USD Higher, EUR and GBP Pressured by Credit Warnings

• USD: Higher, risk aversion re-emerges on European debt worries
• JPY: Higher, supported by a return of risk aversion, leading index rose more than expected
• EUR: Lower, concern about Greek debt troubles, ECB’s Stark says debt places strains on monetary policy
• GBP: Lower, Moody’s and Fitch warnings on banks and debt, weak housing data, trade deficit widened
• CAD and AUD: AUD & CAD higher, Australia’s job ads strong, tracking equities, gains versus Europe

Overview

USD traded higher Tuesday supported by a return of risk aversion sparked by the re-emergence of concern about European and UK debt. Fresh worries over European debt were triggered by statements from Moody’s and Fitch ratings agencies. The EUR traded lower ahead of today’s meeting with Greek Prime Minister Papandreou and President Obama. Bloomberg reports that this meeting is unlikely to produce any significant offer of US aid for Greece. Papandreou says that Greece needs EU and US help to prevent speculative selling of Greek bonds and that borrowing at high rates will not be sustainable. GBP was pressured by a Moody’s warning that it may cut UK bank ratings as bailout support is withdrawn and in reaction to Fitch concern about UK deficit. GBP was also pressured by disappointing UK housing and trade data and election polls which suggest that the UK is headed for a hung parliament. Commodity currencies continued to outperform despite a sharp decline in the price of crude and a spike in risk aversion as equity markets traded lower. AUD downside was limited by strong jobs ads report and a rebound in US equities. JPY traded higher supported by today’s return of risk aversion. There were no major US economic reports released in today’s trade. The NFIB small business optimism index lost 1.3 points in February and Manpower says that hiring plans are in a holding pattern as a net 5% of employers said they expect to hire new workers in Q2. Focus turns to this week’s release of US jobless claims, retail sales and consumer sentiment.

Today’s US data:

No major US economic data was released in today’s trade.

Upcoming US data:

This week’s US economic calendar includes the March 10th release of January wholesale inventories and sales. Wholesale inventories are expected to rise by 0.3% compared to a 0.8% decline last month. Wholesale sales are expected unchanged at 0.8%. The February Treasury budget will also be released on March 10th expected at -200bln compared to -193.9bln last month. On March 11th initial jobless claims for week ending 03/06 will released expected at 460k compared to 469k last week. January trade deficit also will be released on March 11th expected at -40.3bln compared to -40.2bln last month. On March 12th February retail sales and March University of Michigan consumer sentiment will be released along with January business inventories. Retail sales expected flat compared to 0.5% rise last month. Michigan consumer sentiment is expected at 73.5 compared to 73.6 last month and business inventories are expected to rise by 0.2% compared to 0.2% decline last month.

JPY

JPY traded higher supported by a spike in risk aversion sparked by fresh concerns over European debt problems. Moody’s warned that it may cut UK bank ratings as bailout support is withdrawn and Fitch expressed concern about the UK deficit. The Greek PM said that borrowing at high rates was not sustainable and that Greece needs help from the EU and the US to rein in speculative attacks on the Greek bond market. Equity markets traded lower in reaction to European debt risk. JPY posted sharp gains in cross trade to the EUR and GBP in reaction concern that European debt ratings may be cut. JPY was also supported by report that the January leading index rose by 2.4% and by Yuan revaluation speculation. The IMF says that the Yuan may have to be revalued in the coming months as China adapts to the changing global economic outlook. JPY sometimes trades as a proxy for the Yuan and Yuan revaluation would likely boost demand for Asian currencies. Risk sentiment and the direction of equities is key to the outlook for the JPY. Investors will also be closely monitoring BOJ policy outlook. There is increased speculation that the BOJ may soon ease monetary policy to combat deflationary pressures in Japan. Focus turns to Wednesday’s release of Japan’s corporate goods prices Thursday’s release of Japan’s Q4GDP. The corporate goods prices report will be a key indicator of deflationary pressures in Japan. The GDP report will be important to the outlook for BOJ policy. A stronger GDP report may dampen BOJ ease speculation.

On March 10th February CGPI will be released expected to rise by 0.1% compared to 0.3% last month. January machinery orders will be released on March 11th expected at -5.2% compared to 20.1% last month along with Q4 preliminary GDP expected at 1.1%. On March 12th January revised industrial output will be released expected at 2.5% compared to 1.9% last month.

Key technical levels to watch in USD/JPY include support at 89.15 the March 5th low with resistance at 90.69 the March 8th high.

EUR

EUR traded lower ahead of today’s Greek-US meeting pressured by fresh concern about European debt outlook. Greek officials seek US support of Greek austerity measures. The Moody’s and Fitch ratings agencies issued new warnings about possible downgrades of the UK debt rating and this sparked selling of equities and the European currencies. EUR outperformed gaining versus the GDP but uncertainty about the outcome of today’s meeting between the Greek prime minister and president Obama revived concern about the Greek debt outlook. The US is not expected to offer much in the way of substantial aid to Greece. Greek officials want the EU and US to help prevent speculative selling of Greek bonds because the selling of Greek bonds substantially raises the cost of Greek funding of its deficit. EUR was also pressured by statements from the ECB’s Stark and Weber. Stark warned of the risk of global stagflation and that high levels of public debt will place additional strains on monetary policy. Stark’s comments suggest that the European debt crisis may delay the implementation of ECB exit strategies. Weber says that he sees a weak EU recovery. Weber’s comments fuel investor fears that the sovereign debt crisis in peripheral European nations would be a drag on the EU economy. EUR remains vulnerable to concern about EU sovereign debt risk and ECB policy. Focus turns to this week’s release of EU CPI. The ECB is expected to remain on hold because of continued subdued EU inflation and uncertain outlook for EU sovereign debt risk.

On March 10th EU CPI and current account balance will be released. On March 12th EU January industrial production will be released expected at -1.5% compared to -1.7% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3530 the March 5th low and 1.3433 the March 2nd low with resistance at 1.3712 the March 4th high.

GBP

GBP traded lower pressured by fresh concern about the UK debt outlook and sovereign debt rating and in reaction to disappointing housing and trade data. Moody’s said that it may cut UK banks ratings as bailout support is withdrawn and Fitch said that the UK must accelerate cutting its budget deficit or face a sovereign debt downgrade. UK February RICS house price balance came in at 17 compared to 31 in January, a reading of 30 was expected. This marks the lowest UK house price balance since August of 2009. RIC’s house balance report suggests that the recovery in the UK housing market has slowed. GBP was also pressured by report of a widening of the UK trade deficit. The UK trade deficit widened to 7.9bln from 7.01bln last month. UK trade deficit is at its highest level since August 2008. These reports overshadowed report that February BRC retail sales rose by 2.2%. GBP was also pressured by the latest UK election polls which show that the Conservatives and Labor party are running neck and neck. UK elections are expected to be held on May 6th. The UK election polls suggest that neither the Conservative or Labor party will win a significant majority in parliament .This could lead to a hung parliament. A hung parliament may reduce the chance of the new UK government taking fast action to reduce the UK budget deficit. Rating agencies have put the UK on notice that if credible action is not taken to reduce the UK deficit the UK AAA sovereign debt rating is at risk or downgrade. Concern about the strength of the UK recovery and uncertainty about upcoming UK elections should limit demand for GBP. Focus turns to Wednesday’s release of UK industrial production.

