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

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

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

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

Key Levels: 14:05 GMT

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

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9921.14	9931.27	9872.68	0.36	90.93%

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.

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.

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.

S&P 500 Chart Warns of Indecision, Dollar to Challenge Key Support

S&P 500 – Prices put in a Doji candlestick below resistance at the top of a rising channel set from late December, pointing to indecision and hinting and move lower may be ahead after two consecutive days of gains. Initial support lines up at the 1300 figure. Channel resistance is now at 1322.40.

CRUDE OIL – Prices are once again testing support at 97.70 following a rejection at familiar resistance in the 101.28-103.35 region. The downside is reinforced by resistance-turned-support at the top of a falling channel set from mid-November, now at 96.85. A break below the latter boundary initially exposes 95.78, the November 23 close.

GOLD – Prices are testing support-turned-resistance in the 1666.37-1677.05 region, with a break higher exposing the 1700/oz figure. Near-term support lines up at 1638.84, with a break below that initially targeting 1615.65.

US DOLLAR – Prices broke below the midline and top of a falling channel in place since mid-December, exposing a former Head & Shoulders neckline at 9823 as sellers’ next objective. A breach of this level on a daily closing basis would amount to a meaningful bearish change in tone for the greenback. The channel midline, now effectively at the 9900 figure, has been recast as near-term resistance.

EUR/USD: Remain Short Through Upswing

I entered short EURUSD at 1.3526 on November 9 expecting the Eurozone debt crisis to continue to spread and moved my stop to 1.3231 after the pair met my secondary objective at 1.2872, aiming for the next target at 1.2586. Prices took out resistance at the top of a falling channel set from early November last week, hinting the correction I was waiting for is gaining momentum. Near-term resistance begins at 1.3144. I will look for the upswing to yield an opportunity to add to the trade, aiming for renewed selling in the weeks ahead.

MARKET VIBRATIONS: DYNAMIC INTRADAY NEWS COMMENTARY

OVERALL RISK: bullish

US EQUITIY FUTURES: Slightly bearish

CURRENCY WINNER/LOSER: +NZD, -GBP

1010 GMT French Presidential election frontrunner Hollande is talking tough on banks, pledging if elected to separate investment activities from other activities as well as ban them from tax havens. He has also proposed a new Franco-German treaty to increase cooperation. Geopolitics has dominated headlines this morning with the German Foreign Minister pledging to increase EU pressure aimed at stopping funding that the EU suspects is being used to develop nukes.

0853 GMT EURUSD has rallied strongly above 1.2900 and is now at 1.2930. Sources are saying Middle Eastern buyers are behind the move. German Foreigm Minister Westerwelle is now speaking in Brussels, says Iran sanctions are aimed at cutting funds for nukes, adding that EU will agree to sanctions. NYMEX is volitile on Iran developments. Bonds are seeing some strength ahead of the EU summit with EMU peripheral 10-years looking better.

0745 GMT Greek PSI update: reports are saying bondholders have made their final and "maximum" debt swap offer to the EU and IMF. Italy's Monti and ECB's Draghi have voiced a desire to see the ESM expanded by 100% to EUR 1tln. SNB quashes EURCHF speculation, saying will defend 1.2000 peg with "utmost determination." French BusCon indicator for January comes in at 91, versus expected 95 and previous 94.

0645 GMT In European trade this morning, commodity currencies continue to be strong. The Asian session saw some comments saying that Italy wants an increased EU bailout fund, as well as a vote by Croatia to join the EU. Keep heads up for German and French auction results later today, as well as the EU FinMin meeting.

FOREX: Euro Debt Crisis in Focus as Finance Ministers Meeting Looms 

The Eurozone debt crisis remains in focus as traders look to a meeting of the currency bloc’s finance ministers today for details of the much-anticipated “fiscal compact” aimed at introducing structural reforms to restore confidence and rein in borrowing costs ahead of a larger EU leaders’ summit next week. Also on the agenda is a final agreement on the degree of private-sector involvement (so-called “PSI”) in the Greek bailout. The agreement on a 50 percent haircut for the country’s creditors hashed out in October now looks like it may unravel.

