Despite the political unrest unfolding in Egypt, the currency markets has turned their attention back to the fundamentals which have been driving the markets. Over the past few weeks, German interest rates have move higher relative to US interest rates, making it more attractive to hold the EUR relative to the US dollar.
The euro has gained buying interest today, as the widening of interest rates between US and German have trumped the flight to safety trade for the dollar. Euro zone inflation increased to 2.4% on a year over year basis in January from 2.2% year over year in December. The increase has increased short term German interest rates and has led the 2-year US-German differential higher to 85 basis points which is the widest since March of 2009. Inflation levels over 2%, will likely attract hawkish comments from the ECB.
Although it is very unlikely that the ECB will tighten interest rates to the extent that current short term interest rate instruments are pricing, it will be hard for the dollar to rebound significantly if rate differentials continue to widen in Germany’s favor.
The Euro tested lower levels early in Asian trading before snapping back toward the 1.37 level. The next resistance level is close to 1.39. Last week, the 20-day moving average crossed above the 50-day moving average generating upside technical momentum for the Euro. Support for the currency pair is seem below at 1.34, which coincides with the 20-day moving average.
A break of the 1.3770 will quickly lead to further upside.
Asset : EUR/USD
The trade : Binary Call Option
Expiry : End of day
When : On a daily close aboce 1.3770
The Yen has come under pressure after S&P cut Japan’s sovereign rating one notch to AA-, citing the lack of a coherent fiscal strategy, and the continued heavy tone of the dollar. The S&P downgrade was surprising especially in the timing. The BOJ had increased its growth forecast for the current fiscal year to 3.3% from 2.1% earlier this week and the government had just reported that exports rose in December for the second consecutive month. The 13% year-over-year growth in exports was well above expectations (~9.3%). The downgrade was announced after the close of local markets, but overall the impact may be minimal. Foreign involvement in the world’s biggest bond market is minimal – recent data suggests no more than 10%. Moreover, the S&P cut simply brings them in line with Fitch. And when Fitch cut back in May 2009, the dollar rallied for a couple of days and came off. This time, the dollar’s gains are considerably more muted, but the yen has been sold on the crosses. On a separate front, note that Japan’s exports to the US rose in December, helped by a surge in autos, warning of the risk of some widening of the US trade deficit in December. Japanese exports to China jumped 20% to new record highs. Exports to Europe rose just almost 10%, illustrating the weakness of domestic demand there. Continue reading
The UK surprised the markets by reporting Q4 10 GDP contracted by 0.5%. The economy last contracted in Q3 09. Analysts had expected a .2% increase. A full breakdown of the report is not made available until the next report in late February. However, the preliminary numbers suggest that the service sector contracted 0.5% and construction fell 3.3%, while industrial output rose a little less than 1%. This is largely consistent with the PMI readings. The market’s reaction to the disappointing data was clear. UK interest rates fell sharply. Continue reading
The earnings are great, but the CEO is sick, which way will Apple stock move? Apple Inc. posted a 78% surge in profit and record sales of its gadgets in the 4th quarter, but the company’s executives ignored the sudden medical leave of Chief Executive Steve Jobs. Continue reading
The Pound has rallied consistently over the past 7 trading session moving higher as investors are beginning to believe that the next move in rates might be higher than lower. The stronger than expected inflation data in the UK, has put the BOE in a position where a new bond purchasing program is probably off the table.
Early December saw another rise in UK CPI to 3.3%. It is that UK inflation has been ‘temporarily’ boosted by two factors – GBP’s depreciation and the VAT increase. Sterling has fallen by more than 20%, pushing up the GBP price of imports. On top of this, the restoration of VAT to 17.5% in January will have boosted CPI inflation by about 1.0%. The further rise in VAT to 20% on 4th January will prevent inflation from falling.
UK manufacturing activity remains robust based on the latest PMI figures.. The headline balance has risen to 58.3 from 58.0 relative to the consensus forecast of 57.2. This is the highest figure since September 1994, while price component has risen to an all time high, which points to a growing risk of interest rate hikes in the UK. However, manufacturing remains a small component of the economy and with domestic demand set to be hit by tight credit conditions, higher VAT, government spending cuts, negative real wage growth and falling house prices.
The rally in the Pound continues to gain momentum and a break of the 1.5915 is likely to push prices toward the 1.63 level.
Asset : GBP/USD
The trade : Binary Call Option
Expiry time : End of day
When : On a daily close above 1.5915
Growth prospects in Asia and the US are continuing to draw positive sentiment as 2011 begins. The largest chink in the armor is the continued anxiety related to European peripheral countries and the rising level of short and long term debt. If these issues subside, market participants will focus on the growth story. Continue reading
Gold prices have continued to remain strong and hold above support levels into 2011. The change in commodity demand for precious metals has come as interest rates have increased and the yield on the 10 year treasury has moved higher. The US 10-year yield moved from the 3% level in the beginning of December to the 3.5% level, were it is currently trading.
The move in the 10-year yield has been a function of strong than expected economic data which has pushed yields to higher levels. The increase in yield has increased the attractiveness of the US dollar since it is now move expensive to short the currency against potentially lower yielding currencies.
The increase in the dollar against most major currencies has had a negative impact on the price of gold. Gold has declined from the 1420 area to the 1371 area.
Gold has now formed a triple top. This means that the prices have tested higher levels 3-times and has failed to break through to higher levels. Gold is now testing the bottom end of the range that is has formed. 1351 is a robust support level and a break through this area will likely mean that it will test the bottom end of the 1425-1325 range.
The trade is to buy a binary Put option on a close below 1351 as long as the close is close to that level. A close below 1351 and above 1345 would be a signal, anything lower would likely be too close to potential support.
Asset : Gold
The trade : Binary Put option
Expiry time : End of week
When : on a close between 1351-1345.
The dollar is starting to exert itself, and the momentum that is causing this bullish feeling is the better than expected economic data released during the first week of 2011.
In the beginning of the week, the better than expected ISM manufacturing data, helped the dollar rally, after 12 straight days of declines against the Yen. Manufacturing has been strong, which the market had anticipated, but still created a bottom close to the recent loss of 81.00. On Tuesday, Factory Order in the US more than doubled expectations. On Wednesday, the ADP Private Employment Report was nearly 3 time greater than expectations. Additionally, ISM Services hit a 12 month high. Continue reading
The European debt crisis remains an important market issue and should continue to shape the course of the Euro into 2011. It is more important currently than particular economic data, in part because of tax hikes and government spending cuts that are to be implemented in the new year. In addition, the market is aware of the divergent performances in the region, with Germany the main engine. Today’s manufacturing PMI of 57.1 was a bit better than the 56.8 flash reading. Continue reading