Obama Address to Union Proved Optimistic for USD

The US session saw the USD generally firmer with the USD index closing above its 200-day MA for the first time since May last year.

Weak US data helped to temper gains however, as US new home sales came in at a disappointing -7.6% m/m which held Wall St in negative territory for the most part.

GBP rode a mild up-wave after BOE’s Sentence sounded more hawkish in his comments while corporate demand linked to UK dividend payments also kept cable pinned close to 1.62. ECB’s Weber was also more positive on exiting stimulus measures, saying the bank could take further steps before H2.

EUR/USD nevertheless had a quick peep below 1.40 early in the Asian session, taking out some stops below, with concerns that Portugal and Spain may be the “next Greece” to hit the headlines.

Central bank rate meetings in New Zealand and the US did not produce any rate changes or significant developments.

The RBNZ kept an unchanged stance from the December meeting, and reiterated that it may be ready to start raising rates from the middle of 2010. With some market participants expecting of a more dovish commentary, it was seen as slightly NZD positive.

The key outcome of the today's FOMC meeting was the dissenting voice - Hoenig - who voted against the Fed repeating its "extended period" language for describing how long the Fed plans to keep interest rates this low.

On the Fed's plans to withdraw liquidity, very little was changed, with the Fed merely specifying that March 8 will be the final auction for the Term Auction Facility. The outlook for the US economy seemed to have improved since the last meeting and this was reflected in the tone of the statement. Post-FOMC risk appetite seemed to make a comeback with Wall St rallying into positive territory into the close.

Asia started off in a similar vein though was soon caught up in geo-political developments as Yonhap news reported that North Korea had again fired artillery towards South Korea into the disputed maritime border between the two countries.

Forex markets reacted with further USD buying and stops through 1.3970 in EURUSD were again triggered with a quick run down to 1.3935 amid a flurry of selling reported in EURJPY and EURGBP.

President Obama’s state of the Union speech proved more positive for the USD and for risk appetite overall. He assured that there was no intention to “punish” banks but his major interest is the US economy with the biggest focus employment, and wants to create 1.5 million jobs via economic stimulus this year.

To this end, Obama threw his weight behind extending middle class tax cuts, laid out a series of tax incentives for businesses and urged Congress to finish work on a jobs bill "without delay. Otherwise he proposed taking $30bln of TARP bailout money to help community banks give credit to small business and set the goal of doubling US exports over the next 5yrs, with a push for stronger trade ties with Asia.

Asian bourses responded positively and we saw the corresponding strength in Asian currencies. Majors were also on the rebound with the likes of EUR, GBP and AUD all recouping earlier losses. Having reached there, we held in limbo awaiting the entrance of Europe for the next directional clues.

European data releases are relatively minor with unemployment data from Sweden, Denmark, Norway and Germany on tap while Sweden retail sales and Euro-zone consumer confidence are also due. The US session features Chicago Fed Activity, durable goods and the weekly initial jobless claims.

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US session picked up its efforts to reduce the risks

The desire to move out of riskier assets continued on into the US session on Friday, though there were pockets of support for certain Forex currency pairs found at the lows.

GBP traded on the soft side after a weak retail sales print (+0.3% m/m vs. +1.1% expected) while the impact of the Cadbury takeover appears to wane and the USD started to gain favour.

EUR on the other hand outperformed its peers for a change amid some hopeful talk of a Greece plan to be announced at the weekend (ECB’s Torres said a Greek assessment plan would be ready by February 3rd and in the meantime Greece reaffirmed its commitment to stay in the EU mechanism).

CAD was also under a bit of pressure, again on a weak retail sales number (this time -0.3% m/m vs. -0.2% prior).

In addition to the recurring concerns about Greece’s fiscal position, an immediate threat of a China tightening and the effect of US president Obama’s banking reforms, markets were also concerned about the increasing debate on Bernanke’s re-appointment for a second term as Fed chairman (though subsequently weekend press was more supportive of his appointment with a number of US senators assuring that they would vote in favour).

Nevertheless, Wall St endured its third consecutive down day with cumulative losses of over 5% and registered their worst weekly performance since the market bottomed last March.
The slightly positive developments on some of these fronts have led to a slight rebound in risk during the Asian session today.

