USD Recovers as Equities Give Back Early Gains

Daily Forex Fundamentals | Written by Easy Forex | Mar 13 09 16:50 GMT |

USD: Mixed, trade deficit and Michigan consumer sentiment beat expectation JPY: Lower, pressured by diminished safe haven demand, possible threat of intervention EUR: Lower, tracking global equities, EU retail sales fall more than expected GBP: Higher, rising risk sentiment sparks short covering CAD and AUD: AUD & CAD higher, supported by improving risk sentiment, Canadian unemployment rises Overview USD and JPY traded mixed to lower as global equities markets extend recent gains and risk appetite improves. Improving risk appetite is attributed to speculation that the US banks have weathered the financial market storm and that new fiscal stimulus from the US and China will help to boost global growth. Comments from the CEO of Bank of America that the Bank of America will not seek additional government funds sparked speculation that the worst for the US banking crisis may be over. Friday, China announced a new 1.8 trillion stimulus plan. Optimism that US banks have weathered the credit crisis and the new Chinese stimulus plan helped fuel equity market gains. USD was also pressured by comments from Chinese Premier Wen. Wen said that he is concerned about US holdings and that he expects the US to protect Chinese assets held in the US. The PBOC says it expects the USD to remain strong in 2009 but the USD outlook is uncertain beyond 2009. GBP outperformed in Friday's trade benefiting the most from the recovery in global equity markets with sharp gains against the JPY and EUR. Commodity currencies firmed supported by rising equity markets with CAD gaining despite report that Canada's unemployment rises to a six year high. Although the USD continues to trade inversely to the direction of equities and risk sentiment USD downside has been relatively limited despite this week's sharp rebound in global equity markets. This may reflect the fact that many traders believe the rebound is equities is a bear market rally and not the start of sustained uptrend. Optimism about equities remains in question. Because of rising US deficits and increased need for foreign capital to fund the deficits comments by Chinese Premier Wen about uncertain USD outlook may be more troubling for the USD. Concern that foreign investors will not support the US deficits is a major risk to the long term outlook for the dollar. Risk aversion and uncertainty about global economic outlook trumps the potential long term risk to the US dollar from rising US deficits. Nervous investors continue to seek safe haven in US treasuries. US February import prices fall 0.2%, a 0.8% decline was expected. January trade balance falls to 36 billon from 39.9 billion in December. US trade deficit narrowed to its lowest level since October 2002. March University of Michigan consumer sentiment rises to 56.6 from 56.3 in February. The trade was looking for the March consumer confidence to drop to 55. USD extends its losses in reaction to report of improving US trade deficit and better than expected Michigan consumer sentiment. These reports contribute to improving risk sentiment. At this writing US equity market trades lower and USD recovered. Next week's US economic calendar includes the March 16th release of March Empire Manufacturing Index expected at -33 compared to -34.6 last month. February industrial production and capacity utilization will be released on March 16th. Industrial production is expected to fall 1% compared to a 1.8% drop last month. Capacity utilization for February is expected at 71.3 compared to 72 last month. NAHB index for March will also be released on March 16th expected at 8 compared at 9 last month. On March 17th February housing starts and building permits will be released. February housing starts are expected at 460K compared to 466K last month. February building permits are expected at 510K compared to 521K last month. February PPI will also be released on March 17th expected at 0.3% compared to 0.8% last month. On March 18th February CPI will be released expected unchanged at 0.3%. Q4 current account will also be released on March 18th expected at -136.7 billon compared to -174.1 last quarter. On March 19th initial jobs claims for week ending 3/14 will be released expected at 645K. February leading economic indicators will also be released on February 19th expected at -0.2% compared to 0.4% last month. USD has traded firmed in 2009 despite negative US economic data tracking the direction of equities and risk sentiment. US economic data maybe become a more important market driver for the USD as the trade tries to determine whether the US equity market recovery is more than a rally in a bear market. JPY JPY traded lower pressured by rising global equity markets and improving risk sentiment. The Nikkei closed up 371 points Friday following this week's sharp rebound in US equities. JPY is moving in tandem with investor sentiment and equities. JPY was also pressured