- Higher, spike in risk aversion as China's tightens monetary policy, consumer confidence rises
- Higher, China to hike reserve ratios on two major banks, BOJ policy unchanged, cuts deflation forecast
- Lower, above forecast German IFO fails to boost demand
- Lower, UK GDP disappoints, UK crawls out of recession, Pimco's Gross says avoid UK debt
- AUD & CAD lower, China's reserve ratio hike discourages demand for high yield currencies
Overview
USD traded higher Tuesday supported by a spike in risk aversion as equity markets decline in reaction to report that China hiked reserve ratios on some of its banks. Tightening of monetary policy in China generates concern about the global recovery. GBP was pressured by a report of weaker than expected UK Q4 GDP.EUR traded lower despite report that German IFO came in above forecast. GBP and EUR were pressured by selling in cross trade to the JPY with JPY supported by safe haven flows as equity markets decline. JPY traded higher despite S&P lowering of Japans bond outlook to negative from stable. S&P placed Japan on negative watch due to concern about Japan's rising debt load and lack of flexibility to deal with reducing the debt. Commodity currencies traded lower tracking the spike in risk aversion and weaker commodities with crude oil prices falling below $74 a barrel. There was limited reaction to report that Fed officials are considering adopting a new benchmark interest rate to replace the one used for the last two decades (Fed funds). According to a Bloomberg report Fed officials are considering interest on reserves as the new benchmark rate. Today's US economic data was mixed with case Shiller home price index down and consumer confidence rising. USD came off its high after the consumer confidence report. Focus turns to Wednesday's FOMC meeting and President Obama's State of the Union address.
Today's US data:
November case Shiller house price index reading came in at -5.3% a reading of -5.1 was expected. January consumer confidence rose to 55.9, a reading of 53.5 was expected.
Upcoming US data:
On January 27th, December new home sales will be released expected at 370k compared to 355k last month. On January 28th December durable goods will be released expected at 2% compared to 0.2% last month along with initial jobless claims for the week ending 01/23 expected at 450k compared to 482k last week. On January 29th advanced Q4 GDP will be released along with January Chicago PMI and final January University of Michigan. The Q4 GDP is expected to have risen by 4.5% compared to 2.2% in the third quarter. Chicago PMI's expected 57.5 compared to 58.7 last month and the University of Michigan sentiment is expected unchanged at 73.
JPY
JPY traded higher supported by a spike in risk aversion as equity markets drop in reaction to report that China has hiked reserve ratios for some Chinese banks. The Nikkei closed 178 points lower. JPY traded higher despite report that S&P has cut Japan's bond outlook to negative. The S&P downgrade of Japan's bond rating outlook reflects concern about rising Japanese debt load and lack of flexibility in Japan to deal with reducing the debt. After the ratings outlook cut was announced Japan's finance minister pledged fiscal discipline and JPY firmed. The MOF's Noda also said that Japan will communicate with markets to avoid Japan's debt rating downgrade. There was limited reaction to report that the BOJ held monetary policy unchanged as expected. The BOJ said that the economy is improving but domestic demand remains weak and they see the potential that CPI will likely be higher than forecast at the October policy meeting. Japan's December corporate service price index declined by 1.5%. The corporate service index decline confirms continuing deflationary pressures in Japan. Japan's Finance Minister Kan says he hopes that Japan exits from deflation in 2 to 3 years. JPY was also supported by sharp gains in cross trade with AUD/JPY declining 1.6%. GBP/JPY was down sharply after the release of weaker than expected UK Q4 GDP and the EUR/JPY cross traded at a nine-month low. JPY price direction has re-linked to risk aversion and the direction of equities and continues to find support as stocks decline. Japan's PM Hatoyama said there's no immediate need to take steps on the JPY rise or the Nikkei decline.
This week's Japanese economic calendar includes January 27th release of December trade balance expected at ¥590bln compared to ¥374bln last month. On January 28th December retail sales will be released expected to rise by 0.3% compared to 0.2% last month. On January 29th of December CPI will be released expected unchanged at -0.2%. December household spending, unemployment, industrial output housing starts and construction orders will also be released on January 29th. The unemployment rate is expected to rise by 0.1% to 5.3%. Industrial output is expected to rise by 2.5% compared to 2.2% last month. Housing starts are expected to rise by 2% compared to 4.7% last month. Construction orders are expected to fall by 24% compared to 11.6% last month.
Key technical levels to watch in USD/JPY include support at 88.83 the December 18th low with resistance at 91.88 the January 21st high.
EUR
EUR traded lower despite report of above forecast German IFO and the positive reception to the Greek bond auction Monday. The EUR decline is attributed to a spike in risk aversion as news from China dominates the markets. The tightening of China's monetary policy dampens risk appetite and sparked demand for the USD and JPY. The EUR traded a nine-month low versus the JPY. German January IFO improved to 95.8 from 94.6 last month. The German IFO is at an 18 month high. IFO officials indicated that they do not expect a change in ECB interest rates despite improving business sentiment in Germany. The trade also shrugged off report that German import prices rose by 0.5% in December. The ECB's Stark however said that the ECB will look on a quarter by quarter basis to determine whether it will continue liquidity operations and said that the economic outlook remains highly uncertain. The next major focus for EUR trade will be the February 4th ECB policy meeting. The ECB is expected to hold monetary policy unchanged and continue to gradually withdraw liquidity. Focus turns to EU inflation data later in the week.
