Daily Forex Commentary

Majors: Japanese economic growth data beat expectations of an increase in year to date GDP to around 3.5% coming in at a whopping 4.6% during Q4 2009. The weak Yen helped exports and with improvements in global demand mainly led by China also playing a big role growth in the region beat economist forecasts. Despite the positive news the JPY weakened against the USD trading to 90.20 in Asian trade as many analysts expect the rise in GDP to be relatively short lived. With little in the way of offshore economic data for direction overnight it emerged that the Greece finance ministry had entered into interest rate swaps as a means to defer interest payments by several years, a common practice however one that cast some doubt as to the true debt burden. The news hit risk appetite with EUR/USD trading to a low of 1.3580 on two occasions, down from its overnight peak around 1.3635. With the U.S scheduled back from a long weekend this evening and more comments from EU officials likely to emerge the volatility is expected to increase once again as EUR/USD continues to edge closer to 1.35.

Australian Dollar

Australian Dollar: In what was a very lacklustre Asian session yesterday the Aussie dollar traded sideways between 0.8860 and 0.8880 for the majority of the day as local investors searched for inspiration. After an initial dip to 0.8850 during early European trade the AUD/USD then bounced back to retest the 89 cent handle and opens this morning just shy of the mark at 0.8890. With the U.S enjoying the President’s Day holiday it was a quiet session in North America however the release of the RBA board minutes for the recent meeting where rates were left on hold and a talk by RBA assistant governor Debelle are likely to spark the Aussie dollar into action today.

- We expect a range today in the AUD/USD rate of 0.8850 to 0.8925

Great Britain Pound

Great Britain Pound: The Pound traded between 1.5640 and 1.5680 in Asia yesterday and started offshore trading at an intraday low of 1.5610 USD amid fears that the UK mortgage market may again come under financial pressures. Moody’s had assessed that British banks may struggle to refinance 319 billion pounds of mortgaged backed bonds as the Government prepares to wind down its Special Liquidity Scheme and Credit Guarantee Scheme. However the GBP gained 0.7% upon news that housing prices had increased 3.2% as the Sterling rallied back up to 1.5690 before hitting a high of around 1.5720 near the start of US trade. During holiday thinned US trade the Pound edged lower starting today at 1.5660 against the Greenback and 2.2450 versus the Kiwi.

- We expect a range today in the GBP/NZD rate of 2.2385 to 2.2500

New Zealand Dollar

New Zealand Dollar: The Kiwi gained just over 0.5% against the USD during offshore trade peaking at 0.6988. New Zealand’s Performance Services index, though not as high as last month’s 54.4, was still in the green at 53.1 for January. Investor enthusiasm dampened during the US session and the Kiwi fell amid concerns over sovereign debt problems which continue to plague Greece and other European nations sapped the market’s appetite for higher yielding assets. The Kiwi opens higher at 0.6975 USD head of positive expectations for today’s PPI figures.

- We expect a range today in the NZD/USD rate of 0.6950 to 0.7015

Candlestick Summary - EUR/USD

We initially sold EURUSD at 1.4881. Prices are have stalled near our fourth revised profit target, finding support at the bottom of a falling channel established from the swing high in early December. Positive RSI divergence hints that an upswing to the channel top just above the 1.40 level is likely from here. We see this as corrective and will remain short, revising our profit target slightly lower to 1.3651 with a close below that level signaling the next leg of the down move. A stop-loss will be activated on a daily close above 1.4251.

Bias: Bearish

Elliott Wave Bias - Gold

The next major support for Gold is not until 1005 (former breakout level).  Even then, I expect that level to be taken out without much of a fight as the deflationary environment has returned with a vengeance.  Gold has reached resistance from Fibonacci (and former support), which extends to 1094.  The retracement is satisfactory; favor the downside.

Bias: SHORT

Elliott Wave Bias - OIL

Crude is in a 3rd of a 3rd wave decline from 7804.  Although the rally from the low extended, the final leg of the advance is in 3 waves; which favors a complex corrective labeling.  Medium term targets (several weeks) are 6600 (100% extension) and 6426 (July low).

Bias: SHORT

Elliott Wave Bias - NZD/USD

The NZDUSD has found resistance at the confluence of the 61.8% retracement / short term trendline.  The rally from 6804 is in 3 waves (corrective…looks like a double 3), which leaves the NZDUSD vulnerable.  The next major support for the NZDUSD is not until 6600.  A Fibonacci confluence at 6365-6465 serves as a bearish objective.

