Better IFO Helps EUR/USD But 1.30 Proves Elusive

Market Drivers May 24, 2013

IFO beats handily driving EUR/USD towards 1.3000

Nikkei seesaw putting USD/JPY on roller-coaster

Nikkei 0.89% Europe 0.56%

Oil $94/bbl

Gold $1387/oz.

Europe and Asia:

NZD Balance 157M vs. 475M

EUR German GDP -1.4% vs. -1.4%

EUR German GfK Consumer Confidence Survey 6.5 vs. 6.2

EUR German IFO – Business Climate 105.7 vs. 104.5

EUR German IFO – Current Assessment 110.0 vs 107.2

EUR German IFO – Expectations 101.6 vs. 101.6

GBP BBA Loans for House Purchase 32.2K vs. 32.7K

North America:

USD Durable Goods Orders 8:30

USD Durables Ex Transportation 8:30

A better than expected IFO reading boosted investor confidence in Europe and helped to propel the EUR/USD towards the 1.3000 level in morning European trade. The IFO printed at 105.7 versus 104.5 eyed while the current assessment component also rose better than expected to 110 from 107.2 forecast.

The latest IFO results led Klaus Wohrable, the Deputy Department head to suggest that Q2 German GDP will be considerably better than Q1 reading. Mr. Wohrable noted that construction activity picked up immensely in May as pent up demand came on line. He also stated that export orders continue to do well and that the latest rate cut by the ECB has had a positive psychological impact on the German business sector.

The improvement in German sentiment is not restricted to business sector alone. Earlier in the session the German GFK Consumer sentiment survey registered its best reading in 5 years printing at 6.5 versus 6.2 eyed. Taken together the two surveys suggest that conditions in Europe’s largest and most important economy are clearly improving and that augurs well for the rest of the EZ and could help pull the region out of recession as the year progresses.

The EUR/USD pushed its way to 1.2990 in the aftermath of the news, but the rally stalled just ahead of the key 1.3000 mark. The 1.3000 level is a very stiff point of resistance for the euro as represents strong former support from which the unit tumbled over the past several weeks. Whether the pair can clear that hurdle will likely depend on North American session where investors will have to reassess the EZ growth prospects given the lastest IFO data.

Meanwhile in Japan the placid final closing numbers from the Nikkei belied the massive volatility in stocks tonight. The index was up nearly 2% then down 3% until finally ending up a little better than 1%. This strong turbulence may be the new fact of life in the Japanese financial markets as the BOJ massive QE program is clearly triggering wild investor moves in the Land of the Rising Sun.

Japanese officials are clearly trying to pacify the markets and make sure that the JGB yields do not gyrate wildly but so far they have only employed jawboning with PM Abe noting that the BOJ is not buying government debt directly while BOJ Chief Kuroda emphasized that the central bank’s primary focus is on deflation rather than stock market valuations. Still if the volatility does not dampen soon Japanese policymakers may need to take firmer steps to pacify the markets with some analysts suggesting that the BOJ may need to implement its own version of LTRO in order to stabilize the sovereign debt instruments.

For now USD/JPY continues to mirror the volatility in other markets with the pair rising to a high of 102.89 only to tumble back to 101.08 in overnight trade. It appears that for now the 103.75 level will remain as a near term top as the pair consolidates its latest rally, but a further fall to 100.80 could trigger a deep correction that could test the key 100.00 level support.

Chart of the Day for May 24th – AUD/USD

By Ilya Spivak

Prices are testing support in the 0.9663-82 area, marked by the November 23 2011 low and the 23.6% Fibonacci expansion. A break below that eyes the 0.9580-84 region. Near-term resistance is at 0.9841, the May 21 swing high. Positive RSI divergence argues in favor of an upside scenario.

Trade of the Day for May 24th, 2013 – Short EUR/SGD

Swing with Euro Sing

Who doesn’t like a good swing trade? EUR/SGD is on my radar from the breach of short term resistance at 1.6300. For mine, the five day trend is against the fundamentals – QoQ reads of GDP show Singapore is emerging from contraction, whereas tonight’s final GDP in Germany is likely to confirm that the largest economy in Europe is heading to recession.

Fundamentally, I want to sell EUR/SGD.

Today’s price action pushed through longer term resistance at 1.6356 and keeps the pair outside the Bollinger bands:

Dollar Rallies in Asia – Can US Extend?

Market Drivers May 28, 2013
Surge in Nikkei takes USD/JPY through 102.00
Europe quiet post holiday as markets look to US for direction
Nikkei 1.20% Europe 1.44%
Oil 94.43/bbl
Gold $1384/oz.

Europe and Asia:
JPY Small Business Confidence
CHF Trade Balance

North America:
USD Consumer Confidence 10:00

Its been a very quiet post holiday trade in the currency market with all of the action coming out of Asia session where a resurgent Nikkei put the bid back in USD/JPY lifting the pair back through the 102.00 figure. The Nikkei recovered from its Monday sell-off closing up 1.20%. The index swooned nearly -10% in the three prior sessions as volatility in the JGB market put pressure on stocks and USD/JPY, so today’s recovery in equities triggered a sharp short covering rally in FX.

