FOREX TRADING

Singapore dollar revaluation

The government of Singapore decided on a modest revaluation of the Singapore dollar, which jumped a little over 1% vs. the US dollar and therefore to the strongest level since before the crisis hit in 2008. The move is seen as a response to stronger inflation readings in Asia as China’s commodity demand has seen prices for key commodities rise as much as 70% over the last year. The magnitude of the "revaluation" was not particularly great, but the Singapore authorities are clearly not against further appreciation of their currency as growth is expected to surge past previous expectations. The Monetary Authority of Singapore said it would seek a "modest and gradual appreciation" of the SGD against a basket of currencies. This pushed the USD a bit weaker in Asia, and commodity currencies a bit higher (is this a preview of the kneejerk reaction that awaits if the Chinese try to revalue?) but later the EURUSD was back lower, and the market must also consider the argument of whether less pressure on reserve diversification from trying to maintain currency pegs or managed floats is a Euro negative.

Risk rally

Of course, commodity currencies are stronger not just on the Singapore news, but also because risk appetite remains robust after the market liked what it saw from the key chip company Intel yesterday after the US equity markets closed. Sales, profits and guidance were all positive and Nasdaq 100 futures are trading at a new high for the cycle, having rallied almost 100 percent now from their lowest levels after the crisis, and even more remarkably, now only a little over 10% from the 2007 highs. Crude oil also survived a test of support below 84 dollars a barrel and Gold rebounded from its two-day sell-off. The kiwi was a reluctant participant in the commodity currency rally, since its retail sales numbers saw an ugly dip in February, against expectations for reasonably strong expansion.

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Asian markets were firmer today after a lackluster performance in US equities. Concerns about debt laden Greece continue to weigh heavily on the euro while commodity currencies continue to gain on improving global economic outlook. Crude oil continued to climb, testing 17 month highs at $87-per barrel with gold bettering $1137.00 late in the Tokyo session. Copper prices hit levels not seen since August of 2008, topping $7990.00-per metric ton. The loonie and the aussie continued their assault on the dollar with the loonie breaking parity to .9983 at market open in London. (more…)

U.S. Review

Economic Recovery Continues, but is it Enough?

• Economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management manufacturing index and employment all suggest continued progress.
• Yet the pace of the recovery still presents several fundamental challenges. First, construction spending is disappointing and for a society that has put so much emphasis on housing, there is a disconnect between aspirations and reality. Second, the pace of growth will not likely solve the budget shortfalls in many states or at the national level.

Economic Recovery Continues, but is it Enough?

Three important economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management Index and employment all suggested continued progress on the economic front. Factory orders increased 0.6 percent in February and the gain reported for January was revised higher. Factory orders have gained in 10 of the past 11 months and are now more than a third of the way back to where they were at their peak in July 2008. Specifically, new orders for non-defense capital goods ex-aircraft are up nine percent (annualized) over the last three months, consistent with our expectations for 8 percent or more gains in real equipment & software spending for this year.

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USD Mixed, House Prices Flat, Consumer Confidence Rises

• USD: Mixed, house price rebound slows, consumer confidence rises more than expected, stocks turn lower
• JPY: Lower, industrial production and household spending declined , unemployment unchanged
• EUR: Lower, France AAA debt rating at risk of a downgrade, Greek bond spreads widen
• GBP: Higher, GDP revised up, house prices rise, trade gap narrows
• CAD and AUD: AUD & CAD higher, RBA rate hike speculation, Canada’s raw material prices rise

Overview

The USD traded mixed Tuesday weakening against the GBP and commodity currencies and firming versus the EUR and JPY. GBP outperformed supported by report of an upward revision in UK Q4 GDP and higher UK house prices. EUR erased early overseas gains pressured by rumors that France may lose its AAA debt rating and in reaction to ongoing concerns about the Greek debt crisis as Greek bond spreads continued to widen. AUD was supported by RBA rate hike speculation and the JPY traded lower pressured by improving risk appetite and firmer equity market trade with additional selling pressure noted in cross trade to the GBP and AUD. CAD traded higher supported by report of an unexpected rise in Canada’s raw material prices. Risk appetite was supported by news from China about possible Yuan revaluation and US China tensions. Reuters reports of divisions in China over the Yuan value. Two PBOC advisors said that China should allow the Yuan to gradually appreciate but the Chinese trade minister said that the Yuan is not the cause of US China trade gap. US Chinese tensions may be easing in reaction to comments from President Obama that he wants to work with China to create balanced and sustained global growth. US economic data was mixed with the Case Shiller House Price Index unchanged last month. The rebound in house prices seen last fall has faded. Consumer confidence came in above expectations and USD edged higher rising to a fresh two month high versus the JPY. Focus turns to Wednesday’s release of the ADP employment report for March. Investors will be looking at the ADP for clues to Friday’s US unemployment report. March nfp is expected to post a gain of 200k.

