Wednesday, 25 January 2012

Recap of the Latest Global News and Today's F.O.M.C

Investor optimism was dented yesterday after European finance ministers failed to agree on the Greek debt swap deal and called for a greater contribution from debt holders. Finance ministers are pushing bondholders for greater debt relief by asking them to accept lower interest returns in the proposed debt swap deal. The stalling of negotiations has fuelled concerns that Greece will fail to make a bond payment due in late March. The EUR fell from a high of 1.3065 during the Asian session yesterday to as low as 1.2948 in early European trade today.

In more sobering news, the IMF has cut global growth forecasts and warned that the "epicentre of the danger is Europe but the rest of the word is increasingly affected." It cut global growth for 2012 from a September forecast of 4 percent to 3.3 percent and predicted a recession in Europe. The IMF called for an increase in the eurozone's rescue fund and a more active role from the ECB to address the crisis. In a dire warning, the IMF warned of a 1930's style worldwide depression unless more countries play their part and identified a possible global financing need of over $1 trillion in the next few years. Inflation in the UK for December fell to its lowest level in 6 months at an annual rate of 4.2% and the economy contracted in the fourth quarter which saw the GBP fall to as low as 1.5528.

Yesterday, US equities fell after advancing for five consecutive sessions as negotiations stalled in the proposed Greek debt swap deal. Furthermore, the IMF warned that there was potential for "political paralysis" in the United States that could lead to an unwinding of stimulus spending. Asian markets there were opened today closed higher while European shares are down about 1% mid session, falling for the second day, as Ericsson and Novartis missed earnings estimates.

FX News
EUR/USD traded within a narrow range during Asian session (1.3014 - 1.3041) today perhaps due to the Lunar Year celebration.  The same could be expected for the rest of the week for Asia if no surprises hit the market.  At the time of writing, euro spiked up to 1.5050 as German IFO was released. Market was expecting 107.6 but actual came out as 108.3 (last 107.3).  But the spike was very short-lived as it pulled back to the comfortable 1.3020 - 1.3040 zone awaiting for the US FOMC rate decision.  Economists expect no change from 0.25% but the risk may be that if the Fed is more dovish than what the market thinks, then you may see dollar selling in the pipeline.  For the rest of London and New York session, we are still waiting for 1.3145 and support at 1.2983.

USD/JPY reached the highest level since Dec 28 at the time of writing to 78.10 in London time.  The headline news was that Japan reported its first annual trade deficit in 30 years raising concerns about its fiscal health.  The data also showed Japan's exports declined for the third consecutive month - dropped 8% in Dec from a year earlier. JPY traders no doubt will now monitor if the deficit will continue to rise or if Japan's sovereign rating is in question.  Any hint of that should result in shorting the JPY.  For the rest of the day and subject to FOMC release expect 77.60 (61.8% fib) to 78.25 trading range.

U.S. Dollar on Top Ahead of Critical FOMC Meeting

Fundamental Headlines
• Economy in U.S. Preferred by Investors – Bloomberg
• Obama Calls for Higher Taxes on Wealthy – Bloomberg
 Fed Set to Push Back Timing of Eventual Rate Hike – Reuters
• German Bunds Draw Strong Demand – WSJ
• Obama Makes Populist Pitch – WSJ
European Session Summary
Price action was very choppy in the overnight, though, for the first time in what has seemed like weeks, the Asia sell-off / Europe rally trend was broken. Following Australian inflation data last night, market participants bid higher yielding currencies and risk-correlated assets higher, though the rally stagnated by the European session open. The sell-off in the first part of European trading is rooted in two causes: poor British growth figures; and a further breakdown in the Greek bondholder negotiations.
Not much needs to be said about the poor British gross domestic product reading for the fourth quarter; I have long stated that the British economy is stagflating. While inflation has eased in recent months, it remains above the two percent threshold set by the Bank of England; the labor market continues to weaken; and now growth has turned negative.
In terms of the Greek bondholder swap negotiations, it appears that both the Institution for International Finance (IIF) and Greek officials have walked away from the table. The major sticking issue appears to be whether or not the European Central Bank will participate in the haircuts being levied on private sector bondholders. It’s been established that no such event will take place. This, being the main sticking point, is creating more than a stir; the International Monetary Fund (IMF) today suggested that the ECB agrees to the haircut so that the issue is finally resolved.
Taking a look at credit markets, risk-appetite appears to have been stemmed across Europe, with German bunds approaching all-time record low yields (higher prices) while French and Italian 10-year bonds widened against their German counterpart. The Portuguese 10-year bond is under substantial pressure, with the yield moving up to 13.492 percent, as the country mulls options, including requesting another bailout, to help the economy turn around. This situation will only get worse without further intervention; and I would argue that Portugal is close to becoming the next major issue in Europe, ahead of Italy and Spain.
NZD/USD 5-min Chart: January 24 to January 25, 2012
U.S._Dollar_on_Top_Ahead_of_Critical_FOMC_Meeting_body_Picture_10.png, U.S. Dollar on Top Ahead of Critical FOMC Meeting

