March 2009

US Dollar, Japanese Yen Gain Amidst Broad Consolidations – US Durable Goods Orders May Fall for 7th Straight Month

British Pound the Strongest of the Majors as UK CPI Unexpectedly Rises to 3.2%
- Euro Pulls Back From 1.3700 – German IFO Report Could Impact Trade on Wednesday

US Dollar, Japanese Yen Gain Amidst Broad Consolidations – US Durable Goods Orders May Fall for 7th Straight Month
The US dollar generally ended Tuesday higher while the Japanese yen made some headway against the highest yielding currencies amidst broad declines in risky assets. Indeed, after the DJIA surged nearly 500 points on Monday, the index subsequently backed off to end the day down by 115 points. This likely represents more of a consolidation than a turn in investor sentiment, but the moves nevertheless worked to the benefit of the safe-haven currencies even though Tuesday’s US data was surprisingly strong. First, the Federal Housing Finance Agency reported that prices for homes purchased in January rose 1.7 percent, the first increase in eleven months. The index had been anticipated to fall 0.9 percent, and the increase adds to evidence that the seeds for recovery in the housing sector may have been planted. However, given the deteriorating labor market situation, a true rebound may not be possible until the US recession ends. Meanwhile, the Richmond Federal Reserve’s index of manufacturing business activity jumped to a 6-month high of -20 in March, a significant improvement from the reading of -51 we saw in February. A breakdown of the Richmond Fed report shows that shipments, new order volumes, order backlogs, capacity utilization, number of employees, average workweek, and wages all increased during the same period. That said, all of these components remain negative, indicating that activity and conditions are still contracting, albeit at a slower pace.

Signs that domestic demand is showing no sign of recovery should continue to emerge as US Durable Goods Orders are forecasted to have dropped 2.5 percent and even excluding transportation is anticipated to fall 2.0 percent. All told, this would mark the seventh straight month in which the headline reading failed to rise, and while this will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The 3-month annualized figure has fallen sharply over the past few months, and combined with the weak outlook for the headline reading, the news could hurt risk appetite and thus, lead the US dollar higher. However, if durable goods orders actually rise, carry trades could gain and safe-haven currencies like the greenback may slip.

Related Articles: US Dollar Weekly Trading Forecast, Japanese Yen Weekly Trading Forecast

British Pound the Strongest of the Majors as UK CPI Unexpectedly Rises to 3.2%
The release of UK inflation figures helped to support the British pound throughout much of the day on Tuesday, as the data showed that price pressures unexpectedly increased in February. Indeed, the UK’s consumer price index (CPI) surged 0.9 percent during the month, marking the first increase in six months. Even worse, the annual rate of growth accelerated for the first time in five months to 3.2 percent from 3.0 percent, leaving CPI above the central bank’s inflation target range of 1 percent – 3 percent. These indications of persistent price pressures suggest that the Bank of England may be forced to raise the Bank Rate from its record low of 0.50 percent before year end, and for what it’s worth Credit Suisse overnight index swaps are close to pricing in 50 basis points worth of rate hikes over the next 12 months. Going forward, risk trends are likely to continue serving as the primary driver of GBP/USD price action, but the pair’s break above the 100 SMA ultimately suggests that further upside potential remains.

Related Articles: British Pound Weekly Trading Forecast, Top 5 Market-Movers for the Week of 03/23/09

Euro Pulls Back From 1.3700 – German IFO Report Could Impact Trade on Wednesday
EUR/USD spent much of Tuesday consolidating below 1.3700, and based on the end-of-day break below immediate support at 1.3450, there may be bearish potential left for the pair. Over the next 24 hours, there will be marginal event risk on hand, as the IFO index of German business confidence is forecasted to show broadly weak sentiment on the business climate (down from 82.6 to a new record low of 82.2), current economic conditions (down from 84.3 to a new record low of 82.5), and the outlook for growth (up to 81.5 from the December record low of 76.9). As we saw with the March 17 release of the German ZEW survey, investor confidence on the economic outlook has improved somewhat, but sentiment on current conditions continues to falter. The release of this indicator at 5:00 ET tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

Related Article: Euro Weekly Trading Forecast

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

Treasuries Look To Treasury Secretary Geithner And President Obama To Rally Confidence

Treasuries have steadily pulled back from their recent record highs over the past weeks; but the threat to economic health and investor sentiment is holding this move on a tight leash. However, it is debatable whether the world’s favored safe haven asset should hold its highs or naturally deflate.

