Geopolitical news dominated most of the session. Stronger US eco
data were not able to push US bonds down. The German Bund opened
higher but didn't go that much during the session. The Schatz
suffered from renewed hawkish comments by ECB policy makers.
*Euro continues to receive support from hawkish ECB talk even as
risk aversion rises*
On Tuesday, the EUR/USD pair showed some wild swings. Currency
traders didn't really know which card to play: risk aversion or
rising interest rate support due to hawkish ECB speak. But, at the end
of the day, the latter prevailed. So, at least for now, the dollar
disastrous to profit from rising global uncertainty.
* Strong economic data disastrous to push US Equities higher on
Tuesday, when US markets reopened after the long weekend. The S&P
dropped more than 2% led by losses in materials and financials.
This morning, Asian shares trade lower, but losses remain limited.
* Libyan leader Muammar Gaddafi vowed yesterday to fight until the
last drop of his blood had been spilt, rather than step down,
unfolding anti-regime protesters as 'rats' and 'mercenaries'
working to foreign agendas.
* Bank of Japan Deputy Governor Hirohide Yamaguchi said the
country's economy will soon pull out of its torpor, despite a
near-stalling of export growth in January, but warned that risks
from rising commodity prices remain.
* Referring to the next ECB staff economic projections to be
released in March, ECB's Mersch said the euro area's central bank
might go its risk assessment towards seeing upside risks from
current view of balanced inflation risks.
* The Bank of England should not allow fears of rising inflation
expectations to drive it to an increase in interest rates that
could potentially cause deflation, policy maker Adam Posed, who
has voted for more quantitative easing since October, said.
* Japan posted the first trade shortage in 22 months in January as
the Lunar New Year holidays tempered a rise in exports to Plates,
while rising crude prices pushed up the cost of imports.
* Today, the eco calendar contains the euro zone industrial new
orders and US existing home sales. The Bank of England will
publish the minutes of its latest MPC meeting.
!! EUR/USD !!
On Tuesday, the price charts in EUR/USD showed quite some wild swings.
In Asia and ahead of schedule in Europe, risk had become the key
factor for trading. Of late, the unrest in Libya and other Middle East
countries had only a limited impact on global markets and on currency
trading. But, yesterday morning, the usual safe haven trades were
finally place in place. The dollar and the yen received growing buying
interest and the euro was sold. So, EUR/USD dropped from the 1.3680
area ahead of schedule in Asia to fill bids at 1.3525 at the open of
the European markets. From there some consolidation kicked in, even as
sentiment on risk continued to deteriorate. But, traders who had hoped
that the risk aversion theme would sideline the ECB and its
considerations on inflation as a driver for currency trading, at least
in the small term, were incorrect. ECB's Mersch joined the chorus of
ECB hawks as he indicated that he would not be surprised if (the ECB)
had to adjust its language on inflation at the March 3 meeting.
Small-term yields in Europe spiked higher (the yield curve flattened)
and EUR/USD reversed the earlier losses and tested the Asian highs at
onset of the US trading session. The US eco data (consumer confidence,
Richmond Fed survey) were much stronger than expected, but the
disastrous to support the dollar. There was a tiny downside correction
at around the close of the European markets (speech of Gadhafi). But,
given reasonably steep losses on the US equity markets, the hurt for
the single currency was very limited after all. EUR/USD closed the
session at 1.3650, compared to 1.3678 on Monday evening
Today, industrial orders in the euro zone will be published, but this
series will have limited impact on currency trading. Several ECB
members will speak counting Axel Weber after the close of the European
markets. In the US, only the weekly mortgage applications and the
existing home sales will be published. Several Fed members will give
their view on the economy counting Fed's Hoenig and Plosser. The US
Treasury will also sell 35 billion of 5-year bonds. We assume the
central bankers' speeches to be most significant for markets, aside
from the global sentiment on risk. Over the previous days, the hawkish
fraction within the ECB stepped up the difficulty to go to a
normalization of policy as soon as possible. This was keeping
shortterm European yields under upward difficulty and also supported
the single currency even in a context of rising investors risk
aversion. We maintain the view that rising uncertainty on global
markets, if it would persist for a longer period of time, is a
negative for the single currency. But, recent hawkish ECB talk has
place in place quite a high hurdle for EUR bears. For now, the weigh
between interest rate support for the euro on the one hand and risk
aversion on the other hand is still more or less even
Of course, the flipside of this analysis is, that when global risk
aversion would go to the backstage very soon, the euro could go to the
top of the established trading range vacant into next week's ECB
meeting.