Overall, it appears that some of the typical correlations have broken free, with the commodity currencies and European currencies mixed across the board. While the New Zealand Dollar was the worst performing major against the U.S. Dollar, down 0.75 percent at the time this report was written, the Australian Dollar was down a mere 0.22 percent. Similarly, the Euro underperformed the Greenback by 0.50 percent, while the British Pound was off a slight 0.20 percent despite the country’s dismal growth reading released earlier today.
24-Hour Price Action
U.S._Dollar_on_Top_Ahead_of_Critical_FOMC_Meeting_body_Picture_1.png, U.S. Dollar on Top Ahead of Critical FOMC MeetingU.S._Dollar_on_Top_Ahead_of_Critical_FOMC_Meeting_body_Picture_7.png, U.S. Dollar on Top Ahead of Critical FOMC Meeting
Key Levels: 14:05 GMT
U.S._Dollar_on_Top_Ahead_of_Critical_FOMC_Meeting_body_Picture_4.png, U.S. Dollar on Top Ahead of Critical FOMC Meeting
Thus far, on Wednesday, the Dow Jones FXCM Dollar Index is higher, trading at 9915.71, at the time this report was written, after opening at 9884.24. The index has traded mostly higher, with the high at 9931.27 and the low at 9872.68.

USD Index Points To Additional Strength

Daily Change (%)
Daily Range (% of ATR)
DJ-FXCM Dollar Index

USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot040.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further
The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.36 percent higher from the open after moving 91 percent of its average true range, and the bullish divergence in the 30-minute relative strength index instills a bullish outlook for the greenback as it breaks out of the downward trending channel from earlier this month. In turn, the rebound from 9,837 should continue to gather pace, but the reserve currency may face whipsaw-like price action later today as the Federal Open Market Committee interest rate decision takes center stage. Beyond the rate decision, the first batch of interest rate forecast will be closely watched across the financial market, but the Fed’s fundamental assessment of the world’s largest economy may play a greater role in driving price action as investors weigh the prospects for future policy.
USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot041.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further
As we look for a higher high in the USDOLLAR, the FOMC rate decision could pave the way for a major rally in the reserve currency as the more robust recovery dampens the central banks scope to push through another large-scale asset purchase program. As economic activity gradually gathers pace, we anticipate the Fed to strike an improved outlook for the region, and the central bank may continue to soften its dovish tone for monetary policy as the risk of a double-dip recession subside. However, Chairman Ben Bernanke may keep the door open to further expand the balance sheet in light of the ongoing weakness in the housing market, and the USD may come under pressure should the committeefloat the idea of purchasing mortgage-backed securities (MBS) to stimulate home purchases.
USD_Index_Points_To_Additional_Strength_Yen_Poise_To_Weaken_Further_body_ScreenShot042.png, USD Index Points To Additional Strength, Yen Poise To Weaken Further
The greenback rallied against all four components on Wednesday, led by a 0.75 percent decline in the Japanese Yen, and the low-yielding currency may weaken further over the near-term as market participants increase bets for a currency intervention. As the Bank of Japan refrains from taking additional steps to shore up the ailing economy, there’s speculation that the Ministry of Finance will once again step into the FX market to stimulate growth, but Japanese policy makers may put additional pressure on the central bank to further expand its asset purchase program as the fundamental outlook for the region deteriorates. As BoJ Governor Masaaki Shirakawa continues to highlight the threatens of a stronger Yen, speculation for another currency intervention will certainly be a major theme in 2012, and the central bank may have little choice but to expand its balance sheet further as it lowers its growth forecast for the world’s third-largest economy.