- Mixed, ISM manufacturing rises more than expected, USD slips on improving risk appetite
- Lower, Finance Minister Kan calls for more action to combat deflation, US equity market rally
- Higher, manufacturing PMI rises to a two-year high, Greek debt woes limit gains
- Higher, manufacturing PMI beats expectation, threat of SNB intervention, UBS collapse warning
- Mixed, mortgage approvals decline, four MPC shadow members call for expansion of QE
- AUD & CAD higher, Australia's house price index rises, Canada's consumer index falls
Overview
USD traded mixed Monday after experiencing volatile price action in Asian trade as carry trades were unwound in reaction to a report that UK FSA's Turner said that carry trades were valueless. Turner's comments generated speculation of a possible crackdown on carry trades as part of new regulation of proprietary trading. USD consolidated near a seven-month high with gains attributed to Friday's release of stronger than expected GDP today's release of strong ISM manufacturing, ongoing concern about fiscal outlook in Greece and fresh concern about tightening of monetary policy in China. Asian equity markets traded at a three-month low fueling safe haven flows to the USD. USD upside was limited by report that the US 2010 budget deficit will be at a new record high of $1.56trln. Stronger PMI data from the EU and Switzerland sparked demand for the EUR and CHF. GDP traded lower pressured by report of weaker than expected UK mortgage approvals and the UK Times report which suggests that some of the MPC shadow board members call for expansion of quantitative ease at this week's BOE policy meeting. Commodity currencies traded mixed to lower with the CAD pressured by report of a decline in Canada's RBC consumer confidence index and the AUD pressured by unwind of carry trade. AUD downside was limited by report of stronger than expected Australian Q4 house price index and higher inflation.
CFTC commitment of traders for last week showed that speculators increased short positions in the EUR and added to long USD positions. The CFTC report is an indication of shifting and improving sentiment towards the USD. There was limited reaction to a Bloomberg report that said investors are pulling cash out of the EUR at a record pace which has diminished the EUR attraction as reserve alternative to the USD. Today's US economic data was mixed with personal income rising slightly more than expected, consumption coming in slightly weaker than expected and construction spending weaker than expected. ISM manufacturing came in much stronger than expected. Improvement in the ISM generates hope that Friday's stronger than expected GDP report is sustainable. New York University professor Roubini however says that he sees a "very dismal" US growth outlook. USD came off early highs and JPY traded lower after the ISM release pressured by improving risk appetite as equity markets rally.
Focus turns to central bank policy meetings in Australia Tuesday and Europe Thursday and Fridays US January unemployment report. The RBA is expected to hike rates 25 bps to 4%, the ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive.
Today's US data:
December personal income rose by 0.4%, a reading of 0.3% was expected. Personal consumption rose by 0.2%, a 0.3% rise was expected. 2009 personal savings rate was at its highest level since 1998 at 4.6%. Construction spending fell by 1.2% in December a 0.5% declined was expected. January ISM rose to 58.4 compared to 54.9 in December, a reading of 55.5 was expected.
Upcoming US data:
On February 2nd December pending home sales index will be released expected at 97.1 along with domestic auto sales for January. On February 3rd January ADP employment will be released expected at -54k compared to -84k last month. January ISM non manufacturing index will also be released on February 3rd expected at 51 compared to 50.1 last month. On February 4th initial jobless claims for week ending 01/30 will be released expected at 465k compared to 470k last month. Q4 labor productivity, unit labor costs and December factory orders also be released on February 4th. Q4 productivity is expected at 5% compared to 8.1% last quarter, unit labor costs are expected at -2% compared to -2.5% last quarter and factor orders are expected to rise by 0.8% compared to 1.1% last quarter. On February 5th January unemployment rate and nonfarm payrolls will be released. The unemployment rate is expected to rise by 0.1% to 10.1% and nonfarm payrolls expected at -5k compared to -85k last month. December consumer credit will also be released on February 5th expected at -8bln compared to -17.5bln last month.
