FOREX TRADING

The euro bounced higher versus the greenback, edging up to just shy of the 1.34-handle as details of Greece’s bailout continued to trickle through to the markets tempering fears for a default. Crude oil climbed higher by around 1.5% to trade near $85 per barrel amid improving sentiment over the global economic recovery – sparked by sharply higher than expected US housing market data. The US equity bourses traded slightly higher by the afternoon session, with the Dow Jones up by almost 0.4% and the S&P 500 improving by over 0.5%.

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• USD: Higher, FOMC may sell assets, new home sales rise 26.9%, durable goods rise ex. transports
• JPY: Lower, widening yield differential, improving risk sentiment, concern about Japan’s debt
• EUR: Higher, Greece seeks to activate EU/ IMF aid, German IFO rose by more than forecast
• GBP: Lower, Q1 GDP comes in below expectation, BOE seen on hold
• CAD and AUD: AUD & CAD lower, dovish RBA comments, weaker Canadian inflation and retail sales

Overview

A report that Greece seeks to activate the EU/IMF aid package and a surge in the German IFO business sentiment index sparked a short covering rally in the EUR. The EU commission said that Greek aid will be as soon as possible. The cost of financing the Greek debt dropped after the announcement that Greece seeks aid. USD traded mainly higher versus the majors with GBP pressured by report of weaker than expected UK Q1 GDP, AUD pressured by dovish comments from RBA Governor Stevens and CAD pressured by report of weaker than expected Canadian inflation and retail sales. Lower Canadian inflation may ease BOC rate hike pressure. USD was also supported by a CNBC report which says that a growing bloc of the Fed board members favor selling of assets. The selling of assets by the Fed would signal the beginning of withdrawal of monetary stimulus. JPY traded to a two-week low versus the USD in reaction to strong US economic data and Thursday’s warning from Fitch that the Japanese sovereign debt rating is at risk of downgrade because of the rising Japanese budget deficit. US economic data was positive with durable goods posting solid gain ex. transportation and new home sales surged. Today’s US economic reports follow yesterday’s report of stronger than expected existing home sales and drop in jobless claims. These data fuel hope that the US recovery is gaining momentum. Focus turns to next week’s FOMC policy meeting with investors looking for confirmation that the Fed is seeking to start its exit strategy.

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Wakeup Call: Greece Debt Situation Could Recall Risk Aversion In Markets

Moody’s cut Greece’s debt rating while the deficit/GDP was revised up to 13.6% which sent yields into double digit territory with the 2-year rising 244bps in a single day to 10.2%.

Calendar

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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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Fed Upgrades Economic Outlook, A Dissent on “Extended”

Today’s FOMC statement was more optimistic on the economy with emphasis on improvement in business and investment spending. “Subdued” inflation remains. Dissent brings into question the length of easy policy.

Economic Outlook: Upgraded

Economic activity “continued to strengthen” according to the FOMC statement. We would agree. Household spending continues to expand but with the drag of income, wealth and credit constraints. The story here though is the upgraded outlook for business spending in equipment & software. Again we agree, orders and shipments reports have improved in recent months and that is consistent with increased capital spending.

Our outlook for 2010 is for 2.7 percent growth compared to the recession of last year with equipment & software spending up 4-5 percent compared to a drop of more than 15 percent last year. Two interesting aspects appear in this recovery from these trends. First, gains in the economy are associated with no additional labor so far. As a result, we are seeing very strong productivity gains. Second, adding capital equipment without labor suggests a rise in the capital/labor ratio. These two trends suggest increased returns to a smaller workforce but more limited job opportunities to those without the right skills. (more…)

USD Pares Gains as Consumer Confidence Rises

• USD: Higher, spike in risk aversion as China’s tightens monetary policy, consumer confidence rises
• JPY: Higher, China to hike reserve ratios on two major banks, BOJ policy unchanged, cuts deflation forecast
• EUR: Lower, above forecast German IFO fails to boost demand
• GBP: Lower, UK GDP disappoints, UK crawls out of recession, Pimco’s Gross says avoid UK debt
• CAD and AUD: AUD & CAD lower, China’s reserve ratio hike discourages demand for high yield currencies

Overview

USD traded higher Tuesday supported by a spike in risk aversion as equity markets decline in reaction to report that China hiked reserve ratios on some of its banks. Tightening of monetary policy in China generates concern about the global recovery. GBP was pressured by a report of weaker than expected UK Q4 GDP.EUR traded lower despite report that German IFO came in above forecast. GBP and EUR were pressured by selling in cross trade to the JPY with JPY supported by safe haven flows as equity markets decline. JPY traded higher despite S&P lowering of Japans bond outlook to negative from stable. S&P placed Japan on negative watch due to concern about Japan’s rising debt load and lack of flexibility to deal with reducing the debt. Commodity currencies traded lower tracking the spike in risk aversion and weaker commodities with crude oil prices falling below $74 a barrel. There was limited reaction to report that Fed officials are considering adopting a new benchmark interest rate to replace the one used for the last two decades (Fed funds). According to a Bloomberg report Fed officials are considering interest on reserves as the new benchmark rate. Today’s US economic data was mixed with case Shiller home price index down and consumer confidence rising. USD came off its high after the consumer confidence report. Focus turns to Wednesday’s FOMC meeting and President Obama’s State of the Union address. (more…)

USD Lower, US New Home Sales Plunge 11.3%

• USD: Lower, USD drops from three month high, new home sales post an unexpected decline
• JPY: Higher, US two-year bond yields trade above Japanese two-year yields
• EUR: Higher , EU Libor rates fall to record low
• GBP: Lower, BOE may expand quantitative ease in early 2010, mortgage approvals rise
• CAD and AUD: AUD & CAD higher, China and Russia may add CAD reserves

Overview

Today’s US economic data was mixed with personal income and personal consumption reported slightly below expectation. Michigan consumer sentiment improved. New home sales posted an unexpected sharp decline in October. USD traded lower after the release of much weaker than expected new home sales report. USD traded in a narrow range Wednesday drifting lower from a 3 1/2 month high reached in overseas trade. USD is supported by rising US bond yields and optimism about the US recovery. The main feature of the trade was a focus on the debate over whether the BOE plans to expand quantitative and continued underperformance of the GBP. The Bank of England minutes confirm that the BOE voted unanimously to maintain the current level of asset purchases and interest rates at the December policy meeting. The Daily Mail reports that the BOE may be considering expanding its asset purchases by £25 billion in early 2010. (more…)

Weekly Economic and Financial Commentary

U.S. Review

A Huge Week for Policy Announcements

• The U.N. General Assembly, G-20 and FOMC meeting overshadowed this week’s economic news. Stimulus efforts remain in place but some programs are approaching expiration and plans were announced for an orderly winding down of the Fed’s quantitative easing.
• This week’s key economic news included reports on new and existing home sales. New home sales rose 0.7 percent, whereas existing home sales fell 2.7 percent.
• Weekly first-time unemployment claims fell more than expected, dropping 21,000 to 530,000. (more…)

Later afternoon trading saw the price of Crude Oil take a nose dive as traders took profit. The price of Oil stalled at the $75 resistance level and fell significantly following the failed breach. Today traders will be tracking the release of the U.S. Crude Oil Inventories data along with the New Home Sales numbers for today’s market direction. (more…)