BK Asset Management's Daily Trading Outlook

BK Asset Management is a forex fund run Boris Schlossberg and Kathy Lien, two traders, authors, and forex media guests that each bring over a decade of trading experience to their service. The fund focuses short-term trading based on analysis of the 24 hour global news cycle – i.e. upcoming economic news releases and political announcements – as well as technical patterns and market sentiment. This thread will be used to highlight the daily perspectives of Boris and Kathy, particularly the news announcements and technical levels they believe will setup trading opportunities.

Additional commentary as well as proprietary trading setups can be found by registering on the BK Asset Management web site (bkassetmanagement.com).

Midday Market Drivers for March 6, 2013
ADP beats helping fuel Dollar rally
Loonie Swoons on dovish BOC
Nikkei 2.13% Europe 10.12
Oil $90.62/bbl
Gold $1574/0z.

Europe and Asia:
AUD GDP 0.6% vs. 06%
EUR Euro-zone GDP -0.6%
EUR Euro-zone Household Consumption

North America:
USD ADP Employment Change 198K vs. 172K
USD Factory Orders -2.0%
USD US Fed Releases Beige Book 14:00
CAD BOC Rate Decision rate on hold for foreseeable future
CAD Ivey PMI 51.1 vs. 56.2

The dollar continued to gain ground in midday North American trade as better than expected ADP report added to the positive sentiment towards the greenback that has been building for several days. The ADP showed a gain of 192K versus 178K expected providing yet another upside surprise to the US economic calendar this week.

US data has been remarkably resilient since the start of the year despite the contractionary impact of higher payroll taxes and budget sequester cuts. The ADP report showed that US businesses continued to hire in the face of these macro obstacles and if it accurately forecasts the NFP report due Friday then investor sentiment towards US assets is likely to turn even more positive.

It is becoming more evident by the day that US economy is pulling away from the rest of the G-3 and the dollar which typically used to attract only safe harbor flows, is now increasingly viewed as growth currency. The contrast could not have been sharper earlier in the session when the data from Canada along with the BOC statement was released.

Although Canadian economic performance remains positive, it is clearly lagging US results. Today’s Ivey PMI disappointed with a 51.1 read versus 56.2 expected, but true blow to the loonie came from the BOC statement which noted that,”Current policy ‘will likely remain appropriate for a period of time.”

With lackluster growth and little price pressures the BOC appears to be in no hurry to tighten monetary policy anytime soon. The loonie therefore swooned in the aftermath of the announcement with USD/CAD hitting a high of 1.0338. The pair faces some resistance near the 1.0350 level, but if Friday’s employment reports show that the divergence in labor demand between Canada and US continues to widen the pair could break through the 1.0400 and target 1.0500 near term as flows move south of the border.

The EUR/USD meanwhile tumbled below the 1.3000 level on persistent dollar strength but the pair remains supported ahead of the key 1.2950 level. However, tomorrow’s ECB meeting could prove pivotal. Although few investors are anticipating any policy change, the pressure on European monetary authorities is increasing by the day.

Italy remains a quagmire,while growth in the rest of the union is likely to be negative for the sixth quarter in a row. With France now deep in contractionary territory, only Germany is generating any growth in the region. That’s why some analysts believe that ECB would be wise to lower rates another 25bp especially in light of the fact that price pressure with the EZ are actually decreasing. if Mr. Draghi were to surprise the market in this fashion the EUR/USD would very likely pierce the 1.2950 support and target longer term lows near the 1.2700 level.

– Boris Schlossberg, BKAssetManagement.com

Midday Market Drivers for March 7, 2013
Draghi optimistic – euro bounces to 1.3100
BOE leaves rates unchanged cable snaps higher
Nikkei 0.30% Europe 0.46%
Oil $90.70/bbl
Gold $1589/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 45.6 vs. 36.2
AUD Trade Balance -1.06B vs. -0.51B
JPY Leading Index 96.3% vs. 96.2%
EUR ECB Rate Decision
EUR ECB Deposit Facility Rate
EUR German Factory Orders -1.9% vs. 0.6%
GBP BOE Rate Decision
GBP BOE Asset Purchase Target

North America:
USD Trade Balance -44.4B vs. -42.4B
USD Initial Jobless Claims 340K vs. 350K
USD Consumer Credit n/a

Mario Draghi single handedly dragged euro higher today when he put forth a relatively upbeat view of the Eurozone economy pressing the point that the worst may be over for the region and that the process of recovery will start to kick in as the year progresses.

