Forex Blog

February 3, 2012

U.S. Dollar Reversal Underway, Euro Eyes 23.6% Fib

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 8:24 am

Talking Points

  •     U.S. Dollar: Index Threatens Downward Trending Channel, Labor Force Continues To Shrink
  •     Euro: Carves Out Lower Top, Greece Seeks Another EUR 15B
  •     British Pound: Upward Trend Gives Out, BoE To Conduct More QE

U.S. Dollar: Index Threatens Downward Trending Channel, Labor Force Continues To Shrink

The greenback extended the advance from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,751, and the short-term reversal should gather pace in the coming days as the index threatens the downward trending channel carried over from the previous month. Indeed, employment in the world’s largest economy increased another 243K in January, and the rise in hiring may lead the Fed to soften its dovish tone for monetary policy as the recovery gradually gathers pace.

However, we saw the jobless rate fall back to 8.3% from 8.5% as discouraged workers continued to leave the labor force, and Fed Chairman Ben Bernanke may keep the door open to expand the balance sheet further in an effort to encourage a stronger recovery. In turn, we expect the FOMC to maintain a wait-and-see approach throughout the first-half of the year, but there’s little in the way of seeing another round of quantitative easing as the risk of a double-dip recession subsides. As the USDOLLAR appears to be finding near-term support around the 38.2% Fibonacci retracement at 9,710, this could be a key reversal for the greenback, and the bullish momentum underlining the dollar looks poised to gather pace in the week ahead as the relative strength index bounces back from a low of 30.

Euro: Maintains Narrow Range, All Eyes On ECB Rate Decision

The Euro pared the advance to 1.3205 to maintain the range from earlier this week, and the single currency is likely to face additional headwinds in the following week as the fundamental outlook turns increasingly bleak. Although the European Central Bank is widely expected to keep the benchmark interest rate at 1.00%, we are likely to see President Mario Draghi maintain a dovish tone at the press conference following the rate decision, and the central bank head may take additional steps beyond the three-year loan facility scheduled for the end of the month as the heightening risk for contagion continues to pose a threat to the world financial system. In turn, we are looking for a close below the 10-Day SMA (1.3115) to provide conviction for a short EUR/USD trade, and the exchange rate looks poised to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the pair appears to be carving a lower top in February.

British Pound: Upward Trend Gives Out, BoE To Conduct More QE

The British Pound broke out of the upward trending channel from the previous month, with the GBP/USD slipping to a low of 1.5749, and we expect the sterling to face additional headwinds in the following week as market participants see the Bank of England expanding its asset purchase program by another GBP 50B next week. As the GBP/USD fails to make another run at the 200-Day SMA (1.5956), with the RSI falling back from a high of 66, the technical outlook point to a short-term reversal in the exchange rate, but we may see the pound-dollar hold steady ahead of the BoE rate decision as the pair continues to find support around the 38.2% Fib from the 2009 low to high around 1.5730-50.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David’s e-mail distribution list, send an e-mail with subject line “Distribution List” to dsong@dailyfx.com.

Greece Close to Debt Deal

Filed under: OANDA News — Tags: , , , , , , , , , , , , — admin @ 7:09 am

Greek Prime Minister Lucas Papademos said Greece was close to coming to terms on a deal with Eurozone authorities and its bond holders that would reduce the weight of the country’s debt and still provide access to credit as the government struggles to contain its deficit. In order to avoid default, Greece is attempting to reduce its overall debt load to 120 percent of GDP compared to the current 162 percent.

The rescue plan, which European officials and Greek creditors say may be wrapped up in coming days, includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table.

Source: Bloomberg

US Unemployment Falls to 8.3%

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 6:55 am

Friday’s Non-Farm Payroll indicates that 243,000 jobs were added in January marking the greatest single-month gain since last April. The influx helped lower the national unemployment rate to 8.3 percent from 8.5 percent the month before.

The U.S. economy grew at a 2.8 percent annual rate in the final three months of 2011, quickening from 1.8 percent in the third quarter. However, the rebuilding of stocks by businesses accounted for two-thirds of the rise, setting the economy up for a slower growth pace this quarter.

Source: Reuters

February 1, 2012

Eurozone Debt Crisis Infographic

Filed under: OANDA News — Tags: , , , , , , , , , , , , , , — admin @ 8:40 am

The recent downgrade to sovereign credit ratings for several of the Eurozone countries is just the latest challenge to befall the 17-member group of countries sharing the Euro. A total of nine countries were included in the downgrade and while none of the changes were overly surprising, the reclassification casts doubt on the likelihood that some of the weaker countries can remain viable.

