GBP/USD: Gains have stalled out just shy of the 200-Day SMA for now and the market looks to be entering a fresh period of consolidation before considering the next major move. Key levels to watch above and below come in by 1.5930 and 1.5730 respectively, and a daily close above or below will be required for clearer directional bias. A close below 1.5730 could open the door for some broader underlying bearish resumption, while back above 1.5930 exposes the October highs by 1.6170 further up.
Major Currencies vs. US Dollar
(week-to-date % change)
Talking Points
After weeks of preoccupation with Greece and its second bailout package, the Euro appears all but ready to move on. Indeed, traders seemed to resign to the inevitable as early as Wednesday, realizing the ECB had lent banks enough capital via December’s LTRO to ensure a credit squeeze would be averted even if Greece defaulted. The next hurdle was to convince investors that similar provisions would be in place if stress were to emerge in a larger country (specifically, Italy). The ECB rate decision saw policymakers make headway on this front as well, with the bank relaxing collateral requirements for its next LTRO due later this month. This opens the door for more capital to be injected into a wider swath of the banking sector, reinforcing lenders’ war chest and soothing jittery investors.
Importantly, this hardly guarantees a favorable outlook for the single currency. With the credit crunch time-bomb defused for now, the focus turns to growth, where the picture is far from pretty. Economists’ forecasts suggest the Euro zone will be the only G10 economy to sink into recession this year. This beckons further monetary easing. Indeed, considering the goal of LTRO operations is an easing of credit, its impact on the exchange rate can be expected to be essentially the same as the affect of the Fed’s QE efforts on the US Dollar. Needless to say, this bodes ill for the single currency. With that in mind, the spotlight is on fourth-quarter Euro Zone Gross Domestic Product figures next week, where expectations are for output to drop 0.4 percent to mark the first contraction since the region emerged from the Great Recession in mid-2009. The German ZEW gauge of investor confidence is also on tap.
The Japanese Yen is beginning to regain its correlation with the spread between domestic and US 10-year bond yields (see below). With Japanese monetary policy effectively locked in place, traders will be looking to the US for direction cues. Minutes from January’s Federal Reserve policy meeting will be in focus as markets size up the outlook for a third round of quantitative easing. Friday’s Consumer Price Index report will be judged in the same light. A perception that more stimulus may not be as assured as it appeared in the announcement’s immediate aftermath likely pressure Treasury yields and USDJPY higher. Alternatively, signs bolstering the case for QE3 are expected to have the opposite effect, although the downside remains broadly capped by Japan’s “stealth” intervention efforts.
The British Pound appears vulnerable in the week ahead as economic data reinforces the case for the latest expansion of quantitative easing by the Bank of England. Inflation is expected to slow to the weakest in 14 months while the Claimant Count – a proxy for the unemployment rate – is forecast to hit 5.1 percent, the highest since mid-1997. While the Pound rose immediately the BOE announcement as the asset purchase target increased in line with expectations, putting to rest rumors of a larger expansion, the longer-term implications of further sterling dilution appear negative.
The Australian, Canadian and New Zealand Dollars continue to show strong links with stock prices (although the strength of correlation readings has weakened somewhat), meaning risk appetite remains in control. On balance, this does not seem supportive. With Eurozone-triggered credit crisis fears unwinding and the global growth outlook creeping back into focus, the cycle-sensitive currencies may come under increasing pressure as traders are reminded that economists’ median world GDP expectations for 2012 have been sinking precipitously since early August.
EURO
Source: Bloomberg
BRITISH POUND
Source: Bloomberg
JAPANESE YEN
Source: Bloomberg
CANADIAN DOLLAR
Source: Bloomberg
AUSTRALIAN DOLLAR
Source: Bloomberg
NEW ZEALAND DOLLAR
Source: Bloomberg
— Written by Ilya Spivak, Currency Strategist for Dailyfx.com
GOLD our move to a neutral stance on gold in the short term has been validated over the past week as the strong uptrend has clearly stalled. The range overnight was $1,724 to $1,751. Gold looks likely to maintain this range for the short term as investors seek further developments and clarification of the situation in Europe. Gold opens the morning at $1,732. Given our neutral short term bias we expect more of the same with gold expected to maintain recent ranges for now. It will only take some form of even minor shock, most likely emanating from Europe or the Middle East to propel the price above strong resistance at $1,750. For today, we are unlikely to initiate any trades given the high event risk associated with announcements that may come from any one of the parade of cast members involved in the Greek drama. We clean break of $1,755 will have us buy while a test of support at $1,720 will see us enter into a short term long position.
Recap of the Latest Global News
By Keagan York on Feb 9, 2012
European finance ministers have convened an emergency meeting in Brussels today as the Greek government continues to struggle to finalize of terms of its next rescue package. The ministers will meet with IMF chief Christine Lagarde but no agenda has been announced. Meanwhile, the caretaker government led by Prime Minister Papademos is locked in intense talks with its coalition partners to finalize terms on the package which is crucial if Greece is to meet a EUR 14.5 billion bond payment on March 20. Papademos is also holding talks simultaneously with the so called ‘troika’. In the absence of further developments the EUR has firmed to trade at 1.3260.
