FOREX TRADING

U.S. Dollar Trading (USD) saw solid strength on the back of renewed Eurozone concerns and a very weak close in US stocks sparking safe haven demand. April Existing Home Sales jumped 7.6% to 5.77m vs. 5.62mln forecast.In US stocks, DJIA +125 points closing at 10193, S&P +16 points closing at 1087 and NASDAQ +25 points closing at 2229. Looking ahead, March Case Shiller HPI is forecast at -0.3% vs. -0.1% and CB Consumer for May forecast at 59 vs. 57.9 previously.

The Euro (EUR) was under pressure for most of the day as weekend press focused on the Bank of Spain take over of a regional bank and Banking stocks in the US were hammered on heightened credit risk flowing throughout the markets.EUR/USD traded with a low of 1.2331 and a high of 1.2540 before closing at 1.2350. Looking ahead, March Industrial Orders forecast at 2% vs. 1.5% previously.

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Euro-zone sovereign debt concerns continue to weigh on global asset markets, with the revelation that a Spanish savings bank had been taken into government control adding to the negative sentiment. Equity markets were again trading on the backfoot, with US stocks posting their fourth loss in five days, while Libor spreads continued to edge higher. In the US dollar markets, the spread between 3-mth Libor and the OIS rate widened to 29bp, its highest since July 2009, as fears that the debt problems in the Euro-zone could precipitate a wider global liquidity squeeze continued to mount. The euro came under renewed downward pressure against the major crosses, to end around $1.24, with the US dollar finding general support following the release of a much stronger-than-expected 7.6% gain in April existing home sales.

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• USD: Mixed, IMF warns rising sovereign debt levels pose biggest threat to the global economy
• JPY: Lower, BOJ says Japan to eventually escape deflation, stops short of endorsing an inflation target
• EUR: Lower, Greek/German 10 year bond spread widens to record level, Greek aid talks begin today
• GBP: Higher, labor market improves as jobs claimant count falls more than expected, BOE more upbeat
• CAD and AUD: AUD & CAD mixed, Australia’s leading index rises, BOC rate hike speculation

Overview

USD traded mixed with the EUR pressured by ongoing concern about the Greek fiscal debt, GBP supported by report that the UK labor market is improving, commodity currencies trade higher supported by rate hike speculation with AUD supported by report of sharp rise in Australia’s leading index and the JPY traded lower with downside limited by comments from BOJ deputy governor that Japan will eventually escape deflation. Greek/ German 10 year bond spread rose to a 12 year high fueling concern about the cost of financing the Greek debt. Greek aid talks begin today and are expected to last two weeks. The German opposition party has threatened to block the government’s approval of a fast track of Greek aid. The IMF says that sovereign debt levels pose the biggest threat to the global economy. Persistent EUR selling pressure limits USD downside versus the majors. Growth led currencies continue to outperform supported by optimism about the global recovery as the Bank of India hikes interest rates and the BOC signals rates may soon rise. Rising interest rates are seen as confirmation that the markets are returning to normal. No major US economic data was released in today’s trade. Investors will continue to monitor news concerning the Greek debt. Focus turns to Thursday’s release of US initial jobless claims and existing home sales. (more…)

Weekly Economic and Financial Commentary

U.S. Review

Public Policy Grabs Center Stage

• Public policy dominated this week, with the passage of healthcare reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.
• Advance orders for durable goods rose in line with expectations, but a large downward revision to January’s nondefense capital goods orders raises a red flag as to how strong capital spending will be in the first quarter.
• Sales of new and existing homes both declined in February, raising fears the incipient recovery in housing has faltered.

Strange Days in the Credit Markets

The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.

The last few years have seen Treasury yields rise during the spring, triggering a whole new set of challenges. History looks like it will repeat itself this year, with the end of the Fed’s mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will remain a challenge, with additional money needed to pay Social Security benefits and recapitalize Fannie Mae and Freddie Mac. Sovereign credit risk and worries about growing supply also extend to municipalities, which saw yields climb sharply recently.

