FOREX: US Dollar Slumps on China Rate Cut, Greek Bailout Deal Hopes

Talking Points

• Dollar, Yen Slump in Asia as China Cuts Reserve Requirement Ratio by 50bps
• Eurozone FinMin Summit in Focus as Traders Wait for Greek Bailout Accord
• Risk Appetite Expected to Falter Again, Yielding Dollar Buying Opportunities

The US Dollar and Japanese Yen fell against their major counterparts as stocks rose in overnight trade, marking an improvement in risk appetite to start the trading week and sapping demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark equity index rose 0.9 percent afterChina cut the reserve-requirement ratio for the country’s banks by 50bps effective February 24. The move increases the supply of loan-able funds by allowing banks to lend out a greater percentage of their deposits, reducing borrowing costs with the hope of stoking economic activity.

Optimism was compounded by hopeful anticipation of a final deal on the second Greek bailout package as Eurozone finance ministers gather for a meeting in Brussels today. Traders are betting the sit-down will culminate in the provision of €130 billion in EU/IMF funding to stave off a Greek default as a large tranche of maturing debt comes due on March 20. The accord must deliver on two elements: Athens has to iron out the terms of a bond swap with its private-sector creditors – a scheme meant to ease its debt burden by dismissing as much as 70 percent of what is owed and exchanging the rest for longer-dated paper – as well as put to rest EU officials’ concerns about implementation of new austerity measures.

The long history of flawed fixes to the debt crisis unveiled over the past three years suggests that the very existence of an accord is likely to prove initially supportive for risk appetite, regardless of its merits. This spells trouble for safe-haven currencies at least at the onset, but that is unlikely to last.

As we discussed earlier, a Greek default (even a disorderly one) is no longer the danger it once was considering EU banks borrowed enough capital through the ECB’s 3-year LTRO in December to assure a credit squeeze would probably not materialize. This means whatever EU officials come up with will not amount to a meaningful change in the existing fundamental landscape, with traders quickly shifting their focus back to the overall macroeconomic landscape.

On balance, it seems likely that this transition will prove negative for risk appetite. Economists’ forecasts suggest the Eurozone – collectively the world’s largest economy – will sink into recession this year, severely denting global performance expectations as a whole. Indeed, economists’ median world GDP expectations for 2012 have been sinking precipitously since early August. The reemergence of this stark reality is likely to be punishing for the Euro as well as sentiment-sensitive currencies like the Australian, New Zealand and Canadian Dollars. With this in mind, we are looking for US Dollar buying opportunities to emerge in the days ahead.

Critical Level

     CCY                                            Support                                 Resistance 

  EURUSD                                        1.3104                                    1.3234

  GBPUSD                                        1.5791                                    1.5898  

Australian Dollar Outlook - 02/17/2012

The Australian dollar has risen almost a full US cent overnight to open at USD1.0750 this morning, up from USD1.0668 late Thursday.
Australia: The rise came after US economic data showed the number of people applying for unemployment benefits had fallen to its lowest point in four years, while the housing and manufacturing sectors continued to improve.

The Australian labour market also showed signs of improvement yesterday, with the headline employment surging 46.3k in January (seasonally adjusted), driven by a recovery in part-time employment after significant falls in November and December 2011.

Total employment was up 0.4% m/m and 0.3% y/y. Due to the improved employment numbers the unemployment rate fell to 5.1% from 5.2% and perhaps pushing the chance for a potential rate cut further out into 2012.

Majors: Positive momentum in the US labour market has continued with initial jobless claims falling to 348k from 358k last week. They are now running at the lowest level seen since March 2008. US housing also showed tentative signs of recovery with housing start rising to 699k in January.

US equities rallied of the back of the stronger data and positive sentiment with the Dow Jones rising 0.9% to 12898, the S&P 1.0% higher at 1357 and the Nasdaq 1.4% higher at 2958. European equities were slightly lower overnight with headlines early in the session casting doubt over whether EU leaders would agree a Greek bailout package by Monday.