The newswires point to a loose agreement whereby private creditors would accept losses of as much as 65-70 percent on their holdings of Greek debt but the particulars of a bond swap exchanging outstanding paper for new longer-dated maturities to help the country finance its immediate obligations remain elusive. If the talks fail, Greece may yet face a disorderly default that threatens to throw credit markets at large into turmoil. Indeed, a PSI agreement is vital to releasing a tranche of funding from the second EU/IMF bailout for the beleaguered country needed to cover €14.5 billion in debt maturing in March. The main point of contention is reportedly the coupon rate assigned to the new bonds.

Against this backdrop, France and Germany will tap the markets to sell €7.3 billion and €3 billion in shorter-term debt, respectively. Paris will be selling 91-, 168- and 350-day bills while Berlin will offer 12-month paper. As usual, traders will keep an eye on prevailing yield and bid-to-cover readings following the auctions for a reading on the degree of solvency stress in the markets. On the data front, a quiet European docket is likely to put the spotlight on the Richmond Fed Manufacturing Index reading due out in the US, where forecasts call for the highest print in 8 months.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
0:30	AUD	Producer Price Index (QoQ) (4Q)	0.3%	0.4%	0.6%
0:30	AUD	Producer Price Index (YoY) (4Q)	2.9%	3.0%	2.7%
5:00	JPY	Supermarket Sales (YoY) (DEC)	-0.6%	-	-2.3%

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
7:45	EUR	French Own-Company Production Outlook (JAN)	-	-2	Low
7:45	EUR	French Production Outlook Indicator (JAN)	-36	-37	Low
7:45	EUR	French Business Confidence Indicator (JAN)	95	94	Low
8:00	CHF	Money Supply M3 (YoY) (DEC)	-	7.2%	Low
8:00	CHF	Real Estate Index Family Homes (4Q)	-	398.6	Low
10:15	EUR	Germany to Sell €3B in 12mo Bonds	-	-	Medium
14:00	EUR	France to Sell €7.3B in 91-350 day Bills			Medium
15:00	EUR	Euro Zone Consumer Confidence (JAN A)	-21.4	-21.1	Medium
16:00	EUR	Euro Zone Finance Ministers Meet in Brussels	-	-	High

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.2883	1.2982
GBPUSD	1.5492	1.5620

 

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Dollar at the Mercy of Risk Trends Early, Fed and 4Q GDP on Deck

Though the dollar managed to regain a little lost ground against the euro Friday, the currency was still under pressure into the close. For the Dow Jones FXCM Dollar Index, this would lead to a fifth consecutive daily (open-to-close) bearish close – the longest series of losses for the benchmark currency since the run through October 10th. The opportunity to press new 12-month highs has considerably diminished, but it is still early to claim the greenback has made a critical bearish change in trend. Moving forward, there are two key fundamental considerations to monitor for guidance on the dollar: the sentiment surrounding the euro and the progress in underlying risk appetite trends. For the greenback’s most liquid counterpart, the relief of an impending crisis has dissipated, and the euro can continue to draw capital away from the world’s most extreme safe haven. Investor sentiment itself is what we should be most concerned with. The S&P 500 has capped a three-week advance to five month highs, yet conviction is still flimsy. It could find a serious booster however if the Fed hints at QE3 or US 4Q GDP impresses this week.

Euro Advance Takes a Step Back as Market Awaits Word on Greece

Having posted its best rally against the benchmark dollar in three months against a foul-weather fundamental backdrop, it makes sense to have seen the euro ease into the close of this past week. Considering the region’s troubles are so well known at this point, the currency is running fully on speculation of the timing for expected troubles. A side effect of knowing that you are fighting the current, however, is a greater sensitive to holding risk through lockups. With the weekend approaching and negotiations over the discount on private holding of Greek debt ongoing, it is natural to ease the risk of a long euro exposure a little.

Heading into the new trading week, there is a list of potential fundamental threats; but the weight of their influence has lessened considerably from just a few weeks ago. Given expected time frames, the terms of the private sector investors’ accommodation for Greece’s debt burden will be the first concern. The current consensus is still for a 50 percent haircut (essentially debt forgiveness), in a roll to new 30-year bonds with a significantly reduced 3.0 to 4.75 percent coupon. Anything along these lines could buy us a little more time of disregard for real fundamental threats. We have come to expect the same quick-fix and we’ll-fix-it-later policy decisions to follow the EU Finance Minister summit on Monday. A little more open to surprise are the growth-based economic indicators and the ECB’s three-month liquidity tender due in the first 48 hours.

