FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Headlines surrounding support measures for Greece continue to sway the market with EUR showing large choppy moves throughout the New York session. In particular, statements from German government officials seemed to indicate that an aid package for Greece was far from finalized. Without any concrete details out on potential aid to Greece, it remains difficult to have conviction over the near term direction of the EUR. Contributing to today’s volatility, we received the prepared text of Fed Chairman Bernanke’s testimony in which he provided the clearest discussion on the exit strategy we have seen from the Fed. In particular, the text clearly places the emphasis on removing liquidity facilities before changes in the funds rate. In addition Bernanke's speech has significant implications for the discount rate as the Chairman noted that "before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate," but that this move "should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January FOMC meeting." This highlights that the discount rate is not a tool of monetary policy but that we should expect the Fed to begin gradually hiking the rate in the months ahead. Despite these changes, there is nothing within the statement which makes us believe that interest rate hikes will come this year. Bernanke even repeated the statement that rates will remain low "for an extended period." The USD gained ground initially following the release of Bernanke’s testimony, but subsequently reversed these moves, finishing the New York session near where it started against most majors.

The market will be reluctant to take big positions ahead of long awaited summit meeting of EU Heads of State tomorrow, and with a holiday in Japan, we expect exchange rates to remain relatively range bound until the European session. In addition to the summit, tomorrow features January job data from Australia, CPI data from China, and initial jobless claims from the US. Separately, the Riksbank will announce its rate decision tomorrow, but it is likely to be a non-event as we expect the Riksbank to leave policy rate unchanged. Notice that severe weather conditions in the U.S. have resulted in the delay of several US data releases. In particular, retail sales has been delayed from tomorrow to Friday 8:30 a.m. EST the business inventories release has been delayed from tomorrow to Friday 10:00 a.m. EST. Finally, the federal budget has been delayed indefinitely.

Overnight news

CAD: Dec trade balance -0.2 C$ bn (JPM: -0.03, Cons: -0.1)

USD: Dec trade balance was -40.2 $bn (JPM: -37.8, Cons: -35.8)

USD: Fed’s Bernanke releases a testimony draft on the exit strategy; Bernanke noted that “noted that "before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate” and that "the FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."; The chairman also addressed the exit strategy, saying that “as the time for a removal of policy accommodation draws near, those operations could be scaled up to drain more significant volumes of reserve balances to provide tighter control over short-term interest rates."

EUR: European Union officials are in very close dialog with Greece and Greece has made “very serious committments” regarding its budget deficit, the commission said today in Brussels.

EUR: German Finance Minister Schaeuble told lawmakers that options for helping Greece extended beyond loan guarantees, said an official who attended a briefing today at the Parliament in Berlin.

GBP: In BoE Inflation Report, the bank cut its inflation forecast to below 2.0% against our expectation, cut GDP forecast, along with the Governor King’s comment that it is “far too soon to conclude” the ending of asset purchase program.

GBP: Encouraging production data from the UK; Dec industrial production rose 0.5%m/m, sa which is more than double the consensus forecast at 0.2%; Dec manufacturing production also impressive rising 0.9%m/m, sa vs. 0.3% expected.

NOK: Jan underlying CPI in line with expectation, slightly moderating to 2.3%oya from 2.4% in the previous month.

SEK: Dec IP much stronger than expected growing 1.8%m/m, sa vs 0.5% consensus forecast; Jan AMV unemployment rate in line with expectation at 5.7%, rising 0.1% pt from December.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

AUD: @ 00:30 Employment (ch 000s, sa) (JPM: 5, Cons: 15)

CNY: @ 02:00 CPI (%oya) for January (JPM: 1.9, 2.1); PPI (%oya) for January (JPM: 3.8, 3.7)

Overnight price action

FX: FX markets whipsaw in response to conflicting headlines. The USD is finishing the day higher vs. most of the majors.

FX vol: vol curves remain little changed with front end vols slightly falling.

Commodities: Oil is up 1% and gold is down 0.5%.

Bonds: Yields are higher by 4-5bp across the curve.

Equities: US equities are about flat on the day.

Technical View for the day

The USD shifted higher yesterday while maintaining the short term consolidation. The current themes remain intact, as the retracement to the recent risk-unwind continues to develop, but the action is still viewed as a part of a corrective phase. In that regard, this week’s two-sided price action has thus far failed to suggest a reversal to the recent bullish trend for the USD and risk aversion. As such, the odds for a continuation of the deleveraging process remain high. Importantly, the key breakdown levels from last week remain intact including the 1.3850/13965 levels for EUR/USD and the 1.5830/50 zone for Cable. Again, we continue to hold short positions in both. Note yesterday’s downside reversal day for Cable which still argues for a break to new lows and GBP underperformance on the crosses. We see an important test for EUR/GBP given the critical pivot levels in the .8830/50 area as strength above would imply a deeper upside retracement. The action in the commodity currencies maintains the two-sided bias, but note that both AUD/USD and NZD/USD are quickly approaching last week’s breakdown levels which should define whether a deeper short term retracement is underway. Again, this follows the effective test and hold of important support levels including the 200-day moving averages. USD/JPY and cross JPY continued to grind higher yesterday as the short term retracement from last week’s lows remains intact. Note that USD/JPY is pushing against key near term resistance and last week’s breakdown area near 99.10. Moreover, we see a similar setup for EUR/JPY near 124.40 and AUD/JPY at the 78.90/79.70 area. Breaks here would confirm a deeper short term corrective phase.

ENDS

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