On January 27th German January CPI will be released expected at 1% compared to 0.8% last month. On January 28th German December unemployment will be released expected at 8.2% compared to 8.1% last month along with EU January business climate expected at -1.1 compared to -1.2 last month. On January 29th EU December M3 will be released expected at -0.5 and 0.2% last month along with January CPI expected at 1.2% compared to 0.9% last month.
The technical outlook for the EUR is negative as the EUR trades below 1.4100. Expect EUR support at 1.4030 the January 21st low with resistance at 1.4295 the January 20th high.
GBP
GBP traded lower pressured by disappointing UK Q4 GDP report. UK Q4 GDP rose by just 0.1% the trade had expected a 0.4% rise. UK annual GDP declined by 3.2%. The UK GDP report suggests that the UK economy is crawling out of recession but the recovery will likely be slow due to high unemployment and tight credit conditions. After the release of UK GDP a UK treasury official said that the report shows that it's right for the government to continue to support the economy. The UK GDP report is likely to encourage the BOE to continue with its asset purchase plans and maintain low yields. There was little reaction to report that UK December mortgage approvals rose to 45,897 from 44, 897 last month with December net mortgage lending at 3.5bln compared to 3.4bln last month. GBP outperformed last week partly in reaction to report of higher than expected December consumer price index. The GBP outperformance was impressive in light of the weakness in global equity markets late last week. The CPI rise may bring the timeframe for the end of BOE asset purchase plan forward. UK December CPI was reported at 2.9% and the CPI is approaching the high end of the BOE's inflation target range. The BOE's inflation target is 1 to 3%. BOE officials indicated that the asset purchase plan will be under review. Earlier in the month BOE Sentance indicated that the BOE may need to pause its asset purchase plan consider the possibility of hiking rates this year. In light of today's report of weaker than expected UK Q4 GDP it may be a while before the BOE takes action to normalize monetary policy and the GDP data may encourage calls for the BOE to expand its asset purchase plan.
On January 27th January CBI distributive trades will be released expected at 8 compared to 13 last month. On January 29th, January Nationwide home price index will be released.
The technical outlook for GBP is mixed as GBP holds above 1.5900. Expect near-term support at 1.5900 the January 7th low with resistance at 1.6285 the January 22nd high.
CAD
CAD traded at a five week low pressured by a decline in crude prices, weaker equity markets and in reaction to report that China will hike reserve ratios for two of its banks by an additional 0.5% to try to curb lending and cool economic expansion and inflationary pressures. The decline in equities sparked a jump in risk aversion and limits demand for high-yield currencies. The Chinese tightening generates concern about the outlook for the global recovery. The Canadian economy is highly dependent on export demand and the trade will be watching to see if China takes additional efforts to slow growth. CAD was also pressured by an S&P downgrade of Japan's credit outlook from stable to negative. The Japanese news adds to risk aversion and concern about global growth. CAD traded sharply lower last week pressured by deleveraging sparked by weaker equity market trade and China's tightening. Earlier in the month China indicated that it would begin to take measures to curb lending. China's tightening sparked fears that the global recovery could be at risk. The BOC elected to hold monetary policy steady last week and monetary policy is likely to remain on hold as Canada reports a larger than expected decline in inflation. There were no major Canadian economic reports released in today's trade. CAD price direction remains tied to the outlook for commodities and equities. The trade will be watching closely whether China takes additional steps to reduce liquidity. Focus turns to Canada's GDP due for release later in the week.
This week's Canadian economic calendar includes Friday's release of December producer price index and GDP. December IPPI is expected at 0.4% and RMPI is expected at 1.2%. November GDP is expected unchanged at 0.2%.
The technical outlook for CAD is negative as USD/CAD trades above 1.0600. Look for near-term support at 1.0438 the January 21st low with resistance at 1.0700 the December 21st high.
AUD
AUD traded lower as China hikes reserve ratios, S&P warns on Japan's bond rating and stocks and commodities trade weaker. The hike in China's reserve ratio generates concern about the global recovery. The S&P warning on Japan's debt rating sparked safe haven flows limiting demand for high-yield currencies like the AUD. AUD/JPY cross traded 1.8% lower. AUD traded lower last week pressured by a spike in risk aversion as global equity markets weakened in reaction to China's tightening of liquidity, uncertainty about Bernanke's job tenure and President Obama's proposal of new US bank regulations. The BOE's King said he sees merit in the US bank regulation proposals and that more central banks may want to follow the US example. King's comments add to market fears about global bank regulation. AUD may also be vulnerable to diminished RBA rate hike speculation as Australian inflation data comes in weaker than expected. Australia's Q4 PPI came in weaker than expected. The weaker Q4 PPI may be a prelude to weaker Australian CPI. Focus turns to Tuesday's release of Australian CPI report. The CPI report will be a key factor in the RBA's interest rate calculus. A weaker than expected CPI report would raise doubts about a February RBA rate hike. Next RBA policy meeting is scheduled for February 2nd.
This week's Australian economic calendar includes a January the 27th release of Q4 CPI expected at 0.4% compared to 1% last quarter. On January 29th December private sector credit will be released expected at 1.1% compared to 0.8% last month.
The technical outlook for the AUD is mixed as the AUD holds above 8800. Expect AUD support at 8902 the December 30th low with resistance at 9093 the January 22nd high.
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