On March 10th January industrial production and NIESR GDP estimate will be released. The January industrial production is expected at 0.3% compared 0.5% last month. NIESR GDP estimate is expected at 0.3%.

The technical outlook for GBP is negative as GBP trades back below 1.5000. Expect near-term support at 1.4854 the March 2nd low with resistance at 1.5197 the March 8th high.

CAD

CAD traded mixed initially pressured by weaker equity market trade, tumbling crude prices and a spike in risk aversion sparked by the re-emergence of concern about European debt. CAD downside was limited by gains versus Europe. CAD traded at seven week high versus the USD in Monday’s trade supported by a report of a sharp rise in Canadian housing starts, firmer equity market trade and a rally in the CRB index led by stronger crude prices. Canada’s February housing starts came in much higher than expected reported at 196.7k, the trade had expected a reading of 189.5k. CAD has been outperforming supported by last week’s decision by the BOC to maintain steady monetary policy and signal a shift in its policy bias. In the BOC policy statement the BOC dropped reference to inflation risks being to the downside. This has encouraged speculation that the BOC may hike interest rates sooner than the Fed. A BOC rate hike could come as early as August. Canadian interest rate swaps widened to a two year high versus US last Wednesday. The widening of the swap spread reflects increased speculation that the BOC will hike interest rates before the Fed. Canadian housing data follows last week’s strong Canadian GDP report and adds to BOC rate hike speculation. Canada’s Q4 GDP rose at its fastest pace in nine years. The BOC has confirmed that it plans to maintain steady rate policy through June 2010 but the odds of the BOC rate hike before year end are rising. This week’s main focus will be Friday’s release of Canada’s unemployment rate for February. Consensus is that Canada’s jobs creation slowed in February. A weaker than expected Canadian unemployment report may take some of the steam out of BOC rate hike speculation. As the CAD approaches parity it may increase the risk of verbal intervention from the BOC and Canadian officials. The BOC noted in its policy statement concern about the potential drag for the Canadian economy from strong CAD.

On March 11th Q4 capacity use and January trade balance. Capacity use is expected at 67.9 compared to 67.5 last quarter. The trade balance is expected at 0.50bln compared -0.25bln last month. On March 12th February unemployment will be released expected unchanged at 8.3% with employment growth expected at 30k compared to 43k last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0225 the January 14th low with resistance at 1.0368 the March 3rd and high.

AUD

AUD traded mixed to firm with initial selling pressure sparked by a spike in risk aversion offset by strong Australian domestic economic data. Today’s AUD strength was impressive in light of weaker crude oil prices and rising risk aversion. Australia’s February NAB business conditions index rose to +8 compared to +3 in January and the confidence index rose to +19 from +15 last month. February job ads rose by 19.1% this marked the highest level for Australian job ads in over a year. These reports suggest that Australia’s domestic economy is picking up strength. Stronger domestic data will increase pressure on the RBA to hike interest rates next month. Last Tuesday, the RBA hiked interest rates 25bps to 4%. In the statement accompanying the RBA rate hike the RBA appeared to have a balanced outlook towards inflation, growth and future policy decisions. This has sparked speculation that the RBA may pause its rate hike cycle in April. RBA watcher McCrann that the RBA is likely to pause its rate hike cycle in April. McCrann however still expects the RBA to hike rates to 5% by year end. This AUD downside is also limited by Yuan revaluation speculation. Monday Reuters reported that China may be considering breaking its USD peg and Tuesday the IMF says that the Yuan may have to be revalued coming months. If China breaks its peg to the USD it may help to reduce global trade imbalances and boost the global recovery outlook. One note of caution, Chinese officials said they are wary about the outlook for gold. AUD price direction has a high correlation to the direction of the price of gold and Chinese demand for gold has been one of the major factors supporting the rise in the price of gold. Focus turns to this week’s release of Australia’s February unemployment. A strong employment report would add fuel to RBA rate hike speculation. AUD price direction will focus on risk sentiment and the direction of equity markets.

On March 10th January housing finance will be released expected at 2.5% compared to -5.5% last month. On March 11th February unemployment will be released expected at 5.2% compared to 5.3% last month with the participation rate unchanged at 65.3

The technical outlook for the AUD is positive as the AUD trades above 9100. Expect AUD support at 8985 the March 5th low with resistance at 9200.

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.

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Today, the U.K. will release trade balance for January in a calm day in Europe that lacks fundamentals. The British economy has shown improvement, according to the data released last week which showed that consumer confidence surged in February to a two-year high and services expanded at the fastest pace in three years.

Britain expanded 0.3% in the fourth quarter boosted by exports which jumped to 3.7% from 0.1%, while imports rose to 4.1% from 1.3%. Besides, services and manufacturing sectors are showing growth in the first quarter of 2010. However, the economy is suffering from a trade deficit, where it widened in December to the most since January 2009 as imports soared faster than exports.

Trade deficit reached 7.3 billion pounds where imports inclined 5.2%, while exports jumped 4.5% on the month. The trade gap in January is predicted to narrow to 7.0 billion pounds. Trade deficit non EU is estimated to narrow to 3.3 billion pounds from 3.5 billion pounds, while the total trade deficit to retreat to 3.0 billion pounds from 3.2 billion pounds.

Probably the reading will improve after the pound dropped nearly 2.7% versus the greenback in December and January. Growth in the coming period will mainly depend on the increase in exports after the pause of the APF program in February at 200 billion pounds. Last week, MPC members left both interest rate and APF program unchanged at 0.5% and 200 billion pounds in March.

It seems that the high inflation that rallied to 3.5% in January, the most in 14 months, caused the Governor of the Bank of England, Mervyn King, to write an open letter to the U.K Treasury stating why inflation was high above the bank’s target is capping the bank from the increasing the amount of APF to boost recovery that is still fragile.

On the other hand, government spending surpassed revenue by 4.3 billion pounds in January which makes the main concern for the U.K. in the coming period will be taming the skyrocketing budge deficit before witnessing far-reaching calamity like Greece.