However, this was not before we had the usual hair-raising volatility in the thin liquidity conditions at the start of trading with risk initially looking decidedly “off” but it transpired this was more likely linked to a stop-hunt exercise as we had a strong rebound from the lows and equity markets, albeit still in the red, mounted a recovery from the early lows.

GBP found enough legs to make it back above 1.61 again but still looks a bit shaky. In an interview in the Sunday Times over the weekend, Chancellor Darling remained cautious over the economy’s outlook, saying it still needed government support.

He was also a tad skeptical about Obama’s proposed banking reforms (which could be seen as appositive for the City of London).

The Guardian newspaper reported that UK PM Brown was planning to exploit Obama’s crackdown on Wall St banks to further Britain’s campaign for a new global transaction tax on financial products, and intends to use a series of meetings in the coming weeks and months to build international support for a "Tobin tax", which he floated at last autumn's G20 meeting.

The Bank of Japan starts its 2-day policy meeting today, the first of 2010, with the central bank coming under increasing pressure to attack deflation.

Governor Shirakawa is on record pledging easy monetary conditions and there is a chance that the bank’s other options will come in to play, namely expanding the credit program or increasing its monthly purchases of government bonds, increasing the limit on the newly introduced fund supply operation or even introducing schemes of a longer-duration. Its assessment of the economy is expected to remain unchanged, noting an expected improvement though most definitely at a moderate and subdued pace.

With a quiet start to the week on the data front, it will be interesting to see if the slightly better mood from Asia extends into the week. The data highlights for the rest of the week include UK Q4 GDP tomorrow, the FOMC meeting on Wednesday followed by US durable goods orders on Thursday and Q4 US GDP on Friday. For the Euro-zone, focus centres around confidence indicators on Thursday and unemployment Friday.

Today’s risk events are limited to German GfK consumer confidence and US existing home sales.

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United efforts figuring out to withstand the EUR weakness

Market Comments:

Heightened fears of an imminent China hike ensured risk was definitely OFF in the overnight session with a firming dollar feeding in to a weak Wall St translating into a softer tone for commodities.

There was nothing to stand in the way of EUR weakness with Greek yields rising on waning appetite for Greek debt and we touched a fresh 5-month low vs. the USD.

EUR/GBP also confined to a test of 5-month lows as GBP held up well, buoyed by ongoing M&A talk, a surprise drop in the claimant count (at -15.2k the biggest fall since Apr. 2007) and BOE minutes showing talk of positive growth in Q4.

Commodity Forex currencies were also on the rack as gold slumped over 2% and the AUD was pressured by China tightening angst. CAD also beaten lower following benign CPI readings (mostly below consensus) and weak manufacturing sales (+0.1% m/m vs. +0.7% consensus) though mild respite from the selling was seen after Russia said it had begun buying CAD for its FX reserves. NZD down 2.2% was the worst performance for the Kiwi since late November.

Eyes were firmly locked on the slew of Chinese data releases in the Asian morning and activity was relatively muted ahead of the release. In the end, most data was better than expected though the feeling in Asia was that, while better they were not as extreme as had been feared (and nowhere near the extreme rumours bandied around ahead of the release.

For the record Q4 GDP came in at +10.7% y/y vs. +10.5% expected with PPI and CPI at +1.9% y/y and +1.7% y/y respectively with the pace of retail sales accelerating to +17.5% y/y from +15.8% in November. Tempering the exuberance however were industrial production and fixed asset investments which both failed to match expectations. (+18.5% y/y versus 19.6% expected and +30.5% y/y versus 31.5% expected respectively).

The kneejerk reaction was for the dollar to firm with the EUR taking the brunt of the action. However, the volatility was over within a few minutes and Asia spent the rest of the session confined to ranges.
Apart from the China data, there was nothing much to influence trading. Early NZ data gave the Kiwi a boost as both business PMI and retail sales beat forecasts. However, the China data soon knocked it back to opening levels.

Looking ahead, it would appear that all of the positioning for the data was made yesterday though the risk aversion theme looks set to continue near-term. If German PMI services and manufacturing data matches the weaker trend seen in the ZEW surveys then EUR looks ripe for a test of the psychological 1.40 level.

