Forex Profit Multiplier Review

The range 1 challenge for any forex trader is usually to how to shorten the time finding and managing the highest probability lowest chance trades. You see, if you’ve been trading forex for sometime, you really should know by now that waiting to uncover a substantial probability minimal risk trade setup can be a time consuming exercise.

If you might be a day trader, you may well need to sit in front of your pc display for many several hours each and every day for a substantial chance very low possibility commerce setup to appear around the chart before you. You may should sit in front of your personal computer keep track of for lengthy hrs staring at the indicators.

Even, whenever you find a higher likelihood minimal threat setup, you’ll ought to confirm that trading signal employing another indicator prior to you are able to business it. It might be time consuming and fatiguing. How about using a forex robot? Well, a single may possibly argue that by working with a forex robot it is possible to cut your time shell out in front of the laptop or computer monitor looking at the charts.

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It all depends around the technical indicators that you use to produce the trading signals. What a forex robot can do is always to cut your time devote in front of the computer screen. But, if the technical indicators that you use produce a trading sign in days, the robotic will also take hours to create that trading signal.

The difficulty with most with the robots is that they business once or twice in days or even weeks as they only locate the substantial chance low risk business in days or weeks what to talk of hours. What you will need would be to find a method which will give you substantial likelihood lower chance commerce setup in a short span of time.

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Forex Profit Multiplier Review

Inside paragraphs that comply with, we will present you having a couple of forex forex trading guidelines to assist you in becoming a better trader. These tips are primarily aimed at novice merchants, but many skilled investors may perhaps require them as a reminder of what they need to be doing. The forex trading market is after all of such a nature that you will never ever stop learning.

The very first thing you as a trader really should sort out is usually to leave your emotions behind when trading. By no means enter into a trade because you ‘feel’ it is a good opportunity. And hardly ever cling on to a trade due to the fact you’re too scared or as well greedy to take a loss. The most effective method to solve this problem should be to have a documented trading system and to adhere to the rules in there at all costs.

Inside second place, the old saying that knowledge means power is extremely true. You can by no means know every thing there is to know about trading. Be prepared to learn from others and from experience throughout your trading career.

1 from the most typical reasons many merchants consistently lose modest amounts of cash is since of as well tight stop losses. A end loss that does not permit the market to go about its regular ups and downs will outcome in several unnecessary losses. Although it is important to trade with a quit loss, you must set it wide enough to allow the market to breathe.

Extra forex currency trading suggestions: Overtrading is most likely 1 from the most common mistakes made by both novice and experienced investors. Having quite a few trades open at the same time, makes it challenging to focus on all of them. And making hundreds of trades on a single day will outcome in several little profits/losses with no important chance to make severe money.

Margin trading may be a double sided sword. In the initial location, it permits you to trade with a lot more than you really have inside your account, which sounds excellent. A market movement of 1% or less in your favor can see you double your funds. Regrettably, an equally small move within the wrong direction can also wipe out your trading account. This is the reason novice traders need to not immediately jump in and start trading at high margins.

A word of precaution: It is finest to leave quiet periods inside market to professional merchants. They have sophisticated software that allows them to generate a lot of modest trades and benefit from them. Rather concentrate on the peak periods when you can find often substantial movements inside the market. An seasoned trader will probably be able to provide you with thousands of other forex currency trading suggestions – we merely attempted to put a spotlight on the most typical opportunities and pitfalls that the market provides.

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Market Outlook

Tactical view:

• Risk of snap back in GBP/USD and USD/JPY
• Long AUD positions outpace CAD

Dollar weakness continues to characterise G10 fx markets as doubts over the US economy multiply and all-time lows for US yields boost the attractiveness of carry. With the Fed running out of policy options and evidence of macro economic decoupling in the G10 prevailing, we look for the AUD to remain a desirable G10 destination. A test of 85.0 in USD/JPY now looks probable. Though next week will be dominated by the FOMC, all eyes in the UK will be on the latest BoE Inflation Report (QIR) on Wednesday. The QIR has proved a hurdle for GBP in the past and could again prove the proverbial ‘bridge too far’ that forces GBP/USD bulls to rein in their exuberance. Special notes on GBP/USD and AUD/ ZAR are included in this week’s publication.

