FOREX TRADING

USD Lower, JPY Pressured by BOJ Ease Speculation

• USD: Lower, inventories drop more than expected, stocks rally
• JPY: Lower, BOJ ease speculation, weak machinery orders
• EUR: Higher, German exports drop sharply, industrial production rises in Italy and France
• GBP: Lower, industrial production posted an unexpected decline, concern about UK debt rating
• CAD and AUD: AUD & CAD higher, strong Chinese trade data, stocks and crude rally

Overview

USD traded in a narrow range gaining versus JPY and GBP, and drifting lower versus the EUR and commodity currencies. JPY was pressured by BOJ ease speculation. Reuters reports that the BOJ may ease monetary policy next week. GBP traded lower in reaction to report of an unexpected decline in UK industrial production. EUR erased early loses sparked by report of a sharp drop in German exports. EUR rebounded in reaction to report of stronger industrial production data from Italy and France and gains versus the JPY. The commodity currencies continue to outperform trading higher in reaction to strong trade data from China. China’s exports rose 45.7% in February. The Chinese trade data generates optimism about the strength of the global recovery. Dovish comments from the Fed’s Evans had limited impact on the trade. Evans said the weak labor market will make the Fed keep accommodative policy for some time. The Bloomberg Professional Global Confidence Index finds that optimism about the USD is an 18 month high as the US economy shows signs of recovery. According to the survey, investors expect the US economy to grow faster than Japan and Europe and the Fed is expected to hike rates before the ECB and BOJ. Growth and yield differentials are moving in favor of the USD. The Bloomberg survey also states that investors have turned negative the EUR because of fallout from the Greek debt crisis. Jeremy Siegel a finance professor at University of Pennsylvania Wharton school of business says the US recovery is certain but the EU may splinter. A fresh sign that the US economy is recovering is a report that US job openings are at an 11 month high. This report suggests that US employers may be ready to start hiring new workers. US economic data was mixed with wholesale sales coming in higher than expected and wholesale inventories lower than expected. USD traded to the days lows pressured by a surge in the price of crude sparked by report of lower crude inventories. Focus turns to Thursday’s release of US jobless claims and retail sales and Friday’s release of Michigan consumer sentiment.

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USD Higher, EUR and GBP Pressured by Credit Warnings

• USD: Higher, risk aversion re-emerges on European debt worries
• JPY: Higher, supported by a return of risk aversion, leading index rose more than expected
• EUR: Lower, concern about Greek debt troubles, ECB’s Stark says debt places strains on monetary policy
• GBP: Lower, Moody’s and Fitch warnings on banks and debt, weak housing data, trade deficit widened
• CAD and AUD: AUD & CAD higher, Australia’s job ads strong, tracking equities, gains versus Europe

Overview

USD traded higher Tuesday supported by a return of risk aversion sparked by the re-emergence of concern about European and UK debt. Fresh worries over European debt were triggered by statements from Moody’s and Fitch ratings agencies. The EUR traded lower ahead of today’s meeting with Greek Prime Minister Papandreou and President Obama. Bloomberg reports that this meeting is unlikely to produce any significant offer of US aid for Greece. Papandreou says that Greece needs EU and US help to prevent speculative selling of Greek bonds and that borrowing at high rates will not be sustainable. GBP was pressured by a Moody’s warning that it may cut UK bank ratings as bailout support is withdrawn and in reaction to Fitch concern about UK deficit. GBP was also pressured by disappointing UK housing and trade data and election polls which suggest that the UK is headed for a hung parliament. Commodity currencies continued to outperform despite a sharp decline in the price of crude and a spike in risk aversion as equity markets traded lower. AUD downside was limited by strong jobs ads report and a rebound in US equities. JPY traded higher supported by today’s return of risk aversion. There were no major US economic reports released in today’s trade. The NFIB small business optimism index lost 1.3 points in February and Manpower says that hiring plans are in a holding pattern as a net 5% of employers said they expect to hire new workers in Q2. Focus turns to this week’s release of US jobless claims, retail sales and consumer sentiment.

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Today, the U.K. will release trade balance for January in a calm day in Europe that lacks fundamentals. The British economy has shown improvement, according to the data released last week which showed that consumer confidence surged in February to a two-year high and services expanded at the fastest pace in three years.

