More Buying Into US Recovery (Mario Singh, March 20th 2012)

With the Greek story out of the way, all eyes are now focused on the recovery of the US economy.

Over the last couple of months, the US has reported consistent improvements in key economic reports such as non-farm payrolls and retail sales.

For the month of February, US employers added 227,000 jobs while retail sales rose by 1.1%. The jobless rate also remained at a healthy three-year low.

These stellar numbers have damped expectations for more QE from the Federal Reserve – a stimulus that might otherwise debase the greenback.

According to the median forecast of 91 economists in a Bloomberg News survey, US GDP is expected to rise 2.2% this year, while other developed nations are slated to increase by only 1.2%.

Even the Futures Market seems to agree on the bullish sentiment surrounding the greenback. According to date from the Commodity Futures Trading Commission (CFTC), bets for a stronger dollar against other major currencies have outnumbered the bears for 26 consecutive weeks.

Not since 1999 have currency traders been bullish on the dollar for so long, a sign that the market sees the US resuming its role as the engine of global economic growth.

Here’s 3 additional data which points to a stronger dollar in the coming months:

1. The Dollar Index, which tracks the greenback against the currencies of six major US trade partners, is up 1.5% in the past six months; compared with the Yen’s 9.3% drop and the Euro’s 2.4% drop.

2. According to the US Treasury on 15th March 2012, net buying of long-term equities, notes and bonds rose to USD101 billion in January from USD19.2 billion in December. Even China, the largest foreign US creditor, increased its holding of US government securities in January for the first time in six months.

3. US bonds are giving higher yields than German bunds – current 2 year Treasuries yield 0.36%, which is 3 basis points more than the triple-rated German bunds. Just six months ago, German bunds were yielding 34 basis points more than their US counterparts.

Top News This Week

1. GBP CPI y/y. Tuesday, 20th March, 5.30pm. I expect figures to come in at 3.4% (previous figure was 3.6%).

2. GBP Public Sector Net Borrowing. Wednesday, 21st March, 5.30pm. I expect figures to come in above 5B (previous figure was -10.7B).

Trade Call

Long USD/JPY at 83.25

Last week, Bank of Japan Governor Masaaki Shirakawa indicated that the central bank will keep using monetary policy as a tool to tackle deflation. This caused the Yen to decline 1.8% in the past week, the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

On the H1 chart, USD/JPY has been on a steady uptrend, clearing over 350 pips in 2 weeks. Price action looks to be respecting the uptrend line, hence, the bias is for us to go long.

Current price is in a 100-pip range, with Resistance spotted at 84.16, and Support located at 83.16. We will go long once prices bounce off the Support level. Entry is taken 10 pips above the Support level, at 83.25. A stop loss of 55 pips is placed below the Support level.

We will have 2 targets on this trade, exiting the final position at 84.35.

Entry Price = 83.25
Stop Loss = 82.70
1st Profit = 83.80
2nd Profit = 84.35

(Source: MarioSingh.com)