Recap

GBP/USD closed up 1.7% at 1.5962 and just fell short of 1.60. GBP lost 0.04% vs the EUR as EUR/USD (+1.7%) kept track of GBP/USD. GBP/CAD burst through the 1.64 level (1.65 target) after a shock 139,000 drop in Canadian employment in July. The MPC left Bank Rate on hold at 0.50% and the APF at £200bln, but suspense is set to stay elevated over the next two weeks and leaves GBP vulnerable to possible profit taking after a stellar run. Elsewhere, we note the gains for the JPY and the fall in USD/JPY blow 0.8550. A test of the Nov-09 low now looms, prompting possible intervention to weaken the yen.

US payrolls dropped 131,000 in July, double the consensus estimate. Data for June was revised down to -221,000 from -125,000. The unemployment rate held unchanged at 9.5%. UK data highlights were the 4.3pt drop in the construction PMI in July, and smaller falls in the manufacturing (-0.2pts) and services (-1.3pts) PMIs. The three PMIs have now declined simultaneously for two consecutive months, pointing to a slower rate of expansion in Q3. The NIESR reported a rise in GDP of 0.9% in the three months to July vs 1.1% in June. The ECB left its interest rate on hold at 1.0% but reined in optimism over the economy and declared no recovery victory. Strong Q2 GDP data are expected from Germany next week.

Backed by bullish seasonals and weaker macro data, gilts logged an impressive week with yields dropping markedly across the curve, but with the long end outperforming. 10y yields descended below 3.25% to a 3.23% close. Support for a further decline towards 3% could be on the cards. 5y swaps dropped 7bp to 2.35% and the 10y closed 11bp down at 3.27%, causing the 2y/10y spread to flatten below 190bp. The 2y/10y gilts spread tightened below 250bp and closed the week at 245bp. The 3mth Libor/Ois spread held steady at 25bp. The 10y swap spread was also unchanged at 5bp. The 5y gilt auction drew solid demand and was covered 1.99 times (0.7bp tail).

G10 FX – GBP/USD: Negate QIR?

We have argued the case for a rally in GBP/USD since early July, but following a stellar run from below 1.48 on 1 July to above 1.59 in early August, we wonder if upside has now been exhausted and a correction back to 1.55 looms.

Though next week will be primarily dominated by the FOMC decision on Tuesday and whether or not new tools are considered to prod the US recovery, all eyes in the UK will be on the latest BoE Inflation Report (QIR) on Wednesday August 11. The QIR has proved a hurdle for GBP in the past and could again prove the proverbial ‘bridge too far’ that forces GBP/USD bulls to rein in their exuberance. However, the latest jump in correlation of GBP/USD with risk assets suggests that a test of 1.60 remains achievable until aversion for equities and commodities returns. The initially tame reaction by risk to the weak US August employment data indicates that demand for carry is still intact from which GBP/USD should indirectly benefit.

One could argue that the immediate concern from a GBP perspective should theoretically be the BoE Inflation Report (Aug 11) and the MPC Minutes (Aug 18). However, a 0.8/0.9 correlation of GBP/USD with equities and commodities (see chart 2) argues to the contrary. Inflation Reports have since the start of the recession occasionally resulted in sharp swing for GBP/USD (see chart 1), but this time the deterioration in US fundamentals and remarkable, though questionable muted response in commodities and stocks could mitigate the bearish influences from the QIR.

The QIR will be important to understand i/ what the MPC makes of the growth and inflation projections for the next two years based on public spending cuts and VAT hike presented in the Budget and ii/ if lone hawk Sentance still voted for an immediate rate hike. Bank governor King last week emphasised that downside risks to growth still do prevail and that therefore ‘putting the foot on the brakes’ would be a policy mistake. If considering the right amount of stimulus is currently at the heart of the policy discussions, then this implies that additional QE could still be discussed (UK 10y yields heading for 3%?). One could therefore argue that the QIR could be a GBP negative event as the rear view mirror image of a stronger economy is negated by the uncertainty ahead as public spending cuts start to bite and the pace of credit easing slows. Back in May, the BoE forecast GDP growth of 1.2% this year and 2.3% in 2011. CPI inflation is forecast to average 1.7% this year and stay below target in 2011 based on implied market interest rates.

