FOREX TRADING

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 There is concern that when government stimulus is withdrawn the pace of the expansion may slow with growth limited by the weakness of the US labor market.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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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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Fed to Maintain Low Yields for Extended Period

The Fed holds rates policy unchanged as expected and reaffirms promise to keep rates exceptionally low for an “extended period”. The Fed says that economic activity continues to pick up and labor market deterioration is abating.

Housing has shown signs of improvement and spending is expanding moderately but remains constrained. Business’s still reluctant to hire new workers. Financial market conditions more supportive of economic growth. Economic activity likely to remain weak for a time but market forces will help growth.

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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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USD Trades at a Five Week High on Fed Rate Hike Talk

FX Highlights

• The USD is trading higher to start the week as global equity markets slump and investors digest the impact of Friday’s US employment report, better than expected US November unemployment suggests the US economic rebound may be stronger than expected and the Fed may hike rates sooner than most analysts had originally thought, GBP pressured by concern about UK exposure to Dubai debt, a report that EU Sentix index rose to an 18 month high and hawkish comments from Trichet were ignored, Australia’s jobs ads rose strongly last month, AUD pressured by a drop in risk appetite
• Focus turns to today’s release of US consumer credit and Canada’s building permits
• The Japanese government will decide on new stimulus package Tuesday, November foreign reserves rose to a record high, Japan’s financial services Minister Otsuka says Japan must address Forex for fair competition for Japanese companies, JPY higher
• Australia’s November job ads rose 5.2%, AUD lower (more…)

This Week’s Market Outlook

Highlights

• The US Dollar turns a corner; gold melts
• JPY to reprise as the FX punching bag
• Four central bank meetings next week
• NFP beats, but buyer beware
• Key data and events to watch next week

The US Dollar turns a corner; gold melts

The greenback looks to have made a significant reversal as we head into the year-end. The proximate catalyst was a better than expected November jobs report (see below), which saw Fed interest rate expectations move up, but the move was unfolding from earlier in the week as USD/JPY staged a sharp rebound. In a twist to the normal ‘risk on’ reaction, stock markets failed to sustain initial gains and continued to show signs of stalling below recent highs. The failure in shares may stem from multiple causes: the USD rebound may have driven risk positioning out; accelerated rate hike expectations may have damped investor sentiment; year-end profit-taking/position reductions; technical exhaustion as new highs fail, take your pick. But for the USD it was a one-way ticket higher.

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U.S. Economic Turning Point? Maybe, But Not Yet

The NFP report created a strong wave of long dollar orders into the currency market, as the labor market showed the first signs of improvement in two and a half years, since the unemployment rate bottomed in the 4.5% region in mid-2007.

The November NFP report showed that the U.S. economy shed only 11K jobs, the least in almost a year, while the unemployment rate fell 0.2%, down to 10.00%. However, it should be noted that the infamous Birth/Death model added 80K in November and approximately 1200K (1.2M) jobs over the last three months. The birth/death model is used by the BLS to reduce sampling errors, but over the time, it has produced more question marks than actual answers.

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ECB Meeting: Heading for the Exit

• The ECB is now heading for the exit. For one thing they are cutting down on the longer term auctions. The 12-month auction in December will be the last of its kind and so will the 6-month auction at end-March. This is slightly more hawkish than expected.
• Markets were particularly surprised by the ECB moving away from 1% at the 12-month auction and instead applying a rate calculated as the average minimum bid rate of the weekly main refinancing operations over 12 months. Consensus expectation was a flat 1%.
• Trichet was eager to say that this was not intended as a signal of future rate hikes, but it is nevertheless likely to be interpreted as an indication that the ECB considers hikes in 2010 likely. The procedure might help to curb banks’ demand at the auction without affecting interest rate expectations as much as a fixed spread would have.
• The weekly main refinancing operations and the 1-month and 3-month auctions will be with full allotment at least until early April. We find it likely that the ECB moves away from full allotment at the 1-month and 3-month auctions in April.
• The ECB’s assessment of the economic situation is becoming more positive. Nevertheless we still consider that the ECB is too downbeat. We think that they could double their growth forecast for 2010 and still turn out to be too dovish.
• The ECB expects inflationary pressures to be low. But in their inflation projection, the upper end of their band for 2011 is nevertheless 2.0%. They will not have to revise their inflation expectations much upward before they can defend moving away from record low interest rates.
• Today’s press conference has been slightly more hawkish than we expected. It has clearly surprised some observers how determined the ECB is to move towards the exit. Nevertheless market reactions were muted – with interest rates rising ahead of the meeting on rumours that the ECB would be hawkish.

