FOREX TRADING

USD Mixed, Trade Deficit Narrows as Exports Decline

• USD: Mixed, jobless claims decline, trade deficit narrowed by 6.6%, global recovery may be slowing
• JPY: Lower, Q4 GDP revised lower, BOJ ease speculation
• EUR: Higher, rumor of Russian intervention, SNB reaffirms its intervention policy
• GBP: Higher, inflation expectations at a two-year high
• CAD and AUD: AUD & CAD lower, China rate hike fears, Canada’s capacity use and trade balance improve

Overview

The USD and JPY opened lower Thursday despite weaker equity market trade and a modest dip in risk appetite as European and US equity markets traded lower. The USD received a temporary boost after the release of economic data from China which showed any unexpected rise in inflation and strong retail sales and industrial production. China’s inflation rate rose to a 16 month high accelerating by 2.7% in February. The Chinese inflation report generates speculation that China will raise interest rates sooner than expected as the Chinese economy may be overheating. Chinese rate hike fears dampened risk appetite, pressured equities and supported the USD. USD erased early gains with GBP supported by a BOE inflation survey which shows that inflation expectations in the UK are at a two-year high. Rising UK inflation expectations may dampen speculation that the BOE will expand its asset purchases. EUR traded mixed and remained range bound. The EUR was initially supported by report of Russian intervention to slow ruble gains and the SNB’s reaffirmation of its intervention policy. Commodity currencies were mixed with AUD gains limited by risk of a rate hike from China and report of weaker than expected Australian employment data. CAD traded lower despite report of stronger than expected Canadian capacity use and a bigger than expected Canadian trade surplus. JPY traded lower pressured by report of a downward revision in Japans Q4 GDP and by BOJ ease speculation.

S&P says that the USD will maintain its reserve role status as long as US financial markets are sound and government spending is sustainable. S&P went on to say that the US reserve currency status cannot be taken for granted. According to S&P foreign investors could begin to reduce USD holdings if the US fails to address its fiscal deficit and debt. S&P said that the US could lose its AAA credit rating if the government did not address the fiscal outlook. There was limited reaction to report that US February foreclosures were up but were the smallest in four years. US economic data was mixed with jobless claims posting a modest decline and the US trade deficit unexpectedly narrowed in January. The narrowing of the US trade gap reflects a bigger drop in imports than exports. Exports declined for the first time in eight months. USD traded higher after the release of the US trade balance as the report generates concern the global recovery may be slowing. Focus turns to Friday’s release of Michigan consumer sentiment.

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U.S. Review

Growth & Credit: On the Road to Singapore (Recovery)

• Economic growth and finance are both in recovery mode as evidenced by the gradual upturn in jobs and the gains in leveraged loan issuance. Yet, like Bing Crosby and Bob Hope, the economy never seems to be able to reach the happy land of Singapore.
• This recovery is still subpar for housing and the consumer as the pace of recovery still leaves many homeowners underwater in certain areas and many workers underemployed or unemployed. Skies are getting clearer but we remain far away from a sunny day.

On the Road to Singapore

In their most famous “road picture,” Bing Crosby and Bob Hope vow never again to repeat past mistakes and head off to Singapore. Of course, they do repeat their past mistakes and never do get to Singapore. For the U.S. economy the pace of improvement appears maddeningly slow and yet there is improvement.

Employment losses have steadily declined over the past six months. In fact, private sector jobs (ex-construction) have risen over the past two months. There is a cyclical recovery in private sector jobs while the structural problems in real estate limit the recovery. Job gains have also appeared in manufacturing sectors such as machinery, primary metals and electrical equipment. Meanwhile the index of hours worked has risen over the last three months, consistent with sustained economic growth. Combining hours worked and average hourly earnings, our income proxy has broken into positive growth territory. This suggests positive income and therefore spending gains in the months ahead.

Structural – Not Cyclical – Challenges to Employment

While the employment data suggest cyclical recovery, there are also suggestions of structural challenges that will limit our progress on the road to Singapore. We see this clearly in the unemployment rate by education and the duration of unemployment data. The stark reality of the unemployment situation is that higher education levels are associated with lower unemployment – and vice versa unfortunately. Unemployment for college graduates is 5 percent – for high school drop outs the rate is 15 percent. Meanwhile, the average duration of unemployment remains high at 30 weeks. There is a significant skills mismatch in the U.S. economy. It is not as though there are no jobs. More precisely, there are no jobs for many willing workers who do not have the skills to compete in the 21st century workplace.

