- Mixed, ADP employment falls more than expected, non-manufacturing ISM confirms expansion
- Lower, pressured by political and fiscal uncertainty as Japan's finance minister resigns, carry trade
- Higher, ECB's Stark says EU may not bail Greece out of its deficit problems, services PMI and PPI rise
- Higher, consumer confidence unexpectedly drops, shop prices rise at fastest rate in 13 months
- AUD & CAD higher, Australia reports strong building approvals and vehicle sales
Overview
USD traded mixed Wednesday gaining versus the JPY and European currencies and weakening versus the commodity currencies. JPY experienced significant volatility and traded lower in reaction to report that Japan's Finance Minister Fujii has resigned because of health concerns. His resignation generates uncertainty about Japan's fiscal outlook. JPY has recently weakened pressured by concern about a possible downgrade of Japan's sovereign debt rating if Japan does not reduce its deficit. EUR traded lower in reaction to a statement from the ECB's Stark that the EU may not bail Greece out of its deficit problems. EU downside was limited by report of improving EU service PMI and an uptick in EU inflation. GBP was pressured by report of an unexpected decline in UK consumer confidence which posted its sharpest monthly drop for the year. Commodity currencies edged higher supported by firmer metals and gains in cross trade with the AUD supported by report of strong Australian building approvals and CAD supported by report the Canada plans to issue another euro bond. Part of today's JPY weakness and gains in commodity currencies is attributed to fresh JPY carry trades. ADP reported a bigger decline in December employment than had been expected. The ADP report had limited impact on FX trade. The November ADP report significantly undershot last months nonfarm payrolls release. The ADP report suggests that US nfp will be around -15k. Challenger employment survey however says that December job cuts fell 73% from a year ago and are down 10% since November. Focus turns to this afternoon's release of the FOMC policy minutes for the December meeting. The trade will be looking to see whether the Fed confirms that it will maintain low yields for an extended period.
Today's US data:
December ADP was reported at -84k, reading a -73K was expected. December nonmanufacturing ISM rose to 50.1, reading of 50.5 was expected.
Upcoming US data:
On January 7th initial jobless claims for the week ending 01/02 will be released expected at 445k compared to 432k last week. On January 8th December nonfarm payrolls and unemployment will be released. Nonfarm payrolls are expected to come in at -8k compared to -11k last month. The unemployment rate is expected to rise 0.1% to 10.1%. November consumer credit will also be released on January 8th expected at -4.40bln compared to -3.51bln last month.
JPY
JPY traded lower pressured by uncertainty about Japan's fiscal outlook and JPY policy sparked by news that Japan's Finance Minister Fujii has resigned due to health concerns. Japan's Deputy Prime Minister Kan will replace Fujii as Japan's finance minister. The JPY has recently been pressured by concern about Japan's budget outlook and sovereign debt rating. In December Japan announced a record budget deficit and that tax revenues would not cover the deficit shortfall for the first time since World War II. This means that Japan will have to issue a significant amount of new bonds to finance the deficit. Ratings agencies have warned that Japan's sovereign debt rating could be downgraded if Japan does not keep its bond issuance below ¥44trln. The trade wants to see what Kan says about Japan's budget and how he will deal with Japan's fiscal outlook. Japan's former Finance Minister Fujii sparked a sharp JPY rally last September after he said that a strong JPY was the in the best interest of Japan. Fujii's strong JPY comments led some to believe that the new Japanese government was no longer pursuing a weak JPY policy. The trade will be closely monitoring Kans comments about JPY price levels. The Fujii resignation generates political and fiscal uncertainty in Japan. JPY remains vulnerable to concern about Japans fiscal discipline. Japan's new Finance Minister Kan is expected to face pressure to boost spending for the economy. Former Finance Minister Fujii was credited with trying to strike a balance between supporting the economy and maintaining fiscal discipline. Kan has also been a critic of the BOJ in the past and may exert more pressure on the BOJ to support the economy. USD trimmed gains after the release of weaker than expected ADP employment and rallied after report that US services rose back above 50. A reading above 50 suggests the US service sector is expanding.
On January 8th November preliminary leading indicators will be released expected at 2.2% compared to 2.5% last month.
Key technical levels to watch in USD/JPY include support at 91.10 the December 24th low with resistance at 93.22 the January 4th high.
EUR
EUR traded mixed to higher rebounding from a sharp selloff in overseas trade sparked by a statement from the ECB Stark that the EU may not bail Greece out of its deficit problems. Stark said that no EU member state would rescue a nation as it tries to rein in its budget gap. Recent downgrade of debt ratings in Greece and Spain and cut of Iceland's debt rating Wednesday generate concern about sovereign debt risk in the EU. Iceland's finance minister pledged that the country would not default on its debt. Greece pledged Monday to cut its deficit to 3% from GDP. Greece's GDP debt ratio is currently 12.7%. A large portion of the EUR 5% decline versus the USD in December was attributed to concern about EU exposure to deficits in peripheral European countries. EUR downside was limited by report of improving services PMI and an uptick in PPI along with a statement from the ECB's Noyer said he sees no deflation risk for the EU. EU November PPI rose by 0.1% and December services PMI improved to 53.6 from 53 last month. Noyer's comments suggest that ECB policy will remain on hold. Monday the EU reported a sharp acceleration in December CPI. EU December CPI arose by 0.9% compared to 0.5% last month. The outlook for the EU recovery remains mixed as the EU reported a 2.2% decline in industrial orders for October. EUR remains vulnerable to concern about EU sovereign debt risk.