JPY
JPY traded lower pressured by a statement from Japan's Finance Minister Kan that Japan may need fresh policy efforts to stop deflation and in reaction to report of stronger than expected US ISM. Friday, Japan reported that deflation accelerated with December CPI reported to have declined by 1.3%. Kan's statement on deflation will increase pressure on the BOJ to ease monetary policy. JPY initially firmed in early Asian trade supported by gains in cross trade sparked by report that the UK FSA's Turner said that carry trades were economically valueless. Turner's comments generated fear of possible crackdown on carry trades but it's unclear what if anything the FSA or governments could do to discourage the use of carry trades and focus shifted to report of better than expected PMI data from the EUR and Switzerland. The better than expected PMI data sparked a rally in European crosses versus the JPY. JPY traded at the days lows as US equities rally in reaction to report of stronger than expected US ISM manufacturing report for January.
This week's Japanese economic calendar includes the February 5th release of December preliminary leading indicators expected 2% compared to 1.7% last month. On February 8th December current account will be released along with January money supply.
Key technical levels to watch in USD/JPY include support at 89.58 the January 29th low with resistance at 91.88 the January 21st high.
EUR
EUR traded higher rebounding from a seven-month low supported by report of better than expected EU manufacturing PMI data. EU January manufacturing PMI rose to a two year high at 52.4. Before the release of the EU PMI data EUR was on the defense pressured by ongoing concern about the fiscal outlook in Greece and in reaction to comments from ECB President Trichet that the strong USD is in the interest of the US and global economy. Trichet went onto to say that he expects EU growth to remain modest in 2010 and the ECB will do what it takes to ensure price stability. There was an interesting article on Bloomberg which says that investors are pulling cash out of the EUR at record pace. The Bloomberg article suggests that the EUR is becoming less attractive as a reserve alternative to the USD. Sovereign debt concerns in peripheral Europe may be discouraging capital flows to the EUR. This week's main focus is Thursday's ECB policy meeting. The ECB is widely expected to hold monetary policy unchanged and confirm that a gradual exit from nonconventional policy matters will continue. ECB's Bini Smaghi said that the timing of exit strategies depends on the strength of the economic recovery. Concern about sovereign debt risks in peripheral European countries is the main risk for the EUR.
On February 2nd EU December PPI will be released expected flat compared to 0.1% last month. On February 3rd EU January services PMI will be released expected 52.3 compared to 53.6 last month along with December retail sales expected at 0.4% compared to -1.2% last month. ECB will hold a policy meeting Thursday, February 4th. No policy change is expected. The ECB is expected to confirm the continuing drawdown of unconventional liquidity measures. German industrial production for December will be released on Friday expected at -3.8% y/y compared to -8% in the last report.
The technical outlook for the EUR is negative as the EUR trades below 1.4000. Expect EUR support at 1.3830 the June 22nd low with resistance at 1.4053 the January 28th high.
CHF
CHF traded higher supported by report of stronger than expected Swiss PMI. January PMI rose to 56 and 53.7 last month. The improvement in Swiss manufacturing PMI follows last weeks report that Swiss KOF leading indicator rose for its ninth straight month. These reports confirm improved outlook for the Swiss economy. The main focus remains on the CHF appreciation in cross the EUR and threat of SNB intervention. There is a report that the SNB intervened in Friday's trade as EUR/CHF cross traded below 147. This marked the first time that the cross declined below this level since the SNB intervened heavily in March of 2009. CHF has been benefiting from safe haven demand sparked by concern about EU exposure to Greek fiscal troubles. There was limited reaction to statement from a Swiss official that UBS could face a possible collapse if latest talks with US tax officials fail. This weeks Swiss economic calendar includes February 2nd release of consumer confidence expected at -10 compared -14 and the February 4th release of December trade balance expected at 2.7bln compared to 2.1bln last month. If Switzerland reports a deterioration in its trade balance it would increase the risk of invention. Expect USD/CHF support at 1.0644 January 27th low with resistance at 1.0715 the 29th high.