The retreat of the USD vs G10 currencies is a factor and cannot be overlooked as worries grow that the Fed is effectively running out of ammunition to spur the economic recovery. Though doing nothing is not politically palatable ahead of the midterm elections, the impact on the economy from rolling over the proceeds of $200bln worth of MBS securities, an idea discussed in the WSJ this week, is highly debateable. Having cut interest rates to 0.25% and purchased securities in excess of $1.0trln, one wonders what an extra $200bln or reduced interest rate on commercial bank reserves will achieve in a world where 30y and 15y mortgages rates have already reached a record low. Fed fund futures have now pushed forward the timing of a first rate hike past Nov-11. This is the ‘new normal’.

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U.S. Review

The Second Quarter Ended on a Soft Note

• Real GDP grew at a 2.4 percent annual rate during the second quarter, but recent data suggest the period ended on a weak note and point to a slower second half of 2010.
• New home sales rose in June, but downward revisions to April and May data show an even larger pullback following the end of homebuyer tax incentives.
• Advance orders for durable goods fell in June, and regional surveys show industrial activity losing steam.
• Consumer confidence fell in July, despite generally good news on corporate earnings and rising share prices.

More Evidence Of A Second Half Slowdown

Real GDP grew at a 2.4 percent annual rate during the second quarter. While the gain was slightly higher than the reduced market expectations, most of the strength occurred earlier in the quarter and the revisions to previously published data show the recession was deeper than first reported and the recovery in private final demand has been much weaker.

There is a growing debate about whether the economy will need more fiscal and monetary stimulus during the second half of the year. The argument for stimulus got a boost from a paper released by Mark Zandi and Alan Blinder that shows the extraordinary efforts taken by the Treasury, Federal Reserve and the Congress that helped to stave off a much more dire economic outcome than what actually transpired. Altogether, around $4 trillion in fiscal and monetary stimulus was thrown at the economy. While this spending may have averted a deeper recession, or even depression, it has not done much to promote economic growth over the past year. With most of the spending now behind us, the debate is shifting to whether policymakers should do more of what has already been tried, do less or do something different.

Consumers clearly sense something is missing in this economic recovery. The Consumer Confidence Index has fallen for two months in a row and remains extraordinarily low at 50.2. Most of the drop in the Index has been in the expectations component, which has fallen 18 points in the past two months. Consumers are still deeply concerned about employment and income prospects. The share of households reporting that jobs are hard to get rose 2.3 points to 45.8, while the percentage that believe jobs are plentiful remains near its all-time low at just 4.3. The expectations for employment and income both weakened in July, with consumers expecting fewer jobs to be created over the next six months and more consumers expecting income to fall or remain stagnant.

The latest snapshot of the labor market posted a modest improvement during the past week, with first-time claims for unemployment insurance falling 11,000 to 457,000. Unfortunately, that level of jobless claims is inconsistent with the monthly gains in nonfarm employment. Next week’s employment report will again post a decline, as temporary Census jobs fall out of the data. We expect nonfarm payrolls to dip by 45,000 in July. The jobless rate may increase 0.1 percentage point.

New home sales rose 23.6 percent in June, but data for May and April were revised substantially lower. The huge percentage increase garnered headlines but does not mark a turn in new home sales. Builders generally reported a sharper pullback in demand and have weaker production pipelines than they believed they would have once the homebuyer tax credits expired.

Manufacturing activity appears to be cooling off. Advance orders for durable goods fell 1.0 percent in May, following a revised 0.8 percent drop the prior month. Several regional surveys noted that the rebound in manufacturing activity is losing momentum. Output is still rising, but the rate of improvement has slowed.