by comments from the Bank of Japan Governor Shirakawa that Japan's financial conditions are severe. Japan's February consumer confidence index improved to 26.7 from 26.4 last month and January industrial production was revised down to -10.2% from -10% last month. The data had limited impact on today's JPY trade. The Nikkei press reports that demand for USD in front of Japan's fiscal year end is strong. Japan's fiscal year in March 31st. Repatriation flows in front of Japan's fiscal year end may limit JPY downside. JPY may however be vulnerable to speculation that Thursday's decision by the SNB to intervene to try to weaken the CHF will encourage the Bank of Japan intervene to try to weaken the JPY. Despite this week's equity market rebound USD/JPY is relatively unchanged. The EUR and commodity currencies have been the main beneficiaries of improved risk sentiment. EUR/JPY is trading above 1.26 gaining over 1% in Friday's trade. AUD/JPY also gained over 1% Friday. Next week's Japanese economic calendar includes the March 17th release of January tertiary index. On March 18th January leading indicators will be released. On March 19th January all industry activity will be released. These reports are expected to confirm continuing deteriorating outlook for Japan's economy. The technical outlook for JPY has turned mixed with this week's failure to take out psychological resistance at 100.00. Key technical levels to watch in USD/JPY include support at 95.67 the March 12th low with resistance at 99.67 the March 5th high and 100.55 the November 4th high. EUR EUR traded mixed to firm with upside limited by report of weaker than expected EU retail sales and selling in cross trade to the GBP. EUR continues to trade with close correlation to the direction of equities and was supported by Friday's global equity market rally. EU January retail sales fall 2.2%, a 1.9% decline was expected. This is the eighth consecutive month that EU retail sales have declined. EU Q4 labor costs rise 3.8% compared to 4.2% in Q3. These reports confirm weakening EU economy and lower inflation. The data may encourage ECB rate cut speculation. EUR has been gaining this week against the GBP with GBP pressured by the Bank of England's decision to implement quantitative ease. GBP has underperformed because of concern about deteriorating UK economic outlook, UK bank troubles and in response to the Bank of England decision to move to quantitative ease. Friday, GBP experienced a sharp short covering rebound mainly supported by improving risk sentiment and EUR/GBP traded lower. EUR traded above 1.2900 supported by a recovery in US equities. US equities firmed in reaction to report of better than expected US January trade deficit and a slight improvement in Michigan consumer sentiment .EUR price direction remains closely correlated to the direction of global equities and risk sentiment. Skepticism about the rebound in global equities will likely limit EUR gains. Next week's EU economic calendar includes March 17th release of German March ZEW Index. On March 19th EU January industrial production will be released. On March 20th EU current account and foreign trade balance for January will be released. The technical outlook for the EUR has improved with EUR trading above resistance at 1.2900 the February 25th high. The break of this level could spark a test of February 23rd high at 1.2998. Expect key EUR support at 1.2710 and 1.2650. Look for EUR/USD to range 1.2650-1.2998. Next key EUR resistance is at 1.3075 the February 10th high. GBP GBP traded higher supported by short covering and improving risk appetite as global equity markets trade higher. Comments by China's premier about the uncertain long-term outlook for the USD sparked early selling of the USD. No major UK economic data was released in today's trade. GBP rallied despite comments from the Bank of England's Barker that the Bank of England may consider additional quantitative ease. The Bank of England launched quantitative ease Wednesday, buying UK gilts. Quantitative ease will increase the supply of GBP. GBP traded above 1.4000 the prior range low. The rally above 1.4000 sparked short covering in the GBP. GBP technical price suggests the GBP may be trying to carve out a technical bottom. GBP traded to the day's highs after the release of better than expected US January trade deficit. The Bank of England implemented the first stage of quantitative ease Wednesday. The Bank of England is buying UK gilts to try and boost the UK money supply and lower LIBOR rates. The BOE will continue purchase gilts on a biweekly basis with the allotment to total as much as GBP150 billion. The Bank of England's quantitative ease is directed at boosting UK growth. The Bank of England quantitative ease will flood the market with GBP. Increased supply of sterling is a negative for GBP. Because of the negative economic outlook in the UK GBP will continue to be most sensitive to the direction of equities and risk sentiment. GBP downside was limited by today's