- Lower, jobless claims rise, PPI higher than expected, Philly Fed improves, LEI rose less than expected
- Higher, BOJ holds monetary policy steady, no expansion of QE, Yuan revaluation speculation
- Lower, rumors of SNB intervention in EUR/CHF cross, stocks higher, Italian debt troubles
- Lower, worse than expected public-sector borrowing in January, mortgage approvals decline
- AUD & CAD higher, IMF gold sales, Canadian CPI nears BOC target, CRB rebounds
Overview
USD opened near a nine-month high Thursday supported by a number of factors which include Wednesday's report that the FOMC had considered a 25bps discount rate hike in January, in reaction to stronger than expected US economic data, and by fresh sovereign debt concern with the focus shifting to Italian debt troubles. Wednesday the US reported strong housing and industrial production data. These reports encourage speculation that the US recovery is gaining momentum and fuel speculation of an earlier Fed rate hike. The EUR was pressured by a Dow Jones report that says derivative contracts used by Italian municipalities could magnify debt imbalances over time. European sovereign debt concern continues to pressure the EUR and GBP. GBP traded lower pressured by report that the UK posted its first January budget deficit on record. The commodity currencies opened lower pressured by report that the IMF looks to sell 191.3 tons of gold. News of the IMF gold sales sparked selling of commodities. The AUD downside was limited by hawkish comments from the RBA's Lowe and rising Australian consumer confidence. CAD turned higher in reaction to report that Canada's CPI rose sharply in January with the annual inflation rate approaching the BOC's 2% target. JPY traded higher supported by a drop in risk appetite and in reaction to the BOJ's decision to hold monetary policy steady and not expand quantitative ease. The BOJ has been under pressure from the Japanese government to take additional measures to combat deflation. JPY was also supported by speculation that China may allow the Yuan to appreciate by as much as 5% next month. Yuan appreciation could help China slow the pace of its recovery. Today's US economic data was mixed with initial jobless claims posting an unexpected rise. PPI came in higher than expected. The PPI report suggests that inflationary pressures are rising in the US. Rising inflation could encourage more Fed rate hike speculation. The Philly Fed survey came in slightly higher than expected and leading indicators came in below expectation. The employment component of the Philly Fed showed improvement and stocks edged higher. USD turned lower after the release of today's US economic reports as US equity markets trade higher.
Today's US data:
Initial jobless claims for week ending 02/13 rose by 31k to 373k, a reading of 430k was expected. January PPI rose by 1.4%, a rise of 0.7% was expected. Core PPI rose by 0.3%. January leading rose by 0.3%, a 0.6% rise was expected. The February Philly Fed rose to 17.6, a reading of 17 was expected.
Upcoming US data:
On February 19th January CPI will be released expected at 0.3% compared to 0.1% last month.
JPY
JPY traded higher supported by the BOJ's decision to leave monetary policy unchanged and in reaction to Yuan revaluation speculation. JPY traded sharply lower Wednesday partly in reaction to speculation that the BOJ might succumb to pressure to expand quantitative ease to combat deflation in Japan. The Japanese government has been encouraging the BOJ to take more action to fight deflationary pressures. The BOJ elected to hold monetary policy steady and not expand quantitative ease at Wednesday's policy meeting. The BOJ governor specifically called on the Japanese government to respect the BOJ's independence. This pushback by the BOJ sparked demand for the JPY. Over the past few weeks speculation that China may allow a gradual appreciation of the Yuan has emerged with Blue Gold Capital Management stating that China may let its currency appreciate by as much as 5% next month. The JPY sometimes is substituted as a proxy for Yuan revaluation speculation. We noted in a special report Wednesday that because the Yuan is pegged it limits the measures that China can employ to control lending and money supply growth. A gradual appreciation of the Yuan would likely curb some of China's export sales and help China stop the economy from overheating. In its policy statement the BOJ said that the economy is improving but domestic demand lacks momentum. The BOJ expects the pace of the Japanese recovery to remain moderate and pledged to keep monetary conditions accommodative. Fresh concern about sovereign debt risk in Europe with focus shifting to debt troubles in Italy sparked a drop in risk appetite and generated safe haven flows to the JPY. JPY firmed in cross trade gaining versus the AUD in reaction to report that the IMF plans more gold sales, gaining versus the GBP in reaction to report that the UK posted its first budget deficit in January on record and gaining versus the EUR in reaction to concern about bad loans in Italy. JPY price direction will continue to track risk sentiment and news in regard to the EU debt crisis.
On February 19th December all industry activity will be released expected at 0.2% compared to 0.1% last month.
Key technical levels to watch in USD/JPY include support at 90.14 the February 17th low with resistance at 91.88 the January 21st high.