Britain expanded 0.3% in the fourth quarter boosted by exports which jumped to 3.7% from 0.1%, while imports rose to 4.1% from 1.3%. Besides, services and manufacturing sectors are showing growth in the first quarter of 2010. However, the economy is suffering from a trade deficit, where it widened in December to the most since January 2009 as imports soared faster than exports.

Trade deficit reached 7.3 billion pounds where imports inclined 5.2%, while exports jumped 4.5% on the month. The trade gap in January is predicted to narrow to 7.0 billion pounds. Trade deficit non EU is estimated to narrow to 3.3 billion pounds from 3.5 billion pounds, while the total trade deficit to retreat to 3.0 billion pounds from 3.2 billion pounds.

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USD Mixed as Stocks Weaken

• USD: Mixed, better than expected nfp, consumer credit rises, specs on the IMM halve USD long positions
• JPY: Lower, Nikkei rallies 2.9%, BOJ ease speculation
• EUR: Lower, Sarkozy says EU will help Greece, investor sentiment improves
• GBP: Mixed, BOE policy and UK election uncertainty
• CHF: Higher, Swiss unemployment rate improves, retail sales strong
• CAD and AUD: AUD & CAD higher, tracking improving risk sentiment, Canadian housing starts rise 6.1%

Overview

USD starts the week mixed to lower pressured by a modest improvement in risk sentiment. The improvement in risk sentiment is attributed to Friday’s release of better than expected US unemployment and stronger consumer credit, a statement from French President Sarkozy that the EU is ready to help Greece and in reaction to a Financial Times report which suggests that China is ready to shift its currency policy and break its USD peg. US January consumer credit rose for the first time in over a year and posted its largest increase since July 2008. The Nikkei surged 2.9% adding to the improvement in risk sentiment but European equities and US equities struggled which limited the downside for the USD. European economic data was generally positive with EU investor sentiment improving and Swiss unemployment and retail sales coming in better than expected. There was no major UK economic released today and GBP consolidated recent gains. Commodity currencies traded higher supported by the improvement in risk sentiment with the AUD trading at a six-month high. AUD was also supported by M&A news that Royal Dutch Shell and Petro China are bidding for Australia’s Arrow Energy. CAD traded higher in reaction strong Canadian housing starts report and BOC rate hike speculation .There was limited reaction to an NABE report which says that business economists see a Fed rate hike within the next six months. CFTC commitment of traders for the IMM shows that speculators cut USD speculative long positions in halve last week. The CFTC report suggests that speculative sentiment towards the USD is turning less positive. There were no major US economic reports released in today’s trade. Focus turns to this week’s release of US jobless claims retail sales and consumer sentiment.

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U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

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U.S. Dollar Trading (USD) was strong even as stock markets remained positive as the EUR/USD slumped after the ECB announcement and USD/JPY rallied on increasing US Bond Yields. Weekly Jobless Claims improved to 469k vs. 496k. January Pending Home Sales fell -7.2% tracking a broad set of weak housing data in January. In US stocks, DJIA +47 points closing at 10396, S&P +4 points closing at 1122 and NASDAQ +11 points closing at 2292. Looking ahead, February NonFarm Payrolls forecast at -50k vs. -20k previously and the Unemployment rate is forecast at 9.8% vs. 9.7%.

The Euro (EUR) lost ground after the ECB held rates at 1.0% and described the current levels as appropriate with economic growth uneven. EUR/JPY held its own as stock markets improved but EUR/AUD slumped back close to the key 1.50 handle. Also released, Q4 GDP confirmed at 0.1%. Overall the EUR/USD traded with a low of 1.3551 and a high of 1.3714 before closing at 1.3570. Looking ahead, January Factory Orders are forecast at 1.5% vs. -2.3% m/m.

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USD Higher, Jobless Claims Fall, Pending Home Sales Tank

• USD: Higher, jobless claims fall, productivity revised higher, pending home sales tank, stocks erase gains
• JPY: Lower, BOJ’s Noda rejects government pressure to buy JGB bonds and expand QE
• EUR: Lower, Greek budget euphoria fades, ECB holds rates policy study, exit plan continues, weak Q4 GDP
• GBP: Mixed, BOE holds interest rates and asset purchases unchanged, house prices decline
• CAD and AUD: AUD & CAD lower, Australian trade deficit widens, Canadian building permits fall