With the reclassification, Germany, Finland, and the Netherlands are the only countries to retain triple-A rated status. When expanding to all of Europe, only two more countries – the UK and Switzerland – can claim top status, and the UK’s hold on triple-A is tenuous.

The following graphic compares the debt for most of the European economies together with their current credit rating. The 10-year bond yield is represented by the anchor dragging behind each economy – the bigger the anchor, the greater the drag on the economy.

At a Glance: European Debt and Credit Ratings

Sovereign income, debt, and credit by region

Created by OANDA

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January 31, 2012

Record Eurozone Unemployment Pits North Against South

Filed under: OANDA News — Tags: , , , , , , , , , , , — admin @ 1:26 pm

The December unemployment rate for the 17-member countries comprising the Eurozone rose to the highest level since the Euro was introduced in 1999. For the month of December, the rate for the entire region rose to 10.4 percent after the November result was similarly revised upwards one tenth of a percent from the originally-reported 10.3 percent.

A total of 16.5 million people across the Eurozone are now out of work. This is an increase of three quarters of a million in the past year alone. But the pain is not being felt equally amongst all Eurozone nations.

Greece and Spain recorded the greatest increase in unemployment over the past year. At 22.9 percent, Spain had the highest unemployment rate for the entire area with Greece not far behind at just over 19 percent. Portugal watched helplessly as its unemployment rate continued to climb reaching 13.6 percent in December.

Comparing the results of these southern countries with the northern jurisdictions reveals the gap between the north and the south. In Germany, for instance, December’s unemployment rate actually fell more than expected to 6.7 percent – the lowest since German was reunited. Meanwhile, Austria and the Netherlands continued to record the lowest Eurozone unemployment at just 4.1 and 4.9 percent respectively.

Unemployment to Increase in Some Eurozone Countries

Looking ahead to the coming year and beyond, there is every likelihood that the situation will actually worsen. As even the most casual observer knows, the Greek government is presently under intense pressure to implement the infamous “austerity” measures to address the country’s widening deficit.

The massive spending cuts targeted to meet the goal of ultimately eliminating the deficit will require Greek authorities to eradicate a significant number of government jobs. Other countries including Spain, Portugal, and even Italy will be forced – to some degree at least – to follow the same agenda in order to get a handle on overall spending.

Widespread job losses will not be restricted to just the government, however; the private sector too will be forced to reduce costs as companies struggle with falling sales. In the face of the continued uncertainty and growing fears of recession, companies will postpone or even cancel all but the most essential new projects, delaying new hiring accordingly.

Again, it will be the southern countries that will feel the effects of this most keenly.

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Euro Unemployment Hits Record 10.4%

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 7:17 am

Unemployment in the Eurozone region rose to a record 10.4 percent in December of last year. Spain was the hardest hit of the 17 countries at 22.9 percent unemployment while Austria has the lowest unemployment rate of 4.1 percent.

Guillaume Menuet, economist at Citigroup, said he expected the number of people out of work to increase throughout 2012.

“If you think about the direction of employment expectations that you see across various business surveys, the outlook for employment doesn’t look particularly enticing, simply because the uncertainty is very high. In many cases you find firms continuing to delay investment projects. For those that are still making profits, hiring is being frozen, and for those which are under pressure to hit results or losing money, job losses are becoming the only solution that they have,” he said.

Source: BBC News

EUR Short Covering Just Started?

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 4:39 am

The EUR 1.32 handle was to be in the distant past. One Euro summit later, in tandem with month-end requirements, and we have a trading environment wishing to finally throw some volume about and a ‘lost’ currency finding some of its mojo again. The dollar seems to have suffered the opposite fate over the last trading session, under-performing against its peers in response to the relatively constructive outcome from yesterday’s flash EU summit in Brussels (the sixteenth in two years). It seems to be in the post summit, with reluctance, that the bears have been covering some of their longer term short EUR positions. The explanation that the Greek situation may be getting better is an explanation to fit the price action or is it the US, IMF and the Euro-zone working to combine the ESM and EFSF into a superfund with +EUR1.5t the reason?