GBP may find further ammunition to maintain its over-performer status with the release of the CBI industrial trends report. Other UK data focuses around public sector debt and money supply.

In the later sessions we have Canada wholesale sales, weekly US jobless claims and Philly Fed index and leading indicators on tap. The BOC’s monetary policy report and press conference completes the day.

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Risk-on/risk-off pendulum at the Forex session

The risk-on/risk-off pendulum swung back to the former during yesterday’s session with Wall St putting on a strong showing after the long weekend. Firmer China rates at the weekly auction had seen Asia handing over the baton with risk appetite on the wane and this theme extended into the European session.

Weak ZEW surveys out of Germany and the EU put the nail into the EUR while GBP benefitted from ongoing M&A influences and a very high print for CPI in December. In King’s speech later, the BOE governor sought to calm the market nerves by saying the higher CPI would not change the BOE’s forecast that the CPI spike would prove temporary.

The BOC left rates unchanged at 0.25% as expected but again commented that repeated CAD strength would act as a “significant further drag on growth. The BOC also revised lower its 2009 and 2010 growth forecasts, but upped its prediction for 2011, and added that rates are expected to be held at 0.25% at least until the end of H1 2010. Net/net seen as a slight negative and helped the USD/CAD rebound.

The positive mood from Wall St and Forex markets soon evaporated as the Asian session got under way following reports in China media that banks had been told to limit lending for the rest of January.

It took a while before official comments more-or-less confirmed this, when CBRC, the top banking regulator, said it would continue to control the quantity of credit supply and would impose new leverage and liquidity ratios on banks (specifically Citic Bank and Everbright bank mentioned being asked to increase reserve ratios by 0.5%). The news was enough to give risk a quick nudge lower with the usual suspects AUD and NZD major losers.

With the stage set it was only later that EUR/USD fell through the 1.4250 support level with a plethora of stops triggered below and we were below the December low of 1.4217 in the blink of an eye, hitting a low of 1.4185 but lower later in the session.

Note EUR/USD is now convincingly through the 200-day MA, matching a similar move in EURGBP last Friday. Markets were also keeping an eye on the Senate election in Massachusetts and once Democrat Coakley conceded defeat, we saw the dollar extend its gains and US equity futures drifted off.

With all the recent news of firmer Chinese rates and lending curbs it is not surprising that the market is looking at tomorrow’s release of a fistful of Chinese data. Talk is that Q4 GDP numbers will be even higher than recent surveys (+10.5% y/y in the latest Bloomberg survey) while CPI and PPI will both beat forecasts (1.4% y/y and +0.8% y/y are the latest forecasts). It would not be surprising for Chinese authorities to try a take the wind out of the sails of very strong data with some careful manipulation/guidance beforehand.

IMF’s Strauss-Kahn is currently in Asia and was quoted on the wires as seeing currency as a key response to capital flows. He expects sluggish growth in advanced economies, though without any sign of a double-dip, but felt confident to suggest global growth would exceed the fund’s 3% forecast in its last review. He urged policymakers to keep measures in place to support demand and employment, fearing a premature exit from stimulus would risk a double-dip. The IMF releases its revised GDP forecast on Tuesday next week.

Concerns about China tightening will likely keep risk appetite under a cloud near-term and expect to broadly extend the trend seen in Asia. There is no data of note that is likely to provide any support for the EUR and a push towards 1.40 now looks on the cards.

For the UK, BOE minutes will attract the most attention with December’s claimant count close behind, though GBP may pause for consolidation after the recent run-up on the back of Cadbury developments. The US session sees Canadian CPI, US PPI, housing starts and building permits on tap.

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BOJ deflation fight, loosened the Policy hold

JPY

Yen was further down today, as pairs were focused on the JAL’s expected bankruptcy announcement (0800GMT). The Dollar continued it’s gain as Forex investors are rallying their speculation that the company will file for bankruptcy resulting in more data proving that the Japanese economy is continuing to fall and with the Bank of Japan’s recent announcement that they will fight deflation, results in further loose monetary policy. But with the US waking from its recent holiday, investors might be slow in their trading activity today

CAD/JPY – 64 pips (87.96-88.58); AUD/JPY – 95 pips (83.27-84.22);
USD/JPY – 46 pips (90.61-91.05); GBP/JPY – 137 pips (147.51-148.88)

GBP

The UK Consumer Price Index Report for December is due this morning (0930GMT). This is an important indicator for the emerging inflation trends and further monetary policy. Inflation pressures have been rising because of the rising commodity prices, sterling weakness to name a few. For example, in December, Core Producer output prices rose by 0.7% - the biggest monthly gain since May 2008. These emerging pressures, together with the possibility that some retailers could raise prices ahead of the VAT increase on 1 January, raise the likelihood that inflation rose further last month.

