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Friday, 30 Dec 2011
2012 Preview - Examining the Major Issues
As we approach New Years we'll attempt to address the major issues for 2012.
USD - When will Congress Address the US Deficit and Debt?
Could this be the year that Congress finally tackles the difficult issues to reduce spending and lower the national debt? The Congress just recently acted to renew the payroll tax break in a last minute deal, a method that Washington has seemingly perfected. Most likely Congress will kick the can down the road as they are unwilling to take on the big issues of social benefits heading into an election year. If the trend of improving US fundamentals continues then a return to US growth may help to ease the pressure of rising deficits. However, a failure to address the issues could eventually raise the yields on Treasury bonds while reducing the demand to hold the USD. Another factor that may lower investor's desire for the USD could be an additional round of monetary easing from the Fed (QE3) should the US economic momentum slow in Q1.
EUR - Debt Crisis Will Continue to Drive Investor Sentiment
Market events will continue to revolve around the euro zone as they did for the latter half of 2011. A solution to the debt crisis remains elusive and this will endure into the New Year. We can expect additional sovereign credit rating downgrades with France being the most likely candidate and has been warned by the rating agencies on its debt. As the EUR/USD looks to finish the year on its low and also below the psychologically important 1.30 level, the outlook for the euro zone is growing increasingly bearish. This is despite the ECB's best efforts to flood the financial system with unprecedented liquidity. Sometimes you must call a spade a spade as the ECB liquidity provisions is similar to quantitative easing (QE). While the past two years have shown us that European politicians appear incapable of winning back the trust of the investing community, the ECB may step in where the politicians have failed.
At the same time economic fundamentals are deteriorating which will likely jeopardize the aggressive projections for deficit reductions by the already bailed out European nations. Additional easing by the ECB may be needed to overcome a period of lower growth and as of recent there have been ECB governors who have the allowed for the possibility of further central bank policy easing. This looks increasingly likely going into Q1 which is a clear negative for the EUR.
It will then come down to the stronger nations to decide whether or not to save the EUR. While we believe Germany and France will eventually reach into their pockets to keep the great European experiment from falling apart, the stronger nations may allow the crisis to continue on to win further concessions from their weaker counterparts.
JPY - Ignoring Japanese Government Finances
Japanese government finances continue to deteriorate and the debt is now up to 220% of its GDP according to the IMF. So far the Japanese government has taken few steps to relieve this debt burden. One measure being pushed by Prime Minister Noda is a twofold increase of the sales tax by 2015. This is despite opposition from his ruling DPJ party. With Noda's approval rating falling to 31% according to an Asahi newspaper poll. The revolving door of the Prime Minister's office may continue to turn, leaving the budget reforms in doubt.
The failure to reform Japanese public finances has caught the eye of the credit rating agencies, in particular that of S&P who claims Japanese finances are deteriorating by the day. The consistent accumulation of debt is also worrying should interest rate payments continue to rise which could spur a debt crisis in the world's 3rd largest economy should JGB yields begin to increase.
That being said, given the current investment environment where investors are in search for potential safe havens the JPY continues to be a market favorite. With the CHF essentially being removed from the list of safe haven currencies due to the EUR/CHF floor, this leaves the EUR, USD, and GBP. Central banks of the latter two are expected to engage in additional quantitative easing while speculation is increasing for the former. Thus the JPY could see additional strength well into the first half of next year.
Crude Oil - Geopolitical Environment to Keep Crude Oil Prices High
What a year for geopolitical instability. Who could have predicted the number of political and social revolutions spreading across the Middle East and Africa? Does this prove the Bush doctrine was influential in its attempt to establish a democracy in the heart of the Arab world?
Despite the volatility, spot crude oil prices look to end the year only $10 higher from their 2010 close which can be attributed to two factors; increased US/Iranian tensions and improved US economic data. The recent banter between Iranian leaders and the US 5th fleet over the Iranian threat to close the Strait of Hormuz is a notable escalation in the two countries' relations. The US Department of Energy considers the Strait of Hormuz as, “The world's most important oil chokepoint,” the escalation of tensions may only have begun to be priced in by investors. Additionally, the trend of stronger US data releases has not gone unnoticed. Should the positive momentum in the US economy from H2 carry over into 2012, crude oil prices may have the potential to rise further without significantly weighing on the economic recovery.
The weekly chart is telling. After a break of the support line from the January and October lows the pair rose back to this line where it turned into resistance at 1.3200 as often occurs with previously broken trend lines. Weekly stochastics are oversold though the monthlies may still have room to run. 1.2670 will be an important support level as the triangle pattern from the 2008 and 2010 lows on the monthly chart is found here. Below this support there is the 2008 low of 1.2520. Resistance is located back at the 20-day moving average of 1.3215, and the December 9th high of 1.3430, which coincides with the 38% Fibonacci retracement from the October high to the December low.
In a similar fashion cable has weekly stochastics which are oversold while the monthlies continue to decline. Over the course of December sterling has failed multiple times to establish a beachhead above the 1.5770 resistance. The October low of 1.5270 is the initial support though market participants will likely eye the rising trend line from 2009 which is found at 1.5110. A break of the 1.5770 resistance could spur a bout of short covering where the bears may regroup near the November 18th high of 1.5890. This level coincides with the 61% retracement of the October to December move. Only a break of the October high at 1.6165 would turn the technical sentiment from bearish to bullish.
The USD/JPY is testing the downward sloping trend line from the 2007 high which comes in this week at 78.30. A break here and the USD/JPY would most likely encounter selling pressure at the October high of 79.50 and the July high of 81.50. The 100-week moving average at 83.30 is an additional level that long-term players will be watching for confirmation of a bullish technical move. That being said the long term trend remains to the downside and the pair has support at the December low of 77.15, and the November low of 76.50, before the pair's all-time low.
A monthly close above the 20-month moving average at 0.9385 would confirm USD strength. This will put in play the 2011 yearly high of 0.9780, and the December 2010 high of 1.0065. The technical level that stands out the most is 1.1140, off of the long-term downtrend line from the 2003 high. Initial support is back at 0.9065, with the potential for a deeper move back to the pivot from October at 0.8565.
The Wild Card
The stock index shows a clear rejection at 1,265, the falling resistance line from the October and December highs. Therefore, the rising trend line off of the October and November lows is back in play at 1,195. Forex traders should note that a break of the rising trend line and the index's next support level is located at 1,147.
|03:00||CHF||Daylight Saving Time Shift||-||-||-|
|03:00||EUR||Daylight Saving Time Shift||-||-||-|
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|01:00||EUR||German Prelim CPI||m/m||0.9%||-||-|
|01:00||EUR||Italian 10-y Bond Auction||1.36|1.5||-||-|
|01:50||JPY||Prelim Industrial Production||m/m||3.7%||-||-|