Market Overview 20160113: EUR/USD Lower On Improved Risk Appetite
EUR/USD Lower On Improved Risk Appetite
- Federal Reserve Bank of Richmond President Jeffrey Lacker said that the economies of the United States and China are linked less than recent volatility in US equity markets seem to imply. He added that the US stock market's heightened volatility last summer following China's stock market woes and a devaluation in the yuan "in hindsight looks like an overreaction... the same thing is the case now." Lacker, who is not a voter on the Fed's rate-setting committee this year but participates in its deliberations, also repeated his preference for four interest rate hikes this year. The Richmond Fed president is less particular about the timing on such increases but said that while inflation pressures do not currently appear on the horizon, "I'd caution that that outlook can change fairly rapidly."
- Robert Kaplan, the Dallas Fed's new president, said four US interest-rate hikes are "not baked in the cake" for the Federal Reserve this year, particularly given global stock market volatility set off by fears over a cooling Chinese economy. Kaplan said he is not sure there will be enough economic data before the Fed's next policy meeting in late January to justify raising rates then, but "between now and March I think there will be." Kaplan's comments differ somewhat from those earlier in the day from Atlanta Fed President Dennis Lockhart, who said there may not be enough data even by March to make a call for raising rates. Lockhart said he would look for "hard evidence" that the annual inflation rate is moving toward that target.
- In our opinion four Fed hikes this year are possible, but with the first one in April, not in March, as market expects.
- Both the safe-haven JPY and the low-yielding EUR tend to gain at times of market stress because these currencies are often used as funding currencies for investment in risk assets, and consequently rise when there is a retreat from those assets. But today the sentiment in global markets improved after better-than-expected Chinese trade data. That is why we see moderate falls in EUR and JPY against the USD today.
- Our long-term view is that the “short-EUR” trade is over – as a matter fact it has been over since March of last year. There will be bouts of sell-offs and temporary weakness but the common currency has by now reacted to the ECB’s programme while economic activity are likely to improve on low oil prices and still weak EUR. In fact, the risk is for EUR/USD going higher from here.
- However, today’s data showed industrial production in the Eurozone was 0.7% lower in November than in October vs. the median forecast of a 0.3% mom decline. Industrial output was up by 1.1% yoy. October's figures were revised up to increases of a 0.8% mom and 2.0% yoy, from the 0.6% and 1.9% readings announced a month ago. November's monthly decline was the steepest since August 2014 and the year-on-year reading the most muted since last April. Energy production was down 4.3%, with weather in much of northern Europe far milder than on average. Output of capital goods and of durable consumer goods were respectively 1.9% and 1.0% lower.
- We keep our long EUR/USD position opened at 1.0830 unchanged. The nearest support level is 1.0803 low on January 8. The 14-day exponential moving average is the resistance at 1.0865.
- Watch Fed Beige Book today (19:00 GMT). We do not expect it would have a substantial impact on the EUR/USD, but possible signs from the economy that strong USD is harmful to US manufacturing may weaken the dollar.
AUD/USD: Eyes On Australian Jobs Report
- The Australian and New Zealand dollars regained some ground on Wednesday after better-than-expected Chinese trade helped assuage, at least for now, concerns about the world's second largest economy. China's December exports fell 1.4% yoy, while imports slid 7.6%, both much less than expected. That left the country with a trade surplus of USD 60.09 billion for the month. Particularly encouraging was a 17.2% rise in imports of iron ore, Australia's top export earner.
- China's economy likely grew by around 7% in 2015, in line with the government's official target, the top economic planning agency said on Tuesday. Still, such a level would be the slowest pace of expansion in a quarter of a century, and down from 7.3% in 2014 as weak demand at home and abroad, industrial overcapacity and faltering investment drag on the world's second-largest economy.
- Thursday’s Australian labor market (0:30 GMT) report might show some technical slowdown following the very strong November release. If this happens, it would still be unlikely to change the long-term expectation of continuing robustness of Australian employment dynamics. The declining trend in the unemployment rate in 2015, accompanied by a rise in participation in the labor force, is encouraging.
- Therefore, a weaker report would not change our view that AUD/USD has largely adjusted to the negative shock in the terms of trade, provided that commodity prices do not keep declining from current levels. A strong report may trigger some relief for AUD/USD, which has suffered in the risk-off environment since the start of the year.
- We opened short-term long AUD/USD position at 0.6990 yesterday. From the short-term perspective an important resistance level is 14-day exponential moving average, currently at 0.7102.
- Simultaneously, we opened long-term long AUD/USD position. Important support levels for our long-term strategy are 0.6892 low on September 7 and 0.6855 low on April 1, 2009.
It is usually reasonable to divide your portfolio into two parts: the core investment part and the satellite speculative part. The core part is the one you would want to make profit with in the long-term thanks to the long-term trend in price changes. Such an approach is a clear investment as you are bound to keep your position opened for a considerable amount of time in order to realize the profit. The speculative part is quite the contrary. You would open a speculative position with short-term gains in your mind and with the awareness that even though potentially more profitable than investments, speculation is also way more risky. In typical circumstances investments should account for 60-90% of your portfolio, the rest being speculative positions. This way, you may enjoy a possibly higher rate of return than in the case of putting all of your money into investment positions and at the same time you may not have to be afraid of severe losses in the short-term.
How to read these tables?
1. Support/Resistance - three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL - It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT - It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In - Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor - green "*" means high level of confidence (low level of uncertainty), grey "**" means medium level of confidence, red "***" means low level of confidence (high level of uncertainty)
5. Position Size - position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
6. Profit/Loss on recently closed position - is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.