Bias: SHORT

Elliott Wave Bias - AUD/USD

After breaking below the December low, the AUDUSD has found strong support from the confluence of the 200 day SMA / channel support.  A break of this area is required to inspire confidence in the bearish bias (against 8935).  If the decline from 9055 is a 3rd wave, then the decline should extend to at least 8400, which is the 161.8% extension of wave 1. 

Bias: SHORT

Elliott Wave Bias - USD/CAD

The USDCAD is toying with me.  Having been convinced that an expanded flat was complete, I was proved wrong when the pair dropped below 10540.  However, I maintain a longer term bullish bias against 10223.  Support should be strong at 10415, which is former resistance and the 61.8% retracement.  It is also possible that the USDCAD will not make it to that level as the pair has found support at the former 4th wave zone.  Long term traders can establish longs against the January low but short term traders should await clarification of the near term picture. 

 

Bias: Flat

Elliott Wave Bias - USD/CHF

The USDCHF has held trendline support.  The line is unorthodox in that it connects 2nd waves at multiple degrees of trend.  11026-11091 is a target area.  Favor the upside against 10607. 

Elliott Wave Bias - GBP/USD

The GBPUSD broke its diamond top last week and the trend is down against 16076.  The rarity and reliability of the diamond pattern makes the break especially bearish.  Given the 3rd of a 3rd count from 16464, the first Fibonacci confluence is not until 14714/62.  The reversal occurring at the 38.2% / Elliott channel resistance strongly favors the idea that the rally is a 4th wave.  15338 is where wave v (if it is a v) would equal wave i.  Favor the downside.

Elliott Wave Bias - USD/JPY

The USDJPY rally (from 8481) is corrective, which leaves the pair vulnerable to weakness below that level.  Still, a larger correction may underway since the decline from 9380 is not impulsive either.  8832 and 8736 are potential supports.  A rally above 9130 is required in order to turn bullish.  Cautiously favor the downside against that level at this point.

Elliott Wave Bias Chart - EUR/USD

The EURUSD decline below 13584 gives credence to my argument that the pair is in “a 3rd of a 3rd wave…an objective is 13081 (161.8% extension).”  Keep risk at 13842 and 13700 should provide resistance if needed.  Use the unorthodox channel as a point of reference.  Price is now below the midpoint of the channel, which is bearish.

GBP/USD Free Forex Signal, 15 Februar 2010

 

 

Symbol: 

GBPUSD

Forecast High: 

1.5820

Forecast Low: 

1.5505

Entry Sell: 

1.5649

T/P Sell: 

1.5632

T/P Sell: 

1.5602

S/L Sell: 

1.5699

Free signal EUR/USD, 15 Februar 2010

Symbol:
EURUSD
Forecast High:
1.3771
Forecast Low:
1.3457
Entry Buy:
1.3626
T/P Buy:
1.3673
S/L Buy:
1.3576

Greek Saga Won't Kill The Euro But The End May Begin Here

Could the endgame of this Greek tragedy be a eurozone break-up? The single currency's supporters maintain that such an outcome is mere mythology.

 
Greece accounts for only 3pc of the 16 member states' combined GDP, they say, and has lower debts than some of the banks bailed-out during sub-prime. A loan of €20bn (£17.5bn) would do the trick, we're told. That's less than the British government injected into either Lloyds or the Royal Bank of Scotland.

Such analysis sounds vaguely plausible. But its naïve and politically dishonest. Then again, the single currency was built on political dishonesty. That's because, at the heart of the eurozone project there was always a fundamental contradiction – one that the architects of monetary union never dared to address. Now its being highlighted for them, whether they like it or not.

While the European Central Bank controls eurozone interest rates and the money supply, the size of each country's fiscal deficit results from the spending and taxation decisions of its own sovereign government.

How can you enforce collective fiscal discipline in a currency union of individual sovereign states, each answerable to their own electorate? The truthful answer is you can't – not unless you subjugate the autonomy of democratically-elected politicians and, by proxy, their voters.

Voters don't like that. Neither do politicians. Faced with a choice between seriously annoying their own voters and seriously annoying the ECB, the most ardently "pro-European" lawmakers, even those with years of Brussels trough-nuzzling under their belt, will always side with their own. That's why the eurozone will ultimately break-up – whether Greece is bailed out or not.

The eurocrats blame "speculators" for the single currency's woes. That's a bit like sailors blaming the sea. The eurozone is ultimately doomed because, in the end, economic logic wins and the will of each country's electorate bursts through. This current Greek saga won't end the eurozone – but future historians will identify it, perhaps, as the beginning of the end.

