January’s cut, ECB chairman Jean-Claude Trichet almost promised a cut in March. The arguments for a cut have been mounting since then, so a cut of 50bps is widely anticipated. The follow up press conference (13:30) triggers a lot of volatility as Jean-Claude drops hints about future policy, so take care. In the run up, Monday sees euro-zone manufacturing PMI (09:00), and consumer price inflation (10:00). Wednesday has the zone’s services PMI (09:00) lined up, while early Thursday morning brings German retail sales (07:00) and the revised euro-zone GDP (10:00).

The Bank of England is also making its interest rate announcement on Thursday (12:00). It will be releasing PMI data throughout the week (manufacturing on Monday; construction on Tuesday and services on Wednesday – all at 09:30). There’s more news from the ailing UK housing market this week with the Halifax HPI. Friday sees the UK’s producer price index (PPI at 09:30), bringing insight into price changes in Britain.

Tuesday morning sees the Reserve Bank of Australia make its interest rate announcement (03:30); with the Bank of Canada following through with its announcement (14:00) the same day.

Nb: all times GMT

Forecast:
EUR/USD: support @ 1.2512, resistance @ 1.2900.

GBP/USD: support @ 1.4050, resistance @ 1.4400
USD/JPY: support @ 95.80, resistance @ 100.00

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.