European Morning Update 31st January 2008
Asia sells Dollars into rallies
Releases from Australia:
December Forecast Actual
HIA New Home Sales (MoM) - 2.6% (prior) - 1.3%
Private Sector Credit (MoM) +1.2% +1.1%
Private Sector Credit (YoY) 16.6% 16.5%
Private Sector Credit remained buoyant in December recording a sturdy 16.5% YoY rise over 2007. Indeed, both consumers and businesses still see current interest rates as providing no barrier to borrowing – and that is even after banks have begun to pass on funding costs.
Following yesterday’s call for a 50bp hike in rates the RBA may well be beginning to ponder such a move.
However, while consumer credit booms the impact of higher rates does appear to be hitting home with a second consecutive month of declines in sales. This is rather unusual given the shortage of houses given to rent which is forcing up rental prices. However, buyers are wary of the fact that the global economy is slowing and do not want to commit to mortgages at higher rates.
Releases from Japan:
Forecast Actual
December Labor Cash Earnings (YoY) - 0.2% - 1.9%
December Housing Starts (YoY) -19.1% -19.2%
December Construction Orders (YoY) - 6.3% +4.7%
January Nomura/JMMA PMI 52.3 (prior) 53.5
A mixed bag of news from Japan. The Nomura/JMMA PMI surprised to the upside registering a rise for the 3rd consecutive month to the fastest pace over 12 months. This is quite surprising given the lower level of exports and the lackluster domestic market. Rising oil and raw material prices are underscoring price rises and this prompted the group to warn that growth could be endangered by continuing rises in input prices.
The PMI may well be strong but it still hasn’t caused any rise in wages. In fact, as warned, they’re on the decline. Cash earnings were down by – 1.9% YoY and the recent downturn has predictably caused a decline in overtime earnings to – 0.8% YoY.
It has been very clear from numbers over the past year that companies are avoiding higher fixed costs by covering the costs of manpower by asking their employees to work more overtime. It was here that incomes received a boost. As exports have declined so has overtime and thus income in the pockets of householders…
The following economic releases are due today:
December
German Retail Sales (MoM) +1.7%
German Retail Sales (YoY) - 4.2%
French Producer Prices (MoM) +0.2%
French Producer Prices (YoY) +4.5%
Italian Producer Prices (MoM) +0.2%
Italian Producer Prices (YoY) +4.5%
Euro-zone Unemployment Rate 7.1%
U.S. Personal Income (MoM) +0.4%
U.S. Personal Spending (MoM) +0.1%
U.S. PCE Core (MoM) +0.2%
U.S. PCE Core (YoY) +2.2%
January
German CPI (MoM) - 0.3%
German CPI (YoY) +2.7%
U.K. Nationwide House Prices (MoM) - 0.4%
U.K. Nationwide House Prices (YoY) +4.2%
German Unemployment Change -43K
German Unemployment Rate 8.3%
Euro-zone CPI Estimate (YoY) +3.1%
Euro-zone Consumer Confidence -10.0
Euro-zone Economic Confidence 104.1
Euro-zone Business Climate Indicator 0.86
Euro-zone Industrial Confidence 2.0
Euro-zone Services Confidence 13.0
U.K. GfK Consumer Confidence -15.0
U.S. Initial Jobless Claims (26th) 317K
U.S. Continuing Claims (19th) 2688K
U.S. Chicago Purchasing Managers 52.0
I really don’t know quite to make of yesterday. I winced as the Euro climbed through the 1.4832 resistance but then the Swissie and Pound reversed perfectly from their Dollar support areas. The Canadian Dollar too was spot on. What is more, in general the momentum conditions in hourly and 4-hour chart are showing bullish divergences – the hourly being a little weak though.
I would love to say that I’ll still be Dollar bullish but in the circumstances of yesterday’s events it would be wiser to look for the one last thing that would confirm – that is price actually has to prove that it will reverse the downtrend. Until it does there is still no reason why the Dollar couldn’t make new lows though I reserve judgment on how far this will go – I suspect not by an excessive amount.
One more point to keep in minds is that the daily charts are generally warning of a trend reversal also. These new lows in the Swissie are generating a bullish divergence and a minor new high in the Euro would do the same. The Pound is still firmly in a downtrend.
The only real unknown is Dollar-Yen – but having seen the 5-wave move down to 104.95 I still feel the upside is more at risk even if the short term wave structure is very messy.
Thus, keep an open mind. The market may have a bearish mind-set and sometimes that is right to follow, but at major reversals the market is almost nearly always caught out. It therefore warns us to be nimble and not get too entrenched on either side for the while.
Note important support and resistance areas:
USDJPY EURUSD USDCHF GBPUSD
Res: 107.45-88 1.4955-76 1.0948-88 1.9962-06
Res: 106.64-90 1.4875-06 1.0867-02 1.9890-12
Spt: 105.56-73 1.4816-30 1.0795-06 1.9810-30
Spt: 104.95-05 1.4736-63 1.0673-13 1.9727-50
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