Ashraf Laidi @ 3:06 AM, Wednesday January 06 2010
The US dollar builds on its
newly acquired robustness amid the FOMCs modest economic upgrade with
regards to labour markets and the reiteration of the Feb 1st 2010
deadline as the expiry for the various liquidity operations. Although
the FOMC statement maintained the phrase exceptionally low levels of
the federal funds rate for an extended period, the overall tone was
more than sufficient for the greenback to extend its upward trajectory,
especially amid the rapid concentration of Eurozone-centric credit and
banking problems cast a pall on the non-USD block.
Considering
that the balance of recent US data has tipped in favour of the US
(employment, retail sales and CPI), dollar bulls will content
themselves with the slightest of modest of hawkish/ commentary from the
Fed. Wednesdays FOMC statement was a simple step in the Feds
challenging task of normalizing liquidity and credit markets amid an
environment of rising yields and consolidating equities.
The
combination of negative event flow in the Eurozone, year-end window
dressing operations reducing USD shorts and a USD-favourable yield gap
will prolong USD gains into mid Q1 2010, especially amid no prospects
of a fast resolution in the Eurozone sovereign problems. Consequently,
EURUSD hit the $1.4280 target issued at the Dec 10 HotChart after
the pair exceeded the magnitude of its 2 prior down cycles. $1.41
should likely emerge as the next support level, but $1.38 appears to be
a sturdier foundation.
USDJPY Eyes 93
It
is time for JPY to take a temporary a break and allow the USD to draw
most of the risk aversion plays at the next round of risk pullback. Two
weeks after the Bank of Japan was pressured by the MoF to inject extra
liquidity aimed at stabilizing yen strength, the central bank today
altered its definition of price stability to include only positive
price growth, instead of the previous definition of zero-2% annual
growth. By announcing its intolerance for flat consumer price prices,
the BoJ is set push against a resurgence in yen strength.
Accordingly,
we would expect USDJPY to regain 92.50 until it encounters the next
resistance at the 2 year trend line on the monthly chart below.
Subsequent pressure point emerges at 95 before we could see a gradual
turn in the pair near February. Were not yet abandoning our 5-year approach on the cyclical lows in USDJPY and so it is too early to call the bottom of USDJPY.
Sterling to Regain Whipping Boy Status in 2010
Just
as liquidity withdrawal may become the buzzword of 2010, the UK economy
and its currency could fall victim to an excessive reduction in
stimulus. The Bank of England has already signalled its intentions to
not add any more quantitative easing, the UK Treasury plans spending
cuts, the VAT hike is levied in January, the scrappage incentives for
used cars expires in February and the May General Elections promise to
be a close race.
None
of these developments are set to favour GBP or the UK economy which has
yet to recover from recession. Sterling risks regaining its status as
the whipping boy of FX in 2010 as these vital dosages of oxygen are
removed from a still tepid economy. The 200-day MA of $1.60 is the next
target for the bears over the short term, while $1.55 is seen as the
next medium term average for GBPUSD after the $1.70 figure continues to
hold above the monthly closes since October 2008.
Ashraf Laidi
Chief Market Strategist
CMC Markets
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