US Treasuries
• President Obama Says US Economy Faces A “Full-Blown Crisis”
• How Safe Is Government Debt As Fears Of Sovereign Downgrades Rise

Treasuries Look To Treasury Secretary Geithner And President Obama To Rally Confidence

US 10-Year Treasury Note 4.029 2bps
Treasuries have steadily pulled back from their recent record highs over the past weeks; but the threat to economic health and investor sentiment is holding this move on a tight leash. However, it is debatable whether the world’s favored safe haven asset should hold its highs or naturally deflate. On the one hand, near record highs from these essentially risk-free assets reflects the severely depressed state of investor sentiment. As traders look to stem the bleeding from their portfolios, they are looking to preserve their funds in T-notes and bills. From a sentiment perspective, a pull back in debt prices could signal a rise in risk appetite and thereby confidence that the broad markets are finding some level of stability (structurally as well as through returns). On the other hand, the pull back in price naturally inflates the interest rate which every mortgage, business loan, overnight swap contract bases its rates on. Rising rates clearly undermines policy makers’ efforts to restore credit to consumers and small businesses – the life-blood of the economy.

Looking at the shifts in policy and data over the past week; it is clear that the Fed, Treasury and government are running out of time for turning the world’s largest economy around. This past week, the labor department reported the worst drop in non-farm payrolls since 1971 through January. Aside from this marking a significant one-month decline, it perpetuates the worst trend in labor markets on record. Since January of 2008, nearly 3.57 million jobs have been cut – and the past three readings have wiped out more than 500,000 positions apiece. This is strong evidence that the US recession will accelerate through the first quarter of the new year as consumer spending accounts for an estimated 70 percent of total GDP.

Where investor sentiment goes so do Treasury yields. As such, traders will keep a close eye on steadily fading economic docket and measure it against the government’s efforts to right the economy. Today, the government covered its three-pronged approach to recharging the economy. Treasury Secretary Tim Geithner announced his intentions to extend financial bailout efforts. Renaming the TARP effort the Financial Relief Program, Geithner announced his intentions to create a shared public/private investment fund for mature toxic debt (to take the place of the proposed ‘Bad Bank’). He further expanded the Financial Stability Plan from $200 billion to $1 trillion and put the TALF at $100 billion to protect against losses. This is a substantial expansion of the safety net. From the legislative side, the Senate pushed through President Barack Obama’s financial stimulus bill with a figure of $838 billion, and now the final approval rests in the House’s hands to account for the changes that have been made since their passing of the first draft. And, finally, Fed Chairman Ben Bernanke testified before a house panel on the central bank’s policies for disclosure and communication, admitting to the need for better accounting to the public but defending the decision to keep the names of those taking loans off the books. This represents the next dramatic push by the US to stabilize the economy; but the market is still skeptical – and for good reason. The credit crisis and recession are global problems, not just American ones. If the world’s governments don’t mirror the United States’ efforts, it will be extremely difficult for the economy to rise when the rest of the globe is sinking.

European Stock Markets Retreat, FTSE Inching Below Support

t is entirely possible, but far too early to say with any confidence that 5 waves down in the FTSE from the 2007 high are complete. The implications would be bullish for probably close to the rest of 2009. A rally above 3957 would bolster the bottoming case. However, the only way that I’ll turn outright bullish is if the intraday pattern confirms a low…in other words, 5 waves up and 3 waves down.

Short-Term Technical Outlook

Yesterday we wrote: “Having bounced higher at 3491.60, a multi-year support / resistance level that was last tested in March 2003 (and preceded a 93% rally through July 2007), the FTSE has now overcome resistance at 3924.82, the 38.2% Fibonacci retracement of the 01/06-03/09 downswing.” The latest candle is showing initial signs of slipping back below this level. If the bears are back in control, the next level is support is seen at 3780.96. Otherwise, near-term resistance stands at 4068.19, the 50% Fib.

European Equities Mixed As Optimism From US Treasury Plan Wanes

European equities were mixed today as optimism slowed over the US Treasury Bank plan and declining commodities prices hurt the Basic Materials sector. The German and Spanish Indices showed modest gains. Weakness in financials comes as optimism from the US Treasury plan fizzles.