U.S. Outlook

ISM Manufacturing • Monday

The Institute for Supply Management’s (ISM) headline manufacturing index remained in expansionary territory in June, but fell for the second consecutive month. The 4.2 point drop from its April peak of 60.4 reflects the ending of the inventory cycle as manufacturers bring inventories in line with sales. The forward-looking new orders index remained above the threshold of 50, but fell 7.2 points to 58.5, the largest monthly drop since September 2008. Retracement in the regional manufacturing surveys in July further reflect the slowdown in the factory sector. Moreover, if the last two inventory cycles provide any insight, ISM could fall below 50 by year-end. Moderation in ISM is consistent with our expectation of slower industrial production in the second half of the year.

Previous: 56.2 Wells Fargo: 55.0
Consensus: 54.2

Construction Spending • Monday

Construction spending fell 0.2 percent in May with declines concentrated in multifamily and home improvements. Single-family outlays, however, increased 0.8 percent on the month, the fourth consecutive monthly gain. With the expiration of the homebuyers’ tax credit, single-family construction spending should fall in June. The payback will likely pull the headline down 1.4 percent in June. Private nonresidential construction spending was down 24.8 percent from year-ago levels in May with declines concentrated in manufacturing, commercial, office and lodging. We expect declines in nonresidential outlays to persist through year-end, which will continue to subtract from GDP.

Previous: -0.2% Wells Fargo: -1.4%
Consensus: -0.5%

Employment • Friday

The pace of the economic recovery continues to rely on private-sector employment growth. Since January, the private sector added only 593,000 jobs. Some market participants point to weak job creation in the small business sector as the major drag on job growth. According to data released by ADP, small firms, which are defined as companies that employ 1–49 workers, represent about 45 percent of the level of employment, but accounted for only 16 percent of the increase in employment over the past five months. Small firms will likely remain reluctant to hire as credit continues to be hard to obtain. Initial jobless claims have now fallen in three of the last four weeks, but remain stubbornly around 450,000. The elevated level of claims suggests employment will likely remain weak.

Previous: -125K Wells Fargo: -45K
Consensus: -60K

Global Review

Global Economy More Resilient Than You Think

• South Korea released second-quarter GDP earlier this week, and while growth slowed from the first quarter, the pace of activity continued to surprise analysts. The South Korean economy is still humming along at a rapid clip.
• The economic data out of Europe also brightened significantly, reducing market fears of a double-dip in Europe and easing some of the strains in the European bond market, as concerns about the sovereign debt crisis faded into the background.

Slower Global Growth, Not Another Great Recession

Market fears about a double-dip global recession, or a Great Recession Part II, faded a little further into the background this week as economic data from South Korea and Continental Europe built upon the good second-quarter GDP data out of the United Kingdom early in the month. Some slowing of global growth is expected in the second half of 2010 and into 2011, but there is nothing in the numbers so far to suggest the global economy is headed for a train wreck.

In Asia, South Korea was one of the first countries, after China, to report second-quarter GDP. The data revealed an economy that continues to hum along at a respectable pace. South Korean GDP expanded another 1.5 percent from the first quarter of 2010 and is 7.2 percent above a year ago. The numbers easily beat analysts’ consensus expectations and the central banks own forecasts. South Korea’s economy has seen strong growth now for six consecutive quarters. Growth has been reignited on a solid foundation of record low interest rates, government stimulus spending and robust export growth. The concerns had grown about the durability of growth as the Korean Central Bank begins to raise borrowing costs and government stimulus programs begin to unwind.

South Korean manufacturing, exports, consumer and capital spending all posted increases from the first quarter. Exports of goods increased 7.1 percent over the quarter led by shipments of automobiles, semiconductors and machinery. On a weaker note, South Korea’s construction sector contracted 0.8 percent from the first quarter, and services and government spending slowed sharply, rising just 0.2 and 0.1 percent, respectively.

The strong GDP growth numbers suggest that further interest rate hikes from the Bank of Korea can be expected this year. The Bank of Korea also reported this week that South Korea’s current account surplus reached a one-year high of $5.04 billion in June. The won has been rallying on the stronger economic news, prompting the central bank to intervene in the currency market to temper the strengthening currency.