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Weekly Economic and Financial Commentary

U.S. Review

Public Policy Grabs Center Stage

• Public policy dominated this week, with the passage of healthcare reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.
• Advance orders for durable goods rose in line with expectations, but a large downward revision to January’s nondefense capital goods orders raises a red flag as to how strong capital spending will be in the first quarter.
• Sales of new and existing homes both declined in February, raising fears the incipient recovery in housing has faltered.

Strange Days in the Credit Markets

The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.

The last few years have seen Treasury yields rise during the spring, triggering a whole new set of challenges. History looks like it will repeat itself this year, with the end of the Fed’s mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will remain a challenge, with additional money needed to pay Social Security benefits and recapitalize Fannie Mae and Freddie Mac. Sovereign credit risk and worries about growing supply also extend to municipalities, which saw yields climb sharply recently.

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The Week Ahead

Highlights

• Greek denouement looms
• RBI hikes, more coming from others
• SNB pulls the rug out from under EUR/CHF
• March 24 UK budget will be critical in pre-election positioning
• CAD–To parity and beyond
• Key data and events to watch next week

Greek denouement looms

FX markets continue to fluctuate broadly in recent ranges, turning with every twist in the ongoing Greek drama. Risk saw higher in the beginning of the past week as EU leaders appeared to be in agreement on a plan to provide an aid package to Greece. Then the German government indicated it could not legally support such a plan and that Greece should seek aid from the IMF, sending EUR/USD and most other risk assets lower into the end of the week. Then on Friday, EU Commission President Barroso confused matters further by advocating a standby financial aid mechanism of coordinated bilateral loans from Euro-area countries. The immediate Greek drama may be entering the final act, though, as next week’s EU summit is likely to see a definitive resolution one way or the other. If European leaders fail to reach an agreement, it will look very bad for Euro-area cohesion, exposing the fiscal vulnerabilities of other members now seen to be on their own, and likely see the Euro suffer as a result.

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Overbought Test Of Resolve

Gbp/Usd moved 100 pips higher during the European session after reports from the U.K. labor market hit the newswires that were better than expected. The minutes from the recent Bank of England rate meeting revealed that nothing much had changed from the previous month, and that CPI and inflation reads were as much to do with a weaker pound than instigated by internal growth.

The MPC minutes suggest that interest rate increases are just as far away in the U.K. as any other major region, with the exception of Australia. This news had a positive effect on the major currencies, but the pound is the only pair to make a substantial breakout. (more…)

U.S. Review

Upbeat, Downbeat or Simply No Rhythm

• Economic news continues to come in mixed, with positive reports on retail sales and the trade deficit being offset by disappointing reports on small business optimism and unemployment claims.
• Revised employment data for states show larger job losses during the recession and cast some doubt on January’s drop in the national unemployment rate.
• Stronger retail sales and declines in imports led to surprising drops in inventories at retailer and wholesalers in January. Inventories rose slightly at manufacturers, however.

Still on Pace for a Modest Economic Recovery

February’s retail sales report was easily the best economic news released this week. Overall sales rose 0.3 percent during February, with strong gains reported across nearly every major category. Sales excluding gasoline, building material and automotive dealers, which is a category that tends to track the personal consumption data, rose 0.9 percent in February, following a 0.6 percent gain in January. The strong back-to-back gains suggest consumer spending will rise at a 2.2 percent pace or better during the first quarter, which is in line with our forecast, published earlier this week.

