- Higher, bigger than expected downward revision in Q3 GDP, existing home sales surge
- Lower, BOJ to combat deflation, government says BOJ effectively set inflation target
- : Lower , Moody's downgrade of Greece debt rating, German consumer confidence falls
- Lower, smaller than expected upward revision in UK Q3GDP
- AUD lower & CAD higher, Australia's LEI declines, Canada's GDP expected to rise
Overview
USD and equity markets continue to trade higher as the inverse correlation for the USD and risk appetite breaks. Investors are liquidating short USD positions and unwinding USD carry trades before year-end. Optimism about the US recovery and speculation that the Fed will begin to withdraw stimulus sooner than expected supports the USD. EUR traded lower as Moody's cut Greece's sovereign debt rating and in reaction to report of an unexpected decline in German consumer confidence. EUR downside was is limited by gains in cross trade to the GBP and JPY with GBP pressured by report of smaller than expected revision in UK Q3 GDP and JPY pressured by BOJ pledge to fight deflation and set an inflation target. Commodity currencies traded mixed despite improving equity market trade pressured by weaker crude prices as OPEC leaves oil production levels unchanged. AUD was pressured by report of an unexpected drop in Australia's LEI. CAD continued to outperform supported by optimism about improving growth outlook in North America. Today's US economic data was mixed with Q3 GDP revised down more than expected and existing home sales rising more than expected. USD traded to the day's highs after the release of better than expected existing home sales. USD continues to benefit from improving outlook for the US recovery. Today's US existing home sales report fuels optimism about the US recovery.
Today's US data:
Final Q3 GDP was revised 2.2% from 2.8%, a reading of 2.7% was expected. November existing home sales rose 7.4% to 6.54mln units, the trade had expected a rise to 6.25mln.
Upcoming US data:
On December 23rd personal income and consumption for November will be released along with November PCE deflator, final December University of Michigan sentiment and November new home sales. Personal income and consumption are expected to rise by 0.4%. The PCE deflator is expected unchanged at 1.4%. Michigan sentiment is expected at 74 compared to 73.4 last month. Home sales are expected at 440k compared to 430k in October. On December 24th initial jobless claims for week ending 12/19 will be released expected at 476k compared to 480k last week along with November durable goods expected to rise by 0.3% compared to -0.6% last month.
JPY
JPY traded at a six-week low versus the USD pressured by the BOJ's pledge to combat deflation. Japan's national strategy minister said the BOJ has effectively set an inflation target. BOJ Governor Shirakawa said that the BOJ will fight deflation and keep rates near zero. The BOJ has been under consistent pressure from the Japanese government to take action to fight deflation and boost the economy. In early December the BOJ elected to increase its funding activity by ¥10trln to fight inflation and late last week the BOJ concluded a two-day policy meeting and stated that they would not tolerate CPI at or below zero. The BOJ's focus on combating deflation encouraged speculation that the BOJ may be forced to ease monetary policy in early 2010. There was little reaction to report that Japan's December Reuters Tankan survey improved the -27 or a statement from former MOF official Sakakibara the JPY may trade 80 in first half of 2010. Sakakibara said that the BOJ has exhausted almost all options to keep the JPY from rising and that a move to 80 could derail the Japanese recovery. This week's key focus for the JPY will be Thursday's CPI release.
On December 25th November CPI will be released expected at -0.2% compared to -0.4% last month. November household spending, employment housing starts and construction orders will also be released on December 25th. Household spending is expected to fall by 0.5% compared to 0.7 last month, unemployment is expected to rise to 5.2% from 5.1% last month, housing starts are expected to fall by 4.5% compared to 9% last month and construction orders are expected to fall by 28.9% compared to -40.1% last month.
Key technical levels to watch in USD/JPY include support at 90.65 with resistance at 92.55 the September 21st high.
EUR
EUR traded lower pressured by Moody's downgrade of Greece's sovereign debt rating, report of an unexpected decline in German consumer confidence and in reaction to better than expected US existing home sales report. EUR was initially supported by gains in cross trade to the GBP and JPY and by speculation that Moody's sovereign debt rating for Greece will allow Greece to successfully issue new debt. Moody's downgraded Greece's debt rating to A2 from A1 and said the outlook is negative but a crisis is still distant. German GFK consumer confidence came in at 3.3 compared to 3.7 last month reading of 3.5 is expected. EUR edged higher after the release of weaker than expected US final Q3 GDP then turned lower after report of a surge in US existing home sales. Concern about sovereign debt outlook in the EU and risk of weaker than expected recovery are the main negatives for the EUR. Uncertainty about sovereign debt risks in the EU generates concern about the stability of European monetary Union and the credibility of the EUR. The EUR looks much less attractive as an alternative to USD as a reserve currency in light of sovereign debt worries in the EU. EUR traded at a three-month low versus the USD last week pressured by S&P downgrade of Greece's debt rating and speculation that upbeat assessment of US economic outlook by the Fed sets the stage for the beginning of the Fed's tightening cycle. A Barclay's survey finds that the most underpriced risk in the financial markets is the risk of a double dip recession. According to Barclays the USD may benefit from fresh market turbulence if the global recovery falters.