Overview

The USD traded higher Thursday supported by ongoing concern about the Greek fiscal outlook and in reaction to mixed US economic data. USD extended its early rally after the release of an unexpected decline in pending home sales. Equity markets gave back all the morning’s early gains after the release of the pending home sales data. The pending home sales report appeared to inject more risk aversion into the trade. The ECB elected to hold rate policy unchanged as expected. In the press conference following the ECB policy decision ECB President Trichet said that the recovery is on track and will remain uneven, current ECB rates are appropriate, and inflation expectations remain anchored. Trichet went on to say that adverse weather could impact first quarter growth. The ECB expects EU 2010 GDP growth of 0.4% to 1.2%. The ECB expects EU 2010 CPI at 0.8% to 1.6%. Trichet said that the ECB welcomes Greece’s fiscal plan and signaled that the ECB would continue with the current gradual pace of withdrawal of liquidity. Trichet also said that it is not appropriate for the IMF to aid Greece. This comment sparked selling of the EUR and generates concern that Greece could be left out in the cold if the EU fails to agree to aid for Greece. EU officials will discuss the need for Greek aid Friday. GBP traded mixed initially supported by the BOE’s decision to hold interest rates and asset purchases unchanged. GBP turned lower in reaction report of a decline in UK house prices. Commodity currencies were mixed with a CAD continuing to outperform. AUD traded lower pressured by concern about the global growth outlook and in reaction to report that the Australian trade deficit widened in January. JPY traded a three month high versus the USD supported by a decline in risk appetite as Asian equity markets decline. JPY was also supported by comments from the BOJ Noda rejecting Japanese government calls for the BOJ who purchase more JGB’s. JPY turned lower after the release of better than expected US jobless claims and productivity data. Jobless claims posted a larger than expected decline, productivity rose more than expected and unit labor costs declined by more than expected. USD edged higher after the release of these reports. Pending home sales posted a sharp decline and factory orders rose more than expected. USD traded to the highs for the day after the report of the pending home sales drop and erasing of early US equity market gains.

Focus turns to Friday’s release of US February unemployment and nonfarm payrolls. The trade expects a modest uptick in the US unemployment rate and a fairly sharp drop and nonfarm payrolls partly because of bad weather and snow storms that blanketed much of the US during February. (more…)

USD Lower, Service PMI Expands at Best Pace in Two Years

• USD: Lower, ADP employment as expected, services PMI beat expectations, stocks rally
• JPY: Higher, Japan’s finance minister says the government and BOJ will combat deflation
• EUR: Higher, Greece announces extra austerity measures, retail sales and PMI weaken
• GBP: Higher, stronger than expected consumer confidence & PMI, uncertainty about the Prudential AIG deal
• CAD and AUD: AUD & CAD higher, Australian GDP strong, commodity prices rally

Overview

The USD traded mixed in reaction to report that Greece has decided to take extra austerity measures to reduce its budget deficit. Greece plans to cut its deficit by a total of €4.8bln. The new Greek budget plan generates hope that the Greek fiscal crisis will be contained and that Greece will not default on its debt. EUR initially rallied in reaction to the Greek budget news but investors remain cautious and EUR gains were limited. Investors want to see if the Greek budget plans lead to EU solidarity and a plan to aid Greece. Greek officials said they will go to the IMF if the EU fails to give support. EUR upside was also limited by report of weaker than expected EU retail sales and services PMI. GBP traded higher for the first time in six days supported by report of improving consumer confidence and stronger services PMI. Commodity currencies were mixed with the AUD underperforming despite report of strong Australian Q4 GDP. CAD continues to outperform. JPY traded at its highest level since last December versus the USD supported by mixed risk sentiment and a statement from Japan’s finance minister that Japan is taking efforts to defeat deflation. US jobs data was encouraging. Challenging Gray said that February job cuts were at their lowest levels since February 2006. ADP employment declined by the smallest since last February. ADP says jobs growth may return next month for the first time in two years. ADP says the service and manufacturing sector added jobs last month. February non-manufacturing PMI came in stronger than expected posting its fastest growth in two years. US equity markets rallied to the day’s highs after the release of the non-manufacturing PMI and the USD traded lower. The USD traded to a new low for the day in reaction to an IMF statement the Greek budget plan is very strong.

Focus turns Thursday’s ECB and BOE policy meetings and Fridays release of US unemployment. The ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls declining by 50k. (more…)