One complicating factor in the retail sales figures is that retailers have done a really good job at bringing inventories in line with sales and are discounting much less than they did in prior years. As a result, the better numbers reported for January and February may not reflect as much volume as they first appear. The lack of discounting is also apparent in the Consumer Price Index, which has shown larger price gains for core good prices. Prices for core goods are currently up 2.9 percent over the past year, which is their largest gain since the early 1990s.

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USD Lower, Pending Home Sales Up 1%, Stocks Rally

• USD: Lower, pending home sales rise less than expected but post improvement year-over-year
• JPY: Higher, supported by gains in cross trade to AUD, Kamei calls for the Post Bank to diversify
• EUR: Higher, Greek debt default spreads narrow, PPI rises, German retail spending improves
• GBP: Mixed, UK election polls suggest possibility of a hung parliament, debt fears limit gains
• CAD and AUD: AUD lower & CAD higher RBA leaves rate policy unchanged, CAD tracks risk sentiment

Overview

USD traded mixed Tuesday with the main focus on the RBA’s decision to leave rate policy unchanged. A 25 bps hike was widely expected from the RBA and the AUD traded sharply lower in reaction to the RBA’s decision to hold rate policy steady at 3.75%. The RBA cited recent tightening of monetary policy in China as one of the key factors for the decision to hold rates steady. The RBA left the door open for future rate hikes if the Australian economy continues to improve. European currencies were mixed with the EUR supported by report of an unexpected rise in EU producer prices and in reaction to a narrowing of Greek default spreads. The Greek prime minister said that Greece will do everything necessary to end its fiscal crisis. CHF is supported by report of better than expected Swiss consumer sentiment. GDP continues to underperform pressured by uncertainty about the UK budget deficit outlook as the latest UK polls indicate a possibility of a hung parliament. A hung Parliament in the UK would make it much more difficult for the UK to address its budget deficit. GBP downside was limited by report of improvement in UK construction PMI and speculation that the BOE will signal a pause in its asset purchase program at Thursday’s BOE policy meeting. JPY traded mixed supported by sharp gains in cross to the AUD. JPY gains were limited by improving risk sentiment sparked by the RBA’s rate decision and firmer equity market trade. US economic data was mixed with pending home sales reported to have risen by less than expected, pending home sales rose in all districts during the summer. The pending home sales report suggests that US housing market continues to stabilize.

Focus turns to Wednesday’s release of ADP employment report, central bank policy meetings in Europe Thursday and Friday’s US January unemployment report. The ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive. (more…)

Weekly Economic and Financial Commentary

U.S. Review

Making Progress on the Road to Recovery

• December’s employment report was generally disappointing, with a larger than expected 85,000-job decline in nonfarm payrolls and huge declines in household employment and the civilian labor force.
• Most major chain stores reported better-than-expected results for December.
• Manufacturing activity improved toward the end of 2009, with factory orders rising solidly and the ISM manufacturing survey ending the year at 55.9.

Employment Gains Are Not There Yet

December’s employment report was somewhat of a disappointment. Many were expecting a small increase in employment to be reported for December, even though the consensus was calling for a small decline. Our own forecast called for a larger than consensus drop and we had repeatedly noted that the optimism so many were showing was premature. The actual data proved to be weaker than our forecast, with nonfarm payrolls declining by 85,000 in December and the household survey showing substantial drops in both employment and the labor force.

Revisions to the previously published data produced a slight increase in employment during November. The 4,000 job increase was the first since the recession began back in December 2007. Any celebration about November’s increase was tempered by downward revisions to the October data. On net, the employment data were revised down for the two previous months by 1,000 jobs. Moreover, benchmark revisions will be made to the employment data next month dating back March 2008. The BLS has reported the revision would be around 0.6 percent, which would result in an additional 830,000 job losses over the past two years.