The British Chamber of Commerce lowered its forecasts for 2011 to 2.1% instead of 2.3%. Also, the BoE lowered its growth forecasts to 3.2% in the second quarter next year, below the previous estimates of 4%. Still uncertainty is surrounding recovery due to the budget deficit woes and the political change that might take place in May when results of elections are announced.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, topped at 1.3703 but closed lower at 1.3632. The bias is neutral both in nearest and medium term as price still consolidating. The bullish correction scenario after rejection from 1.3450/30 (triple bottom) remains intact as price still move inside the minor bullish channel with 1.3750 – 1.3850 as corrective target but still in a major bearish scenario. Immediate support at 1.3580 area. Break below that area could trigger further bearish momentum re-testing 1.3450/35 area but only clear break below 1.3450/35 area can be seen as bearish continuation confirmation targeting 1.3100 area.

GBPUSD Outlook

The GBPUSD failed to continue its bullish momentum yesterday, bottomed at 1.5030 and closed at 1.5064. The bias is neutral in both nearest and medium term but remains bearish in long term view. The fact that price so far still able to move above 1.5000 – 1.4950 support area indicating the bullish correction scenario after bottomed at 1.4779 on March 01 remains intact with technical target around 1.5250 area. Clear break below 1.5000 – 1.4950 area could trigger further bearish momentum re-testing 1.4779 and might put the bullish corrective phase to its end.

USDJPY Outlook

The USDJPY failed to maintain its bullish momentum yesterday, bottomed at 90.13 and closed at 90.29. The bias is neutral in nearest term, but the failure to stay above 90.50 area could produce a false breakout scenario which could trigger bearish momentum testing 89.50 area. The bullish correction scenario remains intact but we need a consistent move above 90.50 area to continue bullish momentum targeting 91.50 region.

USDCHF Outlook

The USDCHF was indecisive yesterday, leave us in range area of 1.0888 – 1.0640 area. We have no significant technical movement so far and price still consolidating but still in the context of bullish major scenario. I think the best strategy remains to short around 1.0888 or long around 1.0640 with tight stop loss. Break above 1.0888 – 1.0900 area should continue the bullish scenario targeting 1.1000 while a break below 1.0640 should trigger further bearish correction towards 1.0507 area.

EURJPY Outlook

As you can see on h4 chart below, the EURJPY failed to continue its bullish momentum yesterday after rejection to move consistently above the trendline resistance. This fact could produce a false breakout scenario which not only could trigger bearish momentum towards 121.70 area but also a potential threat to the bullish correction scenario. Immediate resistance at 123.50. Break above that area could trigger further upside pressure re-testing the trendline resistance. Clear break above the trendline resistance should trigger further bullish scenario targeting 123.15 region.

GBPJPY Outlook

The GBPJPY failed to continue its bullish correction momentum yesterday after found resistance at the trendline, as you can see on my h4 chart below. This fact not only keep the major bearish scenario intact but could put the bullish correction scenario to its end targeting 134.70 before re-testing 132.00 area. Immediate resistance at 136.50. Break above that area and a violation to the trendline resistance could lead us into a new bullish phase in medium term.

AUDUSD Outlook

The AUDUSD didn’t make significant movement yesterday. The bias is neutral in nearest term and technical levels to be watched today is 0.9140 and 0.9040. Break on either side can give us a clearer direction towards 0.9326 area or testing the trendline support and 0.8910 area. As long as price stay above the trendline support, the bullish scenario should remain intact.

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www.fxinstructor.com

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USD Mixed as Stocks Weaken

• USD: Mixed, better than expected nfp, consumer credit rises, specs on the IMM halve USD long positions
• JPY: Lower, Nikkei rallies 2.9%, BOJ ease speculation
• EUR: Lower, Sarkozy says EU will help Greece, investor sentiment improves
• GBP: Mixed, BOE policy and UK election uncertainty
• CHF: Higher, Swiss unemployment rate improves, retail sales strong
• CAD and AUD: AUD & CAD higher, tracking improving risk sentiment, Canadian housing starts rise 6.1%

Overview

USD starts the week mixed to lower pressured by a modest improvement in risk sentiment. The improvement in risk sentiment is attributed to Friday’s release of better than expected US unemployment and stronger consumer credit, a statement from French President Sarkozy that the EU is ready to help Greece and in reaction to a Financial Times report which suggests that China is ready to shift its currency policy and break its USD peg. US January consumer credit rose for the first time in over a year and posted its largest increase since July 2008. The Nikkei surged 2.9% adding to the improvement in risk sentiment but European equities and US equities struggled which limited the downside for the USD. European economic data was generally positive with EU investor sentiment improving and Swiss unemployment and retail sales coming in better than expected. There was no major UK economic released today and GBP consolidated recent gains. Commodity currencies traded higher supported by the improvement in risk sentiment with the AUD trading at a six-month high. AUD was also supported by M&A news that Royal Dutch Shell and Petro China are bidding for Australia’s Arrow Energy. CAD traded higher in reaction strong Canadian housing starts report and BOC rate hike speculation .There was limited reaction to an NABE report which says that business economists see a Fed rate hike within the next six months. CFTC commitment of traders for the IMM shows that speculators cut USD speculative long positions in halve last week. The CFTC report suggests that speculative sentiment towards the USD is turning less positive. There were no major US economic reports released in today’s trade. Focus turns to this week’s release of US jobless claims retail sales and consumer sentiment.

Today’s US data:

No major US economic data was released in today’s trade.

Upcoming US data:

This week’s US economic calendar includes the March 10th release of January wholesale inventories and sales. Wholesale inventories are expected to rise by 0.3% compared to a 0.8% decline last month. Wholesale sales are expected unchanged at 0.8%. The February Treasury budget will also be released on March 10th expected at -200bln compared to -193.9bln last month. On March 11th initial jobless claims for week ending 03/06 will released expected at 460k compared to 469k last week. January trade deficit also will be released on March 11th expected at -40.3bln compared to -40.2bln last month. On March 12th February retail sales and March University of Michigan consumer sentiment will be released along with January business inventories. Retail sales expected flat compared to 0.5% rise last month. Michigan consumer sentiment is expected at 73.5 compared to 73.6 last month and business inventories are expected to rise by 0.2% compared to 0.2% decline last month.

