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FOREX: Dollar, Yen to Gain as Egyptian Turmoil Stokes Risk Aversion

FOREX: Dollar, Yen to Gain as Egyptian Turmoil Stokes Risk Aversion

2011-01-31 06:47:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • Currency Markets Digest Egypt-Linked Volatility in Asian Trade
  • Japanese Yen Outperforms as Economic Data Remains Supportive
  • NZ Trade Deficit Widens on Imports, Building Permits Tumble
  • Australian Inflation Hits Four-Month Low, Says TD Securities

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.3533

1.3709

GBPUSD

1.5803

1.5948

The Euro and the British Pound were little changed ahead of the opening bell in Europe, with both currencies correcting narrowly higher against the US Dollar to retrace some of last Friday’s losses as the greenback surged amid rising uncertainty about turmoil in Egypt (see below). We are looking to enter short EURUSD.

Asia Session: What Happened

CCY

GMT

EVENT

ACT

EXP

PREV

NZD

21:45

Building Permits (MoM) (DEC)

-18.6%

-1.3%

7.8% (R-)

NZD

21:45

Trade Balance (New Zealand dollars) (DEC)

-250M

50M

-186M

NZD

21:45

Balance (YTD) (New Zealand dollars) (DEC)

1131

1463

1355 (R+)

NZD

21:45

Exports (New Zealand dollars) (DEC)

3.80B

3.80B

3.65B

NZD

21:45

Imports (New Zealand dollars) (DEC)

4.05B

3.75B

3.84B

JPY

23:15

Nomura/JMMA Manufacturing PMI (JAN)

51.4

-

48.3

AUD

23:30

TD Securities Inflation (MoM) (JAN)

0.4%

-

0.2%

AUD

23:30

TD Securities Inflation (YoY) (JAN)

3.4%

-

3.8%

AUD

23:30

RP Data/Rismark Med City Val nsa (MoM) (DEC)

-0.7%

-

-0.6%

AUD

23:30

RP Data/Rismark Med City Val sa (MoM) (DEC)

0.2%

-

-0.2%

JPY

23:50

Loans & Discounts Corp (YoY) (DEC)

-4.3%

-

-4.5%

JPY

23:50

Industrial Production (MoM) (DEC P)

3.1%

2.8%

1.0%

JPY

23:50

Industrial Production (YoY) (DEC P)

4.6%

4.4%

5.8%

AUD

0:30

Private Sector Credit (MoM) (DEC)

0.2%

0.3%

0.3%

AUD

0:30

Private Sector Credit (YoY) (DEC)

3.4%

3.4%

3.6%

NZD

2:00

Money Supply M3 (YoY) (DEC)

1.8%

-

-0.2%

JPY

4:00

Vehicle Production (YoY) (DEC)

-5.1%

-

-6.7%

JPY

5:00

Housing Starts (YoY) (DEC)

7.5%

4.6%

6.8%

JPY

5:00

Annualized Housing Starts (DEC)

0.861M

0.859M

0.847M

JPY

5:00

Construction Orders (YoY) (DEC)

13.1%

1.1%

-5.3%

Major currencies stood little changed late in the overnight session, with investors digesting last Friday’s volatility in the wake of rising geopolitical tensions in Egypt. Traders are concerned about the implications of continued unrest for the global economic recovery after Egyptian President Hosni Mubarak failed to mollify anti-government protesters by dismissing the ruling cabinet. Such fears appear reasonable: Egypt controls the Suez Canal, a conduit carrying 7.5 percent of global seaborne trade; a significant disruption here would divert cargo traffic and force it to travel around the Cape of Good Hope at the tip of South Africa, making for a substantially longer journey and bidding up shipping costs. Furthermore, there are reasons to fear that the turmoil in Cairo may spread across the region having itself migrated from Tunisia, threatening the stability of major oil-producing nations. Such a possibility has already bid up crude prices and will likely continue to do so should the situation devolve further.

The Japanese Yen outperformed as a hefty dollop of economic data reinforced positive cues from last week’s trade balance and employment figures. Most notably, the Nomura/JMMA PMI reading soared back above the “boom-bust” 50 level to reveal the fastest manufacturing-sector growth in six months while preliminary Industrial Production figures showed output added 3.1 percent from the previous month in December, amounting to the largest increase since January of last year.

Elsewhere,New Zealand’s Trade Balance deficit unexpectedly widened in December as imports topped expectations. Meanwhile, Building Permits plunged 18.6 percent to yield the sharpest drop since October 2008, calling into question the central bank’s optimism about emerging stability in the housing market. Meanwhile, Australian Inflation slowed in January according to estimates from TD Securities, with the annual growth rate dropping to a four-month low at 3.4 percent.

Euro Session: What to Expect

CCY

GMT

EVENT

EXP

PREV

IMPACT

EUR

7:00

German Retail Sales (MoM) (DEC)

2.0%

-1.9%

Medium

EUR

7:00

German Retail Sales (YoY) (DEC)

1.1%

2.0%

Medium

EUR

7:45

French Producer Prices (YoY) (DEC)

5.0%

4.5%

Low

EUR

7:45

French Producer Prices (MoM) (DEC)

0.6%

0.4%

Low

EUR

9:00

Italian Producer Price Index (MoM) (DEC)

0.6%

0.4%

Low

EUR

9:00

Italian Producer Price Index (YoY) (DEC)

4.5%

4.1%

Low

EUR

10:00

Italian Business Confidence (JAN)

103.5

103

Low

EUR

10:00

Euro-Zone Consumer Price Index Estimate (YoY) (JAN)

2.3%

2.2%

Medium

Risk sentiment looks likely to overshadow the economic calendar in European trade, with stock index futures pointing sharply lower a head of the opening bell as lingering unrest in Egypt continues to spook the markets. If Friday’s trading dynamics carry over, the turmoil ought to prove supportive for the perennially safety-linked US Dollar and Japanese Yen as well as the Swiss Franc.

On the data front, January’s preliminary Euro Zone Consumer Price Index reading headlines the docket, with expectations suggesting the annual pace of inflation will accelerate to a 27-month high of 2.3 percent. Despite last week’s conflicting signals from ECB President Jean-Claude Trichet, traders seem to be erring on the hawkish side of things ahead of the policy announcement due later this week with a Credit Suisse gauge of priced-in rate hike expectations over the next 12 months standing at the highest in a year. This hints the outcome may prove supportive for the Euro, nudging prices toward our desired short entry at 1.3668.

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