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Weekly Market Wrap

Trading volumes and data were light this week as markets wound down ahead of the holidays. In the US, the November housing starts and building permits data bounced back from the softness seen in October. The FOMC kept interest rates on hold and slightly sweetened its economic outlook, although this positive note was somewhat offset by the second consecutive increase in weekly jobless claims. The dollar gained steadily for a second week against the euro and the yen as sovereign debt issues continued to roil the Euro Zone, while gold hit a one month low below $1,100 on Thursday. The Senate Banking Committee voted to move the nomination of Fed Chairman Bernanke to a full Senate vote, but not without another round of Bernanke bashing from the usual quarters (even after Time named Bernanke the Man of the Year). In the background, there were dark rumblings: PIMCO’s Bill Gross raised his cash holdings to the highest level since the failure of Lehman in Sept 2008, while BoA/Merrill Lynch analysts discussed the possibility of a “Valentine’s day massacre” market correction in Q1 that could stem from the end of the Treasury’s MBS buying program or other factors, and Meredith Whitney took another swipe at banks, cutting her 2009-2011 EPS targets on JP Morgan, Goldman and Morgan Stanley. US equity markets closed the week out on high volume due to quadruple witching and the quarterly Q&P rebalancing. Equity indices ended mixed for the week, with the DJIA down 1.3%, the Nasdaq rising 1%, and the S&P 500 slipping 0.4%.

Little was expected from the FOMC this week, although ahead of the decision an FT article prompted speculation that, in a nod to the ECB, the Fed might choose to distinguish between liquidity and monetary policy, specifically by raising the discount rate from the existing 0.50% level and simultaneously keeping the Fed Funds target rate steady at 0-0.25%. The discount rate hike never came to fruition, but the FOMC did alter its policy statement to remind markets that most of its special liquidity facilities are scheduled to wind down in Q1 2010. As expected, the Fed funds rate was kept unchanged and the commitment to keeping rates on hold for an “extended period” was reaffirmed, with the economic outlook paragraph slightly more optimistic.

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USD Mixed, JPY Lower, BOJ Won’t Tolerate Deflation

• USD: Mixed, overseas loses pared by news of Iran/Iraq tension
• JPY: Lower, BOJ won’t tolerate deflation, five-year bond yields hit a four-year low
• EUR: Mixed, German IFO hits 17 month high, trade balance swung to surplus, EUR/CHF declines
• GBP: Higher, mortgage approvals rise, BOE says banking system more stable, PSNCR at record high
• CAD and AUD: AUD & CAD higher, Australia’s business sales rise, Carney says low rate pledge conditional

Overview

USD drifted lower Friday pressured by a slight uptick in risk appetite as US equity markets edged higher. The EUR was supported by report that the German IFO business sentiment hit its highest level in 17 months and the EU trade deficit swung to surplus in October. GBP edged higher in reaction to report that UK mortgage approvals rose for the third month in a row and the BOE says that the UK banking system is more stable. Commodity currencies traded higher supported by improving risk sentiment and rising crude prices. AUD was supported by report of improvement in Australian business sales. CAD traded higher in reaction to a statement from the BOE’s Carney that the BOC has the flexibility to shorten the time frame for its commitment to keep rates low until mid 2010. Carney appeared to be reacting to Wednesday’s report of higher than expected Canadian CPI. JPY traded lower in reaction to a pledge from the BOJ that the central bank would not tolerate deflation. This pledge encourages speculation that the BOJ may ease monetary policy early next year. USD downside was limited by report of tensions between Iran and Iraq as Iraqi troops were reported to have crossed over the border into Iran and temporarily occupied one of Iraq’s oil fields. The Iraqi deputy minister denied the report. EUR/CHF dropped below 1.50 with CHF supported by rumors of a coup in Pakistan. The drop in EUR/CHF may encourage the SNB to intervene as the SNB has defended the 1.5100 level in the past. The Pakistan government denied the coup rumor.

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Long Equity Momentum – Mixed Global Markets

Forex Trader Note: Global momentum reads are indicating long equity direction, mixed oil and gold trade, and very mixed currency reads. That intimates that Usd weakness may hit, on the strength of risk tolerance in the global market. Over the last few days of trading the dollar index has been in a clear uptrend, helped by positive macroeconomic data coming from the U.S. economy.

This has forced the market to revalue the strength of the dollar index, and is something that will continue until fair value is found off the economic calendar this week. Look for the mixed momentum in these pairs to continue.