Many have said it's hardly surprising that Greece e_SEnD with its history of financial profligacy and capital flight e_SEnD has emerged as the eurozone's Achilles heel. A more germane observation is that, while fiscally wayward, Greece is also the birthplace of democracy. If the Greek population wants to get upset, throw out its elected politicians and reject austerity, it must be allowed to do so. I think they'd be mad, but it must be their choice.

If Berlin and Brussels try to impose their own view on Greece and the "cuts" come from outside, the situation will become absolutely incendiary. Protests will turn into fully-blown riots. Greece will endure very serious social unrest. Deep-seated rivalries and suspicions between countries will be re-ignited. And for what?

Greece is running a budget deficit of 12.7pc of GDP. The real number could be 15pc or more as Greek politicians have lied for years about the extent of their country's liabilities. They're not the first European leaders to do so and they won't be the last. But Greece was, almost uniquely, assisted in its fiscal cover-up by Brussels – with the usual "convergence criteria" being bent to allow Greek euro entry.

As recently as September 2008, the euro seemed to be going well, despite the massive variation between member states. The five-year Greek credit default swap spread was less than 50 basis points. In other words, buying insurance against Greece reneging on its sovereign debt cost only slightly more than insuring German government bonds. Those, such as this columnist, who continued to warn that the eurozone was "dangerous and inherently unstable" were dismissed as cranks, xenophobes or worse.

Then sub-prime hit in earnest. Insuring against Greek default suddenly became a lot more expensive, the CDS spread rising six-fold in eight weeks. The same risk measure is now around 400 basis points, the cost of insuring against Greek default no less than 20 times higher than it was in January 2008. Default risks are growing in Portugal and Spain too, the eurozone's fourth biggest economy.
The problem is that default dangers in Greece – where €20bn of debt falls due in April and May – are making creditors think twice about lending to other cash-strapped governments. Even if Greece avoids default, this latest crisis means governments everywhere will have to pay more for their finance, which in turn will push up borrowing costs for everyone – right across the eurozone and beyond, including in the UK. This is so-called "contagion".

The Greek government has been desperately trying to convince the rest of the world – the Germans in particular – that it will keep its promise to reduce the deficit in its still-shrinking economy to 8.7pc of GDP next year and less than 3pc by 2012. Yet this would amount to the most severe fiscal contraction in the history of modern Europe. It simply won't happen.

The reality is that Greece has two choices – both disastrous for the eurozone. One is to default, leave the euro and re-establish the drachma at a rate low enough to stimulate exports and growth. To write this is heresy. But with general strikes now in the offing, and the Greek public-sector unions resurgent, such a scenario is possible.

For years, the ECB has set rates low to suit France and Germany. This has made life difficult, causing dangerous debt bubbles, in smaller and more inflation-prone eurozone members. Were Greece to take the exit route, the governments of several other single currency members would come under intense pressure to do the same.

The eurozone's vital cohesion would be seriously undermined. Its ultimate break-up - or, at least shrinkage to a Franco-German rump - would only be a matter of time.
The other, more likely, option is that Greece accepts a German-led bail-out and "muddles through". But even that would spark an eventual eurozone split. On extending assistance, Berlin and Brussels would talk tough and Greece would promise to behave. Anything less wouldn't be tolerated by German voters. After the horrors of inter-war hyperinflation, Germany has spent more than 50 years building policy credibility. Backing a Greek bail-out would be a massive step – the first time in decades Germany has departed from its fiscal and monetary hard line.

Yet the German government will do it. Refusing to bail-out Greece would risk being labelled "bad Europeans" – something anathema to Germany's post-war elite. Berlin also has a massive financial stake in the euro's status as the world's second most-used reserve currency.

Although Greece will be presented as a one-off e_SEnD a "very exceptional" case e_SEnD once that line has been crossed there is no going back. Other eurozone countries will want a bail-out. Why should Portuguese, Estonian or Spanish workers endure austerity and unemployment, while those in Greece were spared? Why them and not us? If big banks can compete for bail-outs, walking the line of "moral hazard", political leaders will do so too. A Greek rescue by the Germans would spark repeated bail-outs.

In the end, voters in the big eurozone economies, faced with their own fiscal problems will say enough is enough. Europe's monetary union will collapse, just like every other currency union in the history of man. The exception is America – yet the US, as the eurocrats hate to acknowledge, had been through a century and a half of political union before the Federal Reserve was founded in 1913.