JPY

JPY traded mixed to lower pressured by BOJ ease speculation and an improvement in risk sentiment as the Nikkei rallies 2.9%. Last week Japanese press reported that the BOJ is considering easing monetary policy to combat deflationary pressures and boost the Japanese domestic economy. The Nikkei rallied to its highest level since January 26th supported by BOJ ease speculation and in reaction to better than expected US employment data. JPY was also pressured by demand for the EUR/JPY cross with the EUR supported by report that the French PM said that the EU will rescue Greece if necessary. JPY downside was limited by a Financial Times report which says that China is considering breaking its USD peg and shifting currency policy in response to the global financial crisis. If China allows the Yuan to be revalued the stronger Yuan could boost demand for Asian currencies. JPY sometimes trades as a proxy for the Yuan. Japanese economic data was mixed with the current account surplus for January widening to ¥899.8bln in February M2 reported to have risen by 2.7%. JPY remains vulnerable to improving risk sentiment and BOJ ease speculation. Focus turns to this week’s release of Japan’s Q 4GDP. The GDP report will be important to the outlook for BOJ policy. A stronger GDP report may dampen BOJ ease speculation.

On March 9th January leading indicators will be released expected at 3.7% compared to 3.6% last month. On March 10th February CGPI will be released expected to rise by 0.1% compared to 0.3% last month. January machinery orders will be released expected at -5.2% compared to 20.1% last month along with Q4 preliminary GDP expected at 1.1%. On March 12th January revised industrial output will be released expected at 2.5% compared to 1.9% last month.

Key technical levels to watch in USD/JPY include support at 89.15 the March 5th low with resistance at 91.00.

EUR

EUR traded higher supported by easing fears over Greece as French President Zarkozy says that the EU is prepared to help Greece if necessary and former Fed Chairman Volcker says that he expects the EUR to survive the Greek budget crisis. Zarkozy made his statement after meeting with the Greek prime minister on Friday. EUR was also supported by report of improving investor sentiment. EU March Sentix improved to -7.5 from 8.2 last month. The Sentix index was expected at -8.8. Sentiment towards the EUR has turned mixed as investors aren’t sure if the passing of the Greek budget crisis is temporary or if the investment community is going to look beyond sovereign debt risks and Europe and trade on improving risk sentiment. Despite today’s report of improvement in EU investor sentiment the ECB is expected to remain on hold and maintain a dovish policy bias. There is speculation that EU sovereign debt risks will constrain ECB monetary policy and delay the ECB exit plans. EUR remains vulnerable to concern about EU sovereign debt risk and speculation the Fed may hike rates before the ECB. Speculation of an earlier Fed rate hike is fueled by last Friday’s release of better than expected US employment report and today’s NABE report which says that economists expect the Fed to hike rates within the next six months. Focus turns to this week’s release of EU CPI. The ECB is expected to remain on hold because of continued subdued EU inflation and uncertain outlook for EU sovereign debt risk.

On March 10th EU CPI and current account balance will be released. On March 12th EU January industrial production will be released expected at -1.5% compared to -1.7% last month.

The technical outlook for the EUR is negative. Expect EUR support at 1.3530 the March 5th low with resistance at 1.3712 the March 4th high.

CHF

CHF traded higher supported by report of strong Swiss economic data and an improving risk sentiment as Asian equity markets rally in reaction to better than expected US employment data and easing concern about the Greek fiscal crisis. Swiss February unemployment improved to 4.4% from 4.5% last month and January retail sales rose by 4.4%. The SNB will hold a policy meeting Thursday and are expected to hold monetary policy steady but there could be increased discussion of a exit strategy by the SNB in light of improving Swiss economic outlook and diminishing fears about EU sovereign debt risks. Focus turns to Tuesday’s release of February CPI expected unchanged at 1% and SNB policy meeting. SNB officials will be monitoring closely the CPI figure to gauge the impact of recent CHF price action on inflation. Thursday the SNB is expected to hold its target rate unchanged at 0.25%.EUR/CHF cross continues to trade in narrow range holding above the March intervention lows with the cross supported by threat of SNB intervention. Expect USD/CHF support at 1.0648 the March 3rd low with resistance at 1.0810 the March 5th high.

GBP

GBP traded sideways after rebounding from a 10 month low set versus the USD last week. GBP has experienced a short covering rally sparked by a the BOE’s decision to hold monetary policy unchanged and maintain the current level of asset purchases and in reaction to Friday’s report of a sharp rise in UK PPI. UK February PPI rose to a 14 month high at 4.1% y/y. In addition last week the UK reported that consumer confidence rose to two year high. The rise in the consumer confidence contrasts with report of weaker mortgage approvals and lending. UK economic data paints a mixed picture for the UK recovery and generates concern about the strength of the UK economy. Concern about the strength of the UK recovery and uncertainty about upcoming UK elections should limit the GBP rally. UK elections are expected to be held on May 6th. The UK election polls suggest that neither the Conservative or Labor party will win a significant majority in parliament and this could lead to a hung parliament. The latest ICM opinion poll shows that the Tories will fall six seats short of an overall majority in parliament. A hung parliament may reduce the chance of the new UK government taking action to reduce the UK budget deficit. Rating agencies have put the UK on notice that if credible action is not taken to reduce the UK deficit the UK AAA sovereign debt rating is at risk or downgrade. GBP may find modest short-term support from the BOE steady policy decision but GBP remains vulnerable to concern about UK debt outlook and uncertainty about the UK economy. Focus turns to this week’s release of UK retail sales and industrial production.

This week’s UK economic calendar includes the March 9th release of the January trade balance expected at -7.4bln compared to -7.2bln last month along with February retail sales expected at -0.5% compared to -1.8% last month. On March 10th January industrial production will be released and NIESR GDP estimate. The January industrial production is expected at 0.3% compared 0.5% last month. NIESR GDP estimate is expected at 0.3%.

The technical outlook for GBP is mixed as GBP trades back above 1.5000. Expect near-term support at 1.4960 the March 3rd low with resistance at 1.5205 March 2nd high.

CAD

CAD traded higher supported by strong housing data and firmer or equity market trade. Canada’s February housing starts came in much higher than expected reported at 196.7k, the trade had expected a reading of 189.5k. The 6.1% rise in its Canadian housing starts supported the CAD along with rising commodity prices and improving risk sentiment. Crude prices traded above $82 a barrel and the CRB rallied in reaction to stronger global equity market trade. CAD has been outperforming supported by last week’s decision by the BOC to maintain steady monetary policy and signal a shift in its policy bias. In the BOC policy statement the BOC dropped reference to inflation risks being to the downside. This has encouraged speculation that the BOC may hike interest rates sooner than the Fed and that the BOC rate hike could come as early as August. Canadian interest rate swaps widened to a two year high versus US last Wednesday. The widening of the swap spread reflects increased speculation that the BOC will hike interest rates before the Fed. Today’s Canadian housing data follows last week’s strong Canadian GDP report and adds to BOC rate hike speculation. Canada’s Q4 GDP rose at its fastest pace in nine years. The BOC has confirmed that it plans to maintain steady rate policy through June 2010 but the odds of the BOC rate hike before year end are rising. CAD also is benefiting from improving fiscal outlook in Canada. Last week Canada announced its fiscal budget and Canada’s PM Harper pledged to bring the Canadian budget back in balance by 2016. Canada’s fiscal outlook stands in stark contrast to the US, Japan and Europe. This week’s main focus will be Friday’s release of Canada’s unemployment rate for February. Consensus is that Canada’s jobs creation slowed in February. A weaker than expected Canadian unemployment report may take some of the steam out of BOC rate hike speculation. As the CAD approaches parity it may increase the risk of verbal intervention from the BOC and Canadian officials. The BOC noted in its policy statement concern about the potential drag for the Canadian economy from strong CAD.

