While stimulus spending is due to wind down, Bernanke cites increases in consumer spending and increases in spending by businesses on equipment and software.

“Real consumer spending has risen at an annual rate of nearly 3-1/2 percent so far this year, with particular strength in the highly cyclical category of durable goods. Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions. In the business sector, real outlays for equipment and software posted another solid gain in the first quarter, and the increases were more broadly based than in late 2009; the available indicators point to continued strength in the second quarter. Looking forward, investment in new equipment and software is expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity as sales prospects brighten.”

On the downside, the housing market will weigh down growth, especially as commercial real estate is weak and a government home-buyer tax credit has run out.

“In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions.”

The labor market “has begun to see some modest improvement recently in employment, hours of work, and labor income.” However “a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009.” Inflation continues to be subdued, and “measures based on nominal and indexed Treasury yields have decreased somewhat of late, but at least part of these declines reflect market responses to changes in the financial situation in Europe.”

On the issue of Europe, its impact on US growth is “likely to be modest” if financial markets “continue to stabilize… Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery.”

“The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy.”

Bernanke finished his prepared testimony by calling on lawmakers to begin laying the groundwork for tackling the record federal budget deficit.

“To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.”

The Chairman’s comments, similar to his comments to start the week, may calm some worries about a double-dip recession in the US. Traders and investors last week had begun increasing their bets that the global economy may sputter as a result of the Euro-zone sovereign debt crisis and the weak private sector hiring in the US. Today’s news that China’s exports will post a strong figure for May helped cool those fears as well.

US equities rallied for a second day, with the Dow Jones Index moving above the 10K level. Oil prices were also strongly up, both as a result of a weaker Dollar but also as a weekly report showed a drop in oil inventories in the US. The nation’s stockpiles fell by 1.8 million barrels in the week ended June 4th.

We’ll see how long this recent bout of risk appetite lasts. As we have seen, investors remain very skittish and responsive to negative news such as the Hungary issue to end last week. Bernanke’s assessment of the economy and the China’s trade news have at least temporarily beaten back the global economy bears.

EURUSD Outlook

The EURUSD continued its bearish momentum earlier today in Asian session, hit 1.8882 level and seems comfortable moving below 1.2000 indicating potential bearish continuation targeting 1.1800 before testing 1.1600 this week. Upside risks/correction indicated by a falling wedge formation as you can see on my h4 chart below and the fact that price is in oversold area. This upside pullback scenario is valid only when price breakout above the formation, so until that happen, I am still in bearish mode for this pair. Immediate resistance at 1.2000. Break above that area could trigger further upside pullback testing 1.2150 but the main scenario remains bearish at this phase.

GBPUSD Outlook

The GBPUSD failed to continue its bullish correction on Friday. The bullish channel has been violated to the downside indicating the end of the bullish correction and price ready to continue its major bearish scenario re-testing 1.4240 before targeting 1.4000 area. Immediate resistance at 1.4550. Break above that area could lead us into no trading zone in nearest term but the main scenario remains to the downside

USDJPY Outlook

The USDJPY failed to continue its bullish scenario on Friday. On h4 chart below we can see that the bullish channel has been violated to the downside indicating bullish failure and potential bearish view at least in nearest term testing 90.50 support area. Break below that area could trigger further bearish pressure re-testing 89.00 region.

USDCHF Outlook

The USDCHF attempted to push lower on Friday, bottomed at 1.1428 but whipsawed to the upside, closed higher at 1.1616 and keep moving higher around 1.1644 at the time I wrote this comment. Overall price still trapped in range area of 1.1695 – 1.1445 but the nearest pressure seems more to the upside testing the 1.1695 area. Consistent move above that area could trigger further bullish momentum targeting 1.1750 and confirm the bullish continuation scenario.

EURJPY Outlook

The EURJPY had a significant bearish momentum on Friday, bottomed at 109.39 after break below the rising wedge formation and continue to push lower earlier today in Asian session, moving below 108.83 area indicating potential further bearish pressure 106.00 even 104.00 area this week. Another upside pullback above 108.83 could trigger further upside correction and lead us into no trading zone in nearest term but the main scenario remains to the downside.