GBP/USD – 128 pips (1.6249-1.6377); EUR/GBP – 52 pips (0.8780-0.8832)
GBP/CAD – 94 pips (1.6719-1.6813); GBP/JPY – 137 pips (147.51-148.88)

CAD

The Bank of Canada Interest rate (1400 GMT) should show this old benchmark rate to remain at its record low today of 0.25% and repeat the pledge to leave it unchanged through June as an appreciating currency threatens to hamper the economic recovery.
“Any suggestion they will raise rates before the U.S. would probably drive up the currency, and we’ve already had concern from the bank that the very high dollar would derail the recovery,” said Pedro Antunes, director of economic forecasting at the Conference Board of Canada in Ottawa. “They will be hesitant to make any changes” today, he said.

USD/CAD – 66 pips (1.0246-1.0312); EUR/CAD – 63 pips (1.4737-1.4800);
AUD/CAD – 64 pips (0.9452-0.9516)

PR: wait... I: wait... L: wait... LD: wait... I: wait... wait... Rank: wait... Traffic: wait... Price: wait... C: wait...

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Asian market opened with slow start

USD

On Friday, US data releases were mixed though were generally disappointing at the margin. December CPI was slightly below forecast, rising just 0.1% m/m with core also up 0.1% m/m though year-on-year comparisons ticked sharply higher as a result of higher oil prices.

Industrial production increased in line with expectations in Dec, +0.6% m/m, though much of the gain could be attributed to higher utilities output due to the extremely cold weather during the month.

Friday’s Lows & High

EUR/USD – 175 pips (1.4336-1.4511); AUD/USD – 99 pips (0.9215-0.9314);
USD/CAD – 20 pips (1.0270-1.0290); GBP/USD – 34 pips (1.6288-1.6322).

JPY

The Asian session started off slowly this morning with the Monday morning liquidity not proving to be too volatile.

The Nikkei suffered during the morning session, (down 1.3% at the break and down 1.16% at the close) on the heels of a weak Wall St. and following news that the Tokyo Prosecutors Office had arrested an incumbent DPJ lawmaker and 2 aides of sec-gen Ozawa.

Friday’s Lows & High

USD/JPY – 72 pips (90.59-91.31; EUR/JPY – 210 (130.30-132.40)
AUD/JPY – 109 pips (88.08-89.17); GBP/JPY – 43 pips (148.15-148.58)

AUD

Sentiment in Australia was also dampened mildly, after Treasurer Swan reiterated at the weekend that the government would carefully withdraw its stimulus measures as private demand recovers. Swan noted that the stimulus measures were designed to have its maximum impact in the June quarter of last year and then gradually phased down.

Certainly, Australian data has been suggested that the measures had worked but it remains to be seen whether the consumer is willing to “go it alone” once the measures are withdrawn. Watch consumer sentiment data on Wednesday as the first indicator of future potential in Forex.

Friday’s Lows & High

AUD/USD – 99 pips (0.9215-0.9314); EUR/AUD – 73 pips (1.5522-1.5595)
GBP/USD – 124 pips (1.7531-1.7655); AUD/JPY – 136 pips (83.62-84.98)

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Dawdling Currency pairs at the market

AUD

Over night, the AUD returned to its early momentum and rallied upwards as the Australian's unemployment data was released, adding three times more jobs than forecasted. The unemployment rate fell 0.1% to 5.5% from November the Australian Bureau of Statistics said Thursday morning GMT.

As one of the world’s still expanding economy, the Australians are generating more jobs than expected and as China is demanding more from its neighbors in means of raw materials; new investments and more jobs are continuing. With this, the ozzie is continuing to be strong against all the major currencies in the Forex market.