On March 11th Q4 capacity use and January trade balance. Capacity use is expected at 67.9 compared to 67.5 last quarter. The trade balance is expected at 0.50bln compared -0.25bln last month. On March 12th February unemployment will be released expected unchanged at 8.3% with employment growth expected at 30k compared to 43k last month.

The technical outlook for CAD is positive as USD/CAD trades below 1.0500. Look for near-term support at 1.0225 the January 14th low with resistance at 1.0368 the March 3rd and high.

AUD

AUD traded at a six-week high versus the USD supported by improving risk sentiment as Asian equities rally and the NASDAQ trades at an 18 month high. The improvement in global equity markets is attributed to last Friday’s release of better than expected US employment, diminishing concern about the Greek fiscal crisis, and BOJ ease speculation. AUD/JPY has rallied over 3% over the last two trading sessions. AUD was also supported by M&A news with report that Royal Dutch Shell and Petro China are bidding for Australia’s Arrow Energy. The deal is estimated to be worth $3bln. A report that China may be considering breaking its USD peg adds support to the AUD. If China breaks its peg to the USD it may help to reduce global trade imbalances and boost the global recovery outlook. Last Tuesday, the RBA hiked interest rates 25bps to 4%. In the statement accompanying the RBA rate hike the RBA appeared to have a balanced outlook towards inflation, growth and future policy decisions. This has sparked speculation that the RBA may pause its rate hike cycle in April. RBA watcher McCrann that the RBA is likely to pause its rate hike cycle in April. McCrann however still expects the RBA to hike rates to 5% by year end. Last week Australia reported strong manufacturing data and improving domestic growth. Focus turns to this week’s release of Australia’s February unemployment. A strong employment report would add fuel to RBA rate hike speculation. AUD price direction will focus on risk sentiment and the direction of equity markets.

On March 10th January housing finance will be released expected at 2.5% compared to -5.5% last month. On March 11th February unemployment will be released expected at 5.2% compared to 5.3% last month with the participation rate unchanged at 65.3

The technical outlook for the AUD is positive as the AUD trades above 9100. Expect AUD support at 8985 the March 5th low with resistance at 9200.

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.

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U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

Yes, Financing is Available – the Evolving Financial Marketplace

Financial markets are evolving as is the labor market. In recent month we have witnessed a sharp upswing in equity market offerings and the backlog of offerings is also rising. Leveraged loan issuance picked up in September and has risen sharply this year. Investment grade corporate spreads have declined from over 500 basis points a year ago to just 150 basis points now. High yield bond spreads have also declined.

These improvements suggest that many firms are financing economic activity and this further supports for our outlook for trend-like three percent growth for this year. Finance and real economic growth go together as we have witnessed in the recession and now are witnessing in the recovery. This recovery, however, is still different in character and in strength relative to prior recoveries and that will continue to disappoint many – as long as politicians don’t take up the patty-cake routine of Bing and Bob.

U.S. Outlook

U.S. Trade Balance • Thursday

The U.S. trade deficit widened sharply in December to $40.2 billion primarily due to a surge in petroleum imports. The January U.S. trade deficit released on Thursday is expected to hold near those levels, coming in at $40.0B. U.S. exports have been rising steadily and strongly in recent months, jumping 3.3 percent in December. We see little reason to expect any deviation from this trend as global demand continues to recover from last year’s rout of global trade flows. Imports also rebounded strongly in recent months, rising by nearly $13 billion dollars between October and December from $170.1 billion to $182.9 billion. On balance, however, net exports continue to contribute to GDP growth, though less so than during the height of the recession and financial crisis. According to the revised GDP data, net exports contributed 0.3 percentage points of the GDP growth in Q4.

Previous: -$40.2B Wells Fargo: -$40.0B
Consensus: -$40.8B

Retail Sales • Thursday

Retail sales continue to post respectable gains, considering the continued drag on household spending power due to high unemployment and slowing wage growth. Consumer balance sheets, while healing, remain severely impaired from continued high debt levels and reduced wealth, while access to affordable bank credit remains difficult for many. Still there appears to be real pent-up demand for necessities like clothes since many consumers delayed purchases of these items during the worst of the recession last spring. Moreover, stabilizing employment and steady stock market gains have helped more fence sitters to go ahead with their purchase plans, especially among the higher income bracket households. We expect February retail sales to advance another 0.2 percent following a 0.5 percent increase in January. Retail sales less autos could advance even more, rising 0.6 percent in February.

Previous: 0.5% Wells Fargo: 0.2%
Consensus: -0.1%

Michigan Sentiment • Friday

Michigan consumer sentiment held up well in February, dropping only modestly to 73.6 from 74.4 in January. This was in sharp contrast to other consumer confidence measures which revealed a more notable drop, including the Conference Board’s Consumer Confidence Index that plunged to 46.0 from 56.5. The January reading on Michigan Sentiment marked a two-year high for this measure. Michigan Sentiment appears to be somewhat more sensitive than the Conference Board’s measure to improvements in stock market performance, while the Conference Board’s measure appears to more heavily weight labor market conditions. So this could at least in part account for some of the dichotomy between the surveys. Early stock market gains in March and an encouraging payroll report for February, which seems to indicate that net job gains are just around the corner, will likely help support consumer sentiment in March.

Previous: 73.6
Consensus: 73.7

Global Review

Chile: Slow Reaction to the Disaster

• The earthquake has shown how easily an emerging economy can fall prey to nature’s unpredictability. Early estimates on the cost of the earthquake are approaching $30 billion or about 19 percent of GDP.
• We expect the Chilean economy to grow by 2.7 percent during 2010, down from our previous forecast of 4.4 percent before the earthquake.
• President Bachelet of Chile was not fond of bringing the military to help because of her own misgivings regarding the institution.

Chile: Slow Reaction to the Disaster

Michelle Bachelet, the outgoing president of Chile is, together with Lula da Silva, the president of Brazil, one of the most admired exponents of the South American political left, having managed to garner the support of a majority of Chileans even at the end of her presidency. However, it seems that her initial reaction to the severe earthquake and tsunami that followed has started to tarnish her hard-earned reputation.