GBPJPY Outlook

The GBPJPY had a significant bearish momentum on Friday, bottomed at 132.14 and keep moving lower earlier today in Asian session around 131.50 at the time I wrote this comment. The nearest bias is bearish testing the lower line of the bullish channel and 128.89 area but note that as long as price still move inside the bullish channel the bullish correction scenario remains intact. Immediate resistance at 133.20. Break above that area could trigger further bullish pressure

AUDUSD Outlook

The AUDUSD continued its bearish pressure on Friday after failed to break above 0.8550 area which can be seen as nearest term top at this phase, lead us to potential bearish view testing 0.8070 even 0.8000 region. On the upside, only a movement back above 0.8275 could lead us into no trading zone as my technical study would be a mess and activate my wait and see mode.

• 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.

We still don’t know when the Fed will start to drain excess reserves in the fed funds market and when the Fed will start traditional tightening in terms of interest rate hikes. However, we think that the completion of the mortgage asset purchase programme by 31 March will mark an important point. Following that date, the Fed will slowly start to prepare the ground for monetary tightening. This progress is likely to be very gradual and happen in small and well-advised increments in order to avoid spooking the markets. We think the following order of events is the most likely based on recent Fed communications.

1. Prepare the market to drain excess reserves by increasing the spread between the fed funds rate and the discount rate.
2. Prepare the market for hikes by removing ‘extended period’ language.
3. Excess reserve draining operations.
4. Interest rate hikes.

The timing of these events is likely to be subtle. Our best guess is illustrated in the timeline above, but the sections below will provide more details about the relevant considerations on timing and implementation.

Unwinding of alternative easing measures

The alternative easing measures can broadly be divided into liquidity providing measures, aimed at securing a smooth functioning of money markets, and credit easing measures, targeted at specific dysfunctional credit providing markets. On top of this, the Fed’s asset purchase programme served the purpose of both putting downward pressure on longer term yields and adding liquidity to the system.

Most of the credit easing and liquidity programmes were designed with a penalty rate. Hence, as market conditions improved and the market was flooded with liquidity from the Fed’s asset purchases, they largely unwound automatically. The impact on money markets from the termination of the liquidity programmes is thus minor. The same is true for the credit easing measures, where the use of the facilities has generally declined in line with the healing of financial markets.

The bulk of the increase in excess reserves can be attributed to the agency/MBS purchase programmes. This implies that in order to normalise the amount of liquidity in the system and get a better anchoring of money market rates, the Fed needs to take measures to actively drain liquidity.

While one possible solution would be to simply sell the assets accumulated from the purchase programmes, this would risk sending mortgage rates substantially higher and damaging an already fragile housing market recovery.

The Fed has indicated that it would prefer to drain liquidity through reverse repos – i.e. swapping assets for liquidity temporarily. This would not shrink the Fed’s balance sheet but would merely shift the composition from MBS/Agency/Treasury securities to a large holding of repos. In addition to this, the Fed is flagging the idea of implementing term deposits. Term deposits would pay a higher interest rate than excess reserves (currently equal to the upper level of the interval for the fed funds rate (25bp)) and hence raise the incentive to tie up liquidity at the Fed for a longer period.

One caveat is the arbitrage possibility from borrowing at the term Discount Window at the fed funds rate plus 25bp and placing it on term deposit at the Fed at a higher rate. To prevent this the Fed has indicated that it will increase the discount rate spread sooner rather than later. Importantly, the Fed has clearly signalled that this should not be interpreted as signalling any change for the monetary policy outlook, but merely be considered a normalisation of liquidity facilities.