At 06:52 GMT, The Rate Range

AUD/USD – 115 pips (0.9215-0.9230); EUR/AUD – 131 pips (1.5623-1.5754)
GBP/USD – 168 pips (1.7496-1.7664); AUD/JPY – 129 pips (84.11-85.40)

EUR

At 12:45pm GMT, The European Central Bank's Governing Council meets for the first time this year and their non-decision on rates will be published. Expectations that the 1.00% rate will continue today and for the next several months. ‘Perhaps’ this will change later on but unlikely at the moment. Last week, the Bank of England retained its rates at 0.50%.

The meeting tied in to President Trichet’s ECB Press Conference will also discuss the implications of European weaknesses in the weaker Euro-Zones such as Greece.

The ECB published a working paper in December that suggested it was unlikely for a member state to leave or be forced out of the monetary union. This could be more important than the actual Rate announcement.

Yesterday’s Lows & High

EUR/USD – 123 pips (1.4456-1.4579); EUR/GBP – 73 pips (0.8892-0.8965)
EUR/JPY – 170 pips (131.51-133.21); EUR/NZD – 23 pips (1.9595-1.9618)

USD

At 13:30 GMT, the U.S. Unemployment Claims are expected at 438k. This is even more important in today’s session due to last Fridays un-forecasted 85k decline in non-farm payroll raised the concern that the economy is not on target for a recovery and that improvement in the labor market may have slowed if not reversed!

The lack of new job creation will have other repercussions to the US recovery as it will encourage the US to boost job growth even further which would be included in a new stimulus plan; linked to the increased US budget deficit.

Yesterday’s Lows & High

USD/JPY – 65 pips (90.90-91.55); GBP/USD – 170 pips (1.6135-1.6305)
USD/CAD – 122 pips (1.0288-1.0410); GBP/CHF – 82pips (1.0136-1.0217)

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Chinese updated policies: Pushing pressure on Exports

USD

As the US Commerce Department issued a report that showed the Trade Deficit had widened much more than expected, the US Dollar was able to still hold off another selloff due to concerns brought about by a Chinese mandate that will in effect, make it harder for companies to do business with the Asian giant.

The Chinese government said that it would raise the reserve requirements by half of a percentage point, effectively making it more expensive for countries to export goods to China.

The move comes after many countries had pleaded with China to enact a responsible monetary policy – effectively allowing the Renminbi to be let loose as opposed to tightly control.

As a result of the move, most of commodity linked countries such as Canada and Australia, which rely heavily on Chinese consumption, fell.

The USD also benefitted from a sharp fall in Gold prices after China's announcement. But the data pertinent to the Dollar, the Trade Deficit numbers rose more than 3 Billion Dollars than estimates said it would, trashing 36 Billion Dollars after oil and commodity prices rose considerably.

The Dollar still gained though and Forex traders are awaiting the other supporting data such as consumer spending and confidence before making a final decision on what to do with the Dollar.

At 4AM GMT, the US Dollar was trading down .03% to the Euro to 1.4487, up .14% against the Japanese Yen to 91.12, down /15% to the Pound Sterling to 1.6186, down .1% versus the Canadian Dollar to 1.0378, down .03% to the Australian Dollar to .9236 and up .12% to the Swiss Franc to 1.0177.

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Jobs data crushes greenback; JPY recovers after recant

USD

The US Non-Farm Payroll report came out on Thursday amidst a wealth of hope that it would show the US employment situation improving drastically, a hope brought on by two indicators earlier in the week.

However, the data showed a much larger than expected drop, 11,000 more than expected, and raised the number of US unemployed since the recession began to 7.4 million or 10.14% of the population.

Upon the report’s release, the Dollar collapsed, falling the most in one session in around two months.

The Dollar had been traded up earlier in the week after the ADP payroll report and the First-Time-Filers unemployment report showed improvement, however all the gains were quickly wiped out as investors were betting on a strong NFP report.

The report is especially damaging since it is now unlikely that the US Federal Reserve will move to raise their near low interest rates at their next policy meeting in February.

Forex Investors had hoped that a spate of positive data would spur the rate hike, however with the jobs situation seemingly still in decline; there is little optimism this will occur.

