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Forex - China to Europes Rescue
All it took was some comments from China to put risk appetite into hyper drive. Traders took no time to recover from the yesterday's news that Moody's had downgraded the rating of six Eurozone sovereigns, and cut the outlooks of two more. PBoCs Zhou stated that China was ready to expand its investment in Europe's EFSF and ESM and would participant in resolving the EU debt crisis. This was just the thing traders wanted to hear after the earlier disappointment of EU Fin Min cancelling the meeting in Brussels instead opting for a conference call. Risk rallied across the board, with Asian indices leading the way as Nikkei 2.5% (JPY getting sold off), Hang Seng 2.14% and Shanghai trailing up 0.94%. We are watching for a move to 2400 in Shanghais which would be a clear indication of further appreciation in risk correlated trades. USDJPY continued its bullish run heading to 78.66 from 77.41 yesterday (breaking above 200d ma). AUDUSD upwards move to 1.0756 was highlighted by sudden sharp moves, and is rapidly closing in to 1.0845 critical resistance. EURUSD upside was slightly stifled by concern over developments in Europe as the March 20th deadline is quickly closing in. We are going to take the Chinese comments with a pitch of salt as China has a long history of making sweeping statements then failing to back it up with solid action. However, we still see the fundamental backdrop ripe for further risk appreciation. On the data front Q4 New Zealand retail sales looked impressive printing 2.2% q/q vs. 1.2% q/q exp. while Q3 also revised higher from 2.2% q/q to 2.4% q/q. In Germany, Q4 GDP -0.2% q/q vs -0.3% exp 0.6% prior, 1.5% y/y vs 1.8% cons, 2.6% prior. Clearly there has been some deterioration but far from the collapse some had predicted. The decent data will provide further support that global growth data is slowly showing signs of stability.
Yesterdays French outlook downgrades were actually better than the actual rating cut that the S&P hit them with the last time around. And since France did not take full rating adjustments from Moody's current AAA rating, it's unlikely that the EFSF will lose its Aaa rating…for now. In regards to the UK, Moody's affirmed their Aaa rating, but dropped the outlook to negative from stable. We have to think back to 2009 for the last rating action in the UK, which makes this move relevant. Traders will have to review the group-think which supposes that gilts should be considered a safe haven play. However, we suspect that with lack of real options, gilt inflows will keep the bonds bid for now. As for today, all sterling traders will be watching the Inflation report. Tuesday saw January CPI fall in line with consensus estimates at -0.5% m/m, +3.6% y/y. Today's release will bring new information regarding the direction of inflation as well as growth and a better understanding of policy decisions. The market consensus is that the BoE MPC feels like conditions have stabilized, but stand really to expand QE, should the conditions warrant. EURUSD saw seller ease after a strong ZEW print, which came in at 40.3 vs 30.5 consensus, however respite was short lived. The two primary auctions of Spanish and Italian debt went very well with yields fall and solid bid to cover ratios. Slightly negative was the report that Spanish banks borrowed €161.4bn from the ECB up from €132.4bn in December (after ECB LTRO). This is either an indication that Spanish banks are still having difficultly funding or they are piling into the sovereign carry trade with concerning zeal.
Today scheduled highlight will likely be the FOMC minutes. We suspect the minutes to provide supplementary details about members decision to push back the guidance on the next fed funds rate target till late 2014. There should also be some interesting notes on how committee members came up with this data and details on prospects for expanding purchases of mortgage-backed securities
08:00 EUR Van Rompuy speaking
09:30 GBP Average weekly earnings Prior 1.9 Exp 2.0
09:30 GBP Core Average weekly earnings Prior 1.9 Exp 2.0
09:30 GBP ILO Unemployment rate Prior 8.4 Exp 8.5
09:30 GBP Claimant Count Prior 1.2K Exp 1.0K
10:00 EUR pGDP Prior 0.1 Q/Q Exp -0.4 Q/Q
10:00 EUR Trade Balance Prior 6.1 Exp 5.0
10:30 GBP Inflation report
13:30 USD Empire state Manufacturing Prior 13.5 Exp 15.0
14:00 USD Tic Data Prior $59.8 Bn Exp $45.0 Bn
14:00 USD Fisher speaking
14:15 USD Industrial Production Prior 0.4 Exp 0.7
14:15 USD Capacity Utilization Prior 78.1 Exp 78.5
15:00 USD NAHB house price index Prior 25 Exp 26
15:00 USD Geithner speaking
17:00 EUR Coene Speaking
19:00 USD FOMC Minutes
The Risk Today:
EURUSD price action continues to make us dizzy, as the pair chops around 1.3100 and 1.3300. Moody’s downgrade triggered short term selling to 1.3080 but Chinese verbal intervention has provided renewed buying interest. Our bullish view is derived from the break of 1.3230 and 1.3289 resistances which should expose further upside. On the topside, resistance stands at 1.3215/22 (14th Feb high & 9th Feb high), 1.3386 (12th Dec high 11) then 1.3548 (2nd Dec 12 high). Initial support stands at 1.3109 (intraday low), 1.3089 (7th Feb low), 1.2931 (25th Jan low), 1.2839 (19th Jan Low), 1.2588 (24th Aug low) then a lot of noise till 1.2154 (29th June low).
Expectations of a dovish inflation report and negative employment data has taken the fight out of the cable. In the midterm the pairs clean break of 1.5885 could challange 1.5920/32 (200d MA & 15th Nov high 11) then not much till 1.6167 (31st Oct high 11). Minor support located at 1.5650/52 (30th Jan low & intraday low), then 1.5531 (bearish trend resistance turned support), 1.5517 (23rd Jan low), then 1.5416 (19th Jan low).
BoJ’s policy announcement added pressure on JPY sending the USDJPY over 78.00 and thru 78.49 (200d MA). The bullish move should face resistance at 80.24 (prior intervention high) then 81.48 (8th July high). On the downside, support should come into play at 78.36 (intraday low), 78.01 (14th Feb base), 77.37 (14th Feb low), (76.49 (5th Feb low), 76.05 (2nd Feb low) next support will come into play around then 75.35 (31st Oct low).
Recent price action has slightly reduces bearish tone but downside remains probable/preferable. We seem to be looking at further consolidation between 0.9103 and 0.9198. Resistance is located at 0.9265 (7th Feb high), 0.9396 (23rd Jan high), 0.9596 (9th Jan high), 0.9782 (11th Jan high) then 0.9951 (61.8 Fibo retracement). Next support is located at 0.9103 (13th Feb low), 0.9043 (30th Nov 11 low), 0.8953 (11th Nov 11 low).