The economic data out of Europe over the past two weeks has been almost unanimously positive, surprising the markets, which had been bracing for signs that the sovereign debt crisis would still be negatively impacting European growth. Some of the highlights, European manufacturing and service PMIs for July, exceeded expectations and revealed robust expansion. European industrial orders jumped a much stronger-than-expected 3.8 percent in May. German consumer confidence improved in August, suggesting that the sovereign debt crisis has not irreparably damaged German consumer spending growth. While Germany’s labor market continued to show improvement, German unemployment fell 20,ooo in July and the unemployment rate slipped to 7.6 percent from 7.7 percent in June. Taken together, these data have raised expectations for European Union second-quarter GDP growth and helped to ease concerns about the economic fallout from the sovereign debt crisis.

Global Outlook

U.K. PMIs • Monday – Wednesday

The U.K. economy has posted three straight quarterly gains in GDP as it gradually continues to recover from the recession. While growth jumped in the second quarter, we suspect the sequential growth rate in the second quarter will likely be the high-water mark for the next several quarters and the expansion will slow somewhat as fiscal tightening and deficit reduction programs sap economic growth in the coming quarters.

Still, consumer spending has shown signs of strength in recent months with retail sales adding 1.0 percent in May, a larger increase than had been expected and the second straight increase.

The various purchasing managers’ indexes (PMI) have all been in expansion territory in recent month. No major changes are expected when PMI data become available in the first half of the week.

Previous: 57.5 (Mfg.) 58.4 (Const.) 54.4 (Services)
Consensus: 57.0 (Mfg.) N/A (Const.) 54.8 (Services)

Eurozone Retail Sales • Wednesday

After plunging in late 2008/early 2009 retail sales in the Eurozone have essentially been going sideways since the spring of 2009. In fact, over the past 12 months, retail sales have been up six times and down six times. June retail sales data will print on Wednesday, but we do not expect this sideways trend to change until consumers begin to have confidence that the sovereign debt crisis is no longer a concern, and that could be several quarters.

The ECB also meets next week. With the core rate of CPI inflation only 0.9 percent in June and weak economic growth likely causing the core rate to trend lower in the months ahead, we think the ECB has the cover to keep monetary policy accommodative. While no change in the target rate is expected, analysts will watch for any hints that ECB President Trichet gives about the future course of policy in his post-meeting press conference.

Previous: 0.5% (Year-over-year)
Consensus: 0.1%

Canadian Net Employment Change • Friday

With two hikes in the overnight lending rate already implemented, Canada is the only G7 economy to have already begun monetary policy tightening. While Canada is leading the economic recovery among developed countries, its economy is not without its troubles. Retail sales data for the months of April and May came in much weaker than expected, declining 2.2 percent in April and another 0.2 percent in May. GDP data for the month of April were also disappointing, coming in essentially flat despite expectations for an eighth consecutive monthly gain.

The job market in Canada remains a bright spot as employers have added to payrolls every month so far this year, including a 93,200 print in June, which has restored the labor market to within spitting distance of pre-recession highs. We will find out if jobs grew again in July when the jobs report is released on Friday.

Previous: 93.2K
Consensus: 10K

Point of View

Interest Rate Watch

Japanese-Style Deflation?

Federal Reserve Bank of St. Louis President James Bullard noted that the threat of Japanese-style deflation in the U.S. has increased and that the Federal Reserve needs to make its battle strategy clear to the financial markets. The strategy to combat deflation would be another large dose of quantitative easing, not simply extending the extended period language on short-term interest rates. We view the risk of a Japanese-style deflation as low but still high enough for the Fed’s concern.

We track a large number of inflation indicators and virtually all them are pointing to reduced inflationary pressures during the second half of this year. The Consumer Price Index has declined during each of the past three months and will likely end the year up between zero and 0.5 percent. The core CPI will likely rise less than 1 percent in 2010. These low inflation numbers are the result of weak final demand, an excess supply of housing and excellent weather, which is leading to abundant harvests and low food prices.

