FOREX TRADING

Today’s FOMC statement reflected a cautious view on the economy with an emphasis on modest gains in household and investment spending. “Subdued” inflation remains. Dissent continues.

Economic Outlook: Downgraded Again

Economic activity “has slowed” according to the FOMC statement. We agree. Household spending is increasing gradually but remains constrained by “high unemployment, modest income growth, lower housing wealth, and tight credit.” Real positive momentum in the economy is reflected in business spending on equipment and software. Nonresidential construction spending continues to be weak and housing starts “remain at a depressed level.” We agree. (more…)

• USD: Higher, pending home sales rise, Challenger says job cuts back to pre-recession levels
• JPY: Lower, Japan’s PM resigns, Finance Minister Kan is the likely successor
• EUR: Lower , EU inflation rises more than expected, Iran to sell EUR reserves
• GBP: Lower, mortgage approvals rise, construction PMI at a three-year high, King expects inflation to fall
• CAD and AUD: AUD lower & CAD higher, speculation more BOC rate hikes are in the pipeline

Overview

USD traded in a narrow range Tuesday against most of the major currencies with the main focus on a sharp decline in the JPY and a strong rally in the CAD. JPY traded lower pressured by news that Japan’s PM Hatoyama has resigned. European currencies opened higher supported by gains in cross trade to the JPY with upside progress limited by positive US employment and housing data. EUR struggled to hold overseas gains that were sparked by report of higher than expected EU inflation rise and comments from a number of central bankers reaffirming commitment to the EUR. EUR was pressured by report that Iran plans to covert its EUR reserves to USD. GBP traded lower despite report of rising UK mortgage approvals and stronger construction PMI pressured by BOE King’s statement that he expects inflation to fall back to target. Commodity currencies traded mixed with AUD finding limited support from report that Australia’s GDP rose by 0.5% in Q1. CAD traded higher with gains attributed to speculation the BOC will raise interest rates again before year end. Today’s US economic data was positive with the Challenger Gray employment survey showing little change from last month. This suggests that employers are becoming more optimistic about the strength of the recovery and are shedding fewer jobs. April pending home sales rose by 6%, a 4% rise was expected. (more…)

U.S. Review

“He Was Never the Same”

• In sports, this refrain often accompanies the attempted recovery of an athlete after a serious injury. Today, we can say much the same for the U.S. and European economies.
• Moderate growth and low inflation remain the hallmarks of the outlook in the post-stimulus era. Yes, we have growth, but the pace of gains remains short of the political promises. Moreover, moderate recovery and limited private-sector job gains suggest continued large public-sector deficits and a continued need to restructure all levels of government—both here and abroad.

“He Was Never the Same”

In sports, this refrain often accompanies the attempted recovery of an athlete after a serious injury. Today, we can say much the same for the U.S. and European economies.

“We sense the convergence process to a new economic equilibrium has been more difficult than policymakers estimate. Job growth has been non-existent. Credit growth has been restrained and the recovery in housing far less significant than expected. Still inflation remains subdued as unemployment limits the acceleration in wages and unit labor costs.”

(Annual Outlook, Dec. 9, 2009, for 2010).

This week’s data highlight the change in the U.S. recovery that confirms our suspicions back in December. Housing starts jumped 5.8 percent in April as homebuyers and builders rushed to get contracts signed prior to the April 30 deadline of the homebuyer credit. Yet, building permits fell, thereby suggesting that the rebound in housing will fall short of prior business cycles. Why? For one, consumer confidence numbers indicate that plans to buy a home dropped to the second-lowest level in more than 25 years. Why? Our view is that home values remain uncertain, and there has been a shift in the way households view a home, from an investment opportunity to a shelter. The investment premium in housing is gone. Second, household income growth remains limited once the impact of transfer payments is removed. The Leading Economic Index fell in April. This was the first decline in 12 months. While such a drop is not a signal for panic, it does suggest that forward momentum in the economy may be more modest. There are two components of the leading indicators we find troubling. Building permits fell sharply, which suggests a drop-off in residential construction post-first-time homebuyer credit. This brings into question the sustainability of the housing recovery and its new equilibrium pace of housing starts. Our outlook is for 670,000–710,000 in the fourth quarter. Also, the rise in jobless claims suggests to us that private-sector job growth will remain subpar. (more…)

The minutes of the April 27-28 FOMC meeting provided the details of the discussions on the economic outlook and prospective changes to policy. In all, the minutes highlight that the Fed is more optimistic about the economy with participants expecting that the recovery will continue. Importantly, members indicated that they were seeing signs that growth was being supported by improving domestic demand and “not just fiscal stimulus and a slower pace of inventory decumulation.” This sentiment was reflected in the updates to the Fed’s central tendency forecast with the range for growth in 2010 boosted to 3.2-3.7% from 2.8-3.5% in January.

