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FOMC Meeting in Sight
The overnight session was dominated by positive risk sentiment, triggered by supportive data out of US and the Asia. While the economic agenda is light today, the focus is on two-day FOMC meeting, starting this afternoon. The FOMC is expected to renew its Asset Purchase Program worth USD 40bn in mortgage bonds and USD45bn in Treasuries, despite the divergences on “how long the APP should last” in the last Fed meeting. The markets expect the third round of the APP to be worth USD 1.14trl by the first quarter of 2014.
Unemployment is Key
The US easing policy looks for substantial improvement in US job markets, while the worries over the inflation are left on the sideline. According to Bernanke, the Program will continue until there is “substantial” change in the US job market. Despite the recent improvement in the economic data (Q3 q/q GDP 3.1%, stabilizing unemployment at 7.8%), the economists estimate the Q4 q/q down at 1.1, according to a Bloomberg Survey. Even though the recent Fed meeting saw diverging opinion over the end of the APP, Bernanke’s reaction was clear enough to lead us think that the realistic discussions on the end of APP are still very far away.
In December, the US unemployment rate stabilized to 7.8%, its-lowest level since 2009. Even though the current levels are encouraging compared to 10.0% reached in 2009, the improvement is not “substantial” yet. In comparison, the US unemployment rate was 4% in 2000, and reached its maximum 6.3% in 2003, before the subprime crisis entered the fray. Compared to current levels, the tacit unemployment target is still far away (6.5% working target). While, the market majority tend to think that more easing won’t help to increase jobs substantially, some express their concerns over the accelerating inflation. The St. Louis and Kansas City’s Fed Presidents find the policy “aggressive and too easy”, while others, as Boston Fed’s president Eric Rosengren, focus on improvement in US housing market to highlight that economy reacts positively to monetary stimulus.
Clearly, the event risk is that the FOMC indicates that the discussion on ending APP are broader then we had anticipated , which, if last meeting is any indication, will give USD a significant lift. However, our base scenarios is that the lack of concrete conversation will embolden risk takers to charge back into higher beta currencies. This should assist the EURUSD extend its bullish rally past 1.3500 barrier.
US 10-Year Treasury bond Yields Up
In US session yesterday, the US 10-year Treasury bond yield crossed over 2.0%, its highest level since April 2012. From the beginning of 2013, we saw a strong support at 1.80% (compared to 1.3790 low in July 2012), over the optimism on US growth outlook. While Fed ranges its growth forecast from 2.3 – 3.0%, the markets keep their estimates around 2.0%. The flight out of US Treasuries is, in our view, a search for risk premium, rather than a signal for a confidence in the close future. The rally in bond has support the US / JP interest rate differential and gave the USDJPY its recent boost. Interest rates will have to significantly clear the 2% resistance in order for USDJPY to make another leg up.
2013-01-29T14:00:00 USD S&P / Case-Shiller Home Price index, exp. 145.94, last 146.08
2013-01-29T15:00:00 USD January Consumer Confidence, exp. 64, last 65.1
2013-01-29T15:00:00 USD January Dallas Fed Texas Services Index, lats 11.6
Technicals really have not changed much. EURUSD has further corrected, falling to 1.3432 but did not produce a new low. However, last week bullish rally reached a peak of 1.3479, just a stone’s throw from our 1.3492 target and there is scant evidence that demand is easing. Bullish momentum indicators and dominate uptrend channel suggests there is potential for an extension of strength to 1.3492. We would caution that “groupthink” has the EURUSD moving higher which generally indicates a sharp reversal. The first level of resistance are located at 1.3492 (2012 high) then 1.3550 (2nd Dec reaction high). The next support is located at 1.3404 (14th Jan low), 1.3256 (Dec range floor), 1.3123 (65d MA & Uptrend channel), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high), 1.2787 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high).
Another day another new low for the GBPUSD. The pair hit 1.5674 yesterday and continues to attract demand. However, in the mid-term bearish momentum (MACD firmly below zero) / trend indicators should pull the currency down to 1.5574. The support zone is located at 1.5745/58 (30th July pivot), 1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). Watch for next resistance to come into play at 1.5891 (21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).
Last week USDJPY surged to new yearly highs at 91.22 as the uptrend still reigns supreme – with very few pullbacks or pauses along the way. We are now seeing profit taking pushing the pair lower to 90.39. This bearish move is a healthy correction allowing stretched indicators to unwind (RSI below 70) marginally. In the mid-term, despite one-directional rise we think fundamentals have set the course and expected an extension target of 92.49 (key will be this week FOMC and NFP). On the downside, support is eyed at 89.35 (11th Jan high), 88.88 (21d MA), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high). Above us, minor resistance remains at 91.22 (Jun 2010 high) then 92.09 (11th June high).
USDCHF sell-off extended to lows of 0.9244 in European session, but it now appears that bids ahead of 0.9214 (10th Nov high) are stalling the downside progress. However, the break of support at 0.9270 and indictors bearish (MACD point downwards) suggest a deeper correction to 0.9170 area. The first levels of support should be located at 0.9214 (17th Oct low), 0.9170 (fibo lvl), 0.9085 (20th Dec low) then 0.9041 (1st May low). The next levels of resistance are located 0.9304 (100d MA), 0.9385 (18th Jan high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance).