Weekly FX & Market Analysis

Weekly Market analysis

Monetary policy will remain a very important focus following the Federal Reserve decision to sanction additional quantitative easing during 2013.  There will be further resistance to currency gains by Japanese and also potentially the Euro-zone and this will increase the risk for further more aggressive monetary policy action by the Bank of Japan and ECB. Overall, the dollar will find it difficult to make much headway unless there is a serious deterioration in international risk appetite. Key events for the forthcoming week Date Time (GMT) Data release/event Sunday December 16th Japan general election Wednesday December 19th 09.00 Germany IFO index Wednesday December 19th 09.30 Bank of England MPC minutes Thursday December 20th Bank of Japan interest rate decision Dollar: The Federal Reserve policies will remain an extremely important focus in the short-term. The decision to expand quantitative easing will tend to have a negative impact on the dollar.  The Fed is also committed to maintaining a highly expansionary monetary policy until there is a further marked improvement in the unemployment rate with a decline to at least 6.5%.  In this context, the dollar will find it difficult to gain any strong traction, but there will be some reward in terms of pro-growth policies and likely US growth out-performance. This will be a particularly significant factor if Euro-zone conditions deteriorate further. The dollar weakened against European currencies during the week on additional Fed action, but did show some degree of resilience.   The headline US employment data was stronger than expected with an increase of 146,000 for November from a revised 138,000 gain the previous month while the unemployment rate dipped to 7.7% from 7.9% the previous month. There was a downward revision to October’s payroll gain while the participation rate fell. The US trade deficit widened to US$42.2bn for October from US$40.3bn the previous month as exports were slightly weaker, although there may have been data distortions. The Federal Reserve left interest rates on hold at below 0.25%  following the latest policy meeting. The Fed announced that it would buy an additional US$45bn in Treasuries per month to replace Operation Twist which was in line with market expectations. As has been the case throughout the year, regional Fed President Lacker dissented and voted against further quantitative easing. The Fed downgraded its 2013 growth forecasts slightly. There was an important shift in forward policy guidance as the FOMC dropped the reference to a specific timeframe for keeping interest rates at extremely low levels until 2015. Instead, the Fed announced that it would introduce economic targets for keeping policy extremely expansionary. In particular, the threshold for a policy change would be an unemployment rate of 6.5% and policy would remain extremely expansionary provided the inflation rate did not rise to above  2.5%. There were no significant progress in the US budget talks and concerns surrounding the risk that no agreement would be reached before the year-end deadline. Euro There will be further relief surrounding the ability to defuse the acute Euro-zone crisis phase with agreement secured on the next Greek loan tranche while peripheral bond yields have fallen. There will still be a high degree of unease surrounding the underlying economic outlook, especially with recession conditions persisting.  Political tensions will also be very important with unease surrounding Italian elections early in 2013.  The underlying peripheral situation also remains extremely fragile and longer-term fears will continue.  There will also be speculation over a cut in ECB interest rates which will sap Euro support.  The Euro recovered some ground although this primarily reflected general dollar weakness rather than any great enthusiasm for the currency. Interest rate remained an important focus following Thursday’s ECB press conference where Draghi indicated that a rate cut had been discussed. There were unofficial briefings from ECB officials during the day, an unusual event in itself. There were suggestions that a majority of Council members had either proposed a rate cut or not been opposed and that a decision to cut rates had been blocked by Draghi and the German representatives. The overall impression was that rates could well be cut during the first quarter of 2013 which also had a negative Euro impact. Italian political tensions remained an important focus following Prime Minster Monti’s announcement that he would resign once the 2013 budget has been approved. The most likely outcome is that elections will be held in February which fuelled the mood of uncertainty. There were concerns that reforms could be in doubt with former Prime Minister Berlusconi’s intention to stand contributing to the mood of uncertainty. Stock markets fell sharply and there was a surge in bond yields with Spanish yields also rising sharply. Tensions did subside later in the day as Monti looked to offer reassurance over reforms. The German ZEW index was stronger than expected with a rise to 6.9 for November from -15.7 previously which was the strongest reading for seven months. The ZEW also stated that it considered the recent Bundesbank and ECB forecasts to be on the pessimistic end of the spectrum. There was some positive sentiment surrounding the Greek debt buyback, although the Greek government did have to pay more than expected which means that the decline in debt/GDP ratio will be slightly below target. There was a slightly more cautious outlook on the potential for a cut in ECB interest rates and there was some speculation that former Prime Minister Berlusconi would not stand in forthcoming elections.  The Euro-zone agreed on a framework for the new banking supervisor. Yen: The LDP, continues to hold a comfortable opinion-poll lead ahead of the December 16th General Election, maintaining expectations that there will be a much more aggressive monetary policy and potential changes to the Bank of Japan mandate next year. These expectations will undermine the yen, but there will still be the possibility of political deadlock which could delay additional policy measures. The yen will also gain defensive support at times when risk appetite deteriorates, but the underlying fundamentals will remain weak. The yen was firmly on the defensive during the week and weakened to fresh nine-month lows near 84 against the US currency while the Japanese currency also weakened sharply against the Euro. There were media reports that the Bank of Japan would sanction a further JPY5-10trn in quantitative easing at next week’s policy meeting which contributed to a negative yen tone There were further expectations that the LDP would win the forthcoming election and would also put additional pressure on the central bank to take more aggressive action. A slightly weaker than expected monthly increase of 2.6% for core machinery orders did not have a major market impact while the Tankan index was weaker than expected. A North Korean missile launch had some negative impact on the yen. Sterling There will be further doubts surrounding the UK economic outlook, especially with evidence that industrial output weakened sharply at the beginning of the fourth quarter.  The weak outlook will increase concerns surrounding the underlying fiscal outlook and also maintain pressure for the Bank of England to boost quantitative easing further.  Sterling will gain some degree of support on relative grounds given the aggressive Federal Reserve policy and the prospect of further ECB action. Nevertheless, Sterling is likely to be generally vulnerable given the UK fundamentals and credit-rating downgrade fears. Sterling was resilient against the US currency during the week, but struggled to break above the 1.6150 area and edged weaker against the Euro. The latest industrial data was sharply weaker than expected with a 0.8% decline in industrial production for October compared with expectations of a monthly rebound following the 2.1% drop seen in September. The data increased unease surrounding the fourth-quarter outlook and reinforced fears surrounding the economy as a whole. The NIESR estimated a growth rate of 0.1% in the three months to November with the October reading revised down sharply to 0.1% from 0.5%. The latest labour-market report was stronger than expected as the jobless claimant count fell by 3,000 compared with a revised gain of 6,000 the previous month.  The unemployment rate also held steady at 7.8% for October, in contrast to expectations of a small increase. Earnings growth was capped below 2.0% which maintained concerns surrounding the outlook for consumer spending. The prospect of further quantitative easing by the Federal Reserve, allied with speculation that the ECB would relax monetary policy further, had an impact in underpinning Sterling despite unease surrounding the growth outlook. There will be additional pressure on the Bank of England to take additional action. There was a warning from Standard & Poor’s that it was revising the AAA credit rating to negative from stable, reinforcing fears that one or more of the main rating agencies would downgrade the UK sometime during 2013. Swiss franc: The National Bank will remain strongly committed to maintaining the 1.20 minimum Euro level in the short-term. There will be further concerns surrounding the build-up of reserves, but there will also be a very strong determination to resist franc appreciation, especially with competitiveness still a key issue. Aggressive policy relaxation elsewhere will maintain the risk that upward pressure on the franc will intensify again. The dollar was on the defensive against the franc and retreated to lows below 0.9250. There were no surprises from the Swiss National Bank policy meeting with interest rates left on hold below 0.25% while the minimum 1.20 Euro level was also maintained. The central bank continued to insist that franc gains would be resisted with all necessary force. The latest producer prices data recorded no change in prices with a 1.2% annual increase which may ease deflationary pressure slightly.  The Euro retreated to lows in the 1.2080 area with disappointment that there was no suggestions of additional measures to weaken the franc and the dollar dipped to lows below 0.9250. There was a small recovery in the Swiss ZEW index to -15.5 the previous month Australian dollar The Australian dollar pushed higher with a move above the 1.05 level against the US currency. There were expectations that the Australian currency would gain support from international reserves diversification although there was also pressure for the central bank to act to restrain the currency as it remains substantially overvalued. The domestic data releases did not provide any support for the currency with a sharp decline in business confidence and consumer sentiment according to the latest surveys. A decline in gold prices was also a negative factor for the currency. The Australian dollar will gain support from reserve diversification, but there will still be resistance to gains with the Reserve Bank under pressure to intervene. Canadian dollar: The Canadian dollar was able to resist any significant weakness and strengthened to highs near the 0.9820 region against the US currency. The trade account was slightly stronger than expected, although the overall impact was very limited and there was some decline in gold prices which took the edge of the currency performance. Even with near-term resilience and optimism surrounding the fundamentals, the Canadian dollar will find it difficult to advance from current levels. ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Daily FX & Market Commentary - Fed likely to introduce further monetary stimulus

Daily FX Commentary: (Morning Report)

EUR/USD

The Euro steadies above 1.2900 support, with overnight’s brief break above initial 1.2950 resistance, lacking momentum for test of more significant 1.2970, Fib 38.2% and 1.3000, round figure / 50% retracement of 1.3125/1.2876. Hourly studies are losing traction, while 4h 20 day EMA capping and indicators in the negative territory, with Stochastic reversing, seeing the downside still vulnerable. Failure to regain 1.3000 handle that would open way for stronger recovery, sees risk of retesting 1.2900/1.2876, to possibly trigger further retracement of larger 1.2660/1.3125 ascend.

