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Wednesday, 23 Mar 2011
GBP Shines As Interest Rate Expectations Rise
The British pound performed well today following greater than expected inflation data that increased expectations for an interest rate increase by the Bank of England. The Aussie dollar also put in a strong showing, building on momentum and strong fundamentals.
USD - CAD Falls on Disappointing Retail Sales
The Canadian dollar slumped yesterday as retail sales surprisingly declined -0.3% m/m in January after a -0.2% decline in December. Market expectations were for a rise of 1.0%. Core retail sales were unchanged from the previous month with economists forecasting a rise of 0.8%. The decline in retail sales is the second consecutive drop in Canadian retail sales and is a chink in the armor of the Canadian economy.
Canada had the strongest growth of the group of 7 nations in the 4Q and employment numbers have rebounded nicely, but consumption has been a laggard as displayed by the last two monthly retail sales reports. The Bank of Canada also expects the housing market to slow. Given the slowdown in consumer spending and expected slowdown in the housing sector, the market may begin to price in a pause in rising Canadian interest rates.
Yesterday the USD/CAD rose to a high of 0.9813 before trading back at 0.9809. The pair opened the day trading at 0.9781. Technicals show the USD/CAD remains in a sharp downtrend despite last week's rebound in the value of the pair to the 100-day moving average. Strong bids may be seen at this level. Resistance comes in at last week's high of 0.9970 and 0.9815. Support is found at yesterday's low at 0.9750 and the yearly low of 0.9666.
EUR - Pound Rises on Increasing Inflationary Pressures
The pound was a strong performer today after the release of higher than expected CPI data brought strong bids to sterling. UK y/y CPI rose by 4.4%. The previous year's UK CPI rose 4.0%. Economists had forecasted a rise in prices of only 4.2%. UK core inflation came in at 3.4% on expectations of 3.1%.
Higher than expected inflationary data has given traders reason enough to bring forward expectations for an interest rate hike which would strengthen the pound versus the dollar as the US still remains in a state of monetary policy easing. The BOE could begin raising rates as early as May. Currently the Official Bank rate of Britain stands at 0.5%.
The end result of the data release prompted traders to buy the pound and the GBP/USD moved to its highest level this year, rising to 1.6400 from an opening day price of 1.6300.
The UK budget will be released later today as well as BOE meeting minutes which may show a hawkish tone from the central bank.
Further gains should be expected from the pound as momentum is currently rising on both the daily and the weekly charts. Resistance for the GBP/USD should be the January 2010 high at 1.6460 with a long term target at the November 2009 high of 1.6875.
JPY - Yen Exchange Rate Begins to Stabilize
A noticeable drop off in volatility of the Japanese yen characterized yesterday's trading. This lends to the theory that coordinated intervention by the Japanese Finance Ministry and the G7 nations has succeeded.
The 14-day Average True Range for the USD/JPY stands at 1.31, or 131 pips. Yesterday's volatility was well below that level with the pair only moving 48 pips.
The pair closed the day near its opening price 80.94. Other Japanese crosses also had relatively low volatility. Judging from the significant drop off in volatility, the intervention could be deemed a success. Speculators who were buying yen on expectations of insurers repatriating foreign currencies to Japan in order to pay insurance claims from the earthquake and tsunami may have been driven out of the market at the hand of the G7.
The Aussie dollar put in a strong performance yesterday that caps a solid 3-day run. The AUD/USD rose as the pair may have been undervalued following the disaster in that Japan which caused some market participants to slow expectations for rising interest rates by the Reserve Bank of Australia.
The AUD/USD climbed to a high of 1.0127 before closing at 1.0110. Last week the pair fell to a low at 0.9704 where bids were seen near the 200-day moving average. Resistance for the pair is located at 1.0200 followed by the all-time high of 1.0255. Support is found at 0.9940.
Crude Oil - Falling Dollar Supports Rising Crude Prices
Dollar weakness gave support to spot crude oil prices as the commodity strengthened by 1.8% yesterday, climbing to their highest level since the natural disaster in Japan. Increased fighting in Libya and further protests in the Middle East has kept the crude market in fear of supply disruptions.
Yesterday, spot crude oil prices finished the day near their high at $104.99 after opening the day at $103.84.
Increased fighting in Libya along with the crash of a US F-15 fighter plane raised concerns of a prolonged conflict in Libya which would limit the return of Libyan supplies to the market.
Also adding to tensions was a defection of Yemen army brass to opposition parties, which has raised fears of turmoil in Yemen. Despite Yemen's lack of being a major crude oil producer, its proximity to Saudi Arabia who is a major supplier of crude oil will likely increase tensions in the region.
Today US weekly crude oil inventories will be released and expectations are for a rise of 2.0M barrels. The previous week saw an increase of 1.7M barrels. While Libya is not a supplier of crude oil to the US, it does supply significant amounts to Europe, particularly Italy. A larger than expected draw-down in US crude oil supplies should be another reason for crude oil bulls to continue with yesterday's buying.
Yesterday the pair reached a new 2011 high at 1.4247 before falling back during the Asian trading session. The uptrend is firmly intact with the 20-day simple moving average providing support, coming in at 1.3970. Traders should be looking to buy on dips in the pair with resistance coming in at 1.4280 followed by 1.4580.
Momentum has shifted to the upside as monthly, weekly, and daily momentum are all pointing higher, signaling further potential gains. The pair is currently testing the trend line off of the 2007 high. A close above this level may bring additional bids to the pound. Targets for the pair are 1.6275 and 1.6875.
Volatility for the pair has significantly fallen off following intervention by the G7 to stabilize the yen. A move below the 80 level may bring further action by the world's central banks. Traders may want to be patient with the pair to find better entries. Shorts could be initiated near the 200-day moving average at 83.
Following the breakdown in the value of the pair, a bearish pennant pattern has formed. An estimate of the move from the consolidation pattern would drop the pair 400 pips near the 0.8600 level. Support for the pair comes in at 0.9130.
The Wild Card
The pair appears to find significant resistance near the 100-day moving average line. Opportunities to enter short on the pair near this level at 0.9940 may allow forex traders to enter into the downtrend with targets at the swing low on the daily chart at 0.9666.
|02:00||AUD||HIA New Home Sales||m/m||-1.8%||-||-|
|02:01||JPY||Monetary Policy Statement||-||-||-|
|08:00||EUR||German Industrial Production||m/m||0.7%||-||-|
|08:01||JPY||BoJ Press Conference||-||-||-|
|08:45||EUR||French Trade Balance||-3.3B||-||-|
|09:00||CHF||Foreign Currency Reserves||540B||-||-|
|10:30||GBP||Manufacturing Production m/m||m/m||-0.8%||-||-|
|10:31||EUR||German 10-y Bond Auction||0.69|1.2||-||-|
|16:00||GBP||NIESR GDP Estimate||0.5%||-||-|
|16:30||USD||Crude Oil Inventories||4.0M||-||-|
|19:01||USD||10-y Bond Auction||2.24|2.7||-||-|
|01:01||GBP||RICS House Price Balance||53%||-||-|
|01:50||JPY||Core Machinery Orders||m/m||-3.6%||-||-|