Although Mr. Draghi acknowledged that the most recent “hard data” in the Eurozone continued to point to contractionary conditions he noted that the latest sentiments surveys have seen an uptick in optimism and he stressed that these reports were more reflective of true conditions on the ground. According to Mr. Draghi, the contraction in EZ economic activity is a function of the overhang from Q4 of last year and that demand should slowly pick up over the next few quarters.

Given Mr. Draghi’s generally sanguine outlook the prospects for an ECB rate cut as early as April diminished greatly and the market rallied the EURUSD in response pushing the pair to a high of 1.3116. However, Mr. Draghi also noted that the ECB has lowered its projection for growth in 2013 taking their GDP estimate to -0.9% from -0.1% and curing the 2014 projections to 0%-2.0% range from 0.2%-2.2%.

In short much of Mr. Draghi’s case rests on the assumption that aggregate demand in the EZ will revive in Q2 of this year helping to drive consumer spending and employment growth. One key point that he emphasized is that much of the fiscal budget cutting has been done and therefore will be less of a drag on EZ growth as the year proceeds.

So far however, there is little hard evidence to support Mr, Draghi’s optimism. The latest points from the EZ including today’s horrid German Factory order numbers show that the contraction is steepening not stabilizing. Therefore, the rally in the EUR/USD may prove to be fleeting if the EZ economic data does not show some signs of improvement relatively soon. For now the EUR/USD appears to have support near the 1.3000 level but that support won’t last if the data does back up Mr. Draghi’s positive prognosis.

– Boris Schlossberg, BKAssetManagement.com

Market Drivers for March 08, 2013
USD/JPY breaks above 95.50 as uptrend accelerates
Trading quiet ahead of the NFP
Nikkei 2.64% Europe 0.72%
Oil $91.58/bbl
Gold $1658/oz.

Europe and Asia:
JPY GDP 0.0% vs. -0.1%
JPY Trade Balance 0.36T vs. 0.11T
CHF CPI 0.3% vs, -0.3%
EUR German Industrial Production n/a

North America:
USD Unemployment Rate 8:30
USD Change in Non-farm Payrolls 8:30
USD Average Hourly Earnings All Employees 8:30
CAD Housing Starts 8:15
CAD Unemployment Rate 8:30
CAD Net Change in Employment 8:30
CAD Part Time Employment Change 8:30
CAD Participation Rate 8:30

USD/JPY has continued to power higher in Asian and early European trade as the pair broke above the key 95.50 level on expectations that today’s US Non-Farm Payroll report will be stronger than consensus expectations. This weeks positive string of economic data has convinced the market that US is now vastly outperforming the rest of the G-3 and has attracted further flows into the greenback.

The rest of the major have remained relatively quiet as is typical on pre-NFP day with EUR/USD trading either side of 1.3100, cable rebounding after testing 1.5000 again and Aussie showing some weakness in Asian trade after Chinese trade balance data showed that imports contracted by by -15.2% raising concerns that demand for Australia’s coal and iron ore is waning.

After a series of better than expected indicators, the market is now primed for a stronger print in the NFPs. The consensus call is for 173K new jobs roughly matching January’s 161K print. However, the employment component of ISM services report, as well the ADP number suggest that NFPs could be closer to 200K. The surprisingly sharp drop in weekly jobless claims also supports the view that US labor market demand is fairly robust.

Given those conditions sentiment is clearly skewed to the upside so unless NFPs prints at 225K or better, the reaction may be fairly limited. Still it maybe worthwhile to examine a few possible scenarios for today’s marquee event.

USD/JPY is the prime focus for the event today and with the pair now at fresh highs there is little resistance to the upside, so a solid NFP print could push the unit to a test of 96.00 as the momentum rally continues to roll on. If the data proves positive, analysts will now start talking about 100 USD/JPY rate in the foreseeable future.