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USD Mixed, PPI Jumps and Jobless Claims Rise

• USD: Lower, jobless claims rise, PPI higher than expected, Philly Fed improves, LEI rose less than expected
• JPY: Higher, BOJ holds monetary policy steady, no expansion of QE, Yuan revaluation speculation
• EUR: Lower, rumors of SNB intervention in EUR/CHF cross, stocks higher, Italian debt troubles
• GBP: Lower, worse than expected public-sector borrowing in January, mortgage approvals decline
• CAD and AUD: AUD & CAD higher, IMF gold sales, Canadian CPI nears BOC target, CRB rebounds

Overview

USD opened near a nine-month high Thursday supported by a number of factors which include Wednesday’s report that the FOMC had considered a 25bps discount rate hike in January, in reaction to stronger than expected US economic data, and by fresh sovereign debt concern with the focus shifting to Italian debt troubles. Wednesday the US reported strong housing and industrial production data. These reports encourage speculation that the US recovery is gaining momentum and fuel speculation of an earlier Fed rate hike. The EUR was pressured by a Dow Jones report that says derivative contracts used by Italian municipalities could magnify debt imbalances over time. European sovereign debt concern continues to pressure the EUR and GBP. GBP traded lower pressured by report that the UK posted its first January budget deficit on record. The commodity currencies opened lower pressured by report that the IMF looks to sell 191.3 tons of gold. News of the IMF gold sales sparked selling of commodities. The AUD downside was limited by hawkish comments from the RBA’s Lowe and rising Australian consumer confidence. CAD turned higher in reaction to report that Canada’s CPI rose sharply in January with the annual inflation rate approaching the BOC’s 2% target. JPY traded higher supported by a drop in risk appetite and in reaction to the BOJ’s decision to hold monetary policy steady and not expand quantitative ease. The BOJ has been under pressure from the Japanese government to take additional measures to combat deflation. JPY was also supported by speculation that China may allow the Yuan to appreciate by as much as 5% next month. Yuan appreciation could help China slow the pace of its recovery. Today’s US economic data was mixed with initial jobless claims posting an unexpected rise. PPI came in higher than expected. The PPI report suggests that inflationary pressures are rising in the US. Rising inflation could encourage more Fed rate hike speculation. The Philly Fed survey came in slightly higher than expected and leading indicators came in below expectation. The employment component of the Philly Fed showed improvement and stocks edged higher. USD turned lower after the release of today’s US economic reports as US equity markets trade higher. (more…)

FOMC Indicate A Sooner Than Expected Asset Sale In A Move To Drain Liquidity From The System!

• Yesterday’s trading saw a stronger USD across the board following the FOMC release of its January meeting. To summarize, the report communicated to the market that the Fed should start selling its assets soon so as to drain liquidity from the market. Philly Fed President Plosser said that he prefers the Feds balance sheet to return to pre crisis levels which is aligned with the views of Kansas City Fed President Hoeing’s position. On the data front we saw a rise in US industrial production by 0.9% indicating good strength in the manufacturing sector and housing starts also climbed by 2.8% showing a strong recovery in the housing sector as well. US 2 year yields rose to 0.88% following the FOMC minutes and USDJPY price action was between 90.15 – 91.38.
• In Europe we had a weaker than expected trade balance report coming in at EUR4.4bln. On the topic of Greece a spokesman in Brussels commented that Greece has not made any requests for financial help and also said that the monetary bloc was able to maintain financial stability. However it must be noted that Goldman Sachs took part in helping Greece issue certain off balance sheet derivatives so as to hide the magnitude of Greece’s deficit. EURUSD price action yesterday saw a rally up to 1.3787 and subsequently got hammered all the way back to 1.3556.
• In Japan we had the BoJ 2 day policy meeting take place; the result was to keep rates unchanged at 0.1%. BoJ Governor Shirakawa said in an earlier statement that the BoJ will maintain its easy monetary conditions so as to help the recovery.
• In the UK the BoE minutes showed the unanimous agreement to pause QE however the minutes showed that a few members are cautious about the nation’s economic outlook. The minutes also showed that the MPC ”would provide further monetary stimulus should the inflation outlook warrant such measures.
• Today the financial calendar will show CBI trends for the UK expected to come in at -36 and the public sector net borrowing figures (PSNB) expected to have dropped by GBP2.8bln. In the US we will have jobless claims initial and continuous. Producer prices and Phily Fed business index are also expected out of the US calendar today.

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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. (more…)

USD Higher, Jobless Claims Post a Sharp Drop

• USD: Higher, jobless claims post an unexpected sharp decline, few details on Greek bailout
• JPY: Higher, Japanese markets closed for holiday
• EUR: Lower, pressured by lack of details of EU Greek support plan
• GBP: Higher, supported by gains in cross trade to the EUR
• CAD and AUD: AUD & CAD higher, stronger Australian employment growth, Chinese inflation slows