Several days after the earthquake struck, the administration is suffering from what many see as a reluctance to bring in the military and declare curfew in the most affected regions. President Bachelet was not fond of doing that because of her own misgivings regarding the military. Her father died at the hands of the military and she was abducted and tortured during the Pinochet dictatorship. After the first misgivings it seems that reality has made her change her mind.

Furthermore, the earthquake has shown how easily an emerging economy can fall prey to nature’s unpredictability. While the Chilean economy has been one of the most successful stories in bringing its poor up the income ladder, this disaster has shown how fragile and how much farther the country has to go before it can become an advanced economy.

However, Chile is in a position to come out of this tragedy strengthened. The country’s macroeconomic management has led to a debt burden that is only about 6 percent of GDP, one of the lowest in the world. Therefore, the country will be able to tap either domestic or international financial markets to help on the reconstruction. Furthermore, with copper prices so high during the last decade the country has built a “rainy day” fund that stands at more than $11 billion and can be used to help in the effort.

Thus, we remain bullish on the Chilean economy. As it is the case in almost any disaster’s aftermath, economies benefit from the new construction and the reconstruction efforts even though current production is hindered. It is certainly going to be expensive but Chile can overcome this new challenge.

While early indicators on the country’s productive capacity tend to indicate that GDP will be negatively affected during the first and second quarter of the year, the reconstruction effort will bump GDP during the second half of the year. Early estimates on the cost of the earthquake are approaching $30 billion or about 19 percent of GDP.

We expect the Chilean economy to grow by 2.7 percent during 2010, down from our previous forecast of 4.4 percent before the earthquake. We estimate the largest impact to GDP to be allocated to the second quarter of the year and then envision relatively strong growth during the third and fourth quarter of the year. While inflation may be an issue for the central bank due to scarcity of products across the economy we should expect central bank policy to remain accommodative for the first three quarters of the year.

Global Outlook

German Industrial Production • Monday

Since its low in April, German industrial production (IP) has risen about 6 percent, but the increases have not been consecutive. For example, IP fell 2.6 percent in December relative to the previous month. However, the rise in the Ifo index in January and the increase in factory orders in the fourth quarter of last year has most analysts looking for a solid gain in IP in January. Even if the consensus forecast is realized, however, IP will still be down 17 percent relative to its peak in early 2008.

Data on German exports and imports in January also will be released next week. The upturn in exports since the middle of last year has helped to lift German IP. IP data in France and Italy, as well as in the overall euro area, are also on the docket next week.

Previous: -2.6% (month-on-month change)
Consensus: 1.5%

U.K. Industrial Production • Wednesday

Industrial production (IP) in the United Kingdom tanked in late 2008/early 2009, and it has barely risen off the bottom. Although the manufacturing PMI has been clearly in expansion territory over the past few months, IP is up only 2 percent from its nadir in August. However, real consumer spending rose modestly in the fourth quarter and the volume of exports grew about 4 percent relative to the previous quarter. Therefore, a significant increase in IP should occur sooner or later.

Speaking of exports, foreign trade data for January will also be released on Wednesday. In addition, the monthly estimate for overall real GDP growth in February is on the docket on Wednesday.

Previous: 0.5% (month-on-month change)
Consensus: 0.3

Chinese Industrial Production • Thursday

The monthly barrage of Chinese data releases that is scheduled for release next week will give investors some sense of how the Chinese economy is performing in the first quarter. Arguably, the data highlight of the week will be industrial production (IP). Will the year-over-year change in IP continue to strengthen, or have we already reached the peak? Retail sales data will show how consumers are faring at present.

Inflation indicators will also be released next week. Chinese authorities have been directing banks to slow the pace of lending before inflation, both in goods prices and asset prices, starts to heat up. Investors will closely watch the money supply and new loans data to see what effect the directives are having. Producer and consumer prices indices will also print next week, with investors expecting both rates of inflation to have risen in February.

Previous: 18.5% (year-over-year change)
Consensus: 19.6%

Point of View

Interest Rate Watch

Higher Rates Will Not Derail Us

In his interview on CNBC on Tuesday, Thomas Hoenig, President of the Kansas City Fed said that a move to higher rates should not derail an economic recovery. We agree. Yet we think the outlook is not about a derailment but about the long history that raising policy rates will slow down the pace of growth and affect some sectors more than others. This is particularly true given the initial conditions of a deleveraging consumer and many areas of excess housing inventory.

Economic recovery is unlikely to be derailed if the Fed follows a gradual course of raising the funds rate in the manner we have tendered in our monthly economic outlook. We expect the federal funds rate to be 50 basis points in the fourth quarter and 1.25 percent in the first quarter of next year.

Micro not Macro Matters

The macroeconomic recovery, however, is not the issue. Currently the underachievers in the economy are the consumer and residential and non-residential investment. Here we have initial conditions where all three areas remain overleveraged. Many consumers carried too much revolving credit into the recession and continue to work it off. Homeowners in many regions remain under water. Commercial real estate remains in recession.

Since the 1966 credit crunch observers have noted that changes in monetary policy have uneven impacts on different sectors of the U.S. economy. President Hoenig is correct that the pace of Fed tightening envisioned here will not derail the recovery. However, the credit workout for interest rate sensitive sectors will be more difficult. Therefore, we can expect a slower pace of recovery in these three areas.

Our outlook for consumer spending is that it will remain subpar relative to the typical economic recovery. Housing starts will be in the 650,000 to 700,000 range for the second half of this year. The recession for commercial real estate continues. The current economic recovery will remain different than in the past as higher rates impact each sector in very different ways.

Consumer Credit Insights

Higher Rates and Payment Shocks

Both the pace and extent of the increase in short-term interest rates envisioned under Hoenig’s commentary suggests to us that payment shocks will be limited for households. Rising interest rates will limit the improvement in credit quality for some households, but recent Case-Shiller home price data suggest an offsetting gain in home prices – at least in some metro areas. Once again, we see clear evidence that the changing fortunes of U.S. households are not uniform across the country.

For the fourth quarter, all 20 metro areas surveyed showed improvement in their annual price numbers. Over the last six months there have been solid gains in home prices in San Francisco, Phoenix and Los Angeles. Las Vegas saw a decline of 4.8 percent. With home values stabilizing in many areas and our expected job gains in the months ahead we expect that consumer credit will improve in most markets and for most households over that time period.

The consumer credit challenge will be more of the issue of strategic defaults. In this case, the borrower has the capacity to repay their mortgage but chooses to default because the value of their property is significantly less than their mortgage balance. Such defaults are highly regional, centered in Florida and California and vacation/second home markets. What may be surprising is that many defaulters have high FICO scores but high current loan-to-value ratios, thus it is a strategic decision.