EUR
EUR traded near a nine-month low versus the USD pressured by fresh concern about EU sovereign debt risk with focus shifting to Italian debt troubles. Late yesterday there were reports that a number of Italian municipalities may be exposed to debt troubles because of the impact of the use of derivative contracts. According to Noble Bell Prize winning economist Mundell Italy is saddled with the EU's second-largest debt and is the biggest threat to EMU. Mundell says that Italy has €1.8trln in debt, five times that of Greece and it would be as very difficult for the EU to bailout Italy. The EUR was also pressured by rate hike speculation as the FOMC minutes for January indicate that the Fed debated hiking the discount rate. The ECB is widely believed to be restricted in exiting its extraordinary monetary policy measures because of concern about the impact of sovereign debt risk on the EU recovery. Yield and growth differential appear to be moving more in favor of the USD. Negative sentiment towards the EUR may be reaching an extreme as spec short EUR positions are at a record high and the IMM. This means that the EUR maybe ripe for a technical bounce. EUR turned higher midsession supported by gains in cross trade to the CHF. EUR cross gains were sparked by SNB intervention rumors. Focus turns to tomorrow's release of the manufacturing and services PMI.
On February 19th, February manufacturing and services PMI will be released. The manufacturing PMI index is expected at 52.8 compared to 52.4 last month and the services PMI is expected at 52.7 compared to 52.5 last month.
The technical outlook for the EUR is negative but the EUR is ripe for a short covering rebound due to oversold technical conditions. Expect EUR support at 1.3635 the February 16th low and 1.3425 the May 18th low with resistance at 1.3670.
GBP
GBP traded lower pressured by concern about the UK budget deficit and in reaction to mixed UK economic data. The UK posted its first budget deficit for January since 1993 with January public-sector borrowing reported at 4.3bln. The January deficit revives concern about funding of the UK deficit and the risk that if the UK does not take action to reduce the deficit the UK's AAA debt rating may be cut. The UK reported that mortgage approvals posted an unexpected decline to 49k from 60k last month. Yesterday the UK reported a surprise rise in jobless claims with jobless claims at their highest level in 13 years. These reports suggest there be UK economic recovery remains weak with tight credit conditions and rising unemployment limit growth. February manufacturing CBI rose to its best level in 14 months at -36 from -39 last month. The BOE elected to hold monetary policy steady in February and maintain the current level of quantitative ease but left the door open for expansion of quantitative ease if the recovery falters. The BOE's Barker warned of another contraction in UK growth. Her comments may revive speculation that the BOE will be forced to expand quantitative ease. GBP remains vulnerable to concern about UK debt, economic outlook and possibility of an expansion of the BOE's quantitative ease. In addition, the latest UK election polls continue to point to the risk of a hung parliament. A hung parliament would make it difficult for the UK government to address the budget deficit.
January retail sales will be released on February 19th expected at 0.6% compared to 0.3% last month.
The technical outlook for GBP is negative as GBP trades below 1.5700. Expect near-term support at 1.5515 the May 21st low with resistance at 1.5816 the February 17h high.
CAD
CAD initially traded lower in reaction to report that the IMF plans to sell 191.3 tons of gold. CAD rebounded to trade higher in reaction to report of a bigger than expected rise in Canada's CPI. Canada's January CPI rose by 0.3% with the annual inflation rate at 1.9%. The annual inflation rate jumped close to the 2% BOC inflation target. Although one month's data is unlikely to change the outlook for steady BOC policy the BOC has tied its pledge to maintain low yields through June 2010 long as inflation remains in check. In its quarterly report the BOC reaffirmed its low rate pledge and made no change in growth or inflation forecasts. Today's CPI report is a positive for the CAD. CAD was also supported by a recovery in the price of gold and crude prices as the IMF gold sales are expected to be phased in and there were reports of a gun battle in front of the presidential palace in Nigeria. CAD was also supported by report of stronger than expected net foreign investment flows for December. Canada's foreign investment flows rose by 11.2bln in December, the trade had expected a rise of about 8bln. For 2009 Canada posted to record 109.4 billion in net foreign investment inflows with most of the inflows to Canadian bonds. CAD will continue to track risk sentiment and the direction of crude.
On February 19th December retail sales will be released expected at 0.6% compared to -0.3% last month.
The technical outlook for CAD is mixed to positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0380 with resistance at 1.0580 the February 12th high.
AUD
AUD traded mixed initially pressured by report that the IMF plans to sell 191.3 tons of gold. AUD downside was limited by hawkish comments from the RBA's Lowe and report of improving Australian business confidence. Lowe said that the outlook for the Australian economy is positive and he expects interest rates return to more normal levels. Lowes' comments follow yesterday's release of the RBA minutes which suggest that the RBA is considering future rate hikes and an article written by RBA watcher McCrann. McCrann said that he expects the RBA to hike interest rates 200 bps this year with a 25 bps rate hike expected in March. Australia's Q4 NAB business confidence rose by two points to +18.The business confidence index is at a 15 year high. The rise in the business confidence confirms that the Australian domestic economy is improving. There was limited reaction to report that Australia's central bank sold A$295mln this in January. The small amount of RBA AUD sales suggests that the RBA is not overly concerned about the current level of the AUD. AUD should remain well supported on breaks by RBA rate hike speculation and improving outlook for the global recovery.
The technical outlook for the AUD is positive as the AUD trades above 9000. Expect AUD support at 8928 the February 2nd low with resistance at 9093 the January 22nd high.
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