EURUSD is a much more complicated case as the pair has now ceased trading on risk flows and could actually drop lower if the NFP number posts a strong gain. Yesterday’s relatively upbeat presser by Mario Draghi provided the euro with a temporary lift, but as we noted earlier, the rally may prove to be fleeting if EZ eco data does not improve relatively soon. Still the pair has very strong support at the 1.2950 level and may not decline much unless that handle is broken.

GBPUSD remains in a steep downtrend and although it has been able to find support below the 1.5000 level it may finally crack hard if the US payroll number beats the estimate. Yesterday’s relief rally post the BOE meeting has essentially worn off and as the market focuses on the increasing disparity between US and UK growth differentials cable is likely to see further downside pressure.

USDCAD is perhaps the most interesting pair to examine as both Canadian and US employment numbers will be released at the same time. The loonie has weakened markedly against the buck with USDCAD rising to 1.0300 level as US economy continues to outperform Canadian results. Last month’s horrid -21.9K print along with a persistently dovish BOC has pushed USDCAD to fresh yearly highs… If the divergence continues and worse – if Canada records second consecutive month of job losses while US prints in the neighborhood of 200K USDCAD could take out the 1.0400 level and ultimately target 1.0500 as speculative flows move south of the border.

– Boris Schlossberg, BKAssetManagement.com

[B]Market Drivers for March 11, 2013[/B]
Weak Chinese and Japanese data dampens investor enthusiasm at start of week
EUR/USD holds 1.3000 despite weak data
Nikkei 0.53% Europe -0.46%
Oil $91/bbl
Gold $1578/oz

[I]Europe and Asia:[/I]
JPY Machine Tool Orders -13.1% vs. -1.6%
JPY Tertiary Industry Index
CHF Retail Sales 1.9% vs, 3.7%
EUR German Trade Balance 13.7B vs. 13.9B

[I]North America:[/I]
None

After a boisterous Friday that saw currency markets explode in the wake of much better than expected US NFP numbers, the week’s trade started on a much more muted note after Chinese and Japanese data disappointed investors. Chinese data released over the weekend showed that inflation increased while growth slowed.

Chinese CPI rose to 3.2% from 3.0% forecast while Retail Sales expanded at only a 12.9% rate versus 14.5% eyed. Industrial Production was also lower at 9.9% versus 10.4%. The drop in consumption was led primarily by the new Chinese government frugality campaign as high end restaurants in Shanghai and Beijing saw sales drop by as much as 30%-50% on less spending by government bureaucrats. Analysts also attribute some of the slowdown to seasonal factors due to the Chinese New Year in February.

Nevertheless, the broad weakness in Chinese numbers spurred some concern amongst investors and Aussie gapped lower by 30 points at the start of Asian trade dropping below the 1.0200 level before recovering into morning European trade. The Aussie has now carved out a very narrow 1.0150-1.0300 range as traders await more data from Down Under.

This Wednesday’s unemployment report is likely to be the key driver of trade. The markets are looking for similar print as last month of approximately 10K. If the data meets or beats the expectations the pair could break the upside barrier of the range as fears over additional rate cuts by the RBA will cease. However, if the number shows that jobs contracted the pair could tumble towards parity as fears over the broad economic slowdown in Asia Pacific will weigh heavily on the unit.

The EUR/USD meanwhile has managed to hang tough despite continuing weak economic data. Today’s French Industrial Production sank -1.2% versus -0.10% while Italian GDP contracted -2.8% versus -2.7% anticipated. The only bright spot on the EZ Calendar was the German Trade figure which saw the surplus rise to 13.7B from 12.1B the month prior as exports increased by 1.4%.

Yet despite all the bad news, despite the fact that Italian BTP/German Bund spread continues to widen and despite the steady uptick in Italian CDS rates, the euro refuses to go down. On Friday the pair found support at the 1.2950 level twice and today it has traded above the 1.3000 mark as it remains steady in a quiet consolidation.

One possible reason for the units strength is the assumption by the market that the worst may be over for the Eurozone. This was the key argument of Mario Draghi at last Thursday’s ECB presser. The ECB President argued that over the medium term conditions were likely to improve, noting that much of the fiscal budget cuts have already been made. Furthermore the strength and robustness of the US economy may be viewed as engine for growth for the EZ as investors hope that US demand will prop up the region’s export sector.

