FOREX TRADING

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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Sterling Falls To A Nine Month Low As The Euro Zone’s Debt Worries Investors

The British pound fell to nine month low against the dollar as concerns over euro zone sovereign debt problems boosted the appeal of the greenback as a safe haven currency. Worries about debt problems in the euro zone have extended beyond Greece to Spain and Portugal, hitting riskier assets, with sterling falling in tandem with the euro against the greenback. Last week producer prices data showed further upward pressure on UK inflation, with British manufacturers raw material costs up more than expected last month and continuing to rise at their sharpest annual rate since October 2008. Traders said position adjustment ahead of the weekend accelerated selling of the pound, which has lost close to 2 percent against the dollar this week. The GBP/USD is currently trading at $1.5570 as of 7:14am, GMT, with a bullish trend.

The euro continued to fall this week against the dollar on speculation widening budget deficits in European nations such as Greece and Portugal will deter investors from buying the region’s assets. ‘As sovereign risks spread in the euro-zone, risk aversion will continue in the market,’ said Susumu Kato, chief economist in Tokyo at Credit Agricole Securities, a unit of France’s Credit Agricole SA. ‘Implications of the financial issues remain unclear, which has weighed heavily on the euro.’ (more…)

Investors are jumping off the risk-on bandwagon today and scrambling to get into fixed income as risk aversion rears its head. While Asian equity markets were buoyant overnight with Japanese investors returning after a long weekend the focus migrated to the actions of China’s central bank, after it raised its reserve requirement staring next week and engineered a lift in short term rates through an auction of one-month bills. That was the second consecutive such move and together the central bank is clearly demonstrating that it will back its words of warning when it comes to taming the dragon. The near double-digit pace of growth recently prompted government officials to forewarn that it would take remedial measures to contain the impact of a surge in bank lending.

The interest rate move from the Chinese central bank caught investors off guard and at this point it’s tempting to predict that the path of risk aversion down which investors are running today will prove to be a blind alley. The switch from riskier plays to the safety of bonds is largely inspired by today’s Chinese rate move aimed at curbing excessive bank lending and does not stem from any signs that growth is waning. Indeed yesterday’s domestic Chinese data depicted a voracious pace of growth.

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USD Lower as Fed Seen on Hold for Quite Some Time

• USD: Lower, diminished Fed rate hike speculation, optimism about the global recovery
• JPY: Higher, gains limited by selling in cross trade, EUR/JPY tops 134.00
• EUR: Higher, improving risk appetite, shrugs off of possible downgrade of Portugal’s debt rating
• CHF: Higher, strong Swiss retail sales, gains limited by threat of SNB intervention
• GBP: Higher, business optimism improves, Tories pledge to cut UK budget deficit more than Labor
• CAD and AUD: AUD & CAD higher, China’s exports surge, strong Australian jobs & Canadian housing data

Overview

The USD traded lower to start the week pressured by fallout from Friday’s report of an unexpected decline in US nonfarm payrolls and in reaction to improving optimism about the global recovery as China’s exports surge. The decline in nonfarm payrolls will force the Fed to maintain low yields. The Fed’s Bullard said Monday that US interest rates are likely to stay low for quite some time. The surge in China’s exports sparked a rally in Asian equities to a 17 month high and contributed to improving risk appetite. CHF was supported by report of strong Swiss retail sales with gains limited by threat of SNB intervention. EUR traded higher despite report Portugal’s debt rating may be downgraded. GBP benefits from the Tories pledge to cut the UK budget deficit more than the Labor Party. Commodity currencies surge in reaction to stronger metals and crude prices with gold trading $20 higher and crude prices topping $84 a barrel. AUD was also supported by strong ANZ jobs report and the CAD by strong Canadian housing starts. CAD gains were limited by selling in cross trade to Australia and Europe. Strong economic data from China and Australia fuels speculation that interest rates may be heading higher in Asia. No major US economic data was released in today’s trade. Focus turns to the start of the US earnings season and the release of US retail sales and Thursday’s ECB policy meeting. USD is vulnerable to long liquidation pressures as investors pare back speculation that the Fed will bring forward interest-rate hikes.

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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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Forex Trader Note: The U.S. NFP report printed at -85K, with a net revision of negative -1K over the last two reports. The Unemployment rate posted at 10%, and in reaction S&P futures have hit the floor, with Usd is moving lower initially. The report is very mixed, with no real increase in weekly hourly rates, and the Household survey is way out of line with the Payroll survey; the point to note is the word ‘Survey’; this report is in-line with the more realistic view given by the ADP and weekly Initial Jobless Claims, that are not surveys. This sets up good tests of the 4 hour chart ranges on the majors, and will offer a more reliable read once the Wall Street cash market gets underway.

Once again, the NFP has done nothing to create a clear picture, and the estimated parts of the BLS report create a lot of noise. It will be hard for anybody to put a positive spin on these numbers, and once again we go from famine to feast on the Non-farm Payroll Circus. After all of this, 25 million Americans are still looking for work, and 11% of Americans are still relying on food stamps. The ticker-tape parade from December looks to be rather sobering right now.

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US GDP

US preliminary Q3 GDP was revised down to 2.8% from original report of a 3.5% rise in the advanced estimate. Despite the downward revision, the improvement in US GDP suggests that the worst of the US recessions is over. According to the Bureau of Economic Analysis the increase in Q3 GDP reflects positive contributions from personal consumption, exports, private inventory investment, federal government spending and residential fixed investment. An increase in consumption and improvement in the housing market helped boost Q3 GDP.

This improvement reflects significant impact of government stimulus to encourage demand for auto sales by the cash for clunkers plan and tax credit for new homebuyers. There is concern that when government stimulus is withdrawn the pace of the expansion may slow with growth limited by the weakness of the US labor market. In addition, the Fed is beginning to lay the foundation for the end of its ultra low interest rate policy and the first steps to exit from quantitative ease. How the economy reacts when the Fed begins to withdraw stimulus will be key to the outlook for US GDP growth in 2010. Columbia University economist’s Stiglitz says there’s a significant chance that the US economy will contract in the second half of 2010. He urges the US government to prepare a second stimulus package to create jobs. According to Stiglitz, the economy must grow by at least 3% to create enough jobs to meet US population growth.

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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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