EUR/USD at Crossroad

Written by CMS Forex | Mar 07 09 09:05 GMT |

The greenback gained against the yen but fell versus the euro on Friday, following deteriorating US February employment data. Nonfarm payrolls plunged 651K, in line with expectations; however, revisions to December and January subtracted additional jobs and the unemployment rate rose to 8.1%, the highest level since 1983. After an initial short covering rally, US stocks fell but finished modestly higher. As the stock market rally faded, the dollar recovered partly its earlier losses. The oversold yen, after its rally overnight, pared gains in New York trading and fell for a 6th consecutive week. Bank of Japan Deputy Governor Hirohide Yamaguchi said the BOJ may have to expand its purchases of corporate bonds to prevent a credit shortage from worsening the recession. The pound was modestly lower against the dollar and declined versus the euro for the first time in four days after UK producer-price inflation eased, giving the Bank of England more cover to implement its quantitative easing policy. The Canadian dollar, falling for a fourth consecutive week, fell on the deteriorating export outlook; the currency is just above important technical support. The Australian dollar rose modestly for the week. Just above important support, the aussie is pressured by the global economic contraction and weak commodity prices.

The EUR/USD was higher today and modestly higher for the week. The pair has been trading inversely with risks and the outlook for the financial sectors. The EUR/USD has spent the last three weeks testing the 1.24-1.25 area support and the resistance from the downtrend. The EUR/USD trend is down, and the driver has been collapsing stock markets. The pair could be building a bullish W-formation. If the support from the double bottom at the 1.24-1.25 area holds and the downtrend is broken, the pair could rally strongly. The stock market is trying to find a bottom; the EUR/USD is likely to follow the direction in the stock market.

Financial and Economic News and Comments

US & Canada

The US labor market continues to deteriorate in 2009 amid an intensifying recession. Nonfarm payrolls fell 651,000 in February, in line with expectations, while revisions to December and January subtracted extra 161,000 jobs, data from the Labor Department showed. Private (non-government) payrolls dropped 660,000, with declines in almost all key sectors. The weakest job categories were manufacturing (down 168,000), administrative and support services – temps, business support, and building services – (down 134,000), and construction (down 104,000). The strongest sector was health care (up 30,000). The unemployment rate surged more than expected to 8.1% in February, the highest since December 1983, from 7.6% in January. Average hourly earnings increased a modest $0.03, or 0.2% m/m, as forecast, to $18.47, and rose 3.6% y/y. The average workweek was unchanged at 33.3 hours, as expected.

The mortgage bankruptcy bill, approved by the House 234-191 yesterday, may help at least 1 million Americans by possibly allowing federal judges to lengthen terms, cut interest rates and reduce mortgage balances of bankrupt homeowners. The bill also would permanently increase the Federal Deposit Insurance Corp.'s coverage of bank deposits to $250,000. The measure now goes to the Senate.

Federal Reserve Bank of New York President William Dudley said the US government will supply enough capital to ensure the viability of major banks, stressing that the US must begin an “intensive reconstruction” of the financial system. “The point of the stress assessment is not to pick winners or losers, but instead to ensure that the banking system and all the major banks have sufficient capital to withstand a very adverse environment,” Dudley said at a conference at the Council on Foreign Relations. “At this point in time the Fed has judged that buying long- term Treasuries is not the most efficient means of easing financial conditions,” he said.

Europe

Swiss consumer prices unexpectedly increased 0.2% m/m in February after declining 0.8% m/m in January, the Swiss Federal Statistical Office said. The consumer-price inflation rate rose to 0.2% y/y from January's 1.0% y/y. The Swiss National Bank is likely to cut its target for the 3-month Swiss franc LIBOR by 25 basis points to 0.25% next week and use unconventional measures to combat the Swiss recessionary economy.

UK producer price growth eased in February, data from the Office for National Statistics showed. UK PPI input increased a more-than-expected 0.6% m/m mainly due to the rise in crude oil prices, following January's downwardly revised 0.9% m/m rise. PPI input rose a less-than-expected 0.5% y/y in February, decelerating from January's downwardly revised 1.5% y/y rate. While PPI input data deviated from expectations, PPI output figures came in as forecast in February. PPI output increased 0.1% m/m in February, the same rate as in January. The PPI output inflation rate rose at 3.1% y/y, decelerating from January's 3.5% y/y. Output core prices remained unchanged m/m February, following a downwardly revised 0.3% m/m increase in January. The core PPI output growth rate was at 3.7% y/y, as forecast, decelerating from January's downwardly revised 4.0% y/y.

The G-7 economic outlook deteriorated further to start off 2009, with the OECD's composite leading index for the G-7 countries declining to 91.7 in January from 92.8 in December, pointing to a “strong slowdown” in the G-7's growth cycle outlook, the Organisation for Economic Co-operation and Development reported.

Asia-Pacific

Japan's official reserve assets declined $1.604 billion in February to total $1,009.354 billion, the Finance Ministry said.

Australia's official reserve assets rose to A$48.25 billion in February from A$47.78 billion in January, the Reserve Bank of Australia reported.

Australia's construction industry contracted further in February on weak market demand and declining confidence, with the AiG performance of construction index plunging to 29.5 from January's 34.1, the Australian Industry Group reported.

FX Strategy Update

	EUR/USD	USD/JPY	GBP/USD	USD/CHF	USD/CAD	AUD/USD	EUR/JPY
Primary Trend	Negative	Negative	Negative	Positive	Positive	Negative	Negative
Secondary Trend	Negative	Positive	Negative	Positive	Neutral	Neutral	Neutral
Outlook	Neutral	Positive	Negative	Neutral	Neutral	Neutral	Positive
Action	None	Buy	Sell	None	None	Buy	None
Current	1.2652	98.27	1.4093	1.1580	1.2872	0.6405	124.33
Start Position	N/A	91.45	1.4390	N/A	N/A	0.6601	N/A
Objective	N/A	N/A	N/A	N/A	N/A	N/A	N/A
Stop	N/A	91.00	1.4865	N/A	N/A	0.6245	N/A
Support	1.2450	94.50	1.4000	1.1500	1.2500	0.6280	120.00
	1.2000	93.00	1.3500	1.0700	1.2000	0.6000	114.00
Resistance	1.3000	100.00	1.4600	1.1800	1.3000	0.7000	126.00
	1.3300	102.00	1.5000	1.2300	1.3200	0.7300	128.00

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com