A Roadmap for the Fed’s Exit

• The Fed is moving towards an exit of its very easy monetary policy, and the first steps to reduce liquidity have already been taken There are several more steps on the road to the first fed funds rate hike, but the Fed will prepare markets well in advance.
• The unwinding of alternative easing measures has so far been smooth and we see the biggest risk for a destructive market reaction from the termination of the MBS/Agency purchase programme by end March. A surge in mortgage yields could potentially delay the first rate hike.
• Fundamentals would call for an unchanged fed funds rate through 2011, but given its extremely low level, the first hike is expected to arrive late this year. That said, the Fed will be cautious not to tighten too aggressively and is likely to pause hiking close to the 1% level in 2011.

Exit already in progress

This week a testimony by Chairman Bernanke to the House revealed the Fed has progressed further in its move towards the exit. During the crisis the Federal Reserve System implemented several alternative policy measures to cope with the seizure of money market liquidity and to ease financial conditions for the real economy beyond what could be obtained by a zero interest rate policy. With signs of an economic recovery becoming increasingly convincing, the debate about how and when the Fed will tighten monetary conditions has intensified.

While the Fed will not fully complete its purchase programme for mortgage assets before 31 March, the unwinding has already begun. By 1 February, most short-term liquidity and some lending facilities were terminated. Further, the Fed has laid out a plan for the unwinding of the remaining liquidity and short-term lending programmes. According to this plan, all these measures will be terminated by end H1, as illustrated by the timeline below. (more…)

The dollar rose on Friday for a third consecutive day, pressuring stocks and commodity prices for a third day. US nonfarm payrolls declined a modest 20K in January with the unemployment rate falling to 9.7%. The S&P 500 gained 3.08 to 1,066.19 and erased earlier large losses as US consumer credit declined less than forecast and support at 1050 held. The yen fell versus the dollar but rose against most other key currencies on carry trade unwinding. The euro declined amid ongoing concerns about the fiscal stability in the PIGS countries and concern that efforts by Greece, Portugal and Spain to reduce their deficits will hurt the fragile economic recovery. Sterling fell despite higher-than-expected producer-price inflation. The oversold Australian and Canadian dollars rose. The Canadian dollar was supported by an unexpected drop in Canada’s unemployment rate and stronger-than-expected employment growth. The Swiss National Bank reportedly intervened in the FX market to prevent the Swiss franc from further appreciation against the euro after the EUR/CHF fell to the lowest level since October 2008.

The dollar index rose for a third straight day and touched the highest level since July 9. The appreciating dollar is increasing deflationary pressures, depreciating risky assets and may end the US/global fragile economic recovery. The dollar index rose about 9% since the beginning of December. There are support in the 79-area and important resistance at the 81 area. We expect a consolidation between the support and resistance.

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January NFP Likely Turned Positive

January unemployment and nonfarm payrolls will be released on Friday February 5th at 8:30 am (EST). December nonfarm payrolls (nfp) declined by 85k and the unemployment rate was unchanged at 10%. The trade had expected the December nonfarm payrolls to come in at around -35k with a number of analysts looking for a possible positive reading for the December nfp report. The November nonfarm payrolls was revised to plus 4k. This marks the first monthly increase in nonfarm payrolls since the US recession began in December 2007. The headline unemployment rate was expected to have up ticked by 0.1% to 10.1%. The reason the headline unemployment rate did not rise is 600k unemployed persons declared they were no longer looking for employment. As the labor market improves more discouraged workers are likely to seek employment and this could send headline employment higher for many months to come. A number of analysts expect the headline unemployment rate to reach 10.5% sometime in 2010.

The December unemployment report was disappointing and dampened optimism about improvement in the US labor market. The US shed 4.2mln jobs since the start of 2009 and the total number of unemployed remained unchanged at 15.3mln. The number of long-term unemployed, those unemployed for 27 weeks or more continued to trend up reaching 6.1mln in December. The number of part-time workers was unchanged at 9.2mln. The number of unemployed and underemployed is above 16%. The Labor Department reported Wednesday that unemployment rose in 306 of 372 metro areas in December. This report suggests employers remain reluctant to hire and that the US may face a jobless recovery. According to President Obama one in ten Americans can’t find a job. The continued elevated level of US unemployment has the Obama administration shifting focus to jobs creation. The Obama administration proposed a new $100bln job stimulus bill. It’s unclear what the impact of a new jobs stimulus plan will be or if Congress will pass the plan.

Despite the disappointing December unemployment report the trend of improvement in the US labor market appears to have continued with the December report showing jobs creation in professional and business services along with education and health services. In addition, temporary employment rose by 47k. Hiring of temporary workers is seen as a prelude to increased full time hiring. The manufacturing and construction sector continued to shed jobs in December. The average workweek was unchanged at 33.2 hours and wages rose by three cents.