Europe Session Key Developments

• Optimism Over US Treasury Plan Wanes On Pricing Concerns
• Basic Materials Prices Drop Bringing Down The Sector
• Outlook Remains Precarious For The Near-Term

European equities were mixed today as optimism slowed over the US Treasury Bank plan and declining commodities prices hurt the Basic Materials sector. The German and Spanish Indices showed modest gains. Weakness in financials comes as optimism from the US Treasury plan fizzles. Specific questions on pricing toxic assets remain unanswered and investors remain wary. The success of the program lies in whether or not private institutions will view these assets as underpriced and be willing to invest in them. Given the uncertainty of toxic asset value, until the Treasury or Fed outline specific pricing mechanisms, many private institutions will remain reluctant to invest in these assets. Another reason for possible investor reluctance comes from the current political climate in the US concerning AIG bonuses. Given the public outrage that resulted in the current punitive legislative action, many private investors may be weary of similar retroactive reaction targeted at them if purchases result in to extremely large profits. As such, optimism over the bank plan will likely continue to fizzle in the European markets until the Treasury releases more concrete information on pricing and private institutions begin to purchase assets. Until that happens, market focus will likely return to economic releases, which continue to show weakness. Markets will likely trade flat until then.

FTSE 100 3893.61 -59.20 -1.50%
UK equities were hardest hit out of Europe. The BOE announced it would buy up corporate bonds of several firms in an effort to shore up lending. Copper price declines led the index’s Mining stocks down with the Basic Materials sector declining over 6.2%. Miners hardest hit were Antofagasta, which losing over 7%, and Rio Tinto, which declined over 6%. Following an unexpectedly higher Consumer Price Index release that placed inflation above the BOE’s target of 3%, financials also declined over 3% as optimism from the US Treasury plan waned. Some strength in technology and consumer goods sector offset declines as Northern Foods gained over 10% following a UBS upgrade from neutral to buy on its earnings outlook. Both sectors gained over 1.5%.

CAC 40 2864.33 -5.240 -0.18%
The French index posted modest declines as Financials lead weakness in the index dropping over 3.6%. Weakness in the index was offset however by strength in the technology sector, which gained over 3.2%. The Basic Materials sector was strong in the index gaining over 3%, in stark contrast to other European indices.

DAX 4186.63 +10.26 +0.25%
The German Index showed modest gains following a better than expected PMI release. The Technology, Health care, and Telecom sectors all gained over 1-1.7% but was offset by declines in Consumer goods and services which declined over 1% following news from Metro AG (which declined over 2%), which said its earnings before interest and tax rose by 7%, but offered no outlook for 2009. Chevreux kept the retailer at underperform on concerns of the economy. Financials showed strength as Deutsche Bank AG gained slightly following an announcement that it would not need to raise further capital.

IBEX 35 7967.40 +15.10 +0.19%
Basic Materials and Technology led weakness in the Spanish Index with declines over 2.4 to 3.6% respectively. Acerinox declined over 3.72%. Other major movers were Indra Sistemas, which despite winning a contract in Turkey and announcing a 23% rise in profit, declined 2.36%. Banco Bilboa gained over 2.2% following affirmation from Fitch that their ratings outlook would remain stable.

Crude Trades Flat, Focus Returns To Supply As Equities Stall

Crude prices stalled in US trading as focus returned to supply pressures. The positive sentiment that rallied equity markets yesterday and pushed up crude prices waned as investors returned focus to the unfinished nature of the toxic assets plan.

Commodities – Energy

Crude Trades Flat, Focus Returns To Supply As Equities Stall

Crude Oil (WTI) $53.570 -0.230 -0.43%
Crude prices stalled in US trading as focus returned to supply pressures. The positive sentiment that rallied equity markets yesterday and pushed up crude prices waned as investors returned focus to the unfinished nature of the toxic assets plan. In order for the plan to work, the Treasury must figure out how to make the assets attractive to private investors. Since there is no clarification on how the assets will be priced, investors will likely stay on the sidelines until further notice. The current AIG bonus scandal which spawned legislation taxing employee bonuses may also provide an atmosphere in which private institutions will be unwilling to invest in. Fear of such retroactive backlash may make securities handled through the government unattractive and threatens the effectiveness of thet toxic asset plan. Since these issues will take some time to work through before the arrangement could be implemented, a financial recovery will take much longer to be fully realized. Until that happens, strength from market rallies will be undermined and focus will return to fundamental weakness in demand for crude. Depending on tomorrow’s supply figures (which have been revised expecting supply increases), crude prices could pare much of the week’s gains.