Another positive spin-off is that a discount rate hike will encourage market participants to exchange liquidity through the market place instead of borrowing at the Fed, and hence discourage banks to add even more excess liquidity to the system. Although we expect that the above measures will be implemented before the first Fed hike, the amount of excess reserves is likely to stay elevated throughout 2010 and possibly into 2011. It will thus be difficult to keep short term money market rates at the target Fed funds rate without raising the rate paid on excess reserves (IOER), and we believe they will have to move in tandem going forward. Alternatively, the Fed might choose to communicate its policy stance through the IOER or another alternative shortterm rate.

Higher mortgage rates could be a show-stopper

While the unwinding so far has been smooth, the biggest risk for a destructive market reaction remains attached to the termination of the MBS/Agency purchase programme. It is extremely difficult to assess what the exact impact on mortgage rates will be. One comforting factor is that the Fed has already started to scale down purchases without any major impact on mortgage rates. The real test however is 31 March when the purchase programme will terminate.

Part of the spread tightening of agency-backed MBS’s to government bonds through 2008 and 2009 is likely attributable to a more explicit government guarantee, as the agencies were put under conservatorship in September 2008. However, the major effect on mortgage lending rates came from the Fed’s asset purchase programme. In the first months following the Fed’s start of the MBS/agency purchase programme, the spread between the 30-year Freddie Mac mortgage lending rate and the yields on a 30-year government benchmark tightened more than 100bp.

In a speech on 14 January, New York Fed president Dudley stated that the end of the Fed’s purchases of mortgage-backed securities is “going to have a relatively small effect on the level of mortgage rates, something in the order of 0.5 to 0.25%”. Hence, if mortgage rates were to back up substantially more than this, it could potentially delay the path for the Fed exit scheduled above, and in an extreme case make the Fed extend the MBS purchase programme.

Preparing the markets for a hike

However, if things develop in an orderly fashion, the next step will be traditional tightening in terms of rate hikes. As always the timing is subtle – perhaps this time more than ever – as there are valid arguments for both early and late hikes. That said, hikes are not likely to arrive without proper advertisement by the Fed. For now the FOMC statement clearly communicates that fed funds rates will remain exceptionally low for an extended period

According to the New York Fed President Dudley in a PBS interview on 13 January:

“…extended means at least six months. It could be a year from now, two years from now. It’s going to depend on how the economy develops”

Other Fed members have been indicating a slightly shorter time span of 3-4 months. However, we believe that an important milestone for moving toward traditional tightening is that the ‘extended period’ phrase is removed about 6 months ahead of the initial rate hike, as illustrated in the timeline on the front page. Given our view, that this will arrive in November, we look for the ‘extended period’ to be removed from the statement before mid year.

The rephrasing of the statement is likely to be an incremental process, where the language is gradually twisted, as was the case ahead of the beginning of the hiking cycle in June 2004 (see illustration to the right).

The timing of rate hikes

In general we find three approaches relevant for considering the timing of the hiking cycle.

1. Speed limit approach
2. Output gap approach
3. Judgement based factors

A speed limit approach takes into account the speed of the recovery in the economy. A simple way to do this could be to see how fast the unemployment rate peaks following the recession. If the economy turns fast, the unemployment rate will peak early in the recovery and then tightening should begin sooner.

However, it may be too narrow a framework to only consider the unemployment rate. We believe that the Fed is generally concerned with other factors such as core inflation and credit growth.

In the table above we have recorded the time span from the end of the recession to the peak in the unemployment rate, the trough in annual core CPI, and the trough in the annual growth rate of bank credit, respectively. The sum of these three measures we define as the Hike Score. The faster the indicators on unemployment, inflation and credit recovers, the lower the Hike Score and the earlier the Fed is likely to tighten. The cross plot above compares the Hike Score to the number of months from recession end to the initial hike.

In the current cycle we believe that a peak in the unemployment rate and a trough in the annual growth rate in bank credit has already been established (see table above). Assuming that the recession ended in July 2009 and that core inflation will peak in December 2010, this exercise suggests that the Fed should begin tightening around yearend 2010. In fact this is not far from our forecast.

Output gap based approaches are anchored in the amount of slack and the degree of price pressure in the economy. Based on such a framework it seems as if the Fed has plenty of time to normalize interest rates with an unemployment rate close to 10% and core inflation heading below 1%.

