Afternoon Run … January 12, 2010

Key News

 

* PBOC Reserve Requirement Shift Rattles Currencies (WSJ)

* U.K. Retailers Show Optimism  (WSJ)

* BOE Should Pause Bond Plan as U.K. Recovery Looms, BCC Says  (Bloomberg)

* Kan Appointment Raises Fiscal Discipline Concern, Moody’s Says  (Bloomberg)

 

The Event Agenda

Afternoon Run-Down

The employment data on Friday has triggered some profit taking in the dollar- disrupting the speculation for an earlier Fed rate hike.  A month ago, the market was pricing in a 36% chance of a 25 basis points Fed rate hike by June this year.  Now the market has lowered expectations, pricing in only a 25 percent chance.

 

While the payroll data was on the low extreme of expectations, the report still shows some stabilization on the jobs front—nothing material to damage the recovery scenario.  Nonetheless, it provided a reason to take profits on long dollar positions, particularly in light of some technical boundaries that were being tested.  The euro bounced higher off of its 200-day moving average and USD/JPY turned lower after hitting its 200 day moving average, nine month trend line resistance and completing the corrective ABC structure from the November lows. 

 

The pull back in the recent dollar surge should present a good opportunity to buy dollars.  Although the ramped up expectations for a Fed move has been knocked off path a bit by the weaker jobs data, there continues to be a dollar positive market dynamic, driven by the better growth prospects for the U.S. relative to other major developed economies.  Meanwhile, the threats to the economic recoveries bode well for the safety appeal of the dollar.

 

On that note, the risk front, the news of some belt tightening in China has market participants worried about a souring of the China growth story.  After a slew of hot data in focus yesterday:

 

Ø   Exports spiked by 17.7%, the most since October of 2008,

Ø  New loans amounted to $600 billion in the first week of January, almost twice as much as the monthly average in the second half of 2009.

 

…The PBOC increased the reserve requirements for banks today by 50 bps. 

 

Also effecting global risk appetite, earnings seasons kicked off with an earnings miss from Alcoa.

 

In the euro area, The European Commission said the Greek data on the budget deficit has severe irregularities, making the stated deficit reported by Greece unreliable.  This is for a country that already has the largest budget deficit in among the euro members and the lowest sovereign credit rating. 

 

EU officials have said there will be no bailouts of weak euro member states.  Portugal was noted yesterday in an FT article as vulnerable to a downgrade by Moody’s.  The continued elevation of weak spots in Europe is putting pressure on the euro after its sharp two day climb. 

Also of note, an official from China Investment Corp., the $300 billion sovereign wealth fund, said the dollar “is at its bottom.”

Key Charts

USD/JPY is retracing, after running into resistance at the 200 day moving average and the trendline of the nine month downtrend.  But it looks like a buying opportunity.  The sharp v-shaped reversal in late November following the crisis-driven move in USD/JPY below last year’s lows– in a thin holiday market– was significant.  If that marked a bottom in USD/JPY and a trend change, then we should expect the first correction in this new uptrend to be shallow.  A shallow correction would be marked by a 38.2% Fibonacci retracement, which comes in right around the 50 and 100 day moving average—in the 90.30 area.

 

The Euro also traded into its 200-day moving average and bounced on profit taking following the weaker U.S. jobs report… 

Another reminder than sustainability of economic recovery is a huge question mark.  Last Friday, the report on U.S. consumer credit plunged to record lows…

Market expectations for Fed rate hikes soared in the latter part of December, but have fully retraced…

The climb in crude oil that started in late December has dragged the Canadian dollar and other commodity currencies higher.  Today’s tightening in China finally stalled the momentum in commodities and global stocks…expect the Cad to follow lower.