Daily Forex Analysis by Finexo.com 25/02/2010

Past events:

• USD New Home Sales out at 309K, versus expected 354K, prior 348K
• EUR Industrial New order m/m out at 0.8% versus expected -1.1%, prior 2.7%
• AUD Private Capital Expenditure q/q out 5.5% versus expected 1.5%, prior -5.2%

Upcoming events:

• USD Fed Chairman Bernanke Testifies (continued from yesterday)
• EUR German Unemployment Change (855GMT)
• EUR M3 Money Supply y/y (900GMT)
• GBP BoE Gov King Speaks (930GMT)
• GBP CBI Realizes Sales (1245GMT)
• USD Core Durable Goods Orders m/m (1330GMT)
• USD Unemployment Claims (1330GMT)
• AUD Private Sector Credit m/m (out tomorrow 1230GMT)

Market comments:

In his first appearance before congress, following his re-appointment last month, Federal Reserve Chairman Ben S. Bernanke offered a relatively somber view of the U.S economic situation before Congress yesterday, despite recent signs of strong growth.

Yesterday Bernanke presented the highly awaited for Federal Reserve’s semiannual Monetary Policy Report to the Congress. The Fed chairman opened to admitting that while the U.S economy is making a promising recovery, economic conditions still requires low interests to encourage both consumer and business demand, especially once the federal stimulus package expires. “A sustained recovery will depend on continued growth in private-sector final demand for goods and services,” Bernanke told the House Financial Services Committee today in Washington at the start of his two days of semi-annual testimony before Congress. “Private final demand does seem to be growing at a moderate pace.”

Bernanke’s testimony follows the Federal Reserve Board’s decision last week to raise the cost of direct loans to banks by 0.25bps to 0.75%. Last week, the Fed portrayed the move as a “normalization” of bank lending and said it had not altered the outlook for the economy or monetary policy -a message that was clearly re-iterated by Fed chairman throughout yesterday’s testimony. The currency market was hoping that last’s week unexpected move would lead to a possible near-future “Tighter” monetary policy. While Bernanke pointed out that the Fed will need to start tightening its policy “ at some point”, for the mean time, slack labor markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25% for more than a year, low “for an extended period.”

In reaction to the news that the FOMC would be keeping its benchmark interest rates exceptionally low for some time, the greenback slide against both the Euro and the Yen.

In addition, despite signs that the U.S housing market was beginning to recover, sales of New Homes fell to its lowest level on record- further fueling the dollar’s decline against its major currency counterparts. Purchases of new homes within the U.S tumbled below expectations to an annual pace of 309,000, signaling that the added extension of the government tax credit may not be enough to revive demand. This report further highlights Fed. Chairman Bernanke’s prior comments that even though the economic situation of the U.S is making a promising recovery, homebuilders continue to face intense competition from foreclosed properties that are continually driving down the prices in the market, while at the same time robbing the demand for new homes. The result of which causes a chain reaction –decrease sales of new homes leads to a decrease in demand for construction, thus a decreased amount of employees in that field – directly effecting the level of employment for the country.

Following the release of Bernanke’s testimony to the House Financial Services Committee, and pessimistic U.S. Home Sales data- the U.S dollar plunged against its major counterparts. The EUR/USD broke a session high at 1.36250, and closed at 1.35371, up 0.18% from the day’s opening price.

Today is the second half of Bernanke’s testimony of Congress; in addition, the U.S will release the Unemployment claims for last week, expected to drop to 461K, from the previous week’s 473K joblessness claims. Also out today (1330GMT), the monthly Core Durable Goods Order. Orders have been revised to the upside in the past month, from 0.3% to 1%; while, Core orders have been revised to 1.4%. The positive trend is expected to continue, with a rise a rise of 1.6% in orders and 1.2% in core orders. This figure doesn’t touch the consumers, but has a long term impact on the economy.

For a second month in a row European industrial orders unexpectedly rose in December, led by a rapid increase in the demand for capital goods such as machinery and equipment. While orders to industrial companies in the 16-nation euro area rose 0.8% for the last month of 2009, this increase was preceded by a previous rise of 2.7%. From the year-earlier month, industrial orders increased 9.5%, the first annual gain since July 2008, as a depreciated Euro is making European exports more competitive as the global economic recovery begins to gather substantial strength (in the past three months, the EUR has plunged as much as 9.6% against the U.S dollar). However, with the economic recovery at a virtually stand still, expanding only 0.1% in the last quarter of 2009, manufactures within the zone may now be reluctant to increase spending and hire more employees. Nonetheless, shortly after the release of the better than expected Industrial New order figure, the Euro advanced against the greenback- reaching a session high of $1.3560.
Despite closing up against the U.S dollar yesterday, the Euro has slide below yesterday’s closing price of $1.35371, hitting a low of $1.34500, in Asian trading session early this morning. Worries about a possible downgrade of Greece weighed, with Standard and Poor’s saying on yesterday that it may cut Greece’s BBB+ rating by one or two notches within a month. The euro slipped to a one-year low against the yen on this morning, plunging as much as 1.5% to 120.232 from this morning opening price of 122.090.

At half past midnight, GMT, the Australian Bureau of Statistics published its quarterly Private Capital expenditure – considered one of the most important releases of the week. After plugging 3.9% in the third quarter of 2009, the only negative figure amongst a sea of positive data for Australia, the Private equity capital expenditure rose 5.5% – indicating that the economy “down under” may be strengthening enough for the RBA to raise interest rates in the next week. The Aussie traded at 89.35 U.S. cents, from 89.36 cents just before the report was released.

Shortly after midnight tomorrow, the RBA will announce the monthly Private Sector Credit. While this monthly report complements the previous private sector indicator, it tends to show small changes. The report shows the change in the total of value of new credit issued to consumers and businesses- more credit generally means more spending and is therefore good for the economy. After many month of hovering around the 0% market, last month’s increase of 0.3% was a pleasant surprise for the Australian economy. This time around, analysts are predicting another rise of 0.2% for February.

Written by Finexo.com