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FOMC Meeting Wednesday, No Change Expected

The FOMC will conclude a two-day policy meeting on Wednesday the 27th of January and announce its policy decision at 14:15 PM ET. The FOMC is widely expected to maintain steady rate policy and 0.0 to .25%. At the December FOMC meeting the FOMC concluded that economic conditions warrant maintaining yields a low level for an ‘extended period’ and the economy is strengthening. The FOMC is expected to reaffirm commitment to maintaining low yields for an extended period at Wednesday’s policy meeting. If the Fed were to surprise and drop the extended period language from statement it would be a sign that the Fed is shifting monetary policy and preparing its tightening cycle. This is unlikely at Wednesday’s policy meeting because there has not been a significant change in the US economic outlook since the last policy meeting. In December Fed officials said that the economy is improving and that inflation pressures were likely to remain subdued. Recent US economic data has been mixed with Christmas retail sales weak, improvement in the housing market slowing and December unemployment disappointing.

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Good morning from cold Hamburg. We hope you have enjoyed your weekend and you were able to relax for a new trading week. Today we will see important data from the US, which could have decisively influence on the FOREX market. Have a nice start in the new week

Markets review

According to a survey the fed officials will do their part to spur the economic growth by keeping interest rates near zero after their two-day meeting this week. Futures trading in Chicago showed on Friday an 18 percent chance that the fed will raise its target lending rate by at least a quarter-percentage point by its June meeting. Today, the US economy will release the data of Existing Home Sales in December. The Monthly data is expected to show a fall of 9.8% while the annual rate may be fallen to 5.9 million from 6.54 million in November. The USD fell against the EUR, JPY and a lot of other major currencies. The EUR/USD climbed for a second day to 1.4168 after rising to a high of 1.4174. The USD/JPY fell for a third day to 90.14 after touching on Friday a low at 89.79, which was the lowest level since December 12th. The falls in the USD may be also caused by the drops in stocks after the Nikkei 225 stock Average fell 0.5 percent and the S&P 500 Index fell 2.2 percent on Friday. The AUD/USD gained also for a second day after it touched its psychological support around 0.90. The NZD/USD has got support around 0.71 and pulled up to a high of 0.7170 before coming back to 0.7158

Technical analysis

EUR/JPY

On a long term view, the EUR/JPY has reached its support level around 127.00. It is the forth touch around this level since the middle of Mai 2009. As you can see, the Auto Regression Bands are signalizing an oversold market. If the market doesn’t make a break trough the strong long term support it may turn back and start a bullish phase (more…)

The declining equity market was fully reflected in the value of the dollar index in midweek trade. The dollar index, which tracks the performance of the greenback against a basket of six currencies, gained 85 basis points throughout the day breaking above the 78.00 benchmark level. The major currencies started weakening from the early hours of Wednesday’s session, and to some extent continued to decline throughout the U.S. session. Since December, the market had a strong desire for dollar long positions, however, today’s major currency sell-off had a first; the major currencies moved lower as one, something not often seen over the last few weeks of trading.

Dollar Index Technical View: TheLFB Member Charts

Daily chart trend: Mixed. Main price points: 74.19, and 76.82. Looking for: A Long wave I/ A

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EUR/USD

Current level-1.4397

EUR/USD is in a downtrend, after peaking at1.5146 (Nov.25,2009). Technical indicators are neutral, and trading is situated between the 50- and 200-Day SMA, currently projected at 1.4793 and 1.4169.

Current rebound from 1.4335 is corrective in nature and while the pair stays below 1.4450 resistance, the bias will continue to be negative for a break below 1.4260, en route to 1.3740 support on the daily frame

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Dow -102 S&P -11.7 NASDAQ -22.2

ECONOMIC DATA

(RU) Russia Dec Official Reserve Assets: $439.0B v $441.8Be

(CL) Chile Dec Copper Exports: $3.2B v $2.9B prior

(IS) Israel Dec Consumer Prices M/M: 0.0% v 0.3%e; Y/Y: 3.9% v 4.2%e

(PD) Poland Nov Trade Balance: -€292M v -€750Me; Current Account: -€1.2B v -€975Me

(CA) Canada Nov New Motor Vehicle Sales M/M: -7.0%e v 3.5% prior

(US) Dec Consumer Price Index M/M: 01% v .2%e; CPI Ex Food&Energy M/M: 0.1% v 0.1%e; CPI NSA: 215.949 v 216.000e

(US Jan Empire manufacturing: 15.92 v 12.00e

(BE) Belgium Nov Trade Balance: €1.9B v €0.9B prior

(US) Dec Industrial Production: 0.6% v 0.6%e; Capacity Utilization: 72.0% v 71.8%e

(US) University of Michigan Confidence: 72.8 v 74.0e

(MX) Mexico Central Bank Interest rate leaves Overnight rate unchanged at 4.50%; as expected

JP Morgan’s disappointing earnings report is hammering US indices this morning. Investors have all but forgotten Intel’s hot quarterly report from yesterday. The final CPI reading of 2009 showed that consumer inflation was tame last year, with prices rising 2.7%, following at 0.1% increase in 2008. The January Empire Manufacturing was better than expected, with very strong growth in the prices paid (hit a one-year high) and new orders components. (more…)