FOREX TRADING

U.S. Review

Stability at Low Altitude

• This week’s data suggest that the economic dive that goes by the alias "double dip" remains a low probability outcome. This view is reinforced by policy presentations suggesting that any future weakness would be met with further monetary easing.
• The roots of the current negative sentiment are found in the disappointing economic and jobs outlook relative to historical patterns. Fiscal stimulus associated with the Kennedy and Reagan tax cuts appeared to be more powerful than today, but the credit context of those stimulus programs was quite different.

Instrument Readings: Pulling up from the Dive

For a generation of Americans brought up on action heroes who face impossible challenges and then win the day, the results of fiscal and monetary stimulus are disappointing. Yet, the level of pessimism and talk of a double-dip strike us as too much of a bad thing.

This week we saw leading economic indicators such as the Institute for Supply Management (ISM) manufacturing report, jobless claims, factory orders and pending home sales give us signals of an economy that is stabilizing, but certainly at a subpar level compared to expectations. Our action heroes in the private and public sectors have helped to cut off the decline, but the legacy of consumer leverage and housing finance will limit the gains for this year.

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HIGHLIGHTS OF THE WEEK

• This week provided fairly positive economic data, as U.S. Personal income and consumption rose in July, the ISM manufacturing index surprised on the upside, and non-farm private payrolls were also stronger than expected.
• These data support our view that the U.S. recovery will remain on track, and that growth will continue at a relatively slow pace.
• In order to experience a relapse in economic growth, U.S. aggregate demand components would have to register contractions of a magnitude difficult to justify outside of a scenario characterized by a renewed severe shock.
• Drama has been growing ahead of next week’s BOC meeting. Investors are split on the likelihood of a follow-up 25 basis point rate hike.
• Regardless of whether the Bank hikes rates, this is likely to be the last for a while, as economic growth is falling short of the central bank’s expectations.
• Real GDP for Q2 came in at 2%, below the 2.5% consensus estimate and falling short of the Bank’s 3% forecast.
• Q2 data reinforced some of the growing vulnerabilities to the Canadian expansion, including slowing consumer spending, housing activity and export growth.
• We expect real GDP growth to come in closer to the 2% mark than the Bank’s 3% forecast in the second half of 2010 and first half of 2011.

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Market Outlook

JPY: heading for BoJ intervention?

Resilience in high yield and commodity currencies took us by surprise as demand for risk staged an early September comeback and US payrolls proved better than feared. However, with the outlook for the US not ceasing to cloud over (services ISM, new manufacturing orders) but Washington mulling tax breaks, demand for AUD and NOK will stay sensitive to incoming US data and broader appetite for risk. The week ahead features central bank meetings at the BoJ, Bank of Canada and RBA. BoJ intervention may prove the only effective ammunition to reverse demand for the JPY, but may be delayed until after September 14. The emergence of cracks in the UK do not spell good news for GBP and confirmation of softening industrial activity next week could see sterling extend one of the worst starts to a month since January. We look for the BoE to stand pat on BR and APF target. Our special note this week discusses the outlook for the JPY and CHF.

Recap

USD fell against most G10 currencies as risk appetite resurfaced in the lead up to Friday’s non-farm payroll numbers and major equity and commodity markets rallied strongly. GBP continued to lose ground and dropped against every G10 currency. Among the most watched currency pairs, after dropping initially during the week, EUR/USD rallied 1% to 1.2886. GBP/USD recovered to 1.5444 after slumping by 1.3% at one stage to 1.5327, finishing the week down 0.6%. JPY remained firm against USD (+0.9%), GBP and especially EUR against the backdrop of continuing speculation about possible policy intervention by the BoJ, possibly after the September 14 DPJ leadership challenge.

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Highlights

• Risk rebounds on improving global data
• The most recent risk rally faces a number of hurdles in the week ahead
• A Multitude of Interest Rate Announcements in the Week Ahead
• Outcome from emergency BOJ meeting & political uncertainty may impact the JPY
• Key data and events to watch next week

Risk rebounds on improving global data

The past week began with disappointment stemming from Japan’s lack of direct currency intervention and risk aversion looked probable to continue into the week. This was not the case as better than expected Australian 2Q GDP started a ripple effect culminating into a global wave of positive data surprises. Upbeat manufacturing numbers midweek out of China and the US saw safe havens soften and sent US equities soaring higher by greater than 2% Wednesday. The positive data stream continued Thursday as US July Pending Home Sales printed a much better than consensus +5.2% as compared to an expected -1% decline. Friday’s much anticipated NFP capped the data session as Private Payrolls jumped by +67k and the headline number declined by a less than expected -54k versus expectations of a -105k drop, seemingly cementing a renewed emergence of risk appetite.

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Market Movers ahead

• There is little in the way of US events or data that can seriously be expected to move markets, partly because Monday is Labor Day.
• Can the German upswing continue despite the problems stateside? There is much speculation about this at present, so it will be worth keeping an eye on the figures for German manufacturing orders and output. The UK and Japanese central banks are holding rate-setting meetings, but we do not see either being particularly exciting.
• The US, China and big European economies will be releasing foreign trade data during the week, which could also say something about whether the familiar pattern is persisting, with Asia as growth engine and Europe as its big supplier.

Global Update

• The sense of relief was tangible as incoming data painted a slightly brighter picture than in previous weeks. The strong ISM figures in particular confirm that the risk of a really hard landing in the US is relatively small.
• In Europe, we had evidence that the upswing is becoming broader-based, and the PMI data from China indicates that the recent downturn in manufacturing there is over. On the other hand, the Bank of Japan disappointed with its not particularly ambitious easing of monetary conditions.

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The EURUSD didn’t make significant movement yesterday. The bias is neutral in nearest term but we are still in bullish correction phase as price is moving strongly inside the bullish channel as you can see on my h1 chart below. A break above the trend line resistance could trigger further upside momentum testing 1.2930. On the downside only a violation to the bullish channel and movement below 1.2770 support area could trigger bearish continuation at least testing 1.2700. Pay attention to US Non Farm Payroll data today.

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EUR/USD closed higher on Thursday as it consolidates some of the decline off this month’s high. The mid-range close sets the stage for a steady to higher opening on Friday. Stochastics and the RSI are bullish signalling that a short-term low is in or is near. Closes above the 20-day moving average crossing would temper the bearish outlook. If it renews last month’s decline, the reaction low crossing is the next downside target.

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Today’s US session was one for those who enjoy watching paint dry. But tomorrow is NFP day and may be yet another day for a USD inflection point.

Today’s session was hardly one for the history books, though we did see fairly strong moves in NOK (in support of the interest rate spreads favoring the currency as we have noted in recent days) and in SEK off the back of the Riksbank interest rate hike and guidance. EURUSD and the other major USD pairs failed to follow up on yesterday’s exuberant move higher in respect of the upcoming US employment report and ISM non-manufacturing report tomorrow.

Nonfarm payroll expectations and reactions

Some have lowered expectations for US nonfarm payrolls due to the weak ADP release (soon we’ll be dropping the "private payrolls" figure, which remains the focus, once the rest of these pesky census workers are fired). The Saxo call (see a great report on the release here: is for a virtually unchanged figure versus a slightly more positive consensus. The market is already very short the USD, but risk is made a sharp comeback yesterday, which pushed the dollar lower. It feels like we’re in need of direction here after so many days of aimless trading in EURUSD and whippy trading in the more risk-correlated AUDUSD, but will we get any kind of resolution in tomorrow’s trading? It’s tough to build any conviction in this environment. For now, risk appetite measures are generally very complacent.

It is perhaps worth noting the reactions to the last three US employment reports.

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