Commodities – Metals

Gold And Silver Continue Declines On Dollar Strength And Profit Taking

Gold $921.450 -17.905 -1.91%
Gold continued its decline following strong US dollar rallies and profit taking. Gains in the US dollar likely returned some safe-haven investors back to the greenback. Gold nonetheless still remains in position for future gains. Inflationary risks continue to grow but until an economic recovery begins to take hold, these pressures will likely remain inconsequential. The metal’s appeal as a safe-haven will continue to benefit from the uncertainty in European and Asian markets. Even with some competition from US dollar strength, the level of capital injections the Federal Reserve and the US Treasury will provide to the markets will make the dollar less attractive as a future safe-haven to the benefit of gold. One thing to be wary of however is that a good portion of gold traders trade on technical data. Recent technical evidence for a decline could in turn mitigate price strength. Nevertheless, fundamentals still point to future strength in gold prices.

Silver $12.960 -0.4200 -3.14%
Silver followed gold’s declines as the US dollar gained sharply. Although temporarily lower, safe-haven metals are in position to gain in price. Silver will benefit from the same conditions as gold. As with gold, however some strength may be mitigated by technical traders as there are strong signals for a decline. Fundamentally, silver is set to rebound.

Nikkei And ASX Reversals Run Into Resistance; But Can It Waylay Such An Aggressive Move?

Index Strat Risk Target
NKY Flat
ASX Flat
HSI Flat

Nikkei 225

Short-Term Technical Outlook

Asian Stock Markets Push Higher, Japan to Extend Restrictions on Short Selling

The Asian stock markets advanced on Tuesday, following the 6.8% rally in the Dow Jones on Monday, on hopes the U.S. Treasury’s plan to remove toxic assets from battered institutions will help to restore confidence in the global financial system.

Asia Session Key Developments

· Japan’s Finance Minister to extend ban on short-selling
· ASX gains on higher commodity prices

Asian Stock Markets Push Higher, Japan to Extend Restrictions on Short Selling

The Asian stock markets advanced on Tuesday, following the 6.8% rally in the Dow Jones on Monday, on hopes the U.S. Treasury’s plan to remove toxic assets from battered institutions will help to restore confidence in the global financial system. The Treasury, Federal Reserve and Federal Deposit Insurance Corp. will offer financing to private investors in an effort to remove illiquid loans and securities from the banks’ balance sheets, and the extraordinary efforts taken on by the government should certainly help to get credit flowing once again as policy makers around the globe employ all of their available tools to combat the worst financial crisis since the Great Depression. Meanwhile, Japan’s Finance Minister Kaoru Yosano announced that they will extend restrictions on short selling of stocks until July and pledged to take additional steps to support the stock market.

NKY 225 8488.30
Japan’s Nikkei 225 Stock Average advanced 272.77 points, or 3.32% to end the session at 8488.30, extending its gain from a 26-year low on March 10th to 20%. A deeper look into the index showed that 9 of the 10 components pushed higher. Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, climbed 4.5% the U.S. Treasury’s $1 trillion package. Toyota Motor Corp., which gets 37% of its sales from North America, gained 3.6% in Tokyo after the Japanese Yen weakened against the dollar.

HSI33 13910.34
Shares in Hong Kong climbed 462.92 points, or 3.44% to 13910.34, which is the highest close since January 12. The rally was led by a 5.63% gain in Industrials and a 5.42% increase in technology, while banking shares advanced 4.76% led by HSBC Holdings Plc, Europe’s biggest banks, which surged 9.8%.

ASX 200 3580.00
The Australian stock market added 29.70 points, or 0.84% to close at 3580.00 on Tuesday, which was led by a 2.96% gain in the energy sector after crude oil traded at the highest in four months. Meanwhile, basic materials rose 1.05, led by a 5.6% surge in Rio Tinto Group and a 1.4% increase in BHP Billiton Ltd.

European Stocks Rally Higher on Optimism Surrounding US Toxic Mortgage Plan

European markets rallied higher following news of the US’s plan to deal with toxic mortgage assets clogged on bank balance sheets. Following the news of the plan, financial shares rallied and along with the increase in risk appetite, oil and other commodities rose as well.

Europe Session Key Developments

• Financials Rally on Public-Private Investment Program
• Commodities and Basic Materials Rise

European Stocks Rally High on Optimism Surrounding US Toxic Mortgage Plan

European markets rallied higher following news of the US’s plan to deal with toxic mortgage assets clogged on bank balance sheets. The plan is intended to use public and private funds to purchase up to one trillion dollars of bank assets. The US government would provide $75-$100 billion and add certain guarantees and provisions via the Federal Reserve and Federal Deposit Insurance Corporation while the rest of the funds would be provided by private fund managers interested in the risk. Following the news of the plan, financial shares rallied and along with the increase in risk appetite, oil and other commodities rose as well. In other positive news, Euro-Zone construction output rose in January following declines in nine of the ten previous months. Also of note were US existing home sales which surprised to the upside. While the figure concerns primarily US markets, a quick recovery to the largest economy in the world is likely to boost confidence and reduce contraction in other nations. On the downside, Euro-Zone trade balance deficit continued to widen to -10.5B in January as global trade continues to weaken as nations plunge into recession. Despite ever-present caution, risk appetite is rising in equity markets. For now, it appears as though the previous bounce that started to lose steam late last week may be seeing renewed vigor.

