Euro bulls bail as Trichet fails to increase hawkish rhetoric

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The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3615 level and was capped around the $1.3825 level. Technically, today’s intraday low was below $1.3633, representing the 38.2% retracement of the $1.2587 – $1.4281 range. The common currency was pushed lower after European Central Bank President Trichet made comments in which he did not increase the hawkish rhetoric he offered after the ECB’s January rate-setting meeting despite an increase in headline consumer price inflation to 2.4% y/y. Eurozone wage growth is at or near its lowest level in a decade and core inflation is less than half the headline level of +2.4% y/y. Trichet warned inflation will remain above 2% for most of 2011. These data suggest second-round inflation effects are muted for now and will not necessarily lead to higher official interest rates. Trichet said current interest rate policy “still remains appropriate” and noted risks to the economic outlook are “tilted to the downside.” Three-month Euribor December 2011 futures rallied following Trichet’s remarks. The ECB obviously wants to keep rates low while eurozone sovereign credit jitters dominate headlines, particularly as eurozone policymakers grapple with whether or not the European Financial Stability Facility will be permitted to purchase eurozone sovereign debt in the secondary market to keep a lid on market yields. Eurozone officials will convene a summit tomorrow to discuss the EFSF and will discuss the feasibility of having the EFSF purchase eurozone bonds. A German government official yesterday reported the EFSF does not have the legal authority at this time to purchase outstanding eurozone debt. In contrast, a French government official today reported France is “not in full agreement” with Germany regarding the EFSF and favours allowing the EFSF to purchase debt in the primary and secondary markets. France also favours allowing bond-buybacks by debt-strapped governments. Data released in the eurozone today saw EMU-17 January composite PMI move higher to 57.0 from the prior reading of 56.3 while January services PMI grew to 55.9. Also, EMU-16 December retail sales reversed course and were off 0.6% m/m and 0.9% y/y. Moreover, German services PMI expanded to 60.3 and French services PMI expanded to 57.8. In U.S. news, data released todaty saw Q4 non-farm productivity increase to 2.6% while unit labour costs fell -0.6%. Weekly initial jobless claims fell to +415,000 and continuing jobless claims fell to 3.925 mllion. Moreover, the January ISM non-manufacturing composite improved to 59.4 and December factory orders growth moderated to +0.2%. Dealers await the release of tomorrow’s January non-farm payrolls data with many forecasts focusing on new jobs growth between 140,000 and 150,000. The unemployment rate is expected to print around 9.5% and average hourly earnings are expected to remain muted. Federal Reserve Chairman Bernanke will speak later in the North American session. Traders continue to monitor political developments in Egypt where anti-Mubarak forces have sharpened their rhetoric. Euro bids are cited around the US$ 1.3610 level.

Â¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥82.05 level and was supported around the ¥81.50 level. Technically, today’s intraday high was just below the 61.8% retracement of the ¥80.24 – 84.50 range. The yen was mixed across the board as traders instead focused on weakness in the euro. Bank of Japan Policy Board member Kamezaki this week reported “There’s a high chance Japan’s economic slump will end quickly and the nation will return to a moderate growth path (around spring).” Kamezaki also added “The pause in the yen’s advance is also contributing” to the market’s perception of an economic recovery. He further verbally intervened saying “Foreign exchange movements can have a big effect on corporate and household sentiment as well as profits and we will carefully watch these moves. It’s always undesirable for currency to move rapidly.” He called on Japanese officials to address the country’s expanding debt burden and said Japan cannot view Europe’s fiscal problems as “a house burning on the other side of a river.” Moreover, he said “Financial markets have reacted calmly” to the downgrade in Japan’s credit rating to AA- by Standard & Poor’s last week. Regarding consumer prices, Kamezaki added he is “confident the economy is making progress toward ending deflation.” Data released in Japan this week saw the January monetary base up 5.5% y/y, down from the prior reading of +7.0% y/y. Bank of Japan Governor Shirakawa was this week quoted as saying the central bank’s commitment to keeping rates near zero per cent will keep bond yields stabile as the economy strengthens. Shirakawa also suggested the yen appreciated the second half of last year because investors perceived it to be a “relatively stable” asset. The Nikkei 225 stock index lost 0.25% to close at ¥10,431.36. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥112.30 level and was capped around the ¥112.85 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥132.90 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥86.40 level. In Chinese news, the U.S. dollar was unchanged vis-à-vis the Chinese yuan today the greenback closed at CNY 6.5850 in the over-the-counter market. Liquidity was light on account of the Chinese New Year holiday. Data released in China overnight saw January non-manufacturing PMI tick lower to 56.4 from the prior reading of 56.5. People’s Bank of China is largely expected to raise official interest rates over the next several weeks. Data released in China earlier this week saw January manufacturing PMI fall to 52.9 from the prior reading of 53.9 while HSBC manufacturing PMI ticked higher to 54.5. PBoC adviser Li this week reported the Chinese economy will continue to expand at a clip of at least 9.5% and said the inflation rate may exceed 5% in the first quarter. People’s Bank of China Governor Zhou warned China may need to raise reserve requirements to reduce capital inflows, adding inflation is “still higher than many people expected.”