British Pound: Will We See Confirmation of Policy Official’s Recession Warnings

If there is a recession or region-wide financial crisis for the Euro Zone, it is highly likely that the United Kingdom is not far behind (if it is not already suffering the same fate). The relationship between euro and sterling price action against third party currencies is exceptional due to its fundamental connections, but there are still external factors that can offer a degree of separation. Those alternative factors led to the significant swing in EURGBP over the past week. The three-day rally through Thursday was the influence of the euro’s relief rally and the sterling lagging response. Friday’s plunge was encouraged by rising gilt yields but follow through requires something more. A bullish surprise in the face of growing recession fears for the UK could offer a relief rally akin to what the euro has enjoyed. With 4Q GDP seen contracting, the line is drawn.

Gold Working on its Best January Performance Since 2008

So far this year, gold is up 6.6 percent. This represents the first time in three years that we could see a positive opening month and it is generally the best performance for the period since 2008. Under normal circumstances, we could say this strength was guided by anti-dollar capital flows; but the rolling, 20-day (trading month) correlation between the fiat and metal has deteriorated significantly recently. Furthermore, we see that the relationship between the traditionally safe commodity and risk-inclined S&P 500 is tightening (currently 0.83 – 1.00 being perfect). From this, we can are seeing the distribution of speculative capital from absolute liquidity havens to relative (but expensive) safe havens.

ECONOMIC DATA

Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Producer Price Index (QoQ) (4Q)		0.6%	Another item that will influence the RBA in its decision-making at the Feb 7 meeting
0:30	AUD	Producer Price Index (YoY) (4Q)		2.7%
7:45	EUR	French Own-Company Production Outlook (JAN)		-2	French business confidence has been sliding since mid-2011 on worsening Eurozone outlook
7:45	EUR	French Production Outlook Indicator (JAN)		-37
7:45	EUR	French Business Confidence Indicator (JAN)		94
8:00	CHF	Money Supply M3 YoY (DEC)		7.2%	The 12-month average hit a May 2004 high with the last reading.
8:00	CHF	Real Estate Index Family Homes (4Q)		398.6	Looking for exchange rate influence for growth bearing
13:30	CAD	Leading Indicators MoM (DEC)		0.8%	Will act as a placeholder for year-end GDP speculation
15:00	EUR	Euro-Zone Consumer Confidence (JAN A)		-21.1	Has weakened since mid-2011
23:00	AUD	Conference Board Leading Index (NOV)		0.6%	Signs of a slowing economy coupled with weakening inflation would boost rate cut concerns

GMT	Currency	Upcoming Events & Speeches
10:15	EUR	German Bill Auction
11:45	EUR	Germany’s Merkel Meets with Belgian Prime Minister Di Rupo in Berlin
14:00	EUR	French Bill Auction
16:00	EUR	Euro-Area Finance Ministers Meet in Brussels
17:00	EUR	Germany’s Merkel Speaks in Berlin

SUPPORT AND RESISTANCE LEVELS

EMERGING MARKETS & SCANDIES CURRENCIES 18:00 GMT

Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	16.5000	2.0000	9.2080	7.8165	1.3650		Resist 2	7.5800	5.6625	6.1150
Resist 1	14.3200	1.9000	8.5800	7.8075	1.3250		Resist 1	6.5175	5.3100	5.7075
Spot	13.1813	1.8298	7.9516	7.7618	1.2719		Spot	6.7826	5.7501	5.9324
Support 1	12.6000	1.6500	6.5575	7.7490	1.2000		Support 1	6.0800	5.1050	5.3040
Support 2	11.5200	1.5725	6.4295	7.7450	1.1800		Support 2	5.8085	4.9115	4.9410

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3096	1.5727	77.65	0.9464	1.0227	1.0620	0.8168	100.92	121.26
Resist. 2	1.3055	1.5689	77.49	0.9434	1.0203	1.0586	0.8142	100.59	120.94
Resist. 1	1.3014	1.5652	77.33	0.9405	1.0179	1.0552	0.8116	100.27	120.61
Spot	1.2931	1.5576	77.01	0.9345	1.0132	1.0484	0.8063	99.62	119.97
Support 1	1.2848	1.5500	76.69	0.9285	1.0085	1.0416	0.8010	98.97	119.32
Support 2	1.2807	1.5463	76.53	0.9256	1.0061	1.0382	0.7984	98.65	119.00
Support 3	1.2766	1.5425	76.37	0.9226	1.0037	1.0348	0.7958	98.32	118.67

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