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USD Pares Gains as Stocks Rally

• USD: Higher, Greek bailout doubts, existing home sales come in slightly better than expected
• JPY: Lower, BOJ March minutes suggest deflationary pressures may be stronger than forecast
• EUR: Lower, no Greek aid plan yet, EU summit March 25th and 26th
• GBP: Lower, CBI retail sales disappoint, CPI falls more than expected
• CAD and AUD: AUD & CAD mixed, China may post an 8bln trade deficit in March, Canada LEI as expected

Overview

The USD traded higher Tuesday supported by worries that the EU will not agree on a plan to aid Greece and the increased threat of SNB intervention as EUR/CHF cross trades at a 10 year low. Ahead of the EU summit scheduled for March 25th and 26th there are conflicting reports about whether EU officials will come up with an aid plan for Greece. The latest report suggests that EU officials may be leaning towards some form of loan arrangement with Greece but skepticism abounds about whether the EU will come up with a credible plan to aid Greece. SNB president Hildebrand says that the central bank is ready to take decisive action against excessive CHF gains versus the EUR.CHF traded higher despite the threat of intervention. GBP traded lower pressured by report of weaker than expected UK annual CPI and soft UK retail sales. Commodity currencies were pressured by weaker CRB and a statement from China’s Premier Wen that China may run an 8bln trade deficit in March. This would be the first monthly Chinese trade deficit since April 2004.Wen’s comments may increase worries about global trade tensions. JPY traded mixed to lower with selling pressure attributed to the release of the BOJ minutes for March which state that Japan’s CPI may be weaker than forecast. Today’s dollar strength is impressive in light of the fact that the Fed’s Evans and Lockhart made dovish comments. Evans said that interest rates may stay at historic lows for at least another six months and accommodative policy may be needed into 2011. Lockhart warned against lifting the Feds extended rate pledge to soon. US existing home sales declined by 0.6% compared to 2% decline in December. USD pared early gains in reaction to stronger US equity market trade.

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USD Lower, GDP Revised Higher, Existing Homes Sale Drop

• USD: Lower, pressured by a recovery in global equity markets, Q4 GDP revised up, existing home sales drop
• JPY: Higher, factory output expands and retail sales jump, Yuan revaluation speculation
• EUR: Higher, inflation falls, gains in cross to GBP, short covering
• GBP: Lower, UK Q4 revised up, Q4 government spending higher than expected
• CAD and AUD: AUD & CAD higher, strong Australian credit demand, Canada’s C/A deficit narrows

Overview

The USD traded lower Friday pressured by a modest improvement in risk sentiment as equity markets rally in reaction to report of an upward revision in UK and US Q4 GDP, stronger industrial production and retail sales in Japan and strong private sector credit demand from Australia. USD was also pressured by Yuan revaluation speculation. Yuan forwards traded higher in reaction to a newspaper report that the Chinese government is assessing the potential impact of currency gains. US economic data was mixed with Q4 GDP revised higher, Chicago PMI came in higher than expected and Michigan sentiment was revised slightly lower. Existing home sales posted an unexpected sharp decline. Existing home sales are at a seven month low. USD remained on the defensive despite mixed US economic data as US equity markets trade both sides of settlement.

Focus turns to next week’s central bank policy meetings in Australia and Canada on Tuesday and the UK and EU on Thursday and Friday’s release of US February unemployment. The BOC is expected to maintain steady rate policy, the RBA is expected to hike rates 25 bps, the ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls unchanged from last month. (more…)

Weekly Economic and Financial Commentary

U.S. Review

The Fed Moves to End its Extraordinary Policy Ease

• Regional manufacturing surveys showed a stronger rebound in orders and production than had been expected. Industrial production also rose solidly.
• January’s inflation data were mixed, with import prices and pipeline inflation up sharply and the Consumer Price Index rising slightly less than expected.
• The Federal Reserve raised the discount rate by a quarter percentage point late Thursday afternoon.

When Ben Bernanke Talks, People Listen

Sometimes Ben Bernanke does not even have to speak. Just one week after the Fed Chairman released his testimony, in which he stated that “‘before long” the Fed would raise the discount rate and return it to the spread over the federal funds that existed before the crisis, the Fed acted. We now know the meaning of “before long,” at least as it relates to Fed policy.