The DAX was down 0.1% at 6752 with the FTSE 100 0.1% lower at 5885. Markets seem to be watching headlines closely and awaiting the EU decision on Greece early next week. Rumours have surfaced the

European governments are considering cutting interest rates on emergency loans to Greece and using contributions from the ECB to close a financing gap in the second bailout programme.

If you take things for granted heres somethings to ponder about...

If you woke up this morning with more health than illness...

You are more blessed than the million who will not survive this week.

If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture, or the pangs of starvation ... 

You are ahead of 500 million people in the world.

If you can attend a meeting without fear of harassment, arrest, torture, or death...

You are more blessed than three billion people in the world.

If you have food in the refrigerator, clothes on your back, a roof overhead and a place to sleep...

You are richer than 75% of this world.

If you have money in the bank, in your wallet, and spare change in a dish someplace ... 

You are among the top 8% of the world's wealthy.

If your parents are still alive and still married ... 

You are very rare, even in the United States and Canada.

If you can read this, you are more blessed than over two billion people in the world that cannot read at all.

Take nothing for granted.

Mining: FMG’s Iron Ore Hot, OZ, Copper, Gold Cool

By Aireview

The two sides of the resources boom were clearly on display yesterday in the interim figures from iron ore exporter Fortescue Metals Group and the full year result from copper-gold group OZ Minerals.

In short (and as we saw with BHP Billiton and Rio Tinto a week ago), iron ore is hot and still very profitable, despite a fall in world prices and easing demand.

On the other hand, copper and gold (even though the latter has been very strong) have not been able to produce the same impetus for OZ Minerals.

Fortescue Metals Group, the third largest iron ore miner, yesterday revealed a half year profit of more than $US800 million, but has cut its production guidance for the March quarter due to the impact of Cyclone Heidi in January.

The higher net profit was on a more sedate 15% rise in earnings before interest, tax, depreciation and amortisation to $1.510 billion, from the $1.316 billion in the first half of the 2011 financial year.

The $US801 million net result was more than double the $US314 million achieved in the same period of 2010.

Revenue jumped 33% to $US3.35 billion from $US2.53 billion in the first half of the previous financial year.

Fortescue lifted exports 30% to 27.1 million tonnes shipped in the December half year (20.9 million in the first half of 2011).

But that was short of the guidance for 55 million tonnes to be shipped in the year to June.

As a result of the production downgrade, Fortescue's guidance for the three months to the end of March has been cut from 13.75 million tonnes (Mt) to a range of 13Mt to 13.5Mt.

While guidance for the full year to June 30, 2012 remains unchanged at 55Mt of iron ore, the company will have to ship more than 14 million tonnes in the June quarter, to be sure of making forecast.

In a blow to the company, its fourth berth at Port Hedland harbour has been delayed by three months, but Fortescue said this would not delay its plans to increase exports to 155 million tonnes by the middle of 2013.

Costs continue to haunt the company, with ''mining costs'' almost doubling to just over $US1 billion in the half year. Administration costs fell.

Shareholders will get an interim dividend of 4c to be paid on April 2. That's up from 3c a share paid for the first half of the 2011 financial year.

Investors didn't like the result and marked the shares down 8c to $5.53.

OZ Minerals shareholders saw the downside of the resources boom (and the former bust) in the full year results yesterday.

They saw a trading profit that was down on 2010 because of the weak copper price for much of 2011 (and despite a strong gold price for part of the year).

That was why group revenue was flat at $1.1 billion.

And the net profit was down sharply because of the reversal of an earlier asset impairment which boosted net earnings in 2010.

As a result, net profit for 2011 dropped 53% from $586.9 million in the previous year.

The 2011 result also included the litigation settlement expenditure and an impairment of the company's investment in uranium explorer Toro Energy Limited (the shares lost value after the Fukushima crisis inJapan in March).