FTSE 100                      3,952.81                   +109.96               +2.86%
The British index rose nearly three percent as financials lead with a sharp 8.58% move to the upside. Aside from Basic Materials, which also rose a hefty 6.63%, all other sectors rose by less than 3% and Utilities actually fell 0.86% on the day. The large moves higher can be attributed primarily to the US’s toxic asset plan. Barclays led the financial sector higher, rising 15.71% on the optimistic fervor and also on positive rumor circulating that it will share its iShares unit for a reasonable price. Other major risers included HSBC, up 12.60%, and miner Rio Tinto, up 13.02% at the close. The UK economy continues to suffer deep manufacturing cutbacks and housing market distress. Earlier today Bank of England MPC member David Blanchflower, an early proponent for rate cuts, made calls for the government to introduce a large fiscal stimulus plan. Concern remains high but for now it appears equity markets are optimistic of the outcome, regardless of present conditions.

CAC 40                     2,869.57                   +78.43                 +2.81%
French equities rose in line with the FTSE’s gains and similarly rose on strength in financials; the sector rose 7.08% on the day. Technology was the only losing sector on the day, falling a mere 0.05%. BNP Paribas and Societe Generale led advancers, rising 9.0% and 8.74%, respectively. Optimism is certainly back in equity markets for the moment following a pause late last week after an impressive two weak bear market rally. The future remains uncertain but investors seem convinced governments will take action necessary to tackle any problem that faces global economies.

DAX                         4,176.37                    +107.63             +2.65%
Trading in the German market also led to a noticeable gain, though smallest of the five major indices tracked. Financials and consumer services sectors led with respective gains of 4.66% and 5.35%. Commerzbank rose nearly 10%, while Deutschebank rose an equally high 8.48% on the session. The only losing stock on the benchmark DAX turned out to be software maker SAP, falling a small 0.77% at the close. Germany’s economy is highly dependent on exports and the recent bout of weakness in global trade has certainly kept investors uneasy about the strength of the economy. The German Institute for Economic Research currently predicts the nation to contract 0.2% in 2010 while other nations in the European Union are slated to see small growth.

IBEX 35                     7952.30                   +242.30                 +3.14%
Spanish equities moved higher by more than three percent, led by greater than five percent moves in the basic materials and financial sectors. Seven of the nine sectors traded higher, with losses of less than four-tenths of a percent in consumer services and healthcare. Banco Bilbao and Banco Santandar led the index point advance as banking stocks across Europe and Asia rose on optimism following the US toxic mortgage plan. Largest percent movers for the day included Banco Popular, Engineering firm Abengoa, and Gestevision Telecinco all rising over seven percent on the day.

S&P/MIB                        15,811.00                    +863.00                  +5.77%
The Italian index rose the most of the five majors, rising over 5% due to optimism and strength in the financial sector which makes up nearly 40% of the weight of the index. The sector rose 9.61% trailed by a nearly 4% gain in basic materials. Unicredit and tiremaker Pirelli led advancers, rising 15.09% and 13.19% respectively. All sectors rose more than one percent and while a few companies saw share prices decline, the moves were minimal losses at worst. Luxottica was the lagger of the day, falling 1.05%. The Italian index not too long ago traded under 14,000 but has since surged significantly higher.

Nikkei And ASX Reversals Run Into Resistance; But Can It Waylay Such An Aggressive Move?

After a quite end to last week, the Nikkei has picked its pace back up for Monday’s session with an advance that has cleared another technical hurdle in trying to establish a long-term reversal: the 100-day SMA. This revision to a very steep mean however does not mark the turning point in the market’s ultimate direction. Instead, for matters of long-term trend, the wide wedge formation (now with a trendline hovering at 9,000) will stand in as the higher time frame gauge for price action. Short-term, however, we have conflict overhead at the 50% Fib retracement of the ‘mouth’ of the aforementioned wedge at 8,295. We have seen congestion in this area in the past; so the market will no doubt sow some respect for this level – though will it be enough to truly stall the market’s burgeoning bull trend.