Our initial read from the Fed’s move is that it intends to stay very close to the script Ben Bernanke laid out to reverse the extraordinary actions it put in place to fight the financial crisis. Those actions contributed to an enormous expansion of the Fed’s balance sheet and heightened concerns about whether the Fed could adequately contain or reverse this extraordinary stimulus without putting the recovery at risk or creating an environment, in which inflation might accelerate.

Bernanke noted that returning the discount rate back to its normal relationship to the federal funds rate should not be seen as a tightening move but rather a return to a more normal monetary policy. Maybe that is why the Fed chose to announce its move along with the regular weekly release of the monetary aggregates, whose influence the Fed has also traditionally downplayed. Specifically the Fed noted its policy actions were “not expected to lead to tighter financial conditions for households or businesses and do not signal any change in the outlook for the economy or monetary policy.” Monetary policy is still extremely easy, with the federal funds rate close to zero. All that has changed is that the era of extremely cheap money is beginning to end.

There was a pretty full set of economic reports released this week, including a number of reports on the manufacturing sector. Most of the regional manufacturing surveys, including the New York Fed’s Empire Manufacturing Survey and the Philadelphia Fed survey, came in stronger than expected. The Empire Survey rose nearly nine points to 24.9. The employment component rose for the second month in a row and is now solidly positive at 5.56. Manufacturers also seem to have a better handle on inventories.

Industrial production rose 0.9 percent in January, with solid gains across most categories. Output in the manufacturing sector rose 1.0 percent, with output of consumer goods and business equipment rising solidly. Production of IT equipment remains a notable bright spot, with production climbing 1.7 percent. Utility output, which surged in December, rose a much more moderate 0.7 percent in January. February’s cold temperatures should send output even higher in next month’s report.

The inflation data were clearly mixed. Import prices continue to rebound off last year’s sharp declines. The overall index jumped 1.4 percent in January, while prices excluding petroleum rose 0.6 percent. The Producer Price Index also registered a larger-than-expected gain, climbing 1.4 percent. The Consumer Price Index was much tamer, however, rising just 0.2 percent overall and falling 0.1 percent after excluding food and energy items. Sharply lower prices for hotels and lodging accounted for the smaller-than-expected overall rise and most of the drop in the core. (more…)

USD Rallies as Existing Home Sales Rise by 7.4%

• USD: Higher, bigger than expected downward revision in Q3 GDP, existing home sales surge
• JPY: Lower, BOJ to combat deflation, government says BOJ effectively set inflation target
• EUR: Lower , Moody’s downgrade of Greece debt rating, German consumer confidence falls
• GBP: Lower, smaller than expected upward revision in UK Q3GDP
• CAD and AUD: AUD lower & CAD higher, Australia’s LEI declines, Canada’s GDP expected to rise

Overview

USD and equity markets continue to trade higher as the inverse correlation for the USD and risk appetite breaks. Investors are liquidating short USD positions and unwinding USD carry trades before year-end. Optimism about the US recovery and speculation that the Fed will begin to withdraw stimulus sooner than expected supports the USD. EUR traded lower as Moody’s cut Greece’s sovereign debt rating and in reaction to report of an unexpected decline in German consumer confidence. EUR downside was is limited by gains in cross trade to the GBP and JPY with GBP pressured by report of smaller than expected revision in UK Q3 GDP and JPY pressured by BOJ pledge to fight deflation and set an inflation target. Commodity currencies traded mixed despite improving equity market trade pressured by weaker crude prices as OPEC leaves oil production levels unchanged. AUD was pressured by report of an unexpected drop in Australia’s LEI. CAD continued to outperform supported by optimism about improving growth outlook in North America. Today’s US economic data was mixed with Q3 GDP revised down more than expected and existing home sales rising more than expected. USD traded to the day’s highs after the release of better than expected existing home sales. USD continues to benefit from improving outlook for the US recovery. Today’s US existing home sales report fuels optimism about the US recovery. (more…)