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China Commerce Minister Deals Another Blow To Prospect Of Yuan Appreciation

News and Events:

Yet another day of Asian equity market gains have ensured the European session has started with a positive tone; and gold has once again made new all-time highs above $1226 as the USD has been put under renewed pressure from virtually all currencies except the JPY. The morning rally has pushed EURUSD to test 1.5130 resistance, and after negligible effect from the Eurozone Services and Composite PMI data, the mantle will likely fall to this afternoon’s ECB policy meeting to provide the catalyst for a further climb to test 1.5150 levels. Really there is only one factor that hangs in the balance at this meeting, and that will be the possible discontinuation of the ECB’s 12-month fixed rate-tenders. There is not expected to be any alteration in the refinancing rate, and indeed the recent rhetoric from US officials that they are not concerned by USD depreciation will likely negate the effect of any repetition of the ‘strong USD policy’ from European officials. For now, the issue of JPY strength is taking a back seat after USDJPY has recovered back above 87.15 pivot levels to touch highs of 87.92. However the tension surrounding the recent appreciation of the currency is still simmering amongst Japanese policymakers, with the leader of the Japanese government’s opposition accusing the Prime Minister of exacerbating the currency surge with confusing comments that ‘prompted misconceptions’ in the market. With the powerful downtrend in USDJPY still intact, it is unlikely this matter is going to stay on the sidelines for long, and recent meetings between Japanese and US officials has certainly ignited speculation that Japan is trying to lay the foundations for coordinated currency intervention. In other headlines from Asia, it seems that China is more resolute than ever to deflect pressure for the CNY to appreciate. Commerce Minister Chen Deming was on the wires overnight to say that the world’s attentions would be better focused on the damaging lack of stability in the USD, rather than the value of the CNY. He claimed that an unstable CNY would have a very bad effect on the global economy; echoing previous Chinese rhetoric that by keeping the CNY stable they have helped stimulate the recovery. As we have frequently observed whenever CNY appreciation has been debated in the press, it is almost never supported by China itself, and this is yet another setback for US officials after the much-hyped Obama visit last month. (more…)

ECB To Hold Rates Steady, Outline An Exit Strategy

The European Central Bank (ECB) will hold a policy meeting on Thursday December 3rd. The ECB is expected to maintain steady interest rate policy and outline an exit strategy from extraordinary liquidity measures. Last week, ECB President Trichet said that the ECB would cautiously begin to exit strategies that helped provide liquidity during the global financial crisis that could pose inflation threats in the future. Trichet warned EU banks not to get addicted to cheap credit provided by the ECB and he indicated that liquidity measures will be phased out in a timely and gradual fashion to counter any threat to price stability over the medium and long-term. Trichet indicated that the ECB will tighten collateral criteria for the March auction. The tightening of collateral criteria is seen as the first step in an exit strategy by the ECB.

Note in Trichet’s statement above his focus on the impact of extraordinary liquidity measures on price stability. Monday, the EU reported that CPI rose for the first time in seven months. The rise in EU inflation may influence Thursday’s ECB policy decision. The rise in the EU CPI could encourage ECB officials to move the timeframe of an exit strategy forward as inflation pressures may be starting to build. The trade will be closely monitoring what Trichet say about the ECB’s 12 month auctions in the press conference following the ECB policy announcement. The ECB will likely confirm that the 12 month auctions will be allowed to lapse and that liquidity operations may be for shorter term loans. This would signal the start of the ECB’s exit strategy.

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UK’s Mortgage Approvals Rises To The Highest In 18 Months, While CPI Beat Estimates In The Euro Zone

Today U.K. released important data reflecting the economic situation in the economy after the improvement signaled recently. The British economy managed to moderate the pace of contraction in the third quarter to 0.3% from 0.6% in the second quarter thanks to the stimulus measures adopted by the BoE to stall the deterioration.

Mortgage approvals for October, after touching its highest in 18 months in September, it continued its upside rise in October to from 56.2 thousand. It seems that the housing market which was responsible for the crisis is emerging from a rout.

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