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

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

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In a message delivered on Thursday the President of the U.S. declared that banks will no longer be able to service, own, and run separate hedge funds, nor hold real estate investment vehicles that are reliant upon funding that is not free and clear. The response has been a staggering drop in global equity trade, with all main futures exchanges dropping upwards of 2% in midday trade. The commodity pairs have absorbed the dollar buying, Usd/Jpy has absorbed heavy dollar selling, and the European based pairs have held steady.

In Wall Street trade on Thursday, the dollar has found buyers, but today it is not out of a desire to buy into the U.S. growth story; this move is all about the move to the relative safety of U.S. Treasury notes. Equity markets have been raped and pillaged by the XLF, the Exchange Traded Fund for the financial sector, as the U.S. President’s 11:45 EST speech in regard to reform bills on financial trading gets absorbed.

Asian markets still have to take into account this move, and the currency market may retrace some of the ground lost in Wall Street trade. It will be interesting to observe the reaction coming from other countries over the next few days, if they support these decisions taken by the U.S. government. Most investors are now waiting for a reaction from EU officials. A similar decision regarding bank’s trading branches has the potential to send the market into a new wave of risk-aversion, continuing the wave of dollar-long orders.

Dollar Index Technical View: TheLFB Member Charts

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

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

Dollar Index Technical View: TheLFB Member Charts

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

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U.S. Review

The Fourth Quarter Ended on a Weak Note

• We raised our estimate of fourth quarter real GDP growth to a 5.6 percent pace based on recent data on business inventories and international trade.
• December economic data continue to come in below expectations. Retail sales declined 0.2 percent and sales excluding motor vehicles fell 0.3 percent.
• The Fed’s Beige Book and the National Federation of Independent Business survey showed conditions continuing to deteriorate across much of the country.
• Consumer prices rose 0.1 percent in December.

Caution Remains the Buzz Word

Businesses and consumers remain exceptionally cautious and will not likely be phased by a blowout real GDP number for the fourth quarter. We have recently raised our estimate for fourth quarter real GDP growth to a 5.6 percent annual rate. A substantial slowdown in the rate of inventory liquidations will account for the overwhelming majority of that gain. Final demand remains exceptionally weak and, while the worst of the layoffs appear to have passed, there is little sign hiring is set to pick up. Three major reports, the National Federation of Independent Businesses (NFIB) Small Business Optimism Index, the BLS Job Openings and Labor Turnover (JOLTS) report, and the Fed’s Beige Book reiterated this point this past week.

The NFIB Small Business Optimism Index fell 0.3 points to 88.0 in December. Plans to hire increased modestly but remain in negative territory, rising to -2 percent from -3 percent. In addition, fewer businesses said they were able to raise prices and fewer planned to boost inventories. The one positive aspect of the report is the number of firms stating they planned to boost capital spending rose slightly, climbing 2 points to 18 percent.

The lack of any clear sign that hiring is picking up is particularly discouraging following last Friday’s weak employment report. Job openings in the November JOLTS report fell back to their series low of 1.8 percent. The number of hires and number of total separations both increased in November but total separations still outnumber hires, indicating employment declined on a net basis. There has been a slight improvement in hiring over the past five months. The number of people hired each month peaked in July 2006 and fell by 1.7 million by June of 2009. Hiring has since increased by 257,000 per month.

Total separations, which include quits, layoffs and retirements, rose in November but have generally been trending lower. The combination of fewer hires and fewer separations means that businesses are reducing their workforces more through quits and retirements today than by layoffs. The data also provided the missing link as to why the drop in weekly first-time unemployment claims has not translated into a net increase in nonfarm payrolls.
The Fed’s Beige Book also noted weaker economic conditions and relatively few districts had anything positive to say about the employment outlook. Most districts said layoffs continued but most also noted there has been some reduction in the number and size of cutbacks and that more firms are opting for hiring freezes or reducing hours instead of making large-scale cuts.

The other major disappointment this week was November’s retail sales report, which showed a 0.3 percent drop for December. Earlier reports had indicated that chain store sales were up for the month, so expectations for the Commerce Department’s retail sales figures were high. The Commerce Department sales figures are adjusted for both seasonal and holiday day changes and this year’s earlier Thanksgiving means that more holiday shopping took place in November and sales were thus pulled forward. On a net basis, holiday sales still show modest gains from last year.

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The market showed a tendency to move higher against the U.S. dollar during the Asian and the European sessions, but so far, the major pairs have failed to break out of the range of the prior few days of trading. One exception was the pound, which advanced 90 pips overnight, but even so, this is below the pair’s ATR for this time of the day. Unless something happens during the U.S. session, the trading range is expected to remain subdued. The macroeconomic calendar is relatively light this Wednesday ahead of the Fed Beige Book, which does not necessarily help the currency market ahead of historically slow dollar index movement in Wall Street trade.

Dollar Index Technical View: TheLFB Member Charts

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The dollar index swing up and down around the breakeven line throughout the overnight session. The trading volumes were strong during the European hours, but the market moved chaotically in very close ranges. This is in reaction to the fundamental part of the market being very mixed mixed: on one side, U.S. yields are rising, which is dollar bearish, but on the other, the U.S. economy appears to be emerging faster than the Euro-area from recession, which is dollar bullish. Looking ahead, the dollar bulls and bears will continue to fight during the first part of the U.S. session, with the U.S. and Canadian trade balance numbers at 08:30 EST probably setting the direction of trading.

Dollar Index Technical View: TheLFB Member Charts

4 Hour Chart Flows: Mixed Price Points: 78.45 Looking for: A Short, wave IV) reversal

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The dollar index is down by 0.3% at the start of North American trading still typified by thin trading conditions. The underlying theme remains intact. Investors expect to build on the closing arguments from 2009 and see better things happening next year. There is building anxiety in the bond markets tipping off investors that the period of ultra-low monetary policy is likely to disappear from the agenda in 2010 and like it or not, a higher and steeper yield curve is but one of the ingredients of recovery. The dollar’s recent rally in line with that view has come to a sharp halt as investors realize that there will be no jump in short rates, just a gradual rise. Meanwhile the Japanese yen continues to play second fiddle to the dollar as investors figure it will be left in the dust as and when global interest rates finally budge.

U.S. dollar – With interest rate sentiment shifting markedly during the past several weeks, many investors were forced out of dollar-short positions given the speed and ferocity with which the dollar rebounded. According to fed funds futures contracts trading in Chicago there is more than a 60% chance that the FOMC will raise official rates by a quarter point before June. At the end of November those odds were 48%. With greater prospects for rising yields investors were either scared out of their initial rationale for seeking a lower dollar or have since embraced the chance to hold an asset that might soon carry a meaningful yield.

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It Is The Treasury Market Now

Forex Trader Note: The global equity markets have moved higher in recent trade and have been backed by strong oil ($79) and hard commodity moves. The ‘Long Equity-and-Oil/Short Usd’ correlation is not in play due to the fact that U.S. Treasury yields (dollar denominated) are paying close to 4% per year interest, and looking to increase that return in advance of any overnight or discount interest rate increases from the Federal Reserve.

The imbalance between the Fed’s 0.25% overnight rate, and the 4% 10 year Treasury note yield is creating a unique near-term situation that will have the dollar pulled around a little, until fair value is ultimately found against the major pairs.

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