Overview

USD traded mixed Thursday with the EUR pressured by report of a vague promise from the EU to help Greece and the AUD surging in reaction to report of much stronger than expected Australian employment data. According to EU officials the EU is working on a plan to help Greece avoid debt default but the details of the plan have not been released. Australia’s unemployment rate declined and jobs growth was three times stronger than expected in January. The combination of the Greek support plan and the Australian employment report contributed to improving risk appetite along with a report that China’s January consumer prices rose at a slower than expected pace. China’s January CPI rose by 1.5% the trade had expected a 2% rise. Slower inflation growth in China reduces fear of the need for aggressive tightening from China. China’s central bank signaled that it plans to maintain accommodative monetary policy. The improvement in risk sentiment was somewhat dampened by the fact that China also reported that lending was the third highest on record in January and the US Congressional oversight panel warned that 3k US banks may have to curtail retail lending because of exposure to commercial real estate loan risk. Growing risk of commercial real estate loan default may be the next looming crisis for the financial markets. US economic data was positive with jobless claims posting a sharp drop. A Bloomberg survey of economists finds that the majority of economists surveyed believe that US employment rate has peaked at 10.1% will fall to 9.5% per year end. The White House forecasts that nonfarm payrolls growth will be 95k a month in 2010 with unemployment averaging 10%. The White House expects payroll growth to accelerate by 190k per month in 2011, 251k in 2012 and 274k in 2013 with unemployment falling back to 5.5% by 2016. The USD continued to gain versus the EUR after the release of the US jobless claims report and in reaction to the statement that the German Free Democratic Party has yet to consent to the Greek bailout. EUR traded to the day’s lows in reaction to a statement from an EU official that they will deal with Greece in March. (more…)

USD Higher, Trade Deficit and Bernanke Pressure Stocks

• USD: Higher, risk aversion re-emerges, uncertainty about EU Greek bailout plans, trade deficit widens
• JPY: Mixed, machinery orders and corporate good prices turn higher, CAPEX spending improves
• EUR: Lower, concern Greek rescue plans may slow the EU recovery
• GBP: Lower, BOE cuts UK inflation and growth forecast, King says the bank may consider expanding QE
• CAD and AUD: AUD & CAD lower, China’s trade surplus narrows, risk aversion re-emerges

Overview

USD traded firmer Wednesday supported by uncertainty about a potential Greek rescue plan, weaker than expected trade data from China and Bernanke’s testimony on withdrawing liquidity. The EU is expected to release the details of a plan to support Greece but there is concern that whatever plans emerge that EU sovereign debt risk and the need for austerity measures present a threat to the EU and the global recovery. According to a Bloomberg survey, optimism about the USD is at a 15 month high with the USD supported by concern that sovereign debt risk in Europe will hurt the EU and global recovery. China’s trade balance for January unexpectedly narrowed to 14.2bln, a reading 19.5bln was expected. Narrowing of China’s trade surplus generates concern about the strength of the global recovery. Bernanke laid out the Feds plans for withdrawing liquidity as the economy recovers in testimony before Congress today. He said that the timing of exit will be data dependent and the Fed may soon consider raising the discount rate. He went on to say the Fed can use the interest-rate paid on reserves, selling of Fed security holdings, reverse repos or offering of term deposits to depository institutions as ways to guide monetary policy. Bernanke said the Fed will eventually have to raise rates. The US trade balance widened by a much more than expected 10%. Widening of the trade balance was due to a 4.8% increase and imports in the impact of recent USD strength. The widening of the trade deficit and Bernanke’s rate hike talk pressured US equities and supported the USD. The trade awaits the outcome of Thursday’s EU summit for details of what the EU plans for Greece. According to a German official Greek aid is not on Thursday’s agenda. FX price movement has been volatile with risk appetite supported by optimism about Greek rescue plan and risk aversion re-emerging on uncertainty about the implications of the rescue plan for the EU recovery. Some analysts warn of a moral hazard if EU bails Greece out, but the EU may have little choice. (more…)

Potential Eurozone Assistance for Greece Gives Risk a Boost

Forex News and Events:

Markets were very busy yesterday pricing in speculation and conjecture. The day started with rumors that ECB’s Trichet had left a meeting of central bankers prematurely to head to Brussels to address the Greek situation. Then, later in the day, a German official was cited in say that the Eurozone governments have decided to ‘take significant steps’ to support Greece. This buzz sent traders scrambling out of their safe haven hiding spots. The EURUSD traded up from 1.3700 to nearly 1.3840, while AUDJPY climbed to 0.8800. The rapid move also caught the markets that were considerably short EUR off guard, and the ensuing short squeeze gave the move a frantic feel. Later and through today, German officials are continuing to adamantly deny that any decision on aid for Greece has been made. The Maastricht treaty is vague in this unexplored area, but it seemingly forbids guaranteed loans from the ECB or member states (assuming “liabilities of other member states”) and discrediting today’s WSJ article. However, support could come directly from unguaranteed loans from member states. Hence, the constant mention of Germany. It’s really just a gut feeling the current rhetoric was aimed to relieve pressure and buy time (halting “contagion” speculation). We do believe some sort of stability or bailout program is imminent, but in this rushed, manic fashion. Overshadowed by the gossiping (potential teleconference between EZ ministers this afternoon) UK released Industrial production data and Inflation reports. The Industrial production climbed to m/m 0.5% vs. 0.2% exp, while the inflation forecast on the two year time horizon was revised slightly down. For tomorrow, markets are expecting the Riksbank to leave interest rates on hold at 0.25% this month and also look for the central bank to upgrade its forecasts for employment, growth and inflation. For now, policymakers continue to affirm that they will raise rates in the Autumn of 2010, citing uncertainties to the Swedish economic recovery as the basis for their cautious approach. Nevertheless, if the fundamental rebound in Nordic economy is faster than expected, markets could start bringing forward their timeline for the first hike to July. (more…)