The EUR/USD surprising resilience may be nothing more than just a pause in downtrend, but the longer the pair remains supported the more likely we will see a counter trend rally this week as bargain hunters decide to plow in.

[I]-- Boris Schlossberg, BK Asset Management[/I]

Market Drivers for March 12, 2013
Yen crosses rally in Asia but dip on opposition to Iwata by DPJ
UK IP, MP miss sending GBPUSD below 4850
Europe -.19% Nikkei -.28%
Oil $91.69/bbl
Gold $1581/oz.

Europe and Asia:
AUD NAB Business Confidence 1 vs. 3
JPY Consumer Confidence 44.3 vs. 43.0
EUR German CPI 0.6% vs. 0.6%
GBP NIESR GDP Estimate n/a
GBP Industrial Production
GBP Trade Balance

North America:
USD Monthly Budget 12:00

Its been another seesaw session in FX with yen crosses rising in Asian trade only to give up their gains by morning European dealing. USD/JPY hit a fresh yearly high in Asia rising to 96.71 on speculation that incoming BOJ chief may call a special meeting before April in order to expand QE further.

However, as Europe came online, reports that the DPJ may oppose the nomination of Deputy Governor Kikuo Iwata caused a quick and sharp sell off in yen crosses that dragged EUR/JPY below the 125.00 mark and send EUR/USD back below 1.3000 as a result. Mr. Iwata, who favors more government oversight over the BOJ is the most controversial of Mr. Abe’s appointments. Abe needs at least some support from the DPJ in Japan’s upper house in order to confirm Iwata’s nomination and despite the comments today, it is likely he will get it.

USD/JPY slipped below the 96.00 level as the European wore on. Any forward progress in the pair is now likely to come from US news rather than any fresh initiatives in Japan. Mr. Abe plan and his policy team are now well familiar to the market and have already communicated their key intended actions when they take power. So there is little new information from Japan that could push the pair higher.

On the other hand, if US economic performance continues to surprise to the upside, it could provide further fuel to the rally in USD/JPY which is why tomorrow’s US Retail Sales numbers could be the marquee event of the week.

Meanwhile in UK another set of horrid numbers from the manufacturing sector sent GBP/USD to fresh yearly lows below the 1.4850 level. UK Industrial Production declined by -1.2% versus 0.1% eyed while Manufacturing Production sank -1.5% versus 0.0% forecast. This was the worst reading since August of last year and suggests that the manufacturing sector will weigh heavy on Q1 GDP as the contraction accelerates.

Today’s data shows that the massive divergence between UK’s manufacturing and service sectors continues to expand with the former contracting sharply while the later remains relatively robust. Although manufacturing is a small part of the UK economy it will nevertheless impact the overall growth and as such remains an anchor across the neck of sterling.

Despite the negative news, sterling found some bids underneath the 1.4850 level and stabilized in the aftermath of the release. Although the UK data is undeniably atrocious, the pair is so grossly oversold that the downside may be limited. Given the weakness in PMI reading last week, some of the news may have already been factored in to the price and we could see a short covering rally as the day proceeds with longs targeting 1.4900 on a bounceback.

– Boris Schlossberg, BK Asset Management

Market Midday Drivers March 13, 2013
Dollar drives higher as US Retail Sales beat
EURUSD hits fresh yearly lows
Dow 0.12% Europe -0.18% Nikkei -0.61%
Oil $92/bbl
Gold $1586/oz.

Europe and Asia:
AUD Westpac Consumer Confidence 2.0% vs. 7.7%
AUD Home Loans -1.5% vs. 0.2%
EUR French Payrolls -0.3% vs. -0.2%
EUR Euro-zone Industrial Production -0.4% vs. -0.1%

North America:
USD Advance Retail Sales 1.1% vs. 0.5%
USD Business Inventories 0.5% vs. 0.1%

Dollar gained across the board in midday North American trade as better than expected US Retail Sales pushed the Dollar index to a fresh 7 month high while EUR/USD fell to new year to date lows hitting 1.2922 in morning US dealing. US Retail Sales surprised to the upside rising to 1.1% versus 0.5% eyed and on a core basis they increased by 0.45 versus 0.2% forecast.