Topic of the Week

The Case against Runaway Inflation

Some market-watchers are concerned about runaway inflation in the near future. One of the major arguments against this risk is the enormous slack that currently exists in the economy. A good measure of slack is the output gap, which is the difference between actual real gross domestic product (GDP) and potential real GDP. Potential real GDP depends on supply side factors, and by definition, it is the product of potential productivity and the total number of workers at full employment. During expansionary periods, actual real GDP may increase above potential real GDP, creating a positive output gap. During recessionary periods, the output gap turns negative as actual real GDP falls below potential real GDP. A positive output gap would imply an expanding economy and upward pressure on prices, while a negative output gap would imply slower economic growth and downward pressure on prices.

The recession led to one of the largest output gaps in modern history, peaking during the second quarter of 2009 at -7.0 percent, which was only exceeded by the output gap in Q4 1982 at -7.5 percent. Although the output gap has been less negative in recent quarters, it is expected to remain negative for some time as we go through a slow recovery. In addition, there is indication of plenty of resource slack and low capacity utilization. Housing continues to be in oversupply, and the unemployment rate, at 9.7 percent, is far above the long-run average between 5 and 6 percent. Manufacturing capacity utilization, at 69.2 percent, is also far below the long-run average of 78 percent. These indicators show much lower capacity utilization compared to previous periods of runaway inflation. Relative to long run averages, consumer prices do not seem to be growing too quickly at present. Both the core consumer price index and the core personal consumption expenditure deflator are up less than two percent over the last year. Against this backdrop, the case for near-term runaway inflation seems implausible, at least for now.

Wachovia Corporation
http://www.wachovia.com

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

Two weeks ago, the Greenback was the top performer, followed by the Japanese yen. Then, the Japanese yen we the highlight of last week. This week, the rotation comes to the commodity currencies such as the Loonie and the Aussie. Let’s take a look.

EUR/USD Awaiting Breakout from Consolidation

I was correct to update last week that the bullish attempt on Friday was not to be considered a bullish signal. Instead the market did indeed retest the 1.3450 area, but bounced off of it this week.

Weekly and Daily: The EUR/USD is still in congestion. Looking at the daily, we see that it has been consolidating with a slight downward tilt since the start of February. The 1.3450 area provided support, while each rally attempt falls shorter and shorter (congestion).

Looking at the weekly, we see that the last 4 weeks have been without direction. However, we can see in price and momentum, that the market is very bearish and without any bullish signs, looks to continue to 1.30 area. (78.6% retracement).

On the other hand, the current support is strong and has held up. So wait for a break below 1.3450 to confirm outlook to 1.30 area.

For a bullish outlook, which should only be for short-term and monitored carefully, a confirmation requires a break above 1.38 and estbalishing support above this area as well. Then, the target maybe the 1.43 area.

4H: Looking at the 4H time-frame for clues, you can see that the momentum has channeled up, and is currently testing support. the market is also testing tghe 61.8% retracement area of the previous upswing.

If the market stays above 1.35, there may be another bullish swing projection on the upside. This may bring the market near 1.38 area. Remember, this is still in the context of congestion, which is in a larger context of decline.

If the market gets to that point (1.38/1.3850), monitor for topping action, but also beware of a possible break above.

GBP/USD: Next Stop on the Bear Train: 1.45

Daily: The market reached the target of 1.49, set in last week’s update.

This week, the market pauses above 1.4850 and has only retraced 38.2%. The market is in congestion, and a strong break below the 1.50 level (see in 4H chart) may spell further decline towards 1.44/1.45.

4H: The 4H chart shows that the momentum is bullish, but the price action has not been very strong. A break above the current declining near-term trendline, might be followed by a rally to the 1.53 area. This however is even strong resistance, and the 1.45 target would still be viable if the market tops off here.

USD/JPY Eyes 87.00

Daily: The USD/JPY pair is reversing the previous week’s decline, and the projection to 87.00 is looking less likely.

4H: The 4H time-frame shows that this current rally has strong price action. However, there is resistance at the 90.60 area (78.6% retracement). If the market tops off there, it may still be able to bring the pair to 87.00 level. The choppiness of the market of late, adds to the probability of this. (Usually a swing to 61.8% retracement instead of 38.2% lessens the probability of a full swing projection).

USD/CAD: Approaching Support

Daily: The Canadian dollar, a commodity currency had a very strong week against the greenback. Last week’s anticipated rally was invalidated by the open of this week’s trading.

The market instead started to plunge the pair towards the previous lows near 1.02. Judging from the momentum in the daily, further decline is possible, and a break of the current support is looking probable as well.

Where will this current swing find support?

Weekly: Looking at this chart, we see that the market did attempt a rally, as the stochastic shot up mid-Feb. However, this more bullish momentum was not a reflection of price which made a lower high. This is a “Bearish Reversal” (not to be confused with bearish divergence).

A projection and possible support is near the 1.010/1.015 area.

EUR/GBP Congestion Pattern

4H: Looking first at the 4H time- frame, we see that the market is declining, but after a very strong push. The 0.9150 area held, and the market is already passing the 23.6% retracement. There may be some support at 0.8940. If this area holds, the probability of bullish breakout above 0.9150 improves.

Weekly and Daily: We also see in the daily chart that the 0.91 area was 61.8% retracement and is holding. A decline that breaks below 0.8940 sees support at 0.8850.

After 0.8850, looking at the weekly, we see the flat support at 0.87, and a rising support that may meet price action near 0.8750.

This is a large congestion pattern, so be patient and wait for a clear breakout, and wait for the breakout to be confirmed with either a throwback (after bullish breakout of 0.9150), or a pullback (bearish breakout below 0.87).

A bullish target is the 0.96 area, and a bearish target is the 0.84 area first, then if that breaks, the 0.80 area is the next target.

AUD/USD On to 0.92

1H: The AUD/USD is done with a quick throwback, which only retraced about 38.2%.

The quick, instead of 50-61.8% retracement adds to the likelihood of reaching 0.92, and also adds to the probability of a break above the declining resistance that can be see in the Daily chart.

The break of the near-term declining trendline in the 1H time-frame was the trigger which closed where we anticipated (near 0.91).

I noted that the rally from here would yield a reward to risk ratio of about 2:1.

GBP/JPY: Couter-trend Rally

4H: Looking GBP/JPY pair is showing strength as the 132.00 support held. The 4H time-frame shows that the 138/139 area is significant resistance, so look for some topping action there.

Weekly and Daily: We see that this week paused near the swing projection, and the 161.8% retracement level. We see that if the current rally persists, it will meet resistance at the previous support, which is near 1.38. This may also test a declining channel resistance.

The weekly shows momentum that suggests bearish continuation. So be cautious about the current rally, as it may just be a pullback from the previous breakout below the 1.40 support established throughout second half of 2009.