Inflation numbers this low leave little margin for error. If economic growth falters or there is some exogenous shock to the economy, persistent and troublesome deflation could become reality.

The likelihood of much lower inflation and risks of deflation are a big reason the Treasury’s two-year note is yielding less than 0.7 percent and the 10-year note is constantly flirting with sub 4 percent yields. The low inflation numbers are also apparent in the share prices of grocery store chains and food products companies, which are seeing intense price pressures as consumers continually seek ways to cut their food budgets.

As low as the inflation numbers are, we do not believe troublesome deflation will actually materialize. Apartment rents are already rising, and we expect them to put pressure on the housing components of the CPI in 2011. Inflation will remain low, however, and this will continue to keep businesses in a cost-cutting mode, making it difficult for the recovery to gain momentum.

Consumer Credit Insights

New Lows for Mortgage Rates

Mortgage rates have fallen to 4.54 percent, the lowest since Freddie Mac began reporting 30-year fixed-rate mortgage rates in the 1970s. Rates now stand roughly 2 percentage points below the peak before the recession and another 60 bps below rates in April of this year. Better credit scores and higher down payments can bring rates even lower—but only for the most qualified and well-positioned buyers.

The oversupplied housing market is still searching for price stability, making home purchasing exceed the risk tolerance of many consumers (hence the large impact of homebuyer incentives). Accordingly, mortgage applications for refinancing have increased 98 percent on the year, while mortgage applications for purchase have fallen about 19 percent. Treasury yields have fallen over the past few months as investors have sought a haven from volatile equity performance and sovereign debt concerns in Europe, and mortgage rates have followed, with an average spread of 150 basis points off of 10-year Treasury notes, a trend we expect to hold for the remainder of 2010. As the recovery continues and investor fear diminishes, we expect bond yields and mortgage rates to gradually increase. For the well-positioned consumer, this summer is likely to be the best opportunity to finance a home for some time. Unfortunately, however, many consumers, given the dismal labor market and their overleveraged state, will be unable to act.

Topic of the Week

America’s (Un)Employment Experience

The nation has a well-publicized and politicized unemployment problem. With nearly 10 percent of the labor force unable to find work, the headlines and party lines would suggest that employers are not comfortable increasing their workforce under the shadow of slow top-line revenue expectations. Yet, behind this macro story are the micro dynamics of the labor market today, a host of undercover factors that create an uneven employment experience.

Certain characteristics of the labor force are having a greater effect than ever before on employment status. First, the spread between women’s and men’s rates of unemployment has never been higher. The difference in unemployment rates for those with less education versus those with more is also increasingly problematic. Lastly, different age cohorts are experiencing the labor market very differently, with older generations delaying retirement, while teenage participation in the labor force has declined. These systemic trends have implications for the economy well beyond employment.

The diversity of the labor market experience reflects a variety of factors that cannot be changed in the short run through fiscal stimulus. Thus, the labor market will not recover quickly. Job creation provides the income needed to support consumer spending, which has been limited of late. Current income is more important than ever as consumer credit has retraced significantly; consumers are reluctant to take on debt they are not confident they can pay off. On the supply side, banks have been hurt by credit delinquencies and are working to rebuild their balance sheets. Long-term loans may not make sense if one cannot assume income and steady employment. Given the weakened and evolving state of the labor market, a new thought process in lending may be necessary when we compare the labor market evolution to credit quality in the years ahead.

For further insight, see America’s (Un)Employment Experience: Diversity in the Details on our Web site.

About the Author

Wachovia Corporation

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

In testimony before the House Budget Committee Bernanke said that the economy will continue to grow at a moderate pace, with expectations of GDP growth of 3.5% over the course of 2010. However that growth rate will mean a slow reduction in the unemployment rate which would keep inflation subdued. Those factors will likely keep the Fed on the sidelines in terms or raising interest rates. A strong May non-farm payroll report may have pushed up the timetable for a rate increase, but that was not the case.

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.

Daily Technical Analysis

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.

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.

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

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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.

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

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