U.S. Update: Fear is still around

Market continues moving following risk sentiment, and despite a general tone of optimism is surging around the world, things are not clear enough to made traders feel comfortable with risky positions.

During the Asian session, the RBA cut interest rates to a 49-year low to 3.0% saying the economy is contracting, but at a slower pace than other major economies. Central bank also offered a more neutral policy stance and said there are tentative signs of improvement in the world economy, including in China, Australia's largest trading partner. The cut together with yesterday’s Wall Street fall, triggered a massive buying of dollars and yens, that returned to the table as safe havens.

During the European session, U.K. manufacturing extended the worst performance in February since 1980 as the global economic slump throttled demand for goods. Factory production dropped 0.9 percent from January, less than expected, but yet clearly negative. In the three months through February, output dropped 6.5 percent, the most since records began in 1968. Euro zone was not better: the final GDP for the Q-4 was revised down to -1.6% q/q from previous -1.5%, and to -1.5% y/y from previous -1.3%. Q-3 GDP decline was also revised down to -0.3% from previous -0.2%. Q-3 y/y putting extra pressure in Euro.

Wall Street fell and at this moment remains 165 points down. Despite that, European majors refuse to continue falling and Gbp gave a nice upside come back while Euro consolidates close to daily lows.

Gbp/Usd overview

The pair regains bullish strength during the American session, and quotes above the 1.4720 zone, turning indicators bullish. 20 SMA is acting as dynamic resistance, around 1.4765, and needs to be broken to confirm further upside movements in the pair, with next resistances for the next hours at 1.4812 and 1.4880 zone. Supports on the other hand will be at 1.4720 1.4685 and 1.4615 zone. The pair failed to break under the 38.2% retracement of the last daily up leg, confirming bullish bias. Actual candle close will be decidedly as daily charts are suggesting a reversal pattern.

U.S. Update: Get ready for the FOMC

What happened in Asia

Dollar and yen continued strengthening as safe havens early Asia, as Nikkei 225 Stock Average was down 2.7% in early afternoon trade, while other markets in the region also fell, following Wall Street’s close down. Usd/Jpy dipped briefly below the Y100.00 but could not hold it trough European session. Eur/Jpy also fell after these last days heavy appreciation.

What happened in Europe

German factory orders in February showed a fall of 3.5 percent on the month, compared with the consensus forecast for a monthly decline of 3.0 percent. Domestic orders fell by 5.7 percent, outpacing a drop in foreign orders, which fell by 1.3 percent, in a clear sign that not only foreign demand is hitting the German economy. This is the worst decline on record, leaving out of sight any chances of a quick upturn in one of the Euro zone strongest economy. Germany's trade surplus stood at EUR 8.7 billion in February, up from EUR 7 billion surplus recoded in the previous month; better than the expected surplus of EUR 7.5 billion, but fur less of a year ago trade surplus of EUR 17.1 billion.

In England, annual shop price inflation rose to 2.0 percent March from 1.9 percent in February, after falling to 0.5 percent in December, but picked up this year on the back of higher food prices. Food price inflation remained steady at 9.0 percent in March while non-food price inflation came in at -1.5 percent from -1.7 percent.

What to expect:

The Bank of England has the monthly meeting scheduled for today and tomorrow, and they are likely to hold steady, announcing no new action for the first time n seven months, after lowering its key interest rate to an historical low of 0.5%, and injecting £75 billion in new money into the economy by buying government bonds and some corporate debt.

Oil fell for a fourth day, its longest losing streak since February, on swelling U.S. crude stockpiles, tumbling equities and a stronger dollar. Inventories, are expected to climb to a 15-year high

Be aware, currency markets will become less liquid, and potentially more volatile, ahead of the Easter holiday.

Later today in the American session, the FOMC while release the minutes of their last minutes, when it announced it would buy $300 billion in Treasury securities, as well as increase its purchases of mortgage-backed securities to $1.25 trillion from $500 billion. Minutes could explain, or not, how members of the central bank came to that decision, but whatever the FED says, one thing remains clear: their economic outlook had been marked down significantly since last January.

Eur/Usd overview

Longer term perspective in the pair remains uncertain from a technical perspective, as the pair has been consolidating between 1.3100/1.3700 for almost a month. The economic outlook of both economies remains dark, but seems the U.S. has more chances at this point, to leave the recession first. Rumors of an ECB intervention to keep their currency low also affect the cross, that in daily charts regain bearish strength: price remains under the 200 EMA that acts as dynamic resistance at 1.3590 far from actual price. Today’s candle managed to open under the 20 SMA, a close near today’s low will turn the inclination to the downside and support a bearish continuation from here. Anyway, price should move under the 1.3100/50 zone, to gain momentum in that direction. For the rest of the day and turning to 4 hours charts, pair seems a bit over bought; bearish trend could resume after a short lived upside correction. Consider supports at 1.3200, 1.3147 today’s low and then the 1.3100 zone. Resistances will be at 1.3266, 1.3290 and 1.3340 zone.