Recently, there was not really one dominant theme to drive the EUR/USD
price action. Trading is mostly driven by 'tiny', separate tales,
without a clear overall trend. Interest rate differentials are
becoming more vital for currency trading. But, for most of last week,
the relative changes between US and European yields were not that
significant. Hawkish speak from ECB's Bini-Smaghi at the end of last
week (and from several other ECB members yesterday) gave the euro a
boost. Of late, we advocated that a sustained break above the
1.3745/1.3862 resistance wouldn't be simple. So, we preferred to sell
EUR/USD into strength. The pair extensively tested the 1.3570/00
support (Neckline/Result low) last week, but there was no
follow-through price action (yet). For now, the euro remains very
resilient to the rise in risk aversion. Nevertheless, we hold on to
the view that a sustained break further than the year highs won't be
simple.
EUR/USD: euro remains well bid despite rising risk aversion
*Support* comes in at 1.3640/35 (Boll Midline/ result low), at 1.3609
(Daily envelope), at 1.3589/79 (Daily downtrend line/break-up hourly)
and at 1.3525/22 (Result low/LTMA).
*Resistance* stands 1.3727 (Result high), at 1.3738 (Daily downtrend
line/09 Febr. high), at 1.3767 (MT breakdown) and at 1.3819 (Daily
Boll top) and at 1.3862 (Weekly envelope +year high).
*The pair is moving into overbought territory*
!! USDJPY !!
On Tuesday, the intraday swings in USD/JPY were 'substantially'
wider compared to Monday. The gyrations in EUR/JPY were an vital
factor for the swings in the headline pair, too. USD/JPY tumbled late
in Asia and ahead of schedule in Europe, but the go was partly
reversed as EUR/JPY jumped higher on the headlines of ECB's Mersch.
The US eco data (consumer confidence and Richmond Fed manufacturing
survey) were much stronger than expected but were no factor of
importance for USD/JPY trading. On the contrary, the slide of US
equity indices and the coincident decline in US bond yields, dragged
USD/JPY lower, too. USD/JPY closed the session at 82.77, down from the
83.14 close on Monday evening.
This morning, Japanese exports slowed sharply. The January trade weigh
even showed a shortage. But, for now this is not seen as derailing the
export-led recovery yet. USD/JPY lost again a few ticks compared to
yesterday's close. But, looking at the price action of the Asian
equity markets, the additional hurt from the Middle East tensions on
global markets is not that huge.
Recently we favoured range trading in the 81.00/84.50 sideways sample.
Ahead of schedule this month, a correction bottomed out in the low
81.00 area and the thwart rate reached a correction high just below
84.00 last week. But, the rebound did run out of steam as the rise in
US interest rates slowed. An unexpectedly sharp rise in US bond yields
will doubtless be needed to push USD/JPY further than this range top.
But, of late, US data were unable to inspire such a go. So, we expect
the above mentioned range to hold for now. Over the previous days,
USD/JPY made a setback within the established trading range due to
declining interest rate support for the US dollar and as the yen
profited from safe haven flows. In a day-to-day perspective, this
process might continue. But, in a longer term perspective, one can
bring to somebody's attention the inquiry whether risk aversion
originated by tensions in the Middle East and with higher oil prices
due to supply constraints, should be a lasting support for the yen. We
doubt this will be the case. So, we don't see USD/JPY diminishing
below the 81.00 range bottom in a sustained way anytime soon. So, the
range-trading strategy remains in place.
USD/JPY: drifting lower in the range
*Support* is seen at 83.81/45 (Week low/Break-up hourly), at 81.96
(Break-up hourly) and at 81.86/78 (Daily Starc bottom/ Daily downtrend
line off 84.51).
*Resistance* comes in at 82.96/01 (STMA +daily envelope/ Broken MTMA),
at 83.25 (Result high), at 83.56 (Result high), at 83.87/98 (Weekly
envelope/ result high), at 84.03 (Daily Boll top) and at 84.51 (Result
high).
*The pair is in neutral territory.*
!! EURGBP !!
On Tuesday, the sample of the EUR/GBP price charts was again quite
similar to the trading sample of EUR/USD. EUR/GBP drifted lower in
step with EUR/USD in Asia and ahead of schedule in Europe. Yesterday
we already indicated that we had doubts whether global risk aversion
should be a lasting support for the sterling against the euro. The
decline in EUR/GBP halted in the 0.8285 area. The pair went already
away from the intraday lows during the morning session, ignoring
positive monthly budget data in the UK. But, as was the case for
EUR/USD, the hawkish headlines of ECB's Mersch were the tipping point
for EUR/GBP trading. In two waves, the pair jumped from levels just
below 0.8400 to fill offers further than 0.8480. From there, some
consolidation kicked in with investors looking forward to today's BoE
Minutes. EUR/GBP closed the session at 0.8459, compared to the 0.8431
close on Monday evening.
Today, the Minutes of the previous BoE meeting will give more insight
in the highly divided assessment between different members within the
MPC. It will be fascinating to see whether more members changed their
assessment toward a rate hike. Will there be three voters for a rate
hike instead of two? If so, this could be a temporary support for
sterling. But, with the ECB talking tough on inflation, too, we don't
expect sterling to start a sustained rebound against the euro from
here.