That's the key difference. America is a political union, with a system of explicit inter-regional fiscal transfers, and the eurozone isn't. That's why the single currency will ultimately split and be exposed as what it is – a triumph of European hubris and political vanity over unavoidable economic logic.

• Liam Halligan is chief economist at Prosperity Capital Management

GBP/USD: The 1.5830-1.6000 Levels To Cap Recovery

GBPUSD: Consolidation to corrective price action dominated most of GBP’s activities the past week pushing it a higher close at 1.5697. This is coming on the back of its decline  off its 2009 high at 1.7041. While that continues to be seen, we expect its resistance zone between the 1.5830 and 1.6000 levels(Dec 30’09/psycho level) to contain corrective strength if tested. This should reverse the pair back down in line with its broader medium term downtrend. Further out, overhead resistance is located at the 1.6068 level, its Feb 03’10 high where a reversal of roles is expected. On the downside, strong support lies at its 2010 low at 1.5532 where a clean penetration will activate the resumption of its medium term downtrend towards the 1.5351 level, its May 12’09 high with a turn below there opening up further downside risk towards the 1.5276 level, its .50 Fib Ret(1.3501-1.7041 rally) ahead of its May 10’09 low at 1.5057.

Weekly Chart: GBPUSD

EUR/USD: Threats To Downside With Eyes On 1.3584/30 Levels

EURUSD: The pair may have closed the week almost flat and printing a hammer candle on the daily chart but while it holds below its Feb 09’10 high/Feb 01’10 low at 1.3838/51 and the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high, we see risk to the downside. With that said, the pair retains its broader weakness activated from its 2009 high at 1.5143 and should push towards the 1.3584/30 levels where a break will clear the way for the resumption of its medium term downtrend towards its .61 Fib Ret/May 18’09 low at 1.3422/09 and then its Jun 03’09 low at 1.3211.Its weekly RSI is bearish and pointing lower supporting this view. However, the immediate risk to our analysis will be its Friday hammer print triggering a corrective recovery higher which should target its Feb 10’10 level at 1.3675 at first with a cut through there exposing its Feb 09’10 high/Feb 01’10 low at 1.3838/51. We expect a reversal of roles at this key resistance zone capping further upside gains and turning the pair back down again. Above the latter level if seen will bring the 1.4025/28 levels, its Jan 21’10 low/Feb 03’10 high into focus.

Weekly Chart: EURUSD

Can Anyone Fix The Euro Puzzle?

A crisis-strewn week has left the single currency on the edge of a precipice, write Edmund Conway and Bruno Waterfield
 
The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours.

It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.

By now, the story will be painfully familiar. The southern European nation was having trouble raising money. Never the most sensibly-run economy, Greece had seen its budget deficit balloon to terrifying proportions in the wake of the recession sparked by the financial crisis. To make matters worse, the incoming government, led by Prime Minister George Papandreou, had uncovered the fact that their predecessors had hidden billions of euros worth of borrowing outside their official statistics. The combined effect was to cause a sudden sharp increase in the country's borrowing rates and its default insurance spreads, as investors speculated that it was entering a fiscal debt trap from which it could no longer escape.

In such circumstances, a country would devalue its currency, but this is not an avenue open to a member of the euro like Greece. With investors pulling their money out of the country at such a rapid rate that the interest rate spread between Greek and German government bonds hit its highest level since the creation of the euro, it became clear that someone was going to have to step in and help.
It wasn't merely that Greece, a relatively small economy, was close to collapse; it was that, left unchecked, the panic could spread to Spain, Portugal, Italy or Ireland – all of whom suffer the same ballooning budget deficits and overburdened consumers.

For a whole swathe of euro members to be allowed to crumble would beg questions about the entire euro project. Indeed, as Papandreou pointed out at the World Economic Forum at Davos last month, the attack could be seen as a speculative assault on the euro, targeted at first through its "weakest link". As if to bear out his point, figures from the Chicago Mercantile Exchange released on Monday indicated that speculators had amassed their biggest positions against the currency since its foundation more than a decade ago.

So it was that a week before Thursday's summit, in a bilateral meeting in Paris, Sarkozy told Merkel that France and Germany would have to mastermind some kind of plan to protect Greece. His broad proposal was that the northern European nations should at the least issue a statement promising to stand behind Greece, and perhaps go so far as to spell out how much they would put into a potential lifeboat. Merkel was not convinced. For one thing, she was well aware that Sarkozy had his own political motivations for such a move: the alternative, an International Monetary Fund (IMF) bail-out, would enable IMF chief Dominique Strauss-Kahn, Sarkozy's most likely opponent at the next French election, to ride in and "save the euro".
 
