Quality Check on EUR Rally

The Euro is rallying on... what? There are a couple of interesting
drivers for Euro strength, but it seems nervous shorts rushing for the
exits are the main culprit. Today we look at where the rally faces its
next test of it can stay above the new support levels.

*Euro noise*
A couple of developments today that impinge upon the Euro: the German
newspaper Die Zeit was out with an article claiming that Germany is
softening up its stance on Greek debt and might be willing to help the
country buy back its debt using the EFSF. German officials were out
denying the report. Greek rates were all over the map today, but are
now almost unchanged from yesterday's levels.

Elsewhere, the ECB was out trying a verbal back-down from the market's
interpretation of Trichet's hawkishness on inflation at last
Thursday's ECB meeting, saying that the market over-reacted. Nowotny
called interest rates "adequate" and even the hawkish Weber said he
expects inflation to remain below ECB targets in the medium term. The
market ignored these developments and traded through the important
1.3450 area resistance after yesterday failing to convincingly break
that level.

*Odds and ends*
EU finance ministers are in agreement that *bank stress tests* must be
toughened up in connection with the question of expanding bailout
funds. This comes after the failure of the previous round of tests to
discover the Anglo Irish bank's woes and eventual need for a bailout.
*Portuguese bond yields* remain elevated, with the 10-year still above
7.0% today, close to the top of the range. Meanwhile, CDS prices on
Portuguese debt have declined from as high as 550 recently to 475
yesterday, an indication that default risk is less severe.

There was a flap this morning over a supposed announcement from *the
Swiss government* on the franc, which turned out instead to be a
statement announcing the intent to freeze the assets of the deposed
Tunisian and Ivory Coast presidents. EURCHF hit 1.30 this morning
before backing off slightly.

While *US Housing Starts* disappointed in December (an element of
weather there affecting starts, by all accounts), the *Building
Permits* number was extremely strong registering a nearly 17% increase
month on month and the highest rate since March of last year.
Yesterday's NAHB survey suggested that buyer interest remains at
extremely low levels.

Last night, the weekly US ABC confidence poll dipped back into the
longer term range after showing some signs of hope the previous week.
One suspects that the holiday and hope for the new year were
instrumental in the previous surge, while the reality of higher
gasoline prices and the continued lack of job opportunities is the
reason for the renewed dip.

*Corporate earnings*. Very disappointing results from Wells Fargo,
which was unable to rearrange reality sufficiently to conjure up a
positive number. Goldman Sachs w as in-line with expectations, but
missed the revenue target for the quarter. Will this news outweigh the
incredible Apple earnings report from yesterday? Or does anything of a
fundamental nature matter anymore in the US market in a world of POMO
and HFT?

*Looking ahead*
Well, we have EURUSD through key resistance, though we would question
the quality of the drivers for Euro strength here. Most of it must be
from the surprise to the bearish positioning, a factor that could
drive the pair to the next resistance zones defined by various
Fibonacci retracement levels (the 0.618 for the entire sell-off
sequence comes in at 1.3740, for example). Still, Euro bears shouldn't
feel comfortable until we close back below the 55-day moving average
perhaps (around 1.3350). Elsewhere, AUDUSD rallied through parity
again, but faces an interesting 0.618 Fibo resistance at 1.0085 that
has so far held.

*Chart: AUDUSD*
A classic chart reversal point coming into play today at the 0.618
Fibo retracement at 1.0085 in AUDUSD. This after the failure of the
attempt through the old 1.0164 high (shown with orange line). The
bearish confirmation level would come with a close below the recent
0.9805 low.

Hu Jintao is in Washington and USDCNY is at new lows. Not it's not a
coincidence. Look for lots of flattering language and no real attempt
to address the Chinese currency's over-valuation or other substantive
issues. A rather long and worthwhile read was published by Paul Tudor
Jones back in October of last year on the US-China relationship and
the Fed's (then) planned Qe2. The issues haven't changed since then,
though the market has responded.

On the economic calendar in the coming 24 hours, we have a couple of
New Zealand data points out overnight (NZDUSD trading at almost 0.7800
- really?), together with the monthly spate of Chinese data and the
Chinese Q4 GDP number. In the US tomorrow, we have the weekly claims
data (especially interesting after the huge seasonal spike last week),
Dec. Existing Home Sales and Jan. Philly Fed.

Stay careful out there
*Economic Data Highlights*
* US Weekly ABC Consumer Confidence dipped to -43 vs. -40 expected
and -40 last week
* Australia Jan. Westpac Consumer Confidence out at 104.6 vs. 111
expected
* Euro-Zone Nov. Current Account out at -11.2B vs. -9.6B in Oct.
* UK Dec. Jobless Claims Change fell -4.1k vs. 0k expected and -3.2k
in Nov.
* UK Nov. Average Weekly Earnings rose 2.1% 3M/YoY vs. 2.2% expected
and 2.1% in Oct.
* EuroZone Nov. Construction Output fell -0.9% MoM and -6.8% YoY vs.
-5.9% YoY in Oct.
* Canada Nov. Manufacturing Sales fell -0.8% MoM vs. +0.3% expected
* US Dec. Housing Starts out at 529k vs. 550k expected and 553k in
Nov.
* US Dec. Building Permits out 635k vs. 554k expected and 544k in
Nov.
*Upcoming Economic Calendar Highlights (all times GMT)*
* Canada Monetary Policy Report (1530)
* UK BoE's Posen to Speak (1700)
* US Weekly API Crude Oil and Product Inventories (2130)
* New Zealand Dec. Business NZ PMI (2130)
* New Zealand Q4 Consumer Prices (2145)
* New Zealand Jan. ANZ Consumer Confidence Index (0200)
* China Q4 GDP (0200)
* China Dec. CPI (0200)
* China Dec. Producer Price Index (0200)
* China Dec. Industrial Production (0200)
* China Dec. Retail Sales (0200)
Source: ActionForex.Com