If the market tops off, a bearish target is the 130.30 area (78.6% retracement).

Capital Market Services, L.L.C.
www.cmsfx.com

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. CMS will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analyses.

Foreign currency trading is not conducted on an exchange. CMS is acting as a counterparty to its clients’ transactions and as a result, CMS’ interests may be in conflict with its clients. Since CMS acts as the buyer or seller in the transaction one should carefully evaluate any trade recommendation provided by CMS or any of its solicitors. Foreign currency trading involves a substantial risk of loss and may not be suitable for all investors.

All screenshots are made from VT Trader 2.0 and are of actual market data at the time of the screenshot.

U.S. Dollar Trading (USD) was strong even as stock markets remained positive as the EUR/USD slumped after the ECB announcement and USD/JPY rallied on increasing US Bond Yields. Weekly Jobless Claims improved to 469k vs. 496k. January Pending Home Sales fell -7.2% tracking a broad set of weak housing data in January. In US stocks, DJIA +47 points closing at 10396, S&P +4 points closing at 1122 and NASDAQ +11 points closing at 2292. Looking ahead, February NonFarm Payrolls forecast at -50k vs. -20k previously and the Unemployment rate is forecast at 9.8% vs. 9.7%.

The Euro (EUR) lost ground after the ECB held rates at 1.0% and described the current levels as appropriate with economic growth uneven. EUR/JPY held its own as stock markets improved but EUR/AUD slumped back close to the key 1.50 handle. Also released, Q4 GDP confirmed at 0.1%. Overall the EUR/USD traded with a low of 1.3551 and a high of 1.3714 before closing at 1.3570. Looking ahead, January Factory Orders are forecast at 1.5% vs. -2.3% m/m.

The Japanese Yen (JPY) suffered a major reversal of fortune against the USD with the 3 month Libor turning to the dollars favor for the first time since August 2009. General USD strength and solid crosses also underpinned. GBP/JPY is beginning to rally from 9 month lows at Y132. Overall the USDJPY traded with a low of 88.12 and a high of 89.27 before closing the day around 89.10 in the New York session.

The Sterling (GBP) rallied on heavy GBP/JPY buying in New York to trade above 1.5100 but this was short lived as the Euro fell back late in the day and the pair ended on a slightly weakish footing. EUR/GBP moved lower but is still contained inside the 90-91 range. The BOE held at 0.5% and kept the Asset Purchase Program at 200bn. Overall the GBP/USD traded with a low of 1.5004 and a high of 1.5139 before closing the day at 1.5040 in the New York session. Looking ahead, February PPI input is forecast at 0.25 vs. 2% previously m/m.

The Australian Dollar (AUD) tracked the EURO lower as AUD/JPY broke down through Y80 in early Europe before heavy buying emerged later in New York to keep the AUD/USD near the 0.9000 level. January Trade Balance was at -1.2bn vs. -1.5bn forecast. Overall the AUD/USD traded with a low of 0.8977 and a high of 0.9056 before closing the US session at 0.9040.

Oil & Gold (XAU) fell back as the strong USD discouraged commodity buying. Overall trading with a low of USD$1125 and high of USD$1142 before ending the New York session at USD$1132 an ounce. Held ground as the improving sentiment countered the stronger dollar. Crude Oil was down -$0.30 ending the New York session at $80.60.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD failed to continued its bullish correction yesterday, bottomed at 1.3552 and closed at 1.3580. While technically this fact can be seen as potential false breakout scenario thus trigger significant bearish pressure re-testing 1.3450/30 key support area, the Euro was fell after a big surprise in US pending home sales data which fell to -7.6% indicating that risk aversion has taken center stage again. If this is true, a bad result of NFP today could trigger further weakness for the Euro while a good result could give some support. The bias is bearish in nearest term but as long as price still able to move above 1.3450 area, we are actually still in consolidation phase and need a clear break below 1.3450/35 area to continue further bearish scenario targeting 1.3100 area. Immediate resistance at 1.3625. Break above that area should lead us into no trading zone as direction would become unclear.

GBPUSD Outlook

The GBPUSD attempted to push higher yesterday, topped at 1.5135 but whipsawed to the downside, bottomed at 1.5004 and closed at 1.5030. On h4 chart below we can see that price failed to break above the upper line of the bearish channel indicating that the bearish scenario remains intact. Technically this fact could be seen as potential end to the bullish correction scenario especially if price able to move consistently below 1.5000 – 1.4950 area targeting 1.4779 even 1.4500 area in longer term. The bias is bearish in nearest term. Immediate resistance at 1.5080 area. Break above that area should keep the bullish correction scenario intact but will be a no trading zone for me as direction would become unclear. Eyes on US NFP today. The Dollar rallied yesterday after worse than expected US pending home sales indicating that risk aversion has taken the center stage. If this is true, a bad result of NFP today could trigger further weakness for the Sterling while a good result could give some support.

USDJPY Outlook

The USDJPY failed to continue its bearish momentum yesterday, topped at 89.24 and closed at 89.02. This fact can be seen as a false breakdown below 88.50 area which potentially produce significant upside momentum testing 89.50 even 90.50 area. The bias is bullish in nearest term. Another move below 88.50 area should trigger further bearish momentum testing 87.35 region.

USDCHF Outlook

The USDCHF failed to continue it’s bearish correction yesterday, topped at 1.0794 and closed at 1.0769. The bias is bullish in nearest term but I think overall price still consolidation and only a clear break above 1.0888 – 1.0900 area could continue the bullish scenario targeting 1.1000 and put the bearish correction phase to its end. Immediate support at 1.0720 area. Break below that area should keep the bearish correction scenario intact testing 1.0640 and 1.0507 area.

EURJPY Outlook

The EURJPY made another indecisive movement yesterday. The bias is neutral in nearest term. On h4 chart below we can see that so far trapped in range area of 121.70 – 119.70. I think the best strategy is to short around 121.70 or to long around 119.70 with tight stop loss. In longer term view, the bearish scenario remains intact.

GBPJPY Outlook

The GBPJPY also indecisive yesterday. The bias is neutral in nearest term. On h4 chart below we can see that price so far trapped in range area of 134.70 – 132.00 this week and I think the best strategy is to short around 134.70 or long around 132.00 with a tight stop loss. In longer term perspective, the trend remains bearish

AUDUSD Outlook

The AUDUSD failed to keep its bullish momentum yesterday and now traded below 0.9040 area indicating potential false breakout scenario which could lead to a significant bearish momentum targeting 0.8910 and the trendline support area (red). The bias is bearish in nearest term but remains unclear in medium term as price seems to be in consolidation phase. Immediate resistance at 0.9040. Break above that area should keep the bullish scenario intact targeting 0.9140.

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