rebound in global equities. GBP price direction maintains a close correlation to the direction of equities. Next week's UK economic calendar includes Monday's release of the Bank of England quarterly bulletin and Rightmove house survey. On March 18th January unemployment and February public-sector borrowing will be released along with the Bank of England policy minutes for the March 4/5 meeting. Look for key GBP support at 1.3865 the March13th low with resistance at 1.4185 the March 9th high. CAD CAD traded higher despite report that Canada's unemployment rate rises to a six year high and Canada's trade deficit widened. CAD was supported by improving risk sentiment. Canada's February unemployment rate rises to 7.7% from 7.2% last month. Jobs growth falls 82.6K compared to -129K last month. January trade balance widened to a 1 billion deficit. The Canadian trade balance was right in line with expectation. The fact that the CAD continues to rally despite deteriorating Canadian economic outlook confirms that the main driver for the CAD is risk sentiment. Risk sentiment has improved this week as global equity markets rally supported by optimism that the worse for the US banking crisis may have passed. The Bank of Canada says it will continue to provide liquidity as long as necessary .BOC Deputy Governor Longworth says that he expects the Canadian economy to improve in the second half of 2009. Toronto Dominion and Royal Bank of Canada analysts said Thursday that the Canadian economy faces risk of deeper recession because of falling commodity prices and weakening demand for Canadian exports. TD Bank expects the Canadian economy to contract by 2.4% and Royal Bank of Canada expects the economy to contract by 1.4%.Both banks expect the Canadian economy to rebound in 2010, with the rebound dependent on the US. The BOC is more optimistic and expects the Canadian economy to contract by 1.2%. The Canadian economy contracted 3.4% in Q4. This marked the fastest pace contraction for the Canadian economy since the recession of 1991. The Bank of Canada recently cut interest rates to 0.5% and the government introduced the $40 billion fiscal package at end of January. Longworth also said the BOC is preparing for quantitative ease. Next week's Canadian economic calendar includes the March 16th release of Q4 capacity utilization. On March 17th Q4 labor productivity will be released along with January manufacturing shipments. On March 18th January wholesale sales will be released. The key Canadian economic report for next week's trade will be Friday's release of the February CPI. The CPI report is expected to confirm decreasing inflationary pressure. Weaker Canadian CPI may open the door for the BOC to consider quantitative ease Canada's January net foreign investment will also be released on March 19th. On March 20th January retail sales are due for release CAD continues to trade in a remarkably volatile pattern with the dominant driver, the direction of equities and risk sentiment. Monday USD/CAD traded above a triple top at 1.3015 and tested 1.3064. The break of 1.3015 level encouraged fresh selling the CAD. The fresh selling wound up to be a bear trap and CAD quickly recovered to the 1.2800 level. Look for near-term resistance at 1.2844 the March13th high and 1.3064 March 9th high with support 1.2520 the February 27th low. AUD AUD traded higher supported by improving risk sentiment and firmer commodity prices. Today's announcement that China plans an additional 1.8 trillion stimulus plan supported the AUD on hope the plan will help boost global growth and demand for Australian exports. The trade will monitor this weekend's G-20 Finance Ministers meeting for clues to whether the G-20 plan additional coordinated economic stimulus. The trade will also be minor Sunday's OPEC meeting. OPEC is expected to consider another oil production cut. If OPEC agrees to a production cut crude prices may extend Friday's rally. The recent rebound in commodity prices contributes to optimism that the global economy may be nearing a bottom. Higher crude prices and a pledge of coordinated stimulus from the G- 20 may help carry this week's improvement in risk sentiment forward into next week's trade. No major Australian economic data was released in today's trade. The only data on the Australian economic calendar for next week is the March 19th release of Q4 dwelling unit commencements and new car sales for February. AUD continues to closely track the direction of equities and the EUR. The fundamental outlook for the AUD continues to improve as commodity currencies try to carve out a bottom supported by speculation that the global economy will begin to recover the midyear. The technical outlook for the AUD has improved as well. Look for key AUD support at 6415 with resistance at 6640 the February 13th high. AUD trade above 6640 could spark a move to 6800. By By Michael J. Malpede Easy Forex Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst. Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.