On December 23rd EU October industrial orders will be released expected it 1% compared to 1.5% last month.
The technical outlook for the EUR is negative as the EUR breaks trend line support. Expect EUR support at 1.4045 the August 17th low with resistance at 1.4332 the December 22nd high.
GBP
GBP traded lower pressured by smaller than expected upward revision in UK final Q3 GDP. UK final Q3 GDP was revised to -0.2% from 0.3%, the trade expected the revision to be at -0.1%. The GDP report generates concern about the strength for the UK recovery and adds to uncertainty about BOE policy outlook and BOE decision on whether to maintain the current level of asset purchases. Today's GDP report follows Monday's report from the CBI which forecasts UK employment will continue to rise in 2010. GBP was also pressured by a report from the Royal Institution of Chartered surveyors said that the UK housing market recovery will fade in 2010 as more homes become and the government begins its exit strategy from fiscal stimulus. There was little reaction to report that the UK Q3 current account deficit widened to 4.7bln from a revised 4.4bln, the trade had expected a deficit of 8.7bln. GBP remains vulnerable to uncertainty about BOE policy outlook and UK budget outlook. Last week the BOE left interest rate policy unchanged and said it will maintain its current level of asset purchases. The BOE left interest rates unchanged at a record low 0.5% and the level of asset purchases at £200bln. The BOE is expected to wait until the release of the February inflation report before it decides to make any adjustments in monetary policy or in the size of its asset purchase plan. The UK reported a record that public sector borrowing in November and the cost of financing the UK budget may be increasing as UK long-term yields rise in reaction to stronger equity market trade. Election jitters may be also weighing on the GBP as the latest UK election polls show that conservatives will fall short of a majority in next years general election in the UK. UK election is expected sometime between March and May of 2010. Focus turns to Wednesday's release of BOE policy minutes.
This week UK economic calendar includes the December 22nd release of final Q3 GDP expected at -0.3% along with the Q3 current-account expected at -11.80bln.
The technical outlook for GBP is negative as GBP trades below 1.6100. Expect near-term support at 1.5902 the October 14th low with resistance at 1.6340 the December 17th high.
CAD
CAD continued to outperform trading higher Tuesday despite weaker crude prices. CAD is supported by higher equity market trade, optimism about economic recovery in North America from and speculation that acceleration in Canada's economic recovery could lead to an earlier than expected rate hike from the Bank of Canada. Canada will release its GDP estimate for October on Wednesday. The GDP report is expected to show that the Canadian economy continues to expand. At the BOC policy meeting in December f the BOC reaffirmed its pledge to leave interest rates at record lows through June 2010 as long as inflation remains in check. Last week BOC Governor Carney said that the BOC's pledge to keep rates low until mid to 2010 is conditional and the BOC has flexibility to shorten the time frame for the rate commitment. Canada reported higher than expected CPI. Canada's November CPI rose by 0.5% m/m and 1% y/y with core inflation at 0.4% m/m and 1.5% y/y. Carney's comments appear to open the door for an earlier BOC rate hike if inflationary pressures continue to mount. Improving Canadian GDP could add upward pressure on Canada's inflation rate. Next BOC policy meeting is scheduled for January 19th.
This week's Canadian economic calendar includes the December 23rd release of October GDP expected at 0.5%.
The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0480 the December 7th low with resistance at 1.0780 the November 9th high and 1.0855 November 3rd high.
AUD
AUD traded lower despite firmer equity market trade. AUD was pressured by report of an unexpected drop in Australia's LEI and continued long liquidation ahead of year end. Australia's October LEI declined by 0.3%. The decline in Australia's LEI adds to recent fears that RBA rate hikes have contributed to slowing of recovery in Australia's domestic economy. AUD has been pressured by concern about the outlook for Australia's economy and diminished RBA rate hike speculation. At the start of December investors were looking for the RBA to hike rates by 50 basis points in February. The trade now is looking for the RBA to pause in its tightening cycle because the sustainability of the economic recovery in Australia becomes less certain. Although the RBA was the first major industrialized central bank to hike interest rates this year recent statements from the RBA suggest that further rate hikes are less certain. Last Wednesday the RBA's deputy governor Battelino said that Australian interest rates are back in the normal range and he sees less need for a rate hike if loan rates keep rising. His comments follow Tuesday's release of the RBA policy minutes for December. The RBA policy minutes were seen as less hawkish and dampen speculation that the RBA will hike rates aggressively at the start of 2010. The minutes for the December RBA policy meeting said that arguments for a rate hike are finely balanced and that the current rate structure is less accommodative. Australia also reported weaker than expected Q3 GDP which adds to speculation that the RBA will soon pause its rate hike cycle. AUD remains vulnerable to diminished RBA rate hike speculation and speculation that Fed is moving closer to the end of its ease cycle.
The technical outlook for the AUD is negative as the AUD drops below 8900. Expect AUD support at 8755 the October 6th low with resistance at 9010 the December 17th high.
|
