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FX Technicals
Markets clearly showed their displeasure with todays US economic data, sending both the US dollar and domestic bond yields lower. Given that the actual data… … was largely mixed, however, traders will be mindful of tomorrows significant news events.
January Producer Price Index data will likely dominate forex and bond
markets, while US equities will look to later University of Michigan Consumer
Confidence figures for guidance. Analysts expect broad disappointments across all
four noteworthy economic releases; inflation is likely to soften on softer Food and
Energy prices, while mediocre consumer demand will be seen in Housing Starts and U
Michigan confidence numbers. The low consensus estimates across all releases
arguably leave risks to the upside for the US dollar, as any positive surprises
could help the Greenback retrace off of key trendline support in upcoming trade.
Bonds – US 10-Year Treasury Note Futures
Todays unimpressive news allowed bond prices to break key resistance, leaving
momentum clearly to the upside through short-term trade. Fortunately for the US
dollar, bond yields likewise declined against most major counterparts with the
exception of Japanese Government Bonds. This fails to explain the dollars broad
weakness against most currencies, but it is clearly one of the underlying reasons
for pronounced USDJPY declines. All other things remaining equal, the falling bond
yields will do little but further weaken demand for the domestic currency. Dollar
bulls hope that the currency will hold key support levels, however, allowing for an
end-of the week Greenback rally.
FX – EUR/USD
The dollar has been under tremendous selling pressure for the past three sessions on
disappointing US data and a dovish outlook on inflation and further interest rates
from the Federal Reserve Chairman. The picture garnered from todays fundamental
flow was unusually comprehensive, but ultimately mixed. Todays indicators covered
the most hotly debated topics in the economy today. First off, the manufacturing
sector, which contracted in two of the past three months, retained its murky future
when bigger than expected drops in industrial production and the Philly Fed survey
were offset by the biggest positive jump in New York-area manufacturing in over a
year-and-a-half. Alternatively, the housing market, which is still embroiled in the
biggest slump in 15 years, showed signs of improving when the NAHB indicator rallied
to its highest level in eight months. However, the fundamental outlook for the
dollar may not lay with the worst performing sectors of the US economy, but rather
the best. Labor strength has long supported both growth and inflation through the
consumer sector. This dependence suggests that the greatest number of continuing
jobless claims in over a year may yield dark days for the dollar when NFPs come
around.
Until then though, the market still has some time to push the dollar around. For the
EURUSD, the combination of technicals and fundamentals could lead to interesting
price action tomorrow. From a purely technical perspective, the pair is making an
initial call for a top. Todays touch on a three-month falling trend line is
testing the influence an asymmetrical triangle can muster. Should this seem too
clumsy a resistance with two few confirmed touches on the trend line, there is also
the 61.8% retracement 1.3370-1.2863 at 1.3176. On the other hand, the markets
forecasts for tomorrows indicators is calling for exactly the opposite. Factory
level inflation is expected to follow the Import Price Indexs lead, while housing
starts and the University of Michigans confidence survey are expected to worsen.
Equities – S&P 500 Index Futures
With earnings season winding down, equities traders will need to go elsewhere for
their fundamental forecasts. On the one hand, record profits are likely to encourage
at least a few more M&A deals and stock buy-back plans. Just today, Dow-component
Caterpillar, maker of earth-moving equipment, announced its plan to buy back $7.5
billion worth of outstanding stock. However, these announcements are unscheduled;
and, as fewer and fewer of them are pursued, the momentum such events had on the
overall market will start to diminish. When businesses start to cool their step,
every-reliable macro indicators will once again take the helm. So far this week,
economic data has less than encouraging for business. Domestic business looks soft
with weak retail sales and cooling manufacturing demand. On the same channel,
foreign revenue looks weak with a pick up in the physical trade balance and
subsequent shrinking in net foreign investment in the US. When all is said and done
though, it seems the stock market is more concerned with interest rate policy than
the basic premise of supply and demand. After Ben Bernankes dovish addition
yesterday, the S&P 500 rallied to a new 6-year high. Therefore, tomorrows data
may turn out positive for stocks even if they are bad for the economy. Should
housing starts and the consumer confidence survey contract as expected, expectations
for an eventual rate hike will come back into view. This would be even more likely
should the PPI follow the import price report in printing a bigger than expected
contraction.
Regards,
John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com
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