US Data to Close out the Year on a High Note

There has been a noticeable trend of stronger US economic data over Q4. Today’s last batch of US numbers for this year may show the US economy go into 2012 on a high note.

Forex Market Trends

Daily Trend down down down up down down
Weekly Trend down down down up down down
Resistance 1.3460 1.6165 81.50 1.0065 1.0450 0.8510
1.3230 1.5890 79.50 0.9780 1.0340 0.8450
1.3050 1.5770 78.30 0.9550 1.0220 0.8400
Support 1.2870 1.5410 77.15 0.9065 0.9860 0.8350
1.2675 1.5270 76.50 0.8760 0.9800 0.8280
1.2330 1.5110 75.56 0.8570 0.9660 0.8140

Economic News

USD – US Data to Close out the Year on a High Note

There has been a noticeable trend of stronger US economic data over Q4. Today’s last batch of US numbers for this year may show the US economy go into 2012 on a high note. This afternoon we’ll get pending home sales, unemployment claims, and the Chicago PMI. Last week’s housing data was mixed with existing home sales failing to meet market expectations while new home sales showed a strong 315k report. The uptick in previous manufacturing surveys hints that the Chicago PMI may come in stronger than the 60.4 consensus forecasts. Strong data could take the USD off of its yesterday’s highs, though the downtrend for the EUR/USD remains firmly intact. The EUR/USD has support at 1.2870, the 2011 low. Resistance is back that the broken trend line from the mid-December low at 1.0370.
EUR – EUR/USD Yawns after Successful Italian Debt Auction

Italy succeeded in raising EUR 9Bn in 6-month bills and is now only paying 3.25% versus 6.50% paid in November’s auction. It’s a significant difference for short term funding needs though the benchmark 10-year BTP yield continues to trade near 7% which indicates the pressure remains on Italy. In another sign that tensions are running high in European financial markets European banks parked EUR 452 Bn in the ECB deposit facility, a record for this year. This suggests banks are not using funds from the LTRO to buy sovereign debt but rather European banks remain risk averse.

The market’s reaction to the successful Italian debt auction was almost nonexistent with the sharp declines in the EUR/USD coming about at the opening of the North American trading session.

Today there will be another Italian auction and investors will be eyeing its results. The EUR/AUD traded at a fresh all-time low while the EUR/CAD continues to move lower. The next support for the EUR/CAD is found at 1.3080, from the mid-January low, followed by the 2011 low of 1.2775.

JPY – Deflationary Pressures Continue to Plague Japan

Yesterday Japan released a batch of economic data that failed to live up to expectations. The most worrying piece of data is the core CPI data numbers which show deflationary pressures are potentially having a negative impact on the Japanese economy. The core CPI data showed a -0.2% y/y decline over the month of November after prices fell in October by -0.1% y/y. The Tokyo core CPI improved slightly, falling by -0.3% after a -0.5% y/y drop in over October. Also worrying is disappointing industrial production that declined -2.6% m/m. Consensus forecasts were for a drop of only -0.7%. Household spending plummeted by 3.2% y/y. Perhaps this is a sign Japanese consumers are delaying purchases on anticipation of additional price declines.

The US Treasury report signaled out Japan and not China for its currency market intervention. Despite the harsh rhetoric the move doesn’t signal a policy change for the US which hasn’t participated in a JPY intervention since the earthquake/tsunami in March.

The USD/JPY has continued its decline for the fourth consecutive day following the batch of poor data. The pair failed to make a break of 78.20 at its falling trend line from the 2007 high and is looking to test the initial support of 77.15 off of the December low. A break here opens the door to the November low of 76.55.

Crude Oil – Iranian Threats Fuel Crude Oil Price Increases

Spot crude oil prices have steadily climbed on the Iranian threat to close the Strait of Hormuz should western nations impose sanction the Iranian oil industry. Comments on Tuesday from Iran’s first vice-president did little to reduce tensions when he said if the west imposes sanctions on the Iranian oil industry then Iran will close the Strait of Hormuz. A majority of Middle East oil passes through this waterway and the US Department of Energy considers the Strait of Hormuz as, “The world’s most important oil chokepoint.” The Iranian threat to close the strait is not a new one but the renewal of the tough talk and a US led strike on Iranian nuclear facilities has helped to push crude oil prices higher by almost $10 since the mid-December low.

Spot crude oil has run into a resistance line from the November and December highs which come in at $101.60. A break here and the next resistance level is found at $105.50 from the mid-April low.

Technical News

The weekly chart is telling. After a break of the support line from the January and October lows the pair rose back to this line where it turned into resistance at 1.3200 as often occurs with previously broken trend lines. Weekly stochastics are oversold though the monthlies may still have room to run. 1.2670 will be an important support level as the triangle pattern from the 2008 and 2010 lows on the monthly chart is found here. Below this support there is the 2008 low of 1.2520. Resistance is located back at the 20-day moving average of 1.3215, and the December 9th high of 1.3430, which coincides with the 38% Fibonacci retracement from the October high to the December low.
In a similar fashion cable has weekly stochastics which are oversold while the monthlies continue to decline. Over the course of December sterling has failed multiple times to establish a beachhead above the 1.5770 resistance. The October low of 1.5270 is the initial support though market participants will likely eye the rising trend line from 2009 which is found at 1.5110. A break of the 1.5770 resistance could spur a bout of short covering where the bears may regroup near the November 18th high of 1.5890. This level coincides with the 61% retracement of the October to December move. Only a break of the October high at 1.6165 would turn the technical sentiment from bearish to bullish.
The USD/JPY is testing the downward sloping trend line from the 2007 high which comes in this week at 78.30. A break here and the USD/JPY would most likely encounter selling pressure at the October high of 79.50 and the July high of 81.50. The 100-week moving average at 83.30 is an additional level that long-term players will be watching for confirmation of a bullish technical move. That being said the long term trend remains to the downside and the pair has support at the December low of 77.15, and the November low of 76.50, before the pair’s all-time low.
A monthly close above the 20-month moving average at 0.9385 would confirm USD strength. This will put in play the 2011 yearly high of 0.9780, and the December 2010 high of 1.0065. The technical level that stands out the most is 1.1140, off of the long-term downtrend line from the 2003 high. Initial support is back at 0.9065, with the potential for a deeper move back to the pivot from October at 0.8565.

The Wild Card

The weekly chart shows a triangle consolidation pattern has formed from the October high and low with the pair looking to test its rising support at 1.0130. Forex traders should note that a close here on a weekly basis and the pair could go onto test 0.9750, the previously broken channel line from May 2010. However, should the pair bounce at the support line of the triangle pattern the upper line comes in at 1.0420, while the triangle consolidation pattern has a measured move of roughly 700 pips.

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