On January 7th EU December economic sentiment will be released along with November retail sales. Economic sentiment index is expected at 90 compared to 88.8 last month. Retail sales are expected to rise by 0.1% compared 0.0% last month.
The technical outlook for the EUR is mixed as the EUR struggles to hold above 1.4400. Expect EUR support at 1.4220 the December 22nd low with resistance at 1.4485 the January 5th high.
GBP
GBP traded mixed initially pressured by UK economic data. UK December nationwide consumer confidence index posted an unexpected decline falling at its fastest monthly pace year-over-year. The December consumer confidence index declined to 69 from 74 in November. The drop in consumer confidence generates questions about the strength of the UK economic recovery. GBP downside was limited by report that BRC shop price index rose at its fastest pace in 13 months reported up 2.2% and December services PMI rose to 56.8 from 56.6 last month. Focus turns to Thursday's BOE policy meeting. No policy change expected. The BOE may take interest in the report of a rise in shop price index as recent UK economic data suggest that inflationary pressures may be building in the UK. UK officials have indicated that an inflation rise is likely to be temporary and inflation will fall back to target in early 2011.The BOE is expected to wait to see inflation figures in February before deciding whether a pause in its asset purchase plan is justified. Expect the BOE to maintain interest rates at 0.5% and the current level of asset purchases at £200bln. GBP remains vulnerable to concern about UK debt outlook and election uncertainty.
The technical outlook for GBP is mixed to negative as GBP struggles to hold above 1.6000. Expect near-term support at 1.5832 the December 30th low with resistance at 1.6155 the January 5th high.
CAD
CAD traded higher as growth related currencies outperform and commodity prices remain well supported. CAD is building on Tuesday's gains that were sparked by report increased inflationary pressures in Canada and improving risk appetite. Canada's inflation outlook may become an important factor for BOC policy. The BOC reaffirmed its pledge at its December policy meeting to maintain yields at record low levels through June of 2010 as long as inflation remains in check. BOC Governor Carney said that the pledge to keep rates low until mid 2010 is conditional and that the BOC has flexibility to shorten the time frame for the rate commitment. Tuesday's producer prices data may encourage speculation that the BOC will shorten its timeframe for maintaining low yields. Gold and copper prices continued to rally Friday and crude is trading at a 15 month high. CAD was also sported by announcement that Canada plans to issue general bonds. Canada plans to issue euro bonds to diversify FX reserves. It's not clear what this may mean for the CAD but some analysts suggest that the issuance of Eurobond will keep Canada on investors' radar screens. The bond issuance could also be seen as raising capital as a prelude to possible intervention. Other analysts suggest that this is another shift away from the USD which makes intervention less likely.
On January 7th December Ivey PMI will be released expected at 52 and 55.9 last month. On January 8th December unemployment and employment growth will be released. December unemployment is expected unchanged at 8.5% with employment growth at 20k compared to 79k last month.
The technical outlook for CAD is positive as USD/CAD trades below 1.0400. Look for near-term support at 1.0207 the October 15th low with resistance at 1.0517 the January 4th high.
AUD
AUD traded higher supported by positive Australian economic data and gains in cross trade to the JPY. Australia's November building approvals rose by 5.9% and December vehicle sales rose by 3.2%. These reports suggest that the Australian domestic economy has weathered recent RBA rate hikes. There was limited reaction to report that December PSI dipped to 50 from 52.5 in November. AUD /JPY traded over 1% higher with JPY pressured by report that Japan's finance minister resigned. The resignation generates concern about Japan's fiscal outlook. AUD has benefited from Monday's release of strong Chinese economic data. On Monday, China reported a sharp increase in manufacturing PMI and producers in China have raised prices at the fastest pace in 17 months. The growth outlook in Asia is key to the demand for commodities and exports from Australia. AUD had been experiencing significant selling pressure sparked by diminished RBA rate hike speculation and concern that recent RBA rate hikes have contributed to weaker than expected domestic growth in Australia. At the start of December investors were looking for the RBA to hike rates by 50 bps in February. The trade now looks for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia is less certain. Today's strong domestic data from Australia clouds the outlook for RBA policy and makes a pause in February less certain. Financial futures are pricing the odds of a February RBA rate hike at 50/50.
Is On January 7th November retail sales and November trade balance will be released. Retail sales are expected to rise by 0.6% compared to 0.3% last month. The trade balance is expected at -2.5bln compared to -2.3bln last month.
The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 9092 the January 5th low with resistance at 9295 the December 4th high.
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