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European Market Update

Risk aversion sentiment subsides as European central bankers express confidence that Greek authorities will address its debt problems

ECONOMIC DATA

(SZ) SNB left its 3-Month Libor Target Rate unchanged at 0.25%; as expected. To end corp bind purchases and reiterates to counter any CHF currency strength

Iceland cuts its interest rates by 100bps to 10.00%

(TU) Turkey Oct Current Account: -0.9Be v -0.9B prior

(FI) Finland Oct Preliminary Trade Balance: €1.4B v €1.1Be
(FI) Finland Oct Industrial Production M/M: 2.2% v 2.0%e; Y/Y: -18.9% v -20.8%e

(GE) German Nov Wholesale Prices M/M: 0.7% v -0.4% prior, Y/Y: -3.2% v -7.0% prior

(FR) French Q3 Final Non-farm Payrolls Q/Q: -.06% v 0.0% prior
(FR) French Q3 Manufacturing Production M/M: -0.8% v 1.0%e; Y/Y: -8.8% v -6.5%e
(FR) French Oct Industrial Production M/M: -0.8% v 0.7%e; Y/Y: -8.4% v -6.6%e

(TU) Turkish Oct GDP Y/Y: -3.3% v -3.7%e
(TU) Turkey Nov Capacity Utilization: 70.7% v 71.2%e

(SW) Swedish Nov CPI-Headline Rate M/M: 0.0% v-0.1%e; Y/Y: -0.7% v -0.7%e

(SW) Swedish Nov CPI- Underlying Inflation M/M: 0.0% v0.0%e; Y/Y: 2.3% v 2.3%e; CPI Level 301.03 v 301.22e

(DE) Danish NOV M/M: 0.0% v 0.1%e; Y/Y: 1.3% v 1.5%e

(DE) Danish NOV CPI EU Harmonized M/M: 0.0% v 0.2%e; Y/Y: 0.9% v 1.1%e

(SP) Spain Q3 Housing sales Y/Y: -13.6%

(IT) Italian Oct Production M/M: 0.5% v 1.3%e; Y/Y: -11.8% v -12.7%e; Ind Prod WDA Y/Y: -14.0% v -12.9%e

(EU) ECB Monthly Report: Mirrors ECB press conference from Dec 3rd

(NO) Norwegian Nov CPI M/M: 0.3% v 0.2%e; Y/Y: 1.5% v 1.4%e
(NO) Norwegian Nov CPI Underlying M/M: 0.1% v 0.1%e; Y/Y: 2.4% v 2.4%e
(NO) Norwegian Nov Producer Prices (incl oil) M/M: 3.6% v 1.5% prior, Y/Y: 4.8% v -4.1% prior

(SW) Swedish AMV unemployment Rate: 5.3% v 5.4%e

(SA) South African Q3 Current Account Balance (ZAR): -77.4B v -72.5Be; Ratio to GDP): -3.2% v -3.1%e

(UK) Oct Mortgage approvals M/M: 55.3K v 50.6K prior -Council of Morgtage Lenders: Mortgage

(IT) Italian Q3 Final GDP Q/Q: 0.6% v 0.6%e; Y/Y: -4.6 v -4.6%e v -5.9% prior

(GR) Greek Sept Unemployment Rate: 9.1% v 9.3%e

(IC) Iceland Nov Unemployment rate: 8.0% v 7.6% prior

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USD Higher, Fed Outlook Reduces USD Funding Activity

• USD: Higher, supported by speculation the Fed may begin to withdraw stimulus sooner than expected
• JPY: Higher, technical bounce, new stimulus measures expected to be announced Tuesday
• EUR: Lower, Sentix index rose to an 18 month high, Trichet sees less need for nonconventional policies
• CHF: Lower, retail sales rise 3.1%, SNB policy meeting Thursday, no change is expected
• GBP: Lower, concern about UK budget outlook and exposure to Dubai debt
• CAD and AUD: AUD lower & CAD higher, gold and crude prices fall, Canada’s building permits surge

Overview

The USD traded higher Monday supported by speculation that Friday’s report of better than expected US November unemployment will encourage the Fed to begin to remove stimulus. Fed rate hike talk sparked selling of commodities and equity markets. Despite fresh Fed rate hike speculation, a Reuter’s poll shows that dealer expectations for the timing of Fed rate hike ranged from second quarter 2010 to 2012 with the majority expecting the Fed to hike rates by the end of first quarter 2011.

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