FOREX TRADING

Risk-aversion dominated the headlines at the end of the week with the euro tumbling beneath the 1.20-level against the dollar to a fresh 4-year low at 1.1974. The major US equity bourses were sharply lower as the much-anticipated May labor report missed estimates, dragging the Dow Jones, S&P 500 and Nasdaq all lower by around than 3%. Sparking market jitters and ultimately triggering a renewed bout of risk-aversion was the morning announcement from the Hungarian Prime Minister’s spokesperson – in which he identified the Hungarian economy as being in a "grave" state in which the previous government "lied" about economic figures and that "it would not be an exaggeration" for talk of default. The revelation hit the global markets and prompted a spike higher in the VIX index, which climbed higher by more than 14% from Thursday’s close to above 33.6.

The highly-anticipated May labor report largely disappointed as markets had been factoring in a blockbuster report. Consensus forecasts had been looking for a surge in non-farm payrolls to 536k for May, instead adding 431k jobs versus 290k from April. The private payrolls figure sharply missed estimates at 41k, falling short of calls for an increase to 180k from a downwardly revised 218k in April. The inflated non-farm payrolls are largely attributed to temporary government census workers and will not be sustainable over the coming months. The unemployment rate dipped to 9.7%, better than expected versus 9.9% from April.

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Ahead of a very important day of macro-economic releases from the U.S., and ahead of the Non-farm Payroll numbers on Friday, major forex pairs have struggled to break through Swing Point R1 and S1 areas in European trade. The long side of global equities allowed a short-Usd move to be put in place overnight, but the cash markets were not able to easily hold the positive momentum built up in the futures market, after a move higher from Wall Street.

Forex price action is revealing an obvious reluctance from speculative interest encamped on the long side of the Usd to give up ground too easily. It is also clear to see that the momentum unleashed as each global trading region opens and closes is just not backed with enough volume to break new ground on stocks, and is allowing only tentative move in forex to test dollar index support areas.

Ahead of the 08:15 ET ADP and 08:30 ET Weekly Jobless Claim numbers the markets may just consolidate recent moves. The 10:00 ET ISM numbers will then trigger equity direction, just in time to affect the European market close. The impact of a potentially large NFP number on Friday, because of the farcical way that the survey is completed, in what is obviously a jobless U.S. recovery, will weigh heavily on equity and forex sentiment.

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The mildly positive pieces of economic evidence rising to the surface in the United States are spoiling the otherwise bullish tone for global bond markets. With 48-hours to go before the release of May non-farm payroll data, which is expected to report the creation of more than 500,000 jobs, dealers are in a bit of a bind having pushed yields to extremely low levels. It would take a bad number now to push bond prices even higher, but what might happen in the event such a strong employment reading plays out?

Eurodollar futures - Although U.S. 10-year yields have risen from a crisis-point low of 3.06% to 3.26% today, the overall tone remains one of fear emanating from Europe. The most recent report this week from the ECB showed that 2010 will be a bad year for bank write downs. There is also a potential strain of slowing domestic economies exerting significant downwards pressure on U.S. yields. In isolation a strong non-farm payroll number of the magnitude that the market is currently expecting would be sufficient to see yields move sharply higher. (more…)

USD Mixed as Stocks Weaken

• USD: Mixed, better than expected nfp, consumer credit rises, specs on the IMM halve USD long positions
• JPY: Lower, Nikkei rallies 2.9%, BOJ ease speculation
• EUR: Lower, Sarkozy says EU will help Greece, investor sentiment improves
• GBP: Mixed, BOE policy and UK election uncertainty
• CHF: Higher, Swiss unemployment rate improves, retail sales strong
• CAD and AUD: AUD & CAD higher, tracking improving risk sentiment, Canadian housing starts rise 6.1%

Overview

USD starts the week mixed to lower pressured by a modest improvement in risk sentiment. The improvement in risk sentiment is attributed to Friday’s release of better than expected US unemployment and stronger consumer credit, a statement from French President Sarkozy that the EU is ready to help Greece and in reaction to a Financial Times report which suggests that China is ready to shift its currency policy and break its USD peg. US January consumer credit rose for the first time in over a year and posted its largest increase since July 2008. The Nikkei surged 2.9% adding to the improvement in risk sentiment but European equities and US equities struggled which limited the downside for the USD. European economic data was generally positive with EU investor sentiment improving and Swiss unemployment and retail sales coming in better than expected. There was no major UK economic released today and GBP consolidated recent gains. Commodity currencies traded higher supported by the improvement in risk sentiment with the AUD trading at a six-month high. AUD was also supported by M&A news that Royal Dutch Shell and Petro China are bidding for Australia’s Arrow Energy. CAD traded higher in reaction strong Canadian housing starts report and BOC rate hike speculation .There was limited reaction to an NABE report which says that business economists see a Fed rate hike within the next six months. CFTC commitment of traders for the IMM shows that speculators cut USD speculative long positions in halve last week. The CFTC report suggests that speculative sentiment towards the USD is turning less positive. There were no major US economic reports released in today’s trade. Focus turns to this week’s release of US jobless claims retail sales and consumer sentiment.

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Initial jobless claims for the week ending 01/09 will be released on Thursday January 14th at 8:30 AM ET and are expected at 437k. Initial jobs claims rose 1k during the week ending January 2nd to 434k, a reading of 447k was expected. The jobless claims report is important because last Friday’s report of an unexpected 85k decline in nonfarm payroll raises concern that the improvement in the labor market may have stalled. In addition, Fed policy is closely tied to the outlook for jobs with the Fed indicating that rate hikes are unlikely until jobs creation becomes sustainable. The jobs outlook will be key to the timing of the Feds rate hike cycle. Jobless claims have been trending lower and are at their lowest level in 16 months. The four-month moving average of jobless claims fell to the lowest level since mid-September. Despite the positive trend in jobless claims the US labor market remains weak. The Labor Department reported that job openings in US dropped by 50% in the last two years. In June 2007 there were 4.7mln job openings in the US and in November the number had fallen to 2.4mln. According to the Labor Department the number of job seekers outnumbers the available jobs in the US by 6 to 1. The jobless claims data and Labor Department report indicate that layoffs are slowing in the US but there is no sign of any significant pickup in hiring. The lack of jobs creation will have significant implications for the strength of the US recovery because it will limit consumer demand and may encourage the government to take additional steps to boost jobs growth. These steps could include a new jobs stimulus plan which could lead to increased pressures on the US budget deficit. According to the White House the stimulus plan has saved 2mln jobs. Most economists believe that a jobless claims decline below 400k would signal that jobs are being created in the US (more…)