One way to illustrate this is to apply a standard Taylor rule on core PCE inflation and the unemployment rate. Based on the current data, this rule prescribes a deeply negative policy rate around -4% to -5%. Given our forecast for core inflation and unemployment, the rule remains negative through the entire 2011. This is also the case if we use the FOMC’s own economic projections.

However, as Federal Board Vice Chairman Kohn emphasized in a speech at 3 January: “…because monetary policy typically acts with long lags in the economy and price level, the choice of when and how to exit will depend on forecasts. We will need to begin withdrawing extraordinary monetary stimulus well before the economy returns to high levels of resource utilization.”

Hence the FOMC is likely to be more forward looking than a standard Taylor rule. Given a monetary policy lag of 9-18 months, rate hikes may arrive up to 1.5 years ahead of the Taylor rule according to Kohn. When based on members current central range forecast the Fed is not likely to initiate the hiking cycle before well into 2011 – even under a forward looking approach.

An alternative to the Taylor rule is to estimate a reaction function on economic and financial variables. This is demonstrated in the chart above. Our preferred 12-month forward reaction function for the Fed is supporting the message from the Taylor rules – that hikes could remain off the agenda until well into 2011.

On top of these considerations, several other non-quantifiable factors are relevant. Such factors are usually subscribed to the discretionary judgement of the policy makers.

Firstly, the extreme low level of interest rate is generating concern among some Fed members. These concerns include potential risks for asset bubbles, misallocation of capital, an un-anchoring of inflation expectations and a loss of inflation fighting credibility. Due to these considerations some members in the FOMC are clearly pushing for rate hikes at an earlier stage of the recovery than usual.

Secondly, other policy factors such as fiscal tightening and regulation could affect the decision about when to hike interest rates. If fiscal policy is tightened significantly or if very tough regulation is implemented, this could crowd out monetary policy tightening for a while. We believe that this is a very relevant risk for 2011.

Fed to hike earlier than usual

In conclusion the evidence is very mixed, but we believe that the extremely low level of interest rates may call for hikes to arrive at an earlier stage than warranted by the slack in the economy. This would make some FOMC members feel more comfortable about inflation and bubble risks and it may make it easier to absorb excess liquidity. However, because of the extreme degree of slack in the economy and the prospects of fiscal tightening and financial regulation, we believe that the Fed will be very cautious not to tighten too aggressively during 2011.

Our current forecast assumes that the Fed will hike interest rates to 0.5% at the November 2010 meeting and by a further 25bp at the December 2010 and January 2011 meetings. These hikes will reflect more a desire to move away from zero interest rate policy than the beginning of a long-lasting tightening campaign. Hence, we find it likely that the Fed could pause around 1% in early 2011 to assess the outlook and wait for the slack in the economy to diminish before the real tightening cycle begins.

Danske Bank
http://www.danskebank.com/danskeresearch

Disclaimer

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

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.

Financial and Economic News and Comments

US & Canada

US nonfarm payrolls unexpectedly declined 20,000 in January, much smaller than a revised 150,000 December drop that was larger than previously reported, figures from the Labor Department showed. Public-sector payrolls declined 8,000. Private-sector payrolls fell 12,000, smaller than a 22,000 drop forecast by ADP. The strongest employment increases were for temporary help services (+52,000), retail trade (+42,000), and education/health (+16,000). Manufacturing employment grew 11,000 in January, the first gain in three years. The largest payroll losses were in construction (-75,000), couriers/messengers (-23,000), and leisure/hospitality (-14,000). The unemployment rate unexpectedly fell to 9.7% in January, the lowest since August, from 10.0% in December, indicating labor market conditions have improved. Average hourly earnings increased 0.3% m/m to $18.89 in January and rose 2.5% y/y. Average weekly hours increased to 33.3 from December’s 33.2.