Yen Gains as Stock Losses Sap Demand for Higher-Yielding Assets

April 7 (Bloomberg) -- The yen climbed from a five-month low against the dollar as U.S. stock-index futures declined on concern losses and writedowns at the world’s biggest banks will increase, damping demand for higher-yielding assets.

The yen strengthened against the Swedish krona and the New Zealand dollar after billionaire investor George Soros said gains in stocks are a “bear-market” rally. The Bank of Japan said today it will increase funds to commercial banks by broadening the range of collateral it accepts in an effort to encourage lending.

“It’s a near-term correction of the yen after a recent decline, which was driven by a rally in risk assets,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Overall, we remain bearish on the yen. This is just a rebound in a weakening trend.”

Japan’s currency strengthened 0.9 percent to 100.14 per dollar at 7:50 a.m. in New York, from 100.99 yesterday. The yen appreciated 2 percent to 132.82 per euro from 135.49. The dollar gained 1.2 percent to $1.3264 per euro from $1.3416.

The yen’s gains versus the dollar and euro, the first in four days, came as Standard & Poor’s 500 Index futures slid 1.7 percent and stock markets in Europe declined.

“It’s a bear-market rally because we have not yet turned the economy around,” Soros, 78, said in an interview yesterday on Bloomberg Television, referring to the recent rebound in stock prices. “This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

IMF Estimates

The International Monetary Fund will raise its estimates for U.S. bad debt to $3.1 trillion from a January prediction of $2.2 trillion, with estimates of another $900 billion of toxic assets from Europe and Asia, the Times newspaper said today without saying where it got the information.

The Reserve Bank of Australia cut interest rates less than traders anticipated. RBA Governor Glenn Stevens lowered the cash target by a quarter-percentage point to 3 percent, less than the half-point reduction indicated by a Credit Suisse Group index based on swaps trading. The RBA left its rate at 3.25 percent on March 3. The Aussie fell 1 percent to 70.70 U.S. cents.

“Given expectations for more rate cuts in Australia, it seems to be still risky to resume a yen carry trade type of investment,” said Sho Komamura, a foreign-exchange dealer at Hachijuni Bank Ltd. in Tokyo. “I won’t deny there may be investors who think that as long as there are some interest-rate differentials, such trades will pay off.”

New Zealand’s Dollar

New Zealand’s dollar dropped 1.8 percent to 57.77 U.S. cents, after a four-day advance.
In carry trades, investors get funds in a country with low borrowing costs and invest in another with higher rates. The risk is that market moves can erase those profits.

Standard Life Investments said it’s betting against the yen and sold the currency to buy the U.S. dollar when it strengthened beyond 90 to the dollar.

“We expect the yen to soften against most things, especially against the dollar,” said Euan Monro, head of the firm’s multi-asset team in Edinburgh. “We would view the yen at that level as making Japan very uncompetitive. If it gets to 110 or 115 to the dollar, we would regard that as mission accomplished.”

BOJ Decision

Bank of Japan Governor Masaaki Shirakawa and his colleagues decided by a unanimous vote to keep the benchmark lending rate unchanged at 0.1 percent today.

The euro weakened for a second day against the dollar after the European Union’s statistics office in Luxembourg said gross domestic product in the region declined 1.6 percent from the previous three months, the most in at least 13 years. The EU’s March 5 estimate was for a 1.5 percent contraction.

The euro extended losses after ECB Executive Board member Lorenzo Bini Smaghi said the bank can intervene in the currency market if needed. The euro advanced 4.6 percent in March, increasing concern the 16-nation region’s recession will deepen as exports slump.

“Smaghi seems to be suggesting the euro is beyond the bank’s expected range,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “It’s possible the central bank could intervene. The euro may decline.”
Demand for the yen increased on optimism a finance ministry report tomorrow will show Japan had a current-account surplus in February. The nation posted its first deficit in 13 years in January.

Current Account

“The shrinking current-account surplus was recently used as an excuse to sell the yen,” said Akio Yoshino, chief economist in Tokyo at Societe Generale (Japan) Co., a unit of the French asset management firm that supervises the equivalent of $338 billion. “Signs of change to this trend mean that there is no longer a strong reason to sell the yen.”

Japan had a current-account surplus of 1.07 trillion yen ($10.6 billion) in February, according a Bloomberg News survey of economists. The deficit in January was 172.8 billion yen.
The dollar may rise to its highest level against the yen since August, according to Standard Chartered Bank, citing trading patterns.

The greenback’s weekly chart versus the yen is “bullish” as the dollar is finding support from a rising 50-week momentum oscillator, Callum Henderson, Singapore-based global head of currency research at Standard Chartered, wrote in a note today. At the same time, short-term momentum indicators are “mixed, suggesting consolidation,” he said.

“The dollar-yen is expected to continue to trend higher over the coming three months,” Henderson wrote. “This should target 110, with some potential for 112-113.”