The forecast update also included a mild downward revision to the range for the unemployment rate (9.1-9.5%) this year. In 2011 and 2012, the unemployment rate is expected to trend lower with the 2012 range at 6.6-7.5% as in the January report. Inflation forecasts were trimmed back with the headline PCE rate forecasted at 1.2-1.5% and the core PCE deflator expected to be in a 0.9-1.2% range in 2010. While there were tweaks to the forecasts, the story on the outlook remained generally intact. The risks to the inflation outlook were considered mixed. (more…)

Consumer Prices in United Kingdom Unexpectedly Decline

Today, we have full support that inflation is indeed inline with the Bank of England expectations as Governor of the central bank, Mervyn King stated before that the rise in inflation rates is temporarily and a result of APF program, higher energy prices and the reversal of the VAT.

CPI for the year ending in February today we saw ease from the 14-month high of 3.5% to 3.0% which is lower than the projected 3.1% while on the month rose to 0.4% from the prior decline of 0.2%, which is worse than the expected 0.5%.

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USD Higher, Consumer Prices Flat, Continuing Claims Rise

• USD: Higher, Greek fiscal worries and tensions with China over Yuan revaluation, Philly Fed rises
• JPY: Mixed, manufacturing sentiment improves, gains limited as US equities rally
• EUR: Lower, Greece may seek IMF aid as EU aid to Greece appears less likely
• GBP: Lower, February budget deficit smaller than expected, CBI orders decline
• CAD and AUD: AUD & CAD lower, Canadian net foreign investment flows rise

Overview

The USD traded higher Thursday supported by concern about the Greek fiscal outlook and in reaction to increasing tensions between the US and China over the value of the Yuan. EUR was pressured by a Dow Jones report that Greece may seek IMF aid as aid from the EU seems less likely. Greek PM says it will give the EU one month to decide on an aid plan. US officials tell China that the value of the Yuan is a real concern. There is a movement in U.S. Congress to name China as a currency manipulator. Chinese officials continue to push back against pressure to revalue the Yuan and state that a rise in the Yuan would be a disaster for Chinese exports. US and Chinese rift over the Yuan dampens risk appetite and sparked selling of the commodity currencies. CAD outperformed supported by report of strong net foreign investment flows to Canada and diminished threat of BOC intervention. JPY traded higher in reaction to today’s drop in risk appetite and by report of improving manufacturing sentiment in Japan. GBP traded lower in reaction to a decline in UK CBI orders with downside limited by report of smaller than expected UK February budget deficit. Today’s US economic data was mixed with February CPI unchanged and jobless claims came in slightly higher than expected. Continuing claims unexpectedly rose by 12k. The US current account deficit widened by less than expected in the fourth quarter. LEI was reported a bit weaker than expected and the Philly Fed came in above expectation. Today’s US economic data points to a slow US recovery with low inflation and USD consolidated early gains.

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Risk-Aversion Drags Euro Lower

The dollar and yen were higher in early Thursday trading amid speculation that Greece may seek help from the IMF — sparking fears that next week’s EU Summit meeting will provide little support to the sovereign-debt crisis. Heightened risk aversion pushed the euro lower, relinquishing the 1.37-handle against the dollar and sliding beneath the 123-level versus the yen. Gains in crude oil stalled in the overnight session, drifting back toward the $82-per barrel level and lower by almost 1% to $82.16.

Data from the US will remain in focus in the New York session with the calendar consisting of several key gauges on the economy. The reports include February consumer prices, weekly jobless claims, the Q4 current account deficit, the March Philadelphia Fed survey and the February index of leading economic indicators.