US consumer credit declined a less-than-expected $1.7 billion in December after a revised $21.8 billion November drop that was larger than previously reported, figures from the Federal Reserve showed, registering an eleventh consecutive monthly slump and the longest stretch of declines since records began in 1943.

Canada’s employment surged a more-than-anticipated 43,000 in January, the fourth gain in six months, to 16,924,400, after a revised 28,300 decrease in December, according to figures from Statistics Canada. The unemployment rate declined to 8.3% from December’s downwardly revised 8.4%. Full-time employment increased 1,400 to 13,678,600 in January, while part-time positions jumped 41,500 to 3,245,800. The participation rate was unchanged at 67.1.

Europe

Germany’s seasonally adjusted industrial production unexpectedly fell 2.6% m/m in December, the second fall in three months, after a 0.7% m/m increase in November, IP data from the Federal Ministry of Economics and Technology showed, signaling the German economic recovery has slowed modestly. December IP slid a more-than-expected 7.1% y/y nsa wda, following an 8.0% y/y November decrease.

UK producer-price inflation continued to increase in January. UK PPI output climbed a slightly more-than-expected 0.4% m/m in January after rising 0.5% m/m in December, according to PPI data from the Office for National Statistics. January PPI output rose 3.8% y/y, the most since 2008. Core PPI output grew 0.3% m/m and 2.5% y/y. PPI input increased a more-than-expected 2.0% m/m in January after an upwardly revised 0.6% m/m advance in December. January PPI input jumped 8.4% y/y, following an upwardly revised 7.4% y/y December advance.

Asia-Pacific

The Japanese leading economic indicators index, a measure of future economic activity, rose to a higher-than-expected 94.0 in December, a tenth straight monthly gain, from a revised 91.0 in November, according to preliminary December LEI data released by the Cabinet Office. The coincident index, measuring present economic activity, increased to a higher-than-expected 97.6, a ninth consecutive monthly advance, following November’s 96.0.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

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.

ADP January employment job cuts were smaller than expected and Challenger says that US jobs cuts rose the first time in five months in January. Although the divergence of these reports may make it difficult to get a consensus about US January nonfarm payrolls and unemployment the ADP employment report suggests that the trend in the US labor market continues to improve and that nonfarm payrolls will soon turn positive, possibly in the January report. January nonfarm payrolls are expected to rise by 5k with the unemployment rate up 0.1% to 10.1%. The rise in January nonfarm payrolls is expected to reflect the hiring of census takers and construction workers, due to relatively mild January weather along with increased hiring from midsize businesses as noted in the ADP report and the government.

Easy Forex
http://www.easy-forex.com

Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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.

The trade will be closely monitoring the FOMC statement for any new information on the exit strategy from quantitative ease or to see if Fed officials have fresh concerns about the economy and banking sector which would warrant expansion of quantitative ease. A removal of the extended language from the FOMC statement or more definitive indication of the timeframe for the Feds exit strategy would be positive for the USD. Any indication that the Fed may consider expanding quantitative ease would be negative for the USD. The general consensus among economists is the Fed is unlikely to begin hiking rates until the end of Q3 2010 at the earliest and will allow the special liquidity facilities to expire February 1st as announced at the June policy meeting and MBS purchases to end on March 31st.

The trade will also be interested to see whether the FOMC makes any comments in regard to a Bloomberg report which says that the Fed is considering the option of using the interest rate paid on excess reserves as the new benchmark interest rate replacing Fed funds. According to the Bloomberg report the Fed’s Lacker said that the Fed may want to consider using the interest rate on excess reserves as the new benchmark and letting Fed funds trade with a spread to that rate. In theory this would allow the Fed more control over its Fed funds target and could become a tool for withdrawing liquidity which was flooded into the system by the Fed after the collapse of Lehman. The Fed flooded the financial markets with $1trln to prevent the economy from collapsing after the September 2008 bankruptcy of Lehman Brothers. Since 2008 The Fed has been unable to control the federal funds rate since the Lehman collapse. In the past the Fed controlled Fed funds by buying and selling treasuries or withdrawing cash from system but this has not been effective since the Fed flooded the markets with liquidity. Shifting to a new benchmark would offer the Fed an additional tool to begin tightening of monetary policy when the FOMC decides the time is right. Fed fund futures indicate a Fed rate hike is not likely before November at the earliest.