At the close, the US Dollar was down .12% against the Euro to 1.44 even, down 1.01% against the British Pound Sterling to 1.602, down .86% versus the Canadian Dollar to 1.0301, down .72% to the Australian Dollar to .9245, down .92% against the New Zealand Dollar to .7358 and down over 1% to the Swiss Franc to 1.023.

The ICE Dollar Futures Index, a non-traded indicator that matches the Dollar’s performance against a basket of 6 major currencies, fell by its largest margin in two months, hitting just below 77 before recovering to close at 77.02.

JPY

Japan’s new Finance Minister, Naoto Kan, who came to his position last week after the surprise resignation of Hirohisa Fujii, recanted his inaugural pledge to “work hard to tame the strength of the Yen.”

The remark was meant to establish himself as a pragmatic financial leader amidst concerns that he was not qualified for the post – echoing trader, businessmen and market sentiment that the Yen’s recent bull run was a concern.

However, on Friday Mr., Kan was quoted as saying that free markets should dictate the value of the currency, a capitulating statement that is widely seen as necessary to placate the Prime Minister who was reportedly not pleased with Kan’s earlier remarks.

At the close, the Yen was up .03% to the Euro to 133.42, up .56% to the US Dollar to 92.65, up .34% to the British Pound Sterling to 148.43, up .12% against the Australian Dollar to 85.65 and down .08% versus the Swiss Franc to 90.52.

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A Tale of Two Currencies; Safe-Havens Battered

USD

The US Dollar, which had been up most of the session, was trending downward on Wednesday after policy minutes from the Federal Reserve’s meeting showed that the Central Bank is concerned that by easing up on the stimulus measures enacted over the past fourteen months it could cause an economic aftershock.

The revelation doused hopes that there will be an interest rate hike in the near future and sent a Dollar which was trading mostly higher into a negative pattern.

The minutes specifically addressed the unemployment issue; it is the consensus of the Fed that the rate will remain higher for a long while and that it is possible that they might need to increase their asset purchasing program which ultimately translates into the figurative printing of more money.

The Federal Reserve also discussed the housing issue and are seemingly worried that the rate of defaults and foreclosures are becoming alarming.

At 11:15PM GMT, the US Dollar was trading down .33% against the Euro to 1.441, down .19% to the British Pound Sterling to 1.602, down .57% to the Canadian Dollar to 1.0324, down .85% to the Australian Dollar to .9205 and down .64% against the Swiss Franc to 1.0269.

JPY

The Japanese Yen had traded mostly up early in the Asian session but quickly fell after the Japanese Finance Minister, Hirohisa Fujii, announced his resignation from the government.

Mr. Fujii, seen as a financial guru who advocates fiscal restraint, was in the middle of finalizing the Japanese budget, which has widely been seen as a controversial one on the heels of a recession. The 77 year old Fujii’s resignation was effective immediately, and he cited poor health as his reason.

Regardless of Mr. Fujii’s explanation, which many see as valid, Forex traders are not happy with his replacement, a deputy Prime Minister, Naota Kan, who is not as seasoned in financial governance.

At 11:30PM GMT, the Japanese Yen was down .7% to the US Dollar to 92.34, down 1.02% against the Euro to 133.05, down .91% to the British Pound Sterling to 147.96, down 1.53% versus the Australian Dollar to 84.94 and down 1.24% against the Swiss Franc to 89.81.

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Interest Rate Hopes Impede Dollar Fall

USD

The US Dollar recouped some of its losses from the previous session in Tuesday trading and was mixed overall.

Forex Traders were talking about the ADP jobs report which comes out on later on today and is estimated to show that more jobs were created than lost in December, the first time in two years that this would have occurred.

Should the data prove to be accurate, it could lead to a February interest rate hike at the next Federal Open Market Committee meeting.

Dollar supporters agree that this year could be particularly difficult for the Greenback. With looming debt crisis, a fledgling real estate market that is increasing foreclosures even with the stimulus funds and a 10% unemployment rate that will likely remain high through at least the third quarter.

It is for this reason that any glimmer of hope for an interest rate hike garners positive attention. The ADP jobs report will be followed by Friday’s non-farm payroll, the official government number and traders are hoping both numbers fall in line with expectations – however in recent months the ADP was not always a great indicator of the NFP.