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USD Lower, Inflation Subdued

• USD: Lower, PPI falls the most in seven months, steady Fed policy
• JPY: Lower, BOJ expands quantitative ease and raised its lending auctions to ¥20trln
• EUR: Lower, annual rate of labor cost rise the slowest in four years
• GBP: Higher, UK claimant count posts biggest drop in 13 years, BOE minutes note increased inflation risk
• CAD and AUD: AUD & CAD higher, strong Australian housing data, easy money from the Fed and BOJ

Overview

The USD traded mostly lower Thursday pressured by the Fed’s decision to hold monetary policy steady and signal that interest rates will remain low for an extended period. GBP surged in reaction to report that UK jobless claims declined the most in 13 years. GBP was also supported by the minutes from the BOE’s March policy meeting which state that the central bank is growing more concerned about inflation risk. EUR traded lower with gains limited by report of slowing rise of labor costs in the EU and selling pressure in cross to the GBP. The commodity currencies traded higher in reaction to firmer equity market trade with the AUD supported by hawkish comments from the RBA’s Debelle and strong Australian housing. Debelle said rates may have to rise a bit more. CAD was supported by report of a surge in Canada’s whole sale trade. JPY traded lower in reaction to the BOJ’s decision to expand quantitative ease from ¥10trln to ¥20trln. Today’s US economic data was mixed with PPI posting a bigger than expected decline. The PPI report supports the Feds forecast that US inflation pressures will likely remain subdued. With the US economic recovery uneven and inflation subdued the Fed will be in no hurry to tighten monetary policy. Focus turns to Thursday’s release of US CPI.

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Overbought Test Of Resolve

Gbp/Usd moved 100 pips higher during the European session after reports from the U.K. labor market hit the newswires that were better than expected. The minutes from the recent Bank of England rate meeting revealed that nothing much had changed from the previous month, and that CPI and inflation reads were as much to do with a weaker pound than instigated by internal growth.

The MPC minutes suggest that interest rate increases are just as far away in the U.K. as any other major region, with the exception of Australia. This news had a positive effect on the major currencies, but the pound is the only pair to make a substantial breakout. (more…)

FOMC: Less Dovish, but Hikes Remain Distant

• No change to policy measures. Hoenig repeats his lone dissent.
• Growth language slightly more optimistic but no change to inflation outlook
• ‘Extended period’ retained indicating continued commitment to low rates
• Further asset purchases highly unlikely
• No change to our outlook expecting unchanged rates until late this year

Details

The assessment of activity was slightly more upbeat than in the previous statement. As expected the FOMC turned more optimistic on the labour market while on the other hand noting recent very weak housing data. Generally, the committee still expects a moderate recovery including a gradual return to higher resource utilisation. As a result, the outlook remains 3-3.5% growth, a relatively moderate rate historically.

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The FOMC will hold a one-day policy meeting on Tuesday, March 16th. This will be the first scheduled single day policy meeting for the Federal Reserve since the start of the financial crisis in September 2008. In February the Fed raised the discount rate 50bps to 0.75% and stated that the discount rate hike was not a signal of tightening of monetary policy. According to the Fed the discount rate hike will encourage financial institutions to rely more on money markets than on the Fed for short-term borrowing. The discount rate hike has encouraged speculation over whether the Fed is nearing the end of its accommodative monetary policy. Investors want to know if the Fed will soon hint that the end of easy money is near.

The key focus of Tuesday’s FOMC meeting is whether Fed maintains in its policy statement the language, keeping interest rates at exceptionally low level for an "extended period". Recent statements from Fed officials suggest that the weak labor market, uncertainty about the sustainability of the US recovery and subdued inflation will encourage the Fed to hold policy steady at Tuesday’s meeting.

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U.S. Review

Upbeat, Downbeat or Simply No Rhythm

• Economic news continues to come in mixed, with positive reports on retail sales and the trade deficit being offset by disappointing reports on small business optimism and unemployment claims.
• Revised employment data for states show larger job losses during the recession and cast some doubt on January’s drop in the national unemployment rate.
• Stronger retail sales and declines in imports led to surprising drops in inventories at retailer and wholesalers in January. Inventories rose slightly at manufacturers, however.

Still on Pace for a Modest Economic Recovery

February’s retail sales report was easily the best economic news released this week. Overall sales rose 0.3 percent during February, with strong gains reported across nearly every major category. Sales excluding gasoline, building material and automotive dealers, which is a category that tends to track the personal consumption data, rose 0.9 percent in February, following a 0.6 percent gain in January. The strong back-to-back gains suggest consumer spending will rise at a 2.2 percent pace or better during the first quarter, which is in line with our forecast, published earlier this week.

One complicating factor in the retail sales figures is that retailers have done a really good job at bringing inventories in line with sales and are discounting much less than they did in prior years. As a result, the better numbers reported for January and February may not reflect as much volume as they first appear. The lack of discounting is also apparent in the Consumer Price Index, which has shown larger price gains for core good prices. Prices for core goods are currently up 2.9 percent over the past year, which is their largest gain since the early 1990s.

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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…)