FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

US equities managed to post smallish gains in US trading, up 0.4% on the day. FX markets continue to lose momentum however, with most high beta pairs down against the USD. The EUR has almost fully revered its gains yesterday and now trades at levels close to where the week began. The minutes of the January FOMC released today did not provide much in the way of new information, given the details about the future path of the Fed’s exit policy already revealed within Bernanke’s testimony last week. The only new information was on asset sales; the debate emphasized that asset sales will be a part of the policy normalization process with certain members who would like to begin the process relatively soon. Discussion of the timing of asset sales in such detail is a relatively new development. Despite this, those advocating asset sales in the near term also advocate spreading it over a number of years. Finally, the accompanying forecasts featured small increases in the growth and unemployment forecasts. The committee recognizes that growth was generally stronger than expected in Q4 2009, but did not extend this optimism into their 2010 forecast significantly with only small upgrades to the growth forecast. Markets appear to be shrugging off these developments as old news.

In economic news, today featured several notable reports. Housing permits increased 2.8% to 591k, with single family starts increasing 1.5%. Permits fell 4.9%, driven mainly by a large fall in the multi-family category as single family starts were basically unchanged over the month. Separately, industrial production increased 0.9% and manufacturing production was up 1.0%, both a tad more than consensus. Tomorrow features several notable economic releases in the Asian session including NAB business confidence in Australia and the BoJ rate announcement and subsequent press conference in Japan.

Overnight news

USD: Jan import price index (%m/m, nsa) increased 1% (JPM: 0.8, Cons: 1.0); Jan housing starts (000s, saar) increased to 591k (JPM: 570, Cons: 580); Jan building permits (000s, saar) increased to (JPM: 630, Cons: 620); Jan IP (%m/m, sa) increased 0.9% (JPM: 0.9, Cons: 0.7); Jan capacity utilization (%bal, sa) was 72.6% (JPM: 72.7, Cons: 72.6).

USD: The FOMC minutes revealed that the FOMC agreed to “shrink assets substantially over time,” with several members of the FOMC advocating starting asset sales in the “near future.” The minutes also featured slight upward revisions to the unemployment rate (from a range of 9.3-9.7% to 9.5-9.7%) and GDP (from a range of 2.8%-3.5% from a range of 2.5%-3.5%). The committee continues to emphasize that the process of draining excess reserves should occur within relative proximity to eventual rate hikes.

GBP: The BoE’s minutes for February MPC meeting revealed that the members voted 9:0 (vs JPM expectation of 8:1) to pause asset purchase program. The minutes showed that the BoE is in a wait and see mode to gauge the impact of the cumulative loosening of monetary policy and asset purchases before making further decisions.

GBP: January labor market data surprised on the downside showing a hike of +23.5K in jobless claims vs -10K decrease expected by the market. January unemployment rate fell in line with expectation at 5.0% while weekly earnings for December also printed close to expectation at 0.8% vs 0.9% consensus.

EUR : Decemeber Euro zone trade balance printed slighly below expectation at +EUR 4.4bn vs +EUR 5.0 bn while seasonally adjusted figure printed well above expectation at +EUR 7.0bn vs +EUR 3.9bn expected.

EUR : Head of the Christian Social Union in Germany said not a single Euro of German tax payers’ money should go to Greece even while it’s in the greatest interest of Europe to support Greece politically.

EUR: Quaden – “there is no reason to change interest rates at the moment with no present inflation risk.”

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

AUD: NAB business confidence (%bal, sa) (JPM: 15)

JPY: BoJ rate announcement (Cons: 0.1, JPM: 0.1); BoJ Governor Shirakawa holds press conference @ 6:30

Overnight price action

FX: The dollar is up 1.1% against the Euro, up 0.7% against the Pound and 1.1% against the Yen.

FX vol: FX vols remain under pressure in shorter maturities out to 1y.

Commodities: oil up 0.5% and gold is down 0.5%.

Bonds: US yields are higher by 3-8bp in short maturities and 7-10bp farther out the curve.

Equities: US equities are up 0.3-0.4%.

Technical View for the day

In line with the choppy action, the USD shifted gears again yesterday with a bullish reversal after holding key short term support levels. In turn, we see room for additional USD strength over the near term particularly against the European currencies. In that regard, both EUR/USD and GBP/USD reversed lower in an impulsive manner after once again failing below key resistance levels. We continue to see a risk that both can see new lows in line with the corrective price action over the past week while holding short positions in both. This view is also consistent with the action in the Dollar Index given yesterday’s impulsive reversal from the key 79.50 support area. The commodity currencies retraced yesterday, but the action reflects a corrective bias while reinforcing the view that additional outperformance is in the offing. While some further near term retracement is likely, the risks suggest that corrective pullbacks are buying opportunities particularly on the crosses. The .8924/.8785 levels will now act as key initial support for AUD/USD, while the .6995 area for NZD/USD should be an important short term pivot level. We had thought there was room for some short term retracement in the crosses, but the trends stay persistent highlighted by the steady decline in EUR/AUD. Still, given the proximity of the critical 1.50/1.49 support zone, we sense some near term pause is likely. Yesterday’s JPY weakness put the focus on USD/JPY as the break through the key January downtrendline raises the risk that a deeper upside retracement is underway. The 91.30/91.40 area is now the key test (February high/Ichimoku cloud resistance) as breaks suggest a deeper short term retracement is underway, but note that the upside risks are growing.

ENDS

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