But, more fundamentally, by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece's lead. Moreover, under the German constitution, such moves were legally tricky to organise.
And so the battlelines were drawn prior to a week of frantic behind-the-scenes negotiations as the French and Germans tried desperately to find common ground.

Finally, it seemed as if the ministers had patched together a deal. Some kind of bail-out package – a "firewall" provided by a "coalition of the willing", according to insiders – would be revealed at the summit.

Then came van Rompuy's excuse about the snow. But it wasn't ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," before adding: "The Greek government has not requested any financial support."

The hope was that the statement alone would be enough to reassure markets that in the event of a proper "sudden stop" in funding to Greece, the rest of the euro area would step in. However, the financial crisis has proven that without concerted plans to back them up, statements of broad intent are pretty useless at containing market concerns.

Within moments of the statement, the euro dropped to a nine-month low against the dollar and share prices in the euro area stalled. The rot continued on Friday and, according to economists, will persist unless finance ministers meeting tomorrow provide any detail on what a rescue package might involve.
What makes any hopes for clarity appear forlorn is that the euro has no mechanism for dealing with crises of this sort. It is monetary rather than fiscal union. As Martin Feldstein, a Harvard professor, puts it: "There's too much incentive for countries to run up big deficits as there's no feedback until a crisis."

The ECB could offer the country extra liquidity support, but there is a sense that unless other euro nations dip into their pockets the suspicions over Greece will linger – and those about the rest of the euro's debt recidivists. Juncker's plan would involve a web of bilateral loans from euro members, perhaps being made not directly but through state-owned banks, so as to circumvent those German constitutional obstacles.

However, it is an open question as to how the populations of those donor countries will take the proposal that they once again come to the rescue of their misbehaving neighbours. Nor indeed how the Greeks will take it when it emerges that their coruscating deficit cuts and public sector wage cuts are being overseen by the Germans. Although the political will is clearly still strong in Brussels to fight off any talk about a euro crisis, it is clear even to fans of the single currency that this is its single greatest test. According to Albert Edwards of Société Générale (himself not, it should be pointed out, a fan), "any 'help' given to Greece merely delays the inevitable break-up of the eurozone". The problem, he adds, is a "lack of competitiveness within the eurozone – an inevitable consequence of the one-size-fits-all interest rate policy.

"Even if the PIGS [Portugal, Ireland, Greece and Spain] could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative [and probably absolute] deflation."
This problem – that under eurozone rules Germany is able to pursue an entirely divergent economic strategy to its Mediterranean counterparts – suggests that the best course of action may be for Germany to pull out of the currency union, according to former Bank of England policymaker David Blanchflower.

"That might be the only solution," he says. "At the moment it simply isn't working. And the imbalance makes it almost impossible for countries like Greece or Ireland to escape from this situation."
It is not merely economists who have clocked on to this inherent weakness. According to Simon Derrick, of Bank of New York Mellon, the mood among investors feels not dissimilar to the time the Exchange Rate Mechanism faced speculative attack in the early 1990s.
Back then the targets were currencies; this time they are government bonds. But the objective is the same – to test whether governments really have the political will to persevere with a system plagued by inherent economic weakness and illogicality.

Has any hedge fund put its head above the parapet in this destructive trade, as George Soros did back then, owning up to shorting the pound before successfully "breaking" the Bank of England? Not yet, though the rumours are that John Paulson, the man who made billions betting against the US housing market, has significant positions against some of the weaker euro members. But a currency union is rather more difficult to break than an exchange rate agreement. Betting against the Europeans' political will to further integration remains a gamble.

Still, the difficulties have at least offered Gordon Brown a rare opportunity for genuine self-satisfaction. After all, he decided in 2003 – against Tony Blair's wishes – not to join the single currency, and only now is it clear how wise that decision was. Britain, though marred with similar fiscal difficulties as Greece, has at least had the luxury of being able to devalue the pound.
Business Secretary Lord Mandelson, the arch europhile, still clings on to the dream, saying last week: "I think in the longer term it would be in Britain's interests to be part of the eurozone."
Even with sterling, the UK can hardly rest easy. For one thing, British banks have a large balance sheet exposure to the troubled Club Med nations – estimated by the Bank for International Settlements to be around £240bn – so any collapse there would trigger a secondary crisis in London.
Second, the Greek crisis serves as a reminder that no country is immune to a sudden investor exodus. And if one runs one's finger down the list of leading nations, no prizes for guessing which country has a Greek-style combination of rocketing budget deficits, high current account shortfalls and rising national debt.