One final issue that will be not be addressed by the FOMC is a consideration of whether the upcoming battle for Fed Chairman Bernanke’s confirmation for second term will weaken the Fed and indirectly influence Fed policy. The White House expects Bernanke to be reconfirmed but his confirmation will likely be by the narrowest of margins. Lack of broad support for Fed Chairman Bernanke could increase the risk of politics influencing Fed decisions which could ultimately undermine the credibility of Fed policy. The confirmation hearing is expected later this week.

Easy Forex
http://www.easy-forex.com

Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

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

GBP/CHF

After breaking trough the 1.6780 resistance and getting support around the second pivot resistance level last week, the GBP/CHF has recovered back and crossed below the 1.6780 level. At the moment there are no significant support levels. That may be a sign for further falls towards the first pivot support line around 1.6635

Pivot Points – Daily FX Support and Resistance Levels

Daily Calendar & Key FX Events

Varengold Bank

IMPORTANT NOTIFICATION TO BE READ IN CONJUNCTION WITH THE CONTENTS OF THIS DOCUMENT

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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

Prices on the dollar index reached new lows around the 74.00 zone where the trend quickly reversed at the end of 2009. Traders can look for a move higher in the mid-term away from an ending diagonal pattern shown in wave V) position as the prices have broken through the upper resistance line of an ending diagonal pattern.

If the wave count is correct then the market should trade higher over the coming weeks and months, with a three wave move (red I/A-II/B-III/C ) towards the 81 region.

The euro (Eur/Usd 1.4105) is trading near the lowest value since August 09, on weakness triggered by structural problems in the euro-area, which will likely slow the pace of economic recovery compared to the U.S. or Asian countries. Price action recently broken below the 200-day moving average at 1.4300.

The pound (Gbp/Usd 1.6280) is currently trading at a crossroad between its technical and fundamental outlook. Technically, the pound formed a bearish pin-bar in Tuesday trade, and on Wednesday broke below the 1.6300 area and the 50 and the 100-day moving averages. Fundamentally, the high level of inflation seen in the U.K. over the last few months is Gbp/Usd bullish, which should support the pair for the time being.

Aussie (Aud/Usd 0.9080) saw a day of hard selling, inline with the moves observed in the commodity market. Prices fell by as much as 150 pips, to eventually find support near the 20-day moving average, in the 0.9100 area. The macroeconomic calendar is loaded with important data coming from China, which historically had been volatile for the commodity market, and thus for the two commodity pairs, the cad and the aussie.

The cad (Usd/Cad 1.0475) moved almost exclusively higher in Wednesday trade, following BoC comments regarding the value of the Canadian dollar. If the U.S. dollar-buying wave continues, one possible target for the cad would be the 1.0700 area, the same place where it topped over the last three months of trading

Cad Technical View: TheLFB Member Charts

Daily chart trend: Short. Main price points: 1.0205 Looking for: A Short, wave 5)

The daily wave count was re-worked into un-finished bear market towards the 1.0000 zone that market may reach over the coming days and weeks. We came out with a Short, blue wave 5) in progress after a market has finished a complex, triangle pattern in blue wave 4).

Wave 5) is the final wave of an impulse structure and as such, we will look for a Long reversal once wave 5) finds the lows somewhere below the 1.0205 2009 low.

The swissy (Usd/Chf 1.0440) gained 120 pips during the day, the most in 6 weeks. The weakness was triggered by its correlation with the euro, something that is likely to continue over the medium to longer term. Investors should favor the long side of market.

The yen (Usd/Jpy 91.25) struggled to find a direction to trade and failed to move decisively. The pair managed to find a base over the last few sessions of trading, after a strong bounce off the 200-day moving average. Over the medium term, the yen is expected to re-test the 200-day moving average at 93.20.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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