EUR/USD Traded At Highest Level; Investors Vigilant On USD/JPY

Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank should maintain its policy of accommodation to support the economy while lawmakers reduce government spending to tame the country’s budget deficit. The government should put “in place policies that slowly but surely bring the prospects of future revenues into balance with future spending,” Evans said in remarks in Hong Kong today. “Under this scenario, monetary policy has an important contribution to make.”

Shinzo Abe is set to become the best friend of investors in Treasurys as Japan’s prime minister buys U.S. government bonds to weaken the yen and boost his nation’s slowing economy. Abe’s Liberal Democratic Party pledged to consider a fund to buy foreign securities that may amount to 50 trillion yen ($558 billion) according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan deputy governor.

European leaders declaring they’ve gained the upper hand in the three-year-old debt crisis are sharpening efforts to channel a rebound in financial markets to an economic recovery to chip away at soaring unemployment. Even as euro-area chiefs call for more time to lock in a bailout package for Cyprus and elections loom next month in Italy, German Finance Minister Wolfgang Schaeuble said on January 11 that the single currency is “over the worst of the crisis.”

EUR/USD: The EUR/USD traded at its highest level since April on Friday, after European Central Bank President Mario Draghi said the eurozone economy would begin to recover this year and after the ECB kept interest rates unchanged at 0.75%. In addition, the U.S. official data showed that the trade deficit widened unexpectedly in November, growing to $48.7 billion, the biggest deficit weighed on the USD since April.

Today, the pair was trading higher - at 1.33845 at the time of writing. Sentiments remain bullish on the pair, however investors should remain cautious as profit takings and market corrections are expected intra trade. In the European session ahead, investors will have to focus on the industrial production data in the eurozone and Italy to get more visibility on the pair. Later in the day, the Fed Chairman Ben Bernanke will speak at the University of Michigan; investors should closely watch his comments for any indications on the future possible direction of monetary policy.

Ahead of the coming week, the events that are likely to affect the movements of the pair: Tuesday; the eurozone will produce trade balance data, while the U.S. will publish data on retail sales as well as data on producer price inflation. In addition, the U.S. will release data on manufacturing activity in New York State and a report on business inventories. Wednesday; the eurozone will publish data on consumer price inflation, while Germany will hold an auction of 10-year government bonds.

On the other hand, the U.S. will produce data on consumer inflation, in addition to data on industrial production and the capacity utilization rate. The country will also publish official data on crude oil stockpiles, while the Fed will publish its Beige Book. Thursday; the ECB will release its monthly bulletin. Later in the day, the U.S will produce data on building permits, as well as data on housing starts.

The U.S. will also release the weekly government report on initial jobless claims and data on manufacturing activity in Philadelphia. Friday; the U.S. will release data from the University of Michigan on consumer sentiment. The resistance level is at 1.34937 and the support level is at 1.32606 on the weekly chart.
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USD/JPY: The yen fell to the lowest level in more than two years on prospects Japanese Prime Minister Shinzo Abe will select a central bank chief who will expand monetary easing efforts to accelerate the currency’s decline. The USD/JPY was trading higher at 89.544 at the time of writing after Abe said yesterday he wants someone “who can push through bold monetary policy” as the next governor of the Bank of Japan.

Investors remain vigilant on the pair as there may be some market corrections and profit takings on the pair, following the massive gains registered and after the Federal Reserve Bank of Chicago President Charles Evans said the central bank should keep policy accommodative to support the economy. Demand for the greenback was limited before data tomorrow may show manufacturing in the New York region failed to expand.

In addition, the U.S. retail sales slowed to 0.2 percent growth last month from 0.3 percent in November, a separate poll indicated ahead of data from the Commerce Department tomorrow. On the other hand, the Bank of Japan Governor Masaaki Shirakawa speaks tomorrow at a meeting of branch managers and the BOJ will review its 1 percent inflation goal at its policy meeting next week.

Ahead of the coming week, the events in Japan likely to affect the pair are the official data on core machinery orders (Wednesday) and the official data on tertiary industry activity (Thursday). The events in the U.S mentioned in the paragraph above will also influence the direction of the pair. Investors should remain prudent. The resistance level is at 90.647 and the support level is at 88.138 on the weekly chart.
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Oil (WTI): Oil was trading higher at 94.175 at the time of writing as Robust Chinese trade data further supported gains. Chinese exports grew 14.1% from a year earlier in December, blowing past expectations for a 5% gain and up from a 2.9% increase in November. In addition, oil also advanced before a report today that may show industrial production in the euro area rebounded in November. In the week ahead, investors will be anticipating a speech by Federal Reserve Chairman Ben Bernanke on monetary policy and the recovery from the global financial crisis on Monday, as well as Tuesday’s data on U.S. retail sales for December.

Moreover, the housing starts numbers and the Philadelphia Federal Reserve factory activity index due out on Thursday and the Thomson Reuters/University of Michigan consumer sentiment number scheduled to be released Friday will also affect market sentiment for the commodity. Market players will also be awaiting data from China on fourth quarter gross domestic product for signs of a recovery in the world’s second-largest economy, which will be released later this week. Investors should focus on the news and data to better assess the trend of the commodity. The resistance level is at 96.494 and the support level is at 92.197 on the weekly chart.