GBP
GBP traded lower pressured by report of an unexpected decline in UK mortgage approvals and report that the shadow MPC board is split on whether the BOE should expand quantitative ease at this week's BOE policy meeting. UK December mortgage approvals declined to 59,023 from 60,045 last month. According to the MPC shadow report two members want the BOE to raise interest rates 50 bps to 1%, four members want to expand quantitative ease and three are calling for a pause. Other UK economic data released Monday was mixed with December money supply reported to have declined by 1.1% and December consumer credit at 0.052bln. There was limited reaction to report that UK January manufacturing PMI rose to 56.7 compared to 54.6 in December. This marked the best level for the manufacturing PMI since 1994. This week's main focus will be Thursday's BOE policy meeting. The BOE is expected to pause in its asset purchase plan and leave the door open for possible expansion of its asset purchases should the economic recovery in the UK the weaken. Recent UK economic data has been mixed with improvement in housing prices, manufacturing PMI and rising inflation. These reports confirm indicators that the UK economy is improving. The trade will be monitoring the BOE policy meeting to see if the BOE thinks that the economy needs further support from the central bank. GBP has been outperforming of late supported by speculation that rising UK inflation and improving UK economic outlook may encourage the BOE to pause in its asset purchase plan and take a more hawkish tone. UK December CPI rose by 2.9%. BOE's Sentance said that the BOE may have to consider raising rates sometime this year. GBP has also been benefiting from statements by UK Chancellor Darling that the UK has a plan to reduce its deficit by half over the next four years. Ratings agencies have warned that the UK AAA sovereign debt rating is at risk if the UK does not reduce its deficit. The latest election polls show that the Conservatives lead Labor party by 11 points.
BOE will hold a monetary policy meeting on February 4th. No policy change is expected. The trade will be looking to see whether the BOE elects to pause in its asset purchase plan.
The technical outlook for GBP is negative GBP trades below 1.5900. Expect near-term support at 1.5708 the October 13th low with resistance at 1.6180 the January 29th high.
CAD
CAD traded mixed initially pressured by weaker Asian equity market trade lower commodities and report of a drop in Canada's consumer confidence index. CAD reversed to trade higher in US trade in reaction to firmer US equity markets. Canada's RBC consumer index dropped two points to 106. The decline in consumer confidence index reflects ongoing concerns about the employment outlook in Canada. Last week Canada reported stronger than expected GDP but BOC Governor Carney warned that the economic expansion may peak midyear. Carney's comments suggest that BOC will remain on hold through midyear. CAD also remains vulnerable to concern about the impact of tightening of monetary policy in China. There was a report that China is taking further measures to limit bank lending and Asian equities traded to three month low. The weakness in Asian equities dampens risk appetite and Chinese tightening generates concern about global demand for our commodities and Canadian export outlook. Risk appetite reemerged and CAD traded higher as equities rallied in reaction to report of higher expected US January ISM manufacturing. This week's main focus is Friday's release of US and Canadian unemployment reports.
This week's Canadian economic calendar includes the February 4th release of December building permits expected at 2.5% compared to -4.6% last month along with January Ivey PMI expected 52.5 compared to 40.4 last month. On February 5th January unemployment will be released expected to rise by 0.1% to 8.5% employment growth at 15 K. compared to -28.3k last month.
The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0625 the January 29th low with resistance at 1.0780 the November 9th high.
AUD
AUD traded mixed rebounding from overseas lows that were inspired by weaker Asian equity market trade and concern about the impact of tightening monetary policy in China. China's official PMI data came in weaker than expected. AUD also recovered from the initial selling pressure in cross trade to JPY which was inspired by UK Times report which suggested a possible crackdown on carry trades. AUD rebound is attributed to report of stronger Australian house price data, higher inflation data, firmer US equity market trade and RBA rate hike speculation. Australia's Q4 house price index rose by 5.2%. TD/WI inflation rose by 0.8% in January. The rest of today's Australian economic data was mixed with new home sales reported down 4.6% and December jobs ads down by 8.1%. The RBA will meet Tuesday and is expected to raise interest rates 25 bps to 4%. This would mark the fourth consecutive rate hike since last October. The RBA is likely to signal a pause in its rate hike cycle at Tuesday's meeting. The impact of the rate hike may be negative for the AUD as focus shifts to concern about uncertain global recovery outlook and speculators look to take profits in the AUD. AUD is vulnerable to weaker commodity prices and concern about the impact of tightening monetary policy in China.
On February 2nd the RBA will hold a policy meeting and are expected to raise rates 25bps to 4%. On February 3rd December trade balance will be released expected at -1.98bln compared to -1.70bln last month. On February 4th December building approvals will be released along with December retail sales. Building approvals are expected to fall by 2.7% compared to a 5.9% rise last month and retail sales are expected to rise by 0.6% compared to 1.4% last month.
The technical outlook for the AUD is negative as the AUD breaks trend line support. Expect AUD support at 8830 the December 28th low with resistance at 9048 the January 28th high.
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