Analysis and Signals
February 11, 2010

Fundamentals

The calendar of the previous week was a bit light and I want to note two basic events – consumer credit, payrolls results and yesterday’s B. Bernanke testimony text release. Outside worse than expected Non-manufacturing ISM index (that we’ve talked on a previous week), some growth in unemployment claims data and reducing on NFP for 20K, we see some positive signs. First, Consumer credit has contracted just 1.7B$ instead of -10B$. In spite of reducing NFP in January, unemployment fell to 9.7%, the trend in temporary hiring shows job growth – the number has risen in January for 52K and to 248 K since October. The household employment shows growth as well and the household numbers a bit ahead of NFP. So, all these movements are pointed towards the stable trend in recovery.
Ben Bernanke's testimony text was blurring a bit. As always the Fed has tried to be smooth and predictable in their decisions in order to not shake the markets, so they were very cautious in their rhetoric. The general idea was in line with systematic exit from emergency monetary program and taking course on a normal Fed Fund Rate. The Chairman noted the need for exit from temporary lending programs, stating that total credit outstanding under all programs had fallen from 1.5Trln$ at 2008 to just 100B$ in the most recent period. The main thing in all the testimony is that Fed will not use Fed fund rate tightening just yet, because the inflation pressure is still anemic and early tightening may hurt households and businesses. The Fed rate will be used in line with changing economic situation and the current regulation of liquidity will be made by reverse repos, raising discount rates and sale of securities held.
Concerning the situation in the EU… First, there existed two possible ways – bailout of a Greece from EU and support from financially strong Germany and France to resolve the problem. In general, the first way is simply impossible for many reasons – the Euro-Zone has invested much in Greece. Ireland and UK hold about 23% of total issuance, France – 11%, Italy and Benelux – 6% each. The default of Greece will lead to serious problems in banking sector in the EU. Second, the bailout of Greece (then possibly Spain and Portugal) will lead to destruction of Intra-Euro Zone trade and note that about 41% of German export is based on purchases by EU countries. This will reduce EU GDP much and cause heavy pressure on EUR. From the other side, Greece has not much space to regulate its huge deficit – they can’t reduce wages and rise taxes much, deflate the debt or debase the currency. So, it means that exit will be slow and gradually. But information about support from senior brothers such as France and Germany can calm down the situation in the short term and switch investor’s attention to other questions. Nevertheless situation will resolve slowly and this will press on the EUR in a long-term.

Résumé: Fundamentals have not changed much. The main risk for US is a stability of macro data. Problems in the EU are long-term and can’t be resolved fast; Japan's economy depends much on exports mostly to the USA and Europe, so it is unlikely that it will be able to gain momentum in front of the US economy. So, circumstances adjust probability in favor of the USD. I expect that the EU will support Greece – there will be no bailout decision. This can support the EUR in the short term but the slow resolution of the situation will press on EU currency in the long-term.

Technical
Trade EUR/USD possibilities (1):

Monthly

February close above 1.3975 can lead to previous highs at 1.5150-1.52 area.

Weekly

We have down trend, no oversold conditions. The main thing is a close of current week. If it will be below 1.3740 then downtrend should continue. If not – then retracement higher is more probable at near term.

Daily

At daily timeframe we have potential signal for trading. If market will close today below 1.3727 it will mean that daily bullish trend will not confirmed - then I will be search possibility to enter short with 1.3565 target. If daily bullish trend will be confirmed – then retracement up is possible to 1.3930-1.3960 area.