At 11:00 PM GMT, the US Dollar was trading up .3% to the Euro to 1.4365, down .92% versus the Japanese Yen to 91.65, up .58% to the British Pound Sterling to 1.5993, down .26% against the Canadian Dollar to 1.0388 and down .16% to the Australian Dollar to .9117. The Dollar also made marginal gains against the Swiss Franc, rising .09% to 1.0331.


Analysis: EUR/USD

Despite everything that is happening in the US, the Euro is signaling that it is in a corrective phase now against the US Dollar. After a stellar 2009 for the Euro, largely a result of the declining Dollar, the trend seems to have ended in December.

Technically, the pair could test the horizontal support line of 136 and hover in that vicinity forming a higher bottom. Traders are lining up orders around 147 in the pair, a mark which is the 50 day moving average.

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Unpredictability plagues every angle of USD

The problem that the US has with consistent signs of recovery came through on Monday as two separate reports showing two totally different things were released.

While the manufacturing report showed a steady increase in US production, a clearly positive sign that indicates some semblance of growth, however any bounce that the Dollar took off of this was stifled by a housing report which showed that prices have now fallen – at least in November/December – to the lowest level in years.

The continued duality of this mythical recovery is affecting Forex traders and their ability to adequately trade in any of the USD related pairs. The issue here is misinformation, not necessarily by news organizations, but by the government agencies and private parties that comprise the “independent” review boards for various sectors.

Take the employment numbers for example; ADP which is the largest payroll processor in the US comes out with a report, usually on Wednesdays, that shows the total number of people that they processed payroll for each week.

If the number rises, you know that more people are employed, if the umber drops you know some were terminated.

For the past month and a half, the ADP has come out showing an increase in layoffs, while the government report – the Non-Farm Payroll – has shown less layoffs. They both cannot be right and yet they both are representing the same data.

The difficulty in predicting which way the recovery pendulum is swinging is clearly evident here as there is no guarantee that one piece of data will be supported by another, a former given in Forex trading.

So, as we continue to build on the New Year, we must remember to proceed with caution. What you see is not necessarily what exists – in charts, in data and in rallies and downtrends.

What used to be somewhat predictable has now become impossible to peg and scouring the data will not help clarify – the market in USD is running on whims and psychological factors. As we have seen in the past with stocks, this is a dangerous pattern and we can only hope it settles down soon.

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A European Dilemma

The Eurozone has a problem as the New Year rings in. The few countries that have been demonstrating their economic viability in the 27 nation economic zone have been offset by a handful of smaller, less developed nations that are experiencing aftershocks in the wake of the worst recession in decades.

Countries like the PIIGs (Portugal, Italy, Ireland and Greece) started 2009 by making news as their economies faced disaster; they ended the year in the headlines again as their sovereign credit ratings have been slashed by the major independent agencies.

The problem with the Eurozone is a simple one and fixing it means admitting that the Free Trade and joint economic experiment was fatally flawed.

As nations that are independent economic entities, such as the US and Great Britain, the latitude they have in combating inflation and deflation by altering their monetary policy is evident.

The response that they have to fluctuating valuations is based on their control of their interest rates as well as their ability to effectively “print” more money. The European nations that comprise the Euro (Britain is a EU member but has yet to adopt the single currency) do not have such luxuries.

So, in effect what this means is that when Greece is faced with an internal crisis, in which their debt load is too large for their economy to handle as a result of dwindling tax revenues, the recourse that one has seen in the US and England, which is issuing debt instruments to fund their recovery, is not available (be that a policy in controversy as it may, it still is a policy… ).

As a nation that relies on the Euro, ceding the use of their native Drachma upon joining the EU, they are bound to the whims of the European Central Bank, which is slow or hesitant to act for sake of individual nations.

Had Greece been allowed to float their own bonds, perhaps the situation there would not be as dire as it is today; had the ECB perhaps allowed a specialized bond just for Greece, or any of their needy nations, perhaps the same would have been true.

As we begin a new decade of trading currencies, we look to the solutions for these issues – and while it is not even apparent to those within the ECB that something needs to get done, as the Euro continues its slide in the face of weakness in some of their member states, perhaps they will address the obvious. We can only hope.

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