FOREX TRADING

Market Outlook

Tactical view:

= PMIs to test bullish GBP/USD trend, GBP/CAD target 1.65

Dollar weakness coloured G10 fx markets in July but a stabilisation in speculative positioning begs the question if the currency is due for some reprieve in August. The path to a USD bounce remains uneven at best, but as the tide of positive Q2 corporate earnings subsides and scepticism surrounding EU peripheral spreads lingers, we wonder if safe haven flows could make a surprise return. Dovish statements by the BoE have so far been disregarded by GBP bulls but as the policy stakes are gradually raised, we think there is a possibility that GBP exposure is gradually reduced from technically overbought levels. The week ahead is dominated by the PMIs and US non-farm payrolls. Holiday disrupted trading conditions are likely to characterise daily flows. Demand for carry may keep the AUD underpinned even assuming for no change in RBA policy.

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HIGHLIGHTS OF THE WEEK

• In the U.S., consumer prices fell again in May, driving annual inflation 0.2 percentage points down to 2.0%. Core inflation was flat at 0.9%.
• U.S. industrial production surprised on the upside with a 1.2% monthly gain in May. The rate of capacity utilization rose in tandem to 74.7%, landing half-way up its peak-to-trough gap.
• U.S. housing starts fell by a sharp 10% M/M. A contraction in homebuilding was anticipated, but the magnitude was much larger than expected and it highlights the strong headwinds faced by this sector.
• In a speech this week, Bank of Canada (BoC) Governor Mark Carney struck a cautious tone, noting that “no particular path for monetary policy is preordained”. In light of the multitude of risks still clouding the horizon, the BoC remains understandably vague. While it increased the overnight rate to 0.50% on June 1st, and should continue with gradual increases in the months ahead, it is giving itself room to pause the hiking cycle if the recovery wobbles.
• Existing home sales dropped by 9.5% M/M in May. The sales-to-new listings ratio eased from 0.52 to 0.49. In line with this easing in market balance, the seasonally-adjusted average price slipped by 1.0% M/M with Y/Y growth cooling from 12.2% to 8.5%.
• Manufacturing sales and wholesale trade data for April are consistent with a monthly real GDP expansion of 0.3% M/M.

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Today, the U.K. will release trade balance for January in a calm day in Europe that lacks fundamentals. The British economy has shown improvement, according to the data released last week which showed that consumer confidence surged in February to a two-year high and services expanded at the fastest pace in three years.

Britain expanded 0.3% in the fourth quarter boosted by exports which jumped to 3.7% from 0.1%, while imports rose to 4.1% from 1.3%. Besides, services and manufacturing sectors are showing growth in the first quarter of 2010. However, the economy is suffering from a trade deficit, where it widened in December to the most since January 2009 as imports soared faster than exports.

Trade deficit reached 7.3 billion pounds where imports inclined 5.2%, while exports jumped 4.5% on the month. The trade gap in January is predicted to narrow to 7.0 billion pounds. Trade deficit non EU is estimated to narrow to 3.3 billion pounds from 3.5 billion pounds, while the total trade deficit to retreat to 3.0 billion pounds from 3.2 billion pounds.

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January NFP Likely Turned Positive

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

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

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

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FOMC Meeting Wednesday, No Change Expected

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

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USD Gains Versus EUR, JPY Rallies on Weak US Retail Sales

• USD: Mixed, jobless claims up, retail sales down, business inventories rise
• JPY: Higher, tracking risk sentiment, machinery orders fall sharply
• EUR: Lower, Trichet calls for strong USD, EU Greek bond spreads continue to widen
• GBP: Higher, Moody’s expressed confidence UK will tackle its deficit, BOE may pause its bond buy program
• CAD and AUD: AUD & CAD higher, Australia’s employment report beats expectations

Overview

USD traded mixed Thursday with the main focus on report of improving Australian employment growth and Fed policy outlook. AUD traded higher supported by report of better than expected Australian employment growth. Australia’s employment report helped to boost demand for Asian equities and risk appetite. Growth led currencies continue to outperform. The Fed’s Dudley said that short-term interest rates in the US may rise in six months or may not rise for as long as two more years depending on the strength of the recovery and employment outlook. The ECB left rate policy unchanged as expected and the EUR traded lower pressured by ongoing concern about sovereign debt risk in Greece. In the press conference following ECB policy meeting ECB President Trichet said current rates are appropriate, price developments are expected to be subdued, data suggest improvement in economic activity, EU economy to grow at a moderate pace in 2010, unemployment expected to rise somewhat further, risk to inflation outlook broadly balanced and the ECB will keep phasing out unneeded policy measures. (more…)

The Federal Reserve released the Beige book which summarizes the performance of the U.S economy throughout the past period on twelve Federal Reserve Districts. The book showed that conditions is stabilizing while economical activities are still low, pointing out that those improvement comes broader than the time of last book released.

The report showed that most districts economical activities increased while the two Districts Philadelphia and Richmond reported mixed conditions compared with the last report where eight districts showed better economical conditions and four showing little change.

The report commenced with the most important figure for growth which is Consumer spending where a big leap was witnessed in 2009 holiday season compared with the same time in the year 2008 at the peak of the crisis but still the demand and spending levels during the previous holiday season lays below 2007 levels, concluding that the world’s leading economy might need a longer time to recover from the worst financial crisis since the Great Depression that expected as economical growth is still weak.

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US Nfp May Have Turned Positive In December

The US labor market improved significantly in November and the trend is expected to have continued during December. In November US nonfarm payrolls declined by just 11k. This was well below market expectation that nonfarm payrolls had been cut by 125k. The headline unemployment rate also improved to 10%. The trade had expected the November unemployment rate to be unchanged at 10.2%. Temporary holiday retail and healthcare jobs offset the loss of jobs in construction and manufacturing in November. On Friday January 8th at 8:30 AM ET US December unemployment and nonfarm payrolls will be released. There is a great deal of speculation that the nonfarm payrolls will turn positive in the December report for the first time in 23 months. Estimates for December nonfarm payroll range from -80k to plus 50k. Consensus for December nonfarm payrolls -8k with the unemployment rate expected at 10.1%.

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Just When? US Dollar Reversal and Breakout a Matter of Time

Fundamental Outlook for US Dollar: Neutral

- US Gross Domestic Product numbers show worst drop in 27 years
- Dollar slipped on S&P rallies through earlier-week trading
- Months of consolidation could foreshadow US Dollar breakdown

The US Dollar ended the week lower versus foreign counterparts, but it failed to break below key range-lows in spite of sharp S&P rallies and fairly disappointing domestic economic developments. The highly-anticipated US Gross Domestic Product showed that the economy contracted less than expected in the 2nd quarter of the year, but remarkable downward revisions to earlier figures clearly dampened optimism on growth. Government data showed that the economy saw its worst quarter-on-quarter performance in 27 years in Q1. The slower (more…)