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Investors turn to safe havens after shock China trade deficit

11 March, 2014

The market opened negatively this week on the back of shocking news from China where a trade deficit of -$23 billion was announced. This was largely influenced by a huge drop in exports of -18.1% year-on-year – the biggest drop in Chinese exports since 2009 - and resulted in the yen strengthening against the US dollar by 0.2% to 103.08 on Monday as investors scurried to secure investments in safe haven assets. Other currencies to decline against the yen were the Australian dollar (0.7% to 93.03), the New Zealand dollar (0.3% to 87.18) and the Canadian dollar (0.5% to 92.69). The yen strength was despite the Bank of Japan (BoJ) announcing a revised GDP figure for Q4 2013 of 0.7%, lower than the previously reported rate of 1.0% and much lower than the expectations of 3% growth.
Japan was at the forefront of investors’ decisions on Tuesday when the BoJ announced its decision on interest rates. Investors were closely watching to see whether policy makers would increase the level of stimulus, but this did not eventuate. The yen strengthened shortly after the announcement with USD/JPY moving from 103.40 to 103.30. The USD/JPY pivot point is 103.20, with resistance at 103.46, 103.67 and 103.93; and support at 102.99, 102.73 and 102.52.
In the US, the Non-Farm Payrolls (NFP) figure of 175,000 new jobs created in the last month was a small surprise, with analysts forecasting only 149,000. USD was boosted by this surprising figure and gained strength across the board on Friday. The market is now looking to Thursday’s Retail Sales data for further indications as to the strength of the US economy. Forecasts are for Retail Sales to be up 0.2%, compared to January’s figure of -0.4%. With 70% of US GDP driven by consumer spending, a stronger sales figure would indicate higher consumer spending, and thus signs of economic recovery.
EUR/USD was boosted to around 1.3850 last Thursday in response to European Central Bank (ECB) President Mario Draghi’s hawkish comments about the state of the Eurozone’s economic health. Draghi kept interest rates at the record low level of 0.25% and refrained from being drawn on whether he will consider further easing in future if needed. He also reiterated the central bank's forward guidance of keeping interest rates at present or lower levels for an extended period of time and that ECB projections confirm that inflation will remain low and then gradually move up towards the 2% target. In the Q&A part of the press conference, Draghi said that even though unemployment in the Eurozone remains high, it has already stabilized. EUR/USD pivot point is 1.3879, with resistance levels at 1.3896, 1.3915 and 1.3932; and supports at 1.3860, 1.3843 and 1.3824.
Bank of England (BoE) policy makers also kept interest rates unchanged at 0.5% and this announcement caused volatility on Friday in GBP/USD with the pair trading between 1.6750 and 1.6700, before later retracing back to the pivot level of 1.6720. Attention is now being turned to Tuesday’s Inflation Report where investors will be looking for inflation and growth outlooks from the BoE. Market volatility is expected for GBP pairs across the board for the duration of the hearings. Wednesday’s release of monthly trade balance figures are also expected to be weaker than last month and may cause GBP/USD to pull back from last week’s highs. GBP/USD pivot point is 1.6667, with resistance levels at 1.6712, 1.6787 and 1.6832; and support at 1.6592, 1.6547 and 1.6472.
The latest jobs report from Australia is due to be published on Thursday and will be closely watched for any further deterioration in unemployment levels. In the past 18 months, the Australian unemployment rate has skyrocketed from 4.9% to 6.0% and, while no change to the rate is forecast, should there be a surprise rise it would be a real concern for Reserve Bank of Australia (RBA) policymakers. If unemployment rates remains unchanged it would suggest the Australian economy is stabilising and thus economic growth will be a feasible target for the RBA within the next few months. AUD/USD could also strengthen further against the USD and high volatility on AUD pairs is expected during this announcement. AUD/USD pivot point is 0.9032, with resistance at 0.9052, 0.9084 and 0.9104; and support at 0.9000, 0.8980 and 0.8948.

What to Watch this Week: USD/JPY is an interesting pair to keep watch of, especially as investors look to safe havens in the wake of on-going Ukraine and Russia tensions. AUD pairs may be good to trade during Thursday’s jobs data announcement.

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