We expect a bumpy road for the UK economy in 2011. The BoE faces a
huge policy dilemma. Inflation remains much too high, but the real
economy will most doubtless require ongoing policy support. Since
ahead of schedule January, the pair went up and down within a range of
0.8285 and 0.8672. Since ahead of schedule February, investors started
taking into account the scenario of an ahead of schedule UK rate hike.
This supported sterling. At the same time, the euro ceded some impose
a curfew as Trichet didn't step up his inflation rhetoric at the
February meeting. Looking at the BoE inflation report, the BoE sees
rising upside inflation risks compared to the November report. But,
BoE governor King was less committed to a rate hike than a lot of
investors had anticipated. So, there was a window of opportunity to
take profit on sterling long positions. From here, we expect some
consolidation in EUR/GBP. The downside in this pair might become
better protected. Hawkish ECB talk might support this process. A first
vital support is coming at around 0.83555/60, while 0.8285 is the key
point of reference. We expect this level to be tough to break without
high profile news. The day-to-day momentum is euro constructive
overall. So, EUR/GBP might continue its gradual rebound off from last
week's lows.
EUR/GBP: supported by hawkish ECB talk
*Support* comes in at 0.8441/39 (Break-up hourly/STMA +MTMA), at
0.8429/06 (Daily envelope/Break-up hourly), at 0.8385 (Week low) and
at 0.8357 (15 Febr. + Daily uptrend line).
*Resistance* is seen at 0.8473/77 (Boll Midline/result high), at
0.8497/00 (Weekly envelope + daily envelope) and at 0.8529 (09 Febr.
high).
*The pair is in neutral territory.*
!! US: Consumer Confidence Rises to 3-year High !!
In February, the Richmond Fed manufacturing index reversed January's
losses. The headline index rose from 18 to 25, while the consensus was
looking for a stabilisation. The humanizing sentiment was confirmed by
the details as new orders (27 from 17) and order backlog (12 from 5)
rose sharply, but also shipments (29 from 23), vendor lead time (20
from 15), number of employees (16 from 14), and wages (18 from 13)
increased. Capacity utilization (17 from 18) and average workweek (17
from 20) dropped in February, while price pressures accelerated
roughly. Prices paid rose from 2.79 to 4.72 and prices received
increased from 2.17 to 3.38. After already a strong NY and Philly Fed
index, this outcome provides further evidence that the US economy is
gaining momentum at the start of 2011, but also price pressures are
accelerating and even wages are starting to pick up, raising
expectations that inflation will increase further in the coming
months.
US Conference Board's consumer confidence unexpectedly improved in
February. Consumer confidence rose for the fifth consecutive month,
success its highest level in three years. The details show that
sentiment about both the present circumstances (33.4 from 31.1) and
expectations (95.1 from 87.3) improved in February, while consumers
became also more confident on the labour market (-40.8 from -42.4).
For a long time, consumer confidence remained depressed as the labour
market circumstances stayed weak and also the housing market
circumstances is miserable, but consumers are finally becoming more
confident, which was recently also confirmed by a pick up in consumer
spending. Although the outcome is certainly positive news, the change
in the methodology makes some confusion.
US S&P Case Shiller home prices dropped for the sixth consecutive
month in December. On a monthly basis, home prices fell by 0.41% M/M,
slightly less than expected (- 0.50% M/M). The annual decline
accelerated from -1.62% Y/Y to -2.38% Y/Y, the lowest level in one
year. Although the data are rather outdated and therefore less
fascinating for markets, they indicate that the US housing market is
again struggling after an improvement at the start of last year. In
the coming months, home prices might decline further as foreclosures
are expected to increase again as banks resume seizures.
!! Other:strong UK Public Finances, Boosted by Tax Total Admission
Money !!
In January, UK public finance data came out surprisingly strong as
revenues surged in the month when a fifth of all taxes on company
profits are collected. Britain's budget surplus counting government
support for banks was £5.25, while the government's preferred
measure, public sector net borrowing without interventions, showed a
surplus of £3.7B, compared to a £1.3B shortage a year earlier.
Government revenue rose 12.4% Y/Y, due to increases in taxes on income
and capital gains (18.9% Y/Y), corporation tax (13.5% M/M) and VAT
(8.4% Y/Y). Spending rose by 4.4% Y/Y. The public sector cash surplus
was £14.4B in January, while markets were looking for a much smaller
surplus (of only €6B). The data are an encouraging sign that the UK
government is well on track to meet its fiscal targets, but the Office
for National Statistics warned that the strong tax total admission
money in January might lead to a larger than normal fall back in
February.
Download entire Sunrise Market Commentary
Source: ActionForex.Com
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