12 února 2009

12/2 Forex Market Update

Very strong US Retail Sales surprise the market. NOK goes to the back of the class on renewed plunge in oil prices.

EURGBP rallies, but finds resistance at key moving average. US Jobless claims still desperately weak.

· New Zealand Jan. Business NZ PMI out at 42.0 vs. 42.5 expected.
· Japan Jan. Domestic Corporate Goods Price Index fell -1.0% MoM vs. -0.6% expected
· Australia Jan. Employment rose 1.2K vs. a drop of -18k expected
· Australia Jan. Unemployment rate rose to 4.8% vs. 4.7% expected and 4.5% in Dec.
· Australia Q4 NAB Business Confidence fell to -42 from -7 in Q3
· EuroZone Dec. Industrial Production fell -2.6% MoM and -12.0% YoY vs. -2.5% and -9.5% expected, respectively
· US Jan. Advance Retail Sales rose +1.0% vs. -0.8% expected and +0.9% less Autos vs. -0.4% expected
· US Weekly Initial Jobless Claims out at 623k vs. 610k expected

· US Dec. Business Inventories (1500)
· New Zealand Dec. Retail Sales (2145)
· New Zealand REINZ House Sales (2300)

The pound followed up its move lower with even more weakness in today's European session on continued risk aversion and as the market continues to weigh the negatives for the currency brought on by the BoE's King yesterday, as he clearly stated intentions to move forward with quantitative easing. EURGBP is now trading up close to its 55-day moving average close to 0.9060, an MA that provided decisive resistance recently.

US Treasury Secretary Geithner did little to flesh out further details on the bank bailout plan after he was grilled by lawmakers yesterday. In other news, Geithner and Chinese Vice Premier Wang spoke and agreed on the need for "strong cooperation". This spells perhaps some relief on the protectionism front after Geithner rolled a grenade into the global economy's tent during his confirmation hearings, stating flat out that china is a currency manipulator.

One issue that is not yet weighing on the Euro, but should be, is the worry about the soundness of European banks. An article in the Telegraph yesterday reported on a document (not meant for the press) circulating in Brussels that estimated "impaired assets" at European banks could be 44% of bank balance sheets.

Another column out this morning from the same source estimates European corporate debt at nearly 100% of European GDP, vs. about 50% in the US. European corporate debt tends to be shorter term and in the form of shorter term loans from banks as compared to the corporate bond market of a wider range of durations in the US. The need to roll over this debt when banks aren't extending credit, and the enormous quantities of public debt in the shakier EU member states whose bond yields trade at a hefty premium to German bond yields will make for an ugly situation this year. These issues will really test the viability of the EuroZone and the generosity of the German taxpayer (who will be bailing out the Club Med countries if and when the next bailout packages arrive to shore up these countries public finances).

NOK longs lost their composure as the front contract in crude oil shed another 5 dollars over the last couple of days. NOK has been on a roll recently as it has become a popular currency as the theme of grading currencies on their "relative fiscal horrors" makes NOK stand out as a winner. But perhaps the market has taken things a bit too far and we may be looking at a move bak toward the 9.000 handle for EURNOK. This same theme may be what has kept CAD from weakening more quickly, as its finances are still relatively sound based on years of budget surpluses.

The US Retail Sales was far stronger than expected, though we have to take the data with a grain of salt due to the trend toward gift certificate based purchases from the Christmas season and the possibility that some of the uptick may have been due to so many liquidation-type activities taking place with many stores going out of business. This kind of promotion can move consumers buying horizon forward temporarily. Countering the good news about retail sales was another incredibly weak weekly initial jobless claims report of above 600k. It makes little sense that shoppers are running out and splurging when so many are losing their jobs. Let's have a look at February data before we start to call for any kind of stability in consumer demand.

The Australian employment data overnight was a mixed bag, with the employment changge up slightly rather than showing a shar drop, but the unemployment rate rose by 0.3%, the sharpest rise in the cycle as the recession starts to bite a bit deeper down under. The NAB business confidence number plunged to a record low for the 20-year history of the survey in Q4.

Looking at the market action, the market continues to show no willingness to work up a head of steam in any direction outside of the moves in GBP and NOK. EURUSD has been stuck in a miniscule range for the last two weeks and is going to have to work down through the recent 1.2707 low if we are to believe it has further downside potential. Equities are likely to provide the direction, and 800 in the S&P is the downside line in the sand at the moment.

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