Although USD/JPY appears to have found support near the 101.00 level, the pair continues to consolidate its recent gains and may be vulnerable to further correction if the JGB market turns turbulent once again. Japanese officials are keenly aware of the risks in the sovereign debt market, but are not in a state of panic regarding any possible selloff in the JGBs.

The reason for the relative calm amongst Japanese monetary and fiscal officials is the fact that the balance of Japanese banks are much healthier than they were in 1990′s and therefore the financial sector could absorb some losses on their book. Today, Koichi Hamada who is a close advisor to Prime Minister Abe even argued that the banks could offset their losses on their bond positions with gains on the stock valuations.

Still despite today’s rebound the rally in USD/JPY appears to have topped out for now as investors grow a bit more cautious about the implications of Abenomics on the JGB market and the pair is likely to remain rangebound as traders seek more await more data. One factor that could help the pair to rally further is the latest readings from the US economy. To that end today’s Case Shiller numbers on housing and the Consumer confidence data could determine if the recovery in USD/JPY extends or falters.

Elsewhere the dollar rally appears to have ran into a wall against the high beta currencies. The greenback rallied against euro, cable and Aussie in Asian session trade with those curreciencies breaking below 1.2900, 1.5100 and .9600 respectively but the buck has since given up those gains as risk RX rebounded. The Aussie in particular staged a strong recovery in European session after re-testing support at the .9600 level in late Asian dealing. The unit was hurt by an alarmist newspaper article that suggested that the Australian economy may have hit a secular peak as the mining begins to decline which could lead to a multi year unwind of the investment trends that have made Australia the envy of the G20 universe.

There is no doubt that sentiment towards Aussie remains highly negative, but with the pair so grossly oversold and so close to the 9500 cent level it now looks like a bargain to many reserve diversification officers across the world who continue to eye the G10 leading yield with desire. Therefore the pair is likely to find stronger support around these levels and may see a rebound as the week proceeds.

Chart of the Day for May 28th, 2013 – USD/JPY

By Ilya Spivak

Prices declined as expected after putting in a Bearish Engulfing candlestick pattern. Prices are staging a mild recovery from support at 100.68, the 23.6% Fibonacci retracement, to retest the 14.6% level at 101.84. A reversal back above that exposes the May 22 high at 103.73. Alternatively, a move below support eyes the 38.2% retracement at 98.80.

Dollar Extends Gains on Stronger Data, Central Bank Gold Buying

There is a new sense of energy in the FX markets today but the rally has been contained to only a few major currency pairs. The biggest gains are being enjoyed by USD/JPY and USD/CHF but AUD/USD and NZD/USD also recovered nicely. Euro and sterling on the other hand are struggling to gain any type of momentum – upside or downside as the lack of market moving Eurozone data keep movements in these currencies limited.

At a time when the rest of the world economies are on shaky ground, U.S. economic data continues to surprise to the upside, making the dollar extremely attractive to global investors. Consumer confidence surged to its highest level in 5 years. Thanks to the improvement in the labor market and the persistent rise in stocks, the Conference Board’s measure of consumer sentiment rose to 76.2 in May, up from 69. Greater consumer optimism should hopefully translate into stronger consumer spending in the second quarter. The Richmond Fed manufacturing index also rebounded to -2 from -6. While this was the second month in a row that manufacturing activity contracted, the improvements is a breath of fresh air for the sector. Finally, house prices increased 1.12% in March after rising 1.32% in February. This represents deterioration but for the first quarter, house prices are up 10.17% vs. 7.25% in Q4. As U.S. economic data continues to improve, expectations for tapering asset purchases by the Fed will continue to build and this sentiment should fuel further gains in the dollar.

Meanwhile, the IMF’s report on central bank purchases of gold is getting some attention this morning and even though gold is lower, it is lending support to the beleaguered AUD and NZD. Investors have been eager to see whether the 18% decline in gold prices year to date attracted central bank buying and according to the International Monetary Fund, aside from Canada and Mexico, every major central bank has been hunting for bargains. Russia, Kazakhstan and Azerbajian collectively increased their gold holdings by 75%, cementing Russia’s status as the world’s number one buyer of gold. These 3 former Soviet Republics have been buying all the way down and while their demand has limited the slide in gold, it has not stopped it.

For most central banks, buying gold is part of their overall forex portfolio diversification strategy and the further gold declines, the more demand we expect because central banks are not as sensitive to short or medium term swings as traders or even investors. The outlook for gold hinges on the outlook for the U.S. dollar and for the time being, expectations for a reduction in asset purchases by the Fed should keep the dollar bid. According to the CFTC’s latest positioning data, fund managers and speculators are grossly short gold and we believe that the prices could head lower.