The unprecedented action by central banks around the world to intervene in the markets has clearly impacted in a positive way on volatility in the markets. The move by the Federal Reserve to announce that it will keep interest rates low until 2014 and the action of other institutions globally to increase liquidity in the financial markets has seen volatility reduce significantly this year. The risk on/ risk off moves encountered last year with multi percentage moves in assets prices on what seemed like a weekly basis have now subsided. Investors appear happy to undertake a wait and see response. The Australian dollar continues to perform extremely well in this environment and opens today at 1.0800.
Central bank action and intervene have clearly impacted on share market volatility. Once again markets were relatively subdued. The Dow Jones is still trading at its highest levels since 2008 as investors tread water in anticipation of some sort of a resolution in Greece. Finance and technology stocks gained the most on the S&P 500 which closed 0.22% higher at 1,350. Earlier in Europe, bourses closed relatively flat with the DAX down 0.08% to 6,749 while the FTSE lost 0.24% to 5,876.
The euro seems to have a mind of its own today being the best performer out the risk currencies, reaching levels we haven’t for 2 months. Perhaps statements from Sarkozy and Merkel that Greece will not be allowed to go bankrupt has helped boost confidence in the single currency and as Greece and the troika are putting the finishing touches on the terms required for a 130 billion-euro ($173 billion) bailout package. The market is looking at the ‘outcome glass’ as half-full. Technically if today’s low of 1.3244 (38.2% fib level) holds and euro continues with the momentum, the 50% retracement is within reach at 1.3435. At this time it may be ripe to look for rallies to sell for the long term.
The euro seems to have a mind of its own today being the best performer out the risk currencies, reaching levels we haven’t for 2 months. Perhaps statements from Sarkozy and Merkel that Greece will not be allowed to go bankrupt has helped boost confidence in the single currency and as Greece and the troika are putting the finishing touches on the terms required for a 130 billion-euro ($173 billion) bailout package. The market is looking at the ‘outcome glass’ as half-full. Technically if today’s low of 1.3244 (38.2% fib level) holds and euro continues with the momentum, the 50% retracement is within reach at 1.3435. At this time it may be ripe to look for rallies to sell for the long term.
The jaw-boning seems to be working for the Ministry of Finance and Bank of Japan as USD/JPY drifts higher today towards the 76.80 level. Again between 76.50 and 76.80 is where the market is comfortable for the moment. While the market contemplates its next move, it was timely of the Finance Ministry to release data today showing Japan’s unannounced or ‘stealth’ intervention in the first four days of November 2011 totaling 1.02 trillion yen. This was after selling a record 8.07 trillion yen on Oct 31 (which they made public at the displeasure of the US) when yen reached a post WWII low of 75.35 against the USD. One Official agreed that the unannounced intervention was the most effective strategy to weaken the currency. Food for thought if you see USD/JPY rally for no apparent reason.
Recap of the Latest Global News
By Cory Vi & Andrew Su on Feb 7, 2012
Markets eased yesterday as the Greek government continues to struggle to make the necessary austerity budget cuts to qualify for more financial aid and avoid an ever more likely default. Pressure is mounting on the Greeks to meet the conditions of the EUR 130 billion bailout as PM Papademos negotiates into the second day with the so-called troika. Chancellor Merkel made her frustrations clear by saying “I can’t understand why we need a few more days. Time is running out.” The French and Germans are coming up with increasingly ‘creative’ solutions to the Greek problem by yesterday proposing the setting up of an account for Greek interest payments to ensure that lenders are paid. We aren’t sure that guaranteeing interest payments that are already highly discounted on junk debt will do any good. The EUR is largely unchanged during the Asian and is trading at 1.3120.
Nicolas Sarkozy said at a meeting in Paris that allowing Greece to “go bankrupt is not an option.” It is messages like this that undermine the process that the Europeans are attempting to undertake. Leaders need to let the Greek government know that bankruptcy is an option if they do not comply with the conditions of the bailout package. If bankruptcy is not an option than the Greeks will simply continue to flout agreements in an attempt to get a better deal while the relatives continue to support the black sheep of the family at all costs. Today, the Reserve Bank of Australia surprised investors by keeping its benchmark rate unchanged at 4.25%. The market had priced in a 0.25% cut and the decision saw the AUD rise sharply from just above 1.0700 before the announcement to as high as 1.0825.
US equities eased yesterday with the Dow Jones falling from almost 4 year highs on renewed concerns over the Greek refinancing and debt swap deal as a planned meeting of Greek leaders was delayed as a joint response had yet to be agreed upon. The S&P 500 was largely unchanged at 1,344. Asian stocks closed lower today while European bourses are down 0.5% in mid-trade.
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