£

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.6120 level and was capped around the US$ 1.6275 level. Technically, today’s intraday high was above the $1.6255 level, representing the 76.4% retracement of the $1.6882 – 1.4229 range. The more hawkish members of Bank of England’s Monetary Policy Committee made news this week when Deputy Governor Bean reported “We may well have to respond to (higher commodities prices) by keeping domestically-generated inflation lower. Whether it dents confidence depends on why it happens: if we raise rates because the economy is growing quite strongly and the recovery is entrenched then that’s a ‘nice’ rise in interest rates and unemployment will be coming down. On the other hand if it is in response to a spike in oil prices that we think is likely to persist and inflation is becoming embedded that is not a nice reason to raise interest rates, but we would have to do it. That certainly could be one driver of a change in interest rates if we thought it materially affected the medium-term outlook.” MPC member Sentance was also hawkish in saying once the inflation “genie is out of the bottle,” the U.K. will face a “hard and painful” job of achieving price stability. Data released in the U.K. today saw January PMI services climb to 54.5 from the prior reading of 49.7. January Halifax house prices data will be released tomorrow. NIESR earlier this week reported the central bank is likely to raise rates three times this year to 1.25% by the end of 2011. Cable bids are cited around the US$ 1.5965 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8470 level and was capped around the £0.8530 level.

CHF

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9525 level and was supported around the CHF 0.9395 level. Technically, today’s intraday high was above CHF 0.9502, representing the 38.2% retracement of the CHF 0.9783 – 0.9327 range. Data released in Switzerland today saw the December trade balance expand to CHF 1.93 billion from the revised prior reading of CHF 1.79 billion. Swiss banking giant UBS reported it expects Swiss National Bank will begin raising its benchmark rate in June by 25bps to 0.5%, three months later than previously expected. UBS reported “Their concerns for the Swiss economic outlook due to the franc strength have been reiterated over and over again by various SNB officials. There even seems a risk for a further delayed rate hike.” Other data released in Switzerland this week saw December retail sales off 0.4% y/y while the January PMI survey ticked lower to 60.5. Former Swiss National Bank Chairman Roth this week was quoted as saying “The problem is less in the advance of the franc but with the speed of the movement in 2010. But wouldn’t the situation have been even worse if the SNB hadn’t intervened? Those who now criticize its actions should look at the facts and measure the associated risks.” Earlier this week, SNB member Jordan verbally intervened against the franc’s strength saying “For Switzerland’s export industry, such a strong franc is a big and barely tolerable burden. Given the importance of the export sector for the overall economy, its problems are also showing a negative impact on overall economic growth.” Jordan added “a significant overshooting” of the franc could threaten “the existence of basically sound companies.” U.S. dollar offers are cited around the CHF 0.9540 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3035 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5355 level.

Technical Outlook at 1330 GMT (EST + 0500)

(Bid Price) (Today’s Intraday Range)

EUR/ USD 1.3741 1.3825, 1.3741
USD/ JPY 81.81 81.85, 81.48
GBP/ USD 1.6195 1.6277, 1.6173
USD/ CHF 0.9447 0.9457, 0.9394
AUD/USD 1.0121 1.0144, 1.0088
USD/CAD 0.9889 0.9892, 0.9865
NZD/USD 0.7710 0.7749, 0.7706
EUR/ JPY 112.48 112.86, 112.30
EUR/ GBP 0.8484 0.8530, 0.8470
GBP/ JPY 132.55 132.92, 131.93
CHF/ JPY 86.55 86.86, 86.42

Support Resistance Support Resistance

EUR/ USD USD/ JPY

L1. 1.3575 1.3880 81.55 84.60
L2. 1.3360 1.4025 80.80 85.85
L3. 1.3275 1.4425 79.30 87.30

GBP/ USD USD/ CHF

L1. 1.5810 1.6190 0.9320 0.9775
L2. 1.5645 1.6300 0.9145 0.9965
L3. 1.5320 1.6430 0.8860 1.0120

AUD/ USD USD/ CAD

L1. 0.9820 1.0170 0.9785 1.0140
L2. 0.9720 1.0365 0.9590 1.0355
L3. 0.9540 1.0440 0.9480 1.0585

NZD/ USD EUR/ JPY

L1. 0.7455 0.7840 110.40 114.25
L2. 0.7380 0.7975 109.60 115.65
L3. 0.7210 0.8220 107.20 118.05

EUR/ GBP EUR/ CHF

L1. 0.8375 0.8705 1.2810 1.3115
L2. 0.8260 0.8820 1.2735 1.3285
L3. 0.8110 0.8910 1.2560 1.3495

GBP/ JPY CHF/ JPY

L1. 129.00 135.70 85.50 89.75
L2. 127.10 138.10 84.00 90.90
L3. 125.60 139.85 82.20 92.30

SCHEDULE

Thursday, 3 February 2011
all times GMT
(last release in parentheses)

0030 Australia December building approvals (-4.2% m/m)

0030 Australia December building approvals (-9.9% y/y)

0230 China January HSBC PMI, services

0715 CH December trade balance

0815 France January PMI, services

0845 Italy January PMI, services

1000 Eurozone December retail sales (0.1% y/y)

1245 Eurozone European Central Bank interest rate decision

1330 US Q4 unit labour costs (-0.1%)

1330 US Weekly initial jobless claims

1330 US Continuing jobless claims

1330 US Q4 non-farm productivity (2.3%)

1500 US December factory orders (0.7%)

1800 US Federal Reserve Chairman Bernanke speaks

Friday, 4 February 2011
all times GMT
(last release in parentheses)

0500 Germany December import price index (1.2% m/m)

0500 Germany December import price index (10.0% y/y)

0500 UK January Halifax house prices (-1.3% m/m)

1000 Italy January consumer price index

1200 Canada January employment, net change (22,000)

1200 Canada January unemployment rate (7.6%)

1330 US January non-farm payrolls, net change (103,000)

1330 US January unemployment rate (9.4%)

1330 US January average weekly hours worked (34.3)