US DOLLAR: BIG ANNOUNCEMENTS FROM WASHINGTON

Kathy Lien (http://www.gftforex.com/)
This morning, the Bureau of Labor Statistics reported that January was another month of massive job losses. For the third time in a row, more than 500k Americans lost their jobs. The market was looking for payrolls to drop by 540k, but instead they fell by a whopping 598k ( Instant Insight on January Non-Farm Payrolls ). Yet, currencies and equities traded like non-farm payrolls increased rather than decreased but this baffling response to a very negative number can be easily explained by the prospect of help from Washington.

Politics Overshadowing Economics

Politics will come head to head with economics next week and if today’s price action is any guide, then politics could overshadow economics. The Obama Administration is expected to make a big announce at noon (Eastern Time) on Monday. Treasury Secretary Timothy Geithner will be unveiling a much awaited bank rescue plan that will “be critical in supporting an effective and lasting economic recovery,” according to Treasury department. Geithner will talk about how the Obama Administration plans on getting credit flowing again to family and businesses while imposing new measures and conditions to strengthen the accountability, oversight and transparency in how taxpayer dollars are spent.” The focus will be on how banks will be able to offload toxic debt from their balance sheets. The Treasury could announce a bad bank to absorb the assets or provide a guarantee against losses on the illiquid assets or both. They are also expected to announce some direct support for mortgage foreclosures. If investors are satisfied with Obama’s financial rescue program, the optimism may last. We have long said that fiscal stimulus is one of the few things that can trigger a meaningful recovery in risk appetite. In addition to Geithner’s speech, Fed Chairman Ben Bernanke will be testifying on Tuesday while the market still awaits the Senate to vote on the economic stimulus package, which could happen next week.

EUR/USD: WILL DEEPENING RECESSION FORCE ECB’S HAND?

The improvement in risk appetite helped to drive the EUR/USD within a whisker of the 1.30 price level. Economic data was mixed with the French trade deficit narrowing but German industrial production plummeting. Even though Germany is the world’s third largest economy and France is the world’s sixth, the Germany economy is only 20 percent larger than France, making them both major contributors to the Eurozone. For the time being France is faring much better than German economically. This upcoming week, we will learn how the region as a whole is doing through their fourth quarter GDP report. The recession is expected to deepen significantly which may renew speculation that the ECB could take interest rates towards 1 percent. A 50bp rate cut is widely expected and to some degree validated by Trichet’s comments earlier this week, but weaker growth could force a heavier hand from the central bank. Meanwhile, the Swiss franc sold off against the Euro following comments from Swiss National Bank member Jordan who warned that the central bank is watching the exchange rate closely. The SNB has been very unhappy with the appreciation of the low yielding Swiss Franc but based upon their contradicting comments with the Swiss government, we believe that more verbal intervention is more likely than physical intervention.

EUR/USD: Currency in Play for Next 24 Hours


The currency in play for Monday of the upcoming week will be EUR/USD based on German Current Account and Trade Balance being released at 7:00GMT or 2:00AM EST. After a massive downtrend which has been in place since late last year, the pair seems oversold and entering the Range Trading Zone which we determine using Bollinger Bands. Since the beginning of the year, the pair formulated a downward slopping triangle, which proved to be effective numerous amount of times. The pair is on the verge of breaking the triangle upon moving past its first resistance which is at a psychological level of 1.3000. If the resistance of the upper line of the triangle is negated the next level of resistance will be 1.3180, which is a 78.6% retracement of December high and this year’s low. Nevertheless, the pair may establish another leg of downtrend if support is broken at 1.2705 which is a 2009 low for the pair.