Investors have tentatively welcomed the EU leaders agreement on a higher fiscal pact to be signed off next month, and a bailout mechanism that will come into effect in July. However, a black cloud still exists over proceedings. Portugal’s 10-year government yield (+16.29%) remains elevated and there is still no agreement between Greece and the private sector. The market is again concerned that the Portuguese will require another Greek style bailout if their government is unable to access the capital markets for ‘route one’ funding requirement. The country’s yields have ballooned since credit rating agencies lowered their ratings to below sub-investment grade earlier this month. Just like the other members of the peripheries, investors remain skeptical that the PSI in the Euro-zone sovereignty will only be applied to Greece.

However, in this moment, the summit is being viewed as a success relative to modest expectations. Belief like this has eliminated some of the event risk for the Euro-system. The bears will argue that the various asset classes have priced in a successful outcome already given the rallies across the board over the past week. With the Greek PSI agreement remaining elusive, this again can create enough market anxiety, reminding us that yesterday’s EUR level lows are only but a few trades away. The uncertainty over the extent of actual participation in the debt swap has the market again wanting to fade rallies in the EUR, especially as we approach the employment reports. Fear that other Euro financing stress issues, coupled with the regions deteriorating growth dynamics, may again urge monetary authorities to apply further easing.

Besides Greece, the market is beginning to focus on US employment data later this week and on the dynamics of BoJ and SNB own unique currency situations. Both authorities are on the verge of intervention. The Fed’s decision to extend its contingent commitment to low rates into late 2014 reinforces the markets bullish view on the yen. The EUR/CHF itself is only a touch above the official floor as investors risk aversion appetite comes into question with so much Euro sovereign uncertainty. In the big picture, 1.3250 remains the key resistance zone, but sustaining a break into the 1.32 must first be cemented.

Forex heatmap

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More EUR concession required

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January 30, 2012

Spain Appears Headed for “Double-Dip” Recession

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 6:53 am

Spain’s economy contracted by 0.3 per cent during the fourth quarter, according to official figures released Wednesday, edging the country closer to a new recession as it deals with huge levels of unemployment and painful austerity cuts. The figure announced by the National Statistics Institute broke a run of seven quarters without economic contraction. The institute said GDP fell 0.3 per cent during the quarter compared with a year earlier. For all of 2011, it increased 0.7 per cent.

The economy is expected to slide further through March, placing Spain back in its second recession in less than three years. A technical recession is defined as two consecutive quarters of contraction.

Source: The Canadian Press

More EUR Concessions Required

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 4:40 am

The 1.32 EUR handle is in danger of becoming a distant past. Today’s Euro summit could fail to appease investors concerns about the fiscal outlook of Greece. If that is the case, then the single currency price action is on the verge of repeating itself; a pattern of pre-summit gains and post-summit losses.

The Greek economy is only “one” of the Euro peripheries on the brink of deteriorating further into the abyss near term. The country’s own officials are pushing back on Germany’s proposal for Greece to cede control over its budget in return for aid. Without aid from the IMF and EU, a Greek private sector involvement deal is in danger of collapsing this week. Everyday the market is warned of this pending deal, a deal that was supposed to be concluded weeks ago, a deal that still has some Euro-euphoria premium priced in. Further uncertainty will convince the optimists that a near term EUR top may have been already been established last Friday.

The Fitch credit downgrading last week does not make it any easier for some of the struggling Euro nations to come to the table to raise cash. Auctions this week will be the biggest test of sentiment so far this year. This morning, the Italian auction cleared well, with Italy selling +7.5b of bonds out of a total of +8b. However, the ECB were seen post-results; not necessarily good. Italy, Belgium and Spain sell no less than +EUR22b’s worth of debt amongst a credit rating poisoned atmosphere. The pending issues will be somewhat of a litmus test at these much lower-than-before yield levels. The Italian benchmark 10’s (+5.90%) had only recently traded above the markets +7% default barometer.

The Euro-zone economic sentiment rising to 93.4 from 92.8 has only been capable of offering the single currency slight short-term support. The currency seems to want to check out further, the stop-loss orders touted below the bids into the figure at 1.31 option expiry fame. The economic sentiment indicator along with other Euro surveys may persuade Draghi and company to leave monetary policy unchanged at next months meeting as they look to see if the Euro-zone economic activity is stabilizing. Is the EUR top in for now?

