Market Outlook for January 27, 2012 ~ eToro

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By Cory Vi & Andrew Su on Jan 27, 2012

In a week that the Federal Reserve announced it would keep interest rates low through till at least 2014 and Bernanke said that policymakers are considering further bond purchases to boost growth, markets continued to celebrate as it appears that more free money is about to be pumped into the financial system. Treasury yields dropped to an all time record low as PIMCO's Bill Gross predicted a third, fourth and fifth round of quantitative easing. The USD has, not surprisingly, taken a pounding over the week as the QE junkies got the fix they had all prayed for. The EUR is trading higher at above 1.3150.

The surprise news by the Federal Reserve had markets reprice the likelihood of further quantitative easing and sparked a flurry of activity by investors to revalue assets. In our opinion, the reaction in the markets has been overdone and we will likely see a retracement of the USD move in the coming sessions. The impact on riskier currencies such as the Australian dollar has seen it rally to as high as 1.0665 in trade today.

US equities fell yesterday after the Dow Jones rose to its highest levels since May 2008 during the day. Financial stocks where hit by worse than expected new homes sales data which showed a fall in December, for the first time in 4 months. US jobless claims rose while orders for durable goods rose more than expected. Asian stocks closed marginally higher while European stocks are soft as the Greek debt swap negotiations continue.

Commodities News

Commodity prices continued to be buoyed by the possibility of further easing by the Fed. The CRB gained for the second day yesterday rising 1.05 points to 317.42. WTI crude oil has risen above $100 despite news of increasing output from Libya. Precious metals have consolidated recent strong rise with gold easing 0.21% to $1,726 and silver losing 0.35% to $33.60. Soft commodities are mixed while copper has gained 0.7%.

FX News

EUR/USD

EUR/USD spent the day consolidating after peaking at 1.3183 yesterday. If the technical traders are right, we may have seen the high for a long while and the completion of a technical retracement which began from 1.2624 (16 Jan). However we're not totally convinced and we cautiously think 1.3244 may be the top if 1.2950 holds. Fundamentally, the latest on the Greek saga is that the Institute of International Finance (which represents the creditors) and Greek officials continue negotiations and may well continue over the weekend. On the radar for the rest of the day is US Gross Domestic Product Q4 (annualised), GDP Price Index (1:.30 GMT) and the University of Michigan Confidence survey (14:55GMT). For US GDP, the market is expecting 3% (last 1.8%) and the Price index is expecting 1.9% (last 2.6%). For the U. Mich survey market expects no change from previous 74. From now until the end of the New York session we see a range of 1.3023 - 1.3170.

USD/JPY

Today USD/JPY seems to have taken out short term stop losses below 77.00 after peaking at 78.27 two days ago. The range so far has been 76.88 - 77.49 at the time of writing. News-wise, Japan's core CPI fell for the third consecutive month in the year to December (-0.2%). Japanese retail trade (YoY)(Dec) rose 2.5% against market expectation of 2.1% and the previous of -2.2%. According to Reuters "The Bank of Japan and the government concede that the economy is in a lull, and they could come under increasing pressure to support it with currency intervention and monetary policy easing as Europe's debt crisis weighs on external demand." With that the expected range for the rest of the New York session is 76.54 - 77.72.

GBP/USD

Despite the much weaker than expected CBI Realized Sales data has man-aged to hold onto the recent bid tone of the markets whilst other currencies like Euro and AUD have given up some of the FOMC gains. Talk of EURGBP and GBPJPY flow helping a bid market look to be correct but at this stage we have been unable to confirm due to most of our Australian interbank contacts taking an extra long weekend. During the US morning their was a spike to 1.5730 on the back of weaker than expected New Home Sales but as we close the book on Thursday trade the price is just below 1.5700. It has been a level solid week for the majors against the USD with the FOMC surprising everyone for their calls for a longer period of zero interest rates. However, what we can see into the weeks close in just under 24 hours is a market looking to reduce risk with profit taking from the bulls more than likely going to take the price towards 1.5620 today.

AUD/USD

AUD/USD had a very positive climb during the Australia Day holiday thanks to the expectations that US interest rates will stay close to zero until mid 2014. The lift has been solid as the tone of the short end of the markets was already looking for positive European stories and this was the next best. The solid performance in the Euro and Sterling helped drag the thin liquidity AUD above 1.0540 and 1.0620 offers. Option protective offers ahead of 1.0700 and some stretched corporate orders capped the rally and as the dust continues to settle on the FOMC of Wednesday the mixture of better and weaker data in both Europe and the USA has brought price back towards 1.0600 currently. There is no data for the Australia session and with yesterdays holiday most senior traders would be taking an extra long weekend . A fall below 1.0590 should see intraday names target 1.0550 pivotal support and if that gives way a stop hunt should be seen. Topside resistance should remain ahead of 1.0700 till the end of the weeks trading.

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