Although some of the lift in Retail Sales was due to rising gasoline prices, the increase in the core reading suggests that US consumer demand remains remarkably resilient in the face of myriad headwinds which this month included the hike in payroll taxes, the delay in IRS refunds and the uncertainty surrounding the sequester.

The retail sales beat is the just the latest in a series of positive US economic surprises and it has now led several analysts to increase their projections of US GDP growth this year. The growing dichotomy between the ever improving US economic picture and the moribund conditions in the Eurozone have finally pushed the EUR/USD through the 1.2950 key support level.

As the divergence between the world’s two biggest economies continues to expand, the selloff in the EUR/USD is likely to accelerate as investment flows shift to this side of the Atlantic. The EUR/USD could now drift towards the 1.2750 level as bargain hunters abandon their positions amidst no signs of recovery in the region.

The one currency that did not weaken materially versus the buck was the yen. USD/JPY rose to a high of 96.26 in the aftermath of the release, but then drifted back towards the 96.00 level. The upside in the pair is contained by concerns over the Iwata nomination. Prime Minister Abe is close, but still does not have the necessary support to receive a confirmation from Japan’s Upper House, where DPJ made no bones about its opposition to his candidacy. A rejection of Mr. Iwata may not only be barrier to Mr. Abe’s plans for a more expansionary monetary policy but may also be viewed as a political failure and could put further downside pressure on USD/JPY.

– Boris Schlossberg, BK Asset Management

Market Drivers for March 14, 2013
Australian employment blows past consensus, but questions regarding its accuracy
Bank of Italy tells banks that showed losses in 2012 to not pay dividend
Europe 0.92% Nikkei 1.16%
Oil $92.65/bbl
Gold $1585/oz

Europe and Asia:
AUD Consumer Inflation Expectation 2.3%
AUD Employment Change 71.5K vs. 9.5K
AUD Unemployment Change 5.4% vs. 5.5%
AUD Full Time Employment Change 17.5K
JPY Industrial Production 0.3% vs. 1.0%
CHF Swiss National Bank Rate Decision unch.

North America:
USD PPI 6:30
USD Initial Jobless Claims 6:30

The Aussie was the star performer in overnight Asian and early European trade after the employment report revealed a mind boggling number of 71K new jobs versus 10K expected, but there were questions regarding its accuracy and the pair traded off its highs by midmorning European dealing.

The Australian labor data was truly astounding as the economy created the largest amount jobs in more than a decade, the unemployment rate declined to 5.3% from 5.4% eyed and the labor participation rate rose a whopping 0.3% from 65% to 65.3%. To fully appreciate the magnitude of the report, Australia’s increase in labor demand was equivalent to the US economy creating one million jobs in a month.

Fully 80% of the gains came from Victoria and New South Wales – the service centers of the country – while the mining regions of Queensland and Western Australia generated no jobs. This data point confirms the thesis that the mining sector which was the primary driver of growth in the Australian economy is slowing markedly. It also raises the question as to the accuracy of the data given such a massive upside surprise and such uneven distribution of job growth. Indeed an RBA official suggested that there may have been a statistical error in this months calculations, but no further explanation has been given yet.

Regardless of the final adjustments in the labor data, today’ report makes clear that the Australian economy remains resilient and is unlikely to require any further monetary easing for the foreseeable future. Indeed the curve is only pricing in 6 bps of easing for the rest of the year. If the RBA does indeed remain on the sidelines keeping rates steady at 3% then the Aussie may regain its stature as the preeminent carry trade in the G-10 universe. That is likely to push AUD/JPY through the key 100.00 barrier in the coming days.

Meanwhile in Europe the EUR/USD treaded water in a tight 1.2980-1.2950 range and slipped lower as dealing progressed on news that the bank of Italy asked those banks who reported a loss on their Tier 1 capital to not pay out dividends this year. In addition Spain went to market with some very long term issuance and was able to obtain better yields at 5.445% versus 5.928% the period prior, but only sold 800M of 1-2 Billion planned indicating that investors remain wary of assuming too much long term credit risk in the periphery.
The pair continues to trade with a downward bias as news out of the EZ remains bleak and yesterday’s break of the key 1.2950 level suggests that shorts may want to test the 1.2900 figure as the day proceeds.

– Boris Schlossberg, BK Asset Management