Res: 1.2961, 1.2971, 1.3000, 1.3030
Sup: 1.2927, 1.2900, 1.2885, 1.2876


GBP/USD

Cable holds near-term positive tone, established on a strong bounce from 1.6000 support zone, despite yesterday’s rejection on approach to psychological 1.6100 barrier. While the near-term consolidation holds above 1.6060, previous resistance, scope exists for fresh attempt higher, with clearance of 1.6100 and more important 1.6129 double-top, required to confirm bullish stance. Otherwise, loss of 1.6060, also 55 day EMA, would see increased risk of re-visiting 1.6000 area. Hourly studies are losing momentum, while 4h indicators are about to break above the midlines, with regain of 1.6100, required to confirm.

Res: 1.6086, 1.6095, 1.6100, 1.6127
Sup: 1.6060, 1.6042, 1.6012, 1.6000 


USD/JPY

The pair holds in the middle of near-term 81.70/82.83 range, following unsuccessful attempt at upper boundary and dips being contained above psychological 82.00 support. Near-term studies remain neutral, with break of either side of the range, required to establish fresh direction.

Res: 82.43, 82.63, 82.74, 82.83
Sup: 82.29, 82.10. 82.00, 81.68


USD/CHF

The pair holds near-term positive tone, as reversal from last Friday’s fresh high at 0.9381, finds ground at initial support at 0.9320, reinforced by 20 day EMA. Positive 4h chart structure keeps the upside in focus, with hourly studies starting to point higher and gaining bullish momentum. Regain of important 0.9400 barrier is seen as initial signal of bullish resumption, with break above 200 day MA at 0.9420 and previous peaks at 0.9430 zone, required to confirm. Conversely, loss of 0.9320/00 would revive bears and re-expose 0.9239 and key support at 0.9213.

Res: 0.9368, 0.9381, 0.9400, 0.9430
Sup: 0.9320, 0.9300, 0.9263, 0.9254 

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Daily Market Commentary: (Evening Report)

London Market Report

London close: 'Fiscal cliff' hopes lift markets
Market Movers

• techMARK 2,128.24 +0.11%
• FTSE 100 5,924.97 +0.06%
• FTSE 250 12,190.58 +0.10%

- Fiscal cliff optimism increases ahead of FOMC
- German ZEW smashes expectations
- Tullow drops 8.4 per cent

After a weak start, the FTSE 100 finished Tuesday's session with slight gains on the back of increasing optimism about the 'fiscal cliff', as well as a better-than-expected reading of German sentiment.

"The improved sentiment in the markets today has been largely come from the US," said market analyst Craig Erlam from Alpari.

"It appears that negotiations over how to avoid the fiscal cliff at the end of the year are actually starting to go somewhere. Details of the discussions between Obama and Boehner haven't been released but it now appears to be a case of deciding which entitlements to cut back on."

Meanwhile, the Federal Open Market Committee (FOMC) meeting will conclude tomorrow with analysts expecting the Fed to announce a new long-term bond purchase programme valued at $45bn per month as "Operation Twist" comes to an end.

Stock markets across Europe pushed into the blue this morning after the German ZEW Institute's economic sentiment index shot up to 6.9 points in December from -15.7 the month before. The consensus estimate was for a slight improvement to -11.5.

Analyst Thomas Harjes from Barclays Research said that the results "bode well for our forecast of a rebound in economic activity early next year even if further improvements in investor expectations turn out to be more modest in coming months."

Also helping the mood this morning was a Spanish debt auction which sold €3.89bn of 12- and 18-month bills, ahead of the €3.5bn targeted. They were sold at lower yields than the previous auction.