Forex heatmap

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A Yen to Lead

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January 27, 2012

A Yen to Lead

Filed under: OANDA News — Tags: , , , , , , , — admin @ 11:49 am

Other regional data and policy innovation has mostly been positive for the Asian region this week. The Fed’s surprise extension of its commitment not to raise US rates for another 18-month’s, until late 2014, “should be the key to medium-term development”. Yen is expected to be the natural beneficiary of the latest dovish rhetoric by Bernanke and company and monetary easing by other G10 members. The lack of attractive yield opportunities complicates Japans current account recycling efforts. The stronger than expected Euro area flash PMI’s this month should be Asia’s strongest macro support (it suggests that the regions exports have ‘bottomed out’). Analysts historically use this indicator as a bellwether for Asian currency appreciation.

Below are some other highlights of the week:


ASIA

  • CNY: Chinese New Year of the Dragon begins.
  • AUD: Because of the Chinese Holidays, markets down-under were vulnerable to illiquid pockets this week.
  • AUD: The IMF has warned that Aussie banks might need “tougher capital requirements.”
  • JPY: It was no surprise that the BoJ cut growth forecasts at this weeks monetary meeting, while maintaining the policy rate (+0.05%) and leaving the QE program unchanged. Policy makers have revised down the country’s growth outlook for 2011 (from +0.3%, y/y, to -0.4%) and 2012 (from +2.2%, y/y to +2.0%) attributing the slowdown to the overseas economies and the retroactive revision of GDP stats.
  • JPY: Their inflation metrics remain unchanged, believing that the global financial markets, US balance sheet adjustments and price stability in the emerging economy, all represent risks to Japanese growth. What about the yen? It’s a currency that is likely to continue to “benefit from policy convergence and risk aversion.”
  • INR: The RBI held the repo rate unchanged at +8.5% (as expected), however, they unexpectedly lowered the cash reserve ratio to +5.5% from +6.0% (It’s first ease in nearly three-years). Analysts expect this to add approximately +INR320b into the economy.
  • INR: The RBI also revised this years growth forecast lower to +7% from +7.6%.
  • AUD: Australia headline CPI was flat in Q4 (forecasted for a +0.2%, q/q rise) due to a sharp fall in fruit prices. The RBA’s trimmed mean measure of CPI inflation was +0.6%, q/q, and the weighted median was +0.5%. Both are running at +2.6%, y/y, after some upward revisions to Q3 numbers. However, with core prices in the middle of RBA’s +2-3% target band suggests further easing is not required just yet. The market expects the RBA to cut rates +25bps because of Euro woes.
  • JPY: Japan’s December’s trade deficit rose to -JPY567b, pushing the 2011 trade balance into a deficit of JPY2.5trn (the first annual trade deficit in 20-years). Analysts expect this trend to continue for 2012. Euro uncertainties and global central banks monetary easing will continue to make it hard for any current account surplus to be recycled offshore. With repatriation of overseas assets remaining strong, the currency should remain under pressure longer term.
  • PHP: Philippine imports remained at a high, +$4.9b in November, pushing the trade deficit -$0.7b wider to -$1.6b. Remittances continue to support the PHP and a current account surplus. Expect policy makers to remain reluctant to allow their currency outperform in the region.
  • SGD: Singapore CPI inflation was at +5.5%, y/y in December, in line with the consensus forecast. Inflation is expected to remain high through the next one to two quarters. This scenario would suggest that the MAS to maintain the SGD on its current mild appreciation path.
  • FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
  • KWN: With EM Central Banks more active in reducing the appreciation of their own currencies, the BoK is supposedly restricting KRW appreciation to about five won per day.
  • NZD: RBNZ remains on hold at +2.5%, as widely expected. No rate move is priced in until Q4.
  • KRW: GDP growth slowed to +3.4%, y/y, in Q4 vs. +3.5%. The underlying details were soft, with domestic demand and investment continuing to be weak. Net export growth also slowed.
  • SGD: In Singapore IP rose +12.6%, y/y, in December, much higher than the consensus forecast of 6.4%yoy. The MAS is expected to keep the SGD on an appreciating trend.
  • KWN: Korea’s manufacturing business survey rallied +2pts to 81 in January, and still below the expansionary level of 100. Analysts expect the index to rise in line with the recovery in global PMI’s. This would suggest stronger export growth and support for the won.
  • NZD: New Zealand recorded a trade surplus of +0.3b in December, this after four consecutives months in the red. This was achieved on the back of increased dairy exports. In December exports rose +13% while imports fell +1.6%. For 2011, the trade surplus was largely flat at around +1.1b. Expect further Kiwi appreciation to hurt exports. Governor Bollard at the RBNZ said he is comfortable with the current market pricing of no rates hike for the year ahead.

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