Underlying net profit of $322.7 million was down 19% mainly because of higher recognition of restricted tax losses in the prior year.

Shareholders will be paid a final dividend of 30c a share, making 60c for the full year, down from the 70c paid for 2010.

But shareholders aren't being short-changed.

The company ran a couple of major capital management programs during the year which included a capital return of $1.20 a share, which was completed in June and a $200 million on market buyback of which $99.9 million had been spent.

So a lower dividend for the year was well offset by the capital return (with the bonus of selling into the on market buyback and then buying back into the stock).

Despite the spending on the capital management and dividends and acquisitions, the company remains debt free (with a $200 million credit line untouched) and has more than $880 million in cash.

OZ Minerals chairman Neil Hamilton said in yesterday's release that despite the uncertainty in the broader economy in 2011 which persists into 2012, the prices for the company's commodities have remained buoyant.

"This is demonstrative of the strong demand for copper and the continuing constraints on supply - a scenario we anticipate continuing," he said in yesterday's statement.

"With our strong operational performance at Prominent Hill and its good margins we are able to enjoy the strength of the market and at the same time be prepared for volatility."

OZ shares eased 15c, or over 1% to $11.24. 

  

Dollar boosted by positive jobs data

THE Australian dollar rose more than half a US cent after the release of stronger-than-expected employment data.

At 11.30am AEDT today, the Australian Bureau of Statistics (ABS) announced that 46,300 jobs were added to the economy in September, compared to the 15,000 rise that economists were expecting.

The unemployment rate fell to 5.1 per cent from an unrevised 5.2 per cent.

Economists had expected the jobless rate to rise to 5.3 per cent.

By 11.31am AEDT, the currency had risen to 107.39 US cents, compared with 106.86 cents just before the data was released.

The Australian dollar finished yesterday's local session at 107.52 US cents.

Australian Dollar Outlook - 02/16/2012

The Australian dollar edged its way towards USD1.0800 during yesterday's local session but is back down under USD1.0700 this morning.

Australia: Comments out of China yesterday afternoon, stating they were supportive of the Euro-zone and considering providing further financial support to the troubled region, sent equity markets higher and sparked a round of EUR and AUD buying.

The renewed market confidence turned sour overnight once rumours began to emerge that a Greek default was once again a real possibility.

The EUR was sold off and the AUD went with it. Overall the outlook for the AUD in the short - medium term still suggests the local currency will remain strong, with a move back above USD1.1000 considered likely by many forecasters.

Australia's relatively high interest yield is very attractive for offshore investors, and with the RBA signalling that official interest rates are unlikely to fall by a large amount anytime soon, this yield advantage will be sustained for quite some time to come.

The European banks are cashed up thanks to a large funding injection from the ECB in December, and if they are reluctant to lend these funds within Europe, they will be looking for where best to gain some return and Australian assets present a pretty attractive alternative.

Today we await the release of Australian labour force data for January. Market expectations are for an increase in the unemployment rate to rise to 5.3%, with the number of employed expected to increase by 10k.

Majors: The euro-zone finance ministers met overnight to discuss releasing further bailout funds for Greece. A decision on  releasing the EUR130bn second Greek aid package has been delayed until after their next meeting on February 20. The other

Euro-zone minsters are becoming increasingly frustrated with Greece repeatedly failing to meet budget targets and failing to implement promised cuts.

Without the bailout funds Greece could default on its debt as early as next month. News out of the US was a little more encouraging, with both the empire manufacturing survey and the NAHB housing market index results exceeding expectations.

USD/CAD Climbs Above Parity; 1.0070 is the Next Key Pivot

The USD/CAD has been trading in sideways action since breaking above a declining trendline. But after a ABC (3-wave)bear run that failed to push below the 0.9925 support area, the USD/CAD rebounded and climbed back above parity. The RSI also pushed above 70 showing bullish momentum. What are the next key resistance levels to watch for?
(BY Sir Yang)