Europe Market Report 

Europe midday: Stocks rise on German economic confidence

-Confindustria lowers Italian 2013 GDP view
-RWI cuts German growth view
-Mixed newsflow out of the Eurozone periphery
-10 year Spanish bond yields down by 8 basis points to 5.49 per cent

FTSE-100: 0.13%
Dax-30: 0.71%
Cac-40: 0.76%
FTSE-Mibtel 30: 0.83%
Ibex 35: 0.18%
Stoxx 600: 0.22%

The main European equity benchmarks were standing moderately higher by the midday point of the session, buoyed by a surprisingly large rise in German economic sentiment - as measured by the well-known ZEW institute - and the relatively respectable results seen at the latest Spanish Treasury bill auctions this morning.

That following the slight gains on Wall Street last night and despite the somewhat weaker than expected money supply and bank lending figures out in China overnight.

The news-flow out of the Eurozone's periphery this morning was also somewhat mixed.

Thus, there were reports that Greece is very close to meeting its debt buy-back targets, but the Spanish region of Catalonia has informed the central government in Madrid that it will not meet this year's fiscal targets.

Acting as a backdrop, the two day meetings of both the US Federal Reserve and OPEC were slated to start on Tuesday. 

From a sector stand-point the best performance on the DJ Stoxx 600 is now to be seen in the following groups of shares: Automobiles (1.11%), Utilities (1.09%), and Construction (1.03%). 

German 2013 GDP forecasts lowered

The Germany's ZEW institute's economic sentiment index for the month of December improved to 6.9 points after a reading of -15.7 in the month before (Consensus: -11.5).

Some market commentary is calling attention to the fact that according to the survey results just over 75% of respondents were saying that they expected no change in the European Central Bank's (ECB) main policy rate during the next six months.

Italian business lobby Confindustria has lowered its forecast for the country's economic growth rate in 2013 to -1.1% from -0.6% before.

Single currency back at the 1.30 area

The euro/dollar is now rising again, by 0.34%, to the 1.2985 dollar mark.

Front month Brent crude futures are now rising by 0,813 dollars to the 108.20 dollar mark on the ICE.

US Market Report

Stocks Rally On Upbeat German Data, Optimism On Fiscal Cliff
Stocks have moved sharply higher over the course of the trading day on Tuesday, adding to the modest gains posted in the previous session. The markets have benefited from some upbeat German economic data as well as optimism about the looming fiscal cliff.

The major averages have moved roughly sideways in recent trading, hovering near their best levels of the day. The Dow is up 120.59 points or 0.9 percent at 13,290.47, the Nasdaq is up 41.96 points or 1.4 percent at 3,028.92 and the S&P 500 is up 14.13 points or 1 percent at 1,432.68.

The rally on Wall Street is partly due to the release of a report from the Center for European Economic Research showing a bigger than expected improvement in German investor confidence.
The report showed that the expectations index climbed to a positive 6.9 in December from a negative 15.7 in November, turning positive for the first time since May. The current conditions index edged up to 5.7 from 5.4.

Positive sentiment has also been generated by a report from the Wall Street Journal indicating that negotiations between the White House and Republican House Speaker John Boehner have progressed steadily in recent days.

Citing people familiar with the matter, the Journal said the talks have taken a marked shift recently, becoming more "serious."

The reported progress on talks between Obama and Boehner comes as a number of Republicans have indicated they would be willing to accept higher tax rates on wealthy Americans in exchange for significant spending cuts and reform to entitlement programs.

The strength on Wall Street also comes as traders look ahead to the Federal Reserve's monetary policy announcement on Wednesday.

Many analysts expect the Fed to announce a new round of Treasury securities purchases to replace its "Operation Twist" program, which expires at the end of the year.

Meanwhile, traders are also digesting a report from the Commerce Department showing that the U.S. trade deficit came in narrower than expected in the month of October.

The Commerce Department said the U.S. trade deficit widened to $42.2 billion in October from a revised $40.3 billion in September. Despite the increase by the size of the deficit, it still came in narrower than the $42.8 billion deficit forecast by economists.

A separate Commerce Department report said wholesale inventories increased by more than expected in October, although wholesale sales showed a notable decrease.

Other Markets In overseas trading, stock markets across the Asia-Pacific region moved mostly higher on Tuesday. Hong Kong'sHang Seng Index and Australia's All Ordinaries Index rose by 0.2 percent and 0.4 percent, respectively. However, Japan's Nikkei 225 Index bucked the uptrend and edged down by 0.1 percent. The major European markets also moved to the upside on the day. The U.K.'s FTSE 100 Index inched up by 0.1 percent, while the German DAX Index and the French CAC 40 Index advanced by 0.8 percent and 0.9 percent, respectively. In the bond market, treasuries have come under pressure, more than offsetting the modest gains posted in the previous session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 3.6 basis points at 1.652 percent. ==================================================================== Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.