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.

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.

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.