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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In the midst of a looming sovereign debt crisis, the US will offer us some insight into the status of the labour market. Reports out of the US of late have generally been positive, but we only expect a mild improvement in the labour market in April. We estimate that 170,000 payrolls were added to the economy while the unemployment rate will yet again remain unchanged at 9.7%

Businesses are hiring again

The private sector finally appears to add jobs on a regular basis. According to the ADP report, the economy has now created more jobs than it has destroyed for three months straight. Following some – for ADP – fairly large revisions, the company now estimates that February with its raging blizzards actually created 3,000 jobs on net. The numbers for March and April were revised to 19,000 and 32,000, respectively. The gains are of course modest, but they do signal that the private sector has slowly recovered to the point where employers dare hire again – even if much hiring is still only on a temporary basis.

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USD Lower, ADP Employment Unexpectedly Declines

• USD: Lower, ADP employment posts unexpected decline, Chicago PMI drops
• JPY: Lower, housing starts and construction orders decline, Postal Bank to buy less JGB’s
• EUR: Higher, EU inflation rises more than expected, Irish government plans to recapitalize Irish banks
• GBP: Higher, consumer confidence dips, election polls suggest Conservative victory
• CAD and AUD: AUD lower & CAD higher, Australian retail sales decline, Canada’s GDP beats expectations

Overview

USD traded mostly lower in Wednesday’s trade pressured by speculation that an unexpected drop in ADP employment will encourage the Fed to maintain a dovish policy bias. EUR was supported by report of above expectation EU inflation and announcement that the Irish government plans to recapitalize Irish banks. GBP traded higher despite report of weaker UK consumer confidence. CHF traded higher supported by report of above expectation Swiss KOF index. CAD traded higher supported by firmer energy prices as crude trades above $83 a barrel and metals prices are firmer. Canada’s GDP came in above expectation. AUD traded lower and underperformed pressured by report of a sharp drop in Australia’s February retail sales. The decline in Australia’s retail sales may dampen RBA rate hike speculation. JPY traded at a three month low versus the USD pressured by liquidation ahead of Japan’s fiscal year end. US economic data was mixed. March ADP employment posted an unexpected decline. The ADP report suggests that the US recovery has not yet strengthened enough to create jobs. The unexpected decline in the March ADP report suggests that Friday’s US nfp may not be as strong as anticipated. Estimates for March nfp have been rising all week with some analysts looking for a number as high as 200k. Consensus for Friday’s March US NFP may not be significantly altered by today’s ADP report. The ADP said that the report does not include the impact of bad weather in February or an estimate of the addition of new government census workers that were hired in February. Chicago PMI came in weaker than expected and factory orders were in line with expectations.

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USD Lower, Service PMI Expands at Best Pace in Two Years

• USD: Lower, ADP employment as expected, services PMI beat expectations, stocks rally
• JPY: Higher, Japan’s finance minister says the government and BOJ will combat deflation
• EUR: Higher, Greece announces extra austerity measures, retail sales and PMI weaken
• GBP: Higher, stronger than expected consumer confidence & PMI, uncertainty about the Prudential AIG deal
• CAD and AUD: AUD & CAD higher, Australian GDP strong, commodity prices rally

Overview

The USD traded mixed in reaction to report that Greece has decided to take extra austerity measures to reduce its budget deficit. Greece plans to cut its deficit by a total of €4.8bln. The new Greek budget plan generates hope that the Greek fiscal crisis will be contained and that Greece will not default on its debt. EUR initially rallied in reaction to the Greek budget news but investors remain cautious and EUR gains were limited. Investors want to see if the Greek budget plans lead to EU solidarity and a plan to aid Greece. Greek officials said they will go to the IMF if the EU fails to give support. EUR upside was also limited by report of weaker than expected EU retail sales and services PMI. GBP traded higher for the first time in six days supported by report of improving consumer confidence and stronger services PMI. Commodity currencies were mixed with the AUD underperforming despite report of strong Australian Q4 GDP. CAD continues to outperform. JPY traded at its highest level since last December versus the USD supported by mixed risk sentiment and a statement from Japan’s finance minister that Japan is taking efforts to defeat deflation. US jobs data was encouraging. Challenging Gray said that February job cuts were at their lowest levels since February 2006. ADP employment declined by the smallest since last February. ADP says jobs growth may return next month for the first time in two years. ADP says the service and manufacturing sector added jobs last month. February non-manufacturing PMI came in stronger than expected posting its fastest growth in two years. US equity markets rallied to the day’s highs after the release of the non-manufacturing PMI and the USD traded lower. The USD traded to a new low for the day in reaction to an IMF statement the Greek budget plan is very strong.

Focus turns Thursday’s ECB and BOE policy meetings and Fridays release of US unemployment. The ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls declining by 50k. (more…)

USD Mixed, Hoenig Says Zero Rates Not Sustainable

• USD: Lower, risk appetite improves as stocks rally, hope for Greek aid
• JPY: Higher, unemployment unexpectedly declines, government call for the BOJ to target inflation/buy JGB’s
• EUR: Lower, supported by short covering ahead of Wednesday’s Greek budget announcement
• GBP: Lower, construction PMI falls, election polls point to a hung parliament
• CAD and AUD: AUD & CAD higher, RBA rate hike, strong retail sales, BOC refers to higher CPI

Overview

The EUR and GBP made new lows for the year in overseas trade pressured by concern about sovereign debt risk in peripheral European nations and UK debt. Despite ongoing uncertainty about the Greek fiscal outlook there was limited follow through selling of the EUR and the USD traded lower in the US session. Greece is expected to outline its budget plans Wednesday. Anticipation that Greece will announce significant austerity measures sparked a short covering rally in the EUR. If Greece takes credible action to reduce its deficit it will increase the likelihood of EU aid for Greece. GBP continued to underperform. The latest UK election polls point to a hung parliament which generates concern that the UK government may not have the political backing to cut the UK deficit. The AUD traded higher supported by the RBA’s 25bps rate hike. CAD continues to rally in reaction to yesterday’s release of stronger than expected Canadian Q4 GDP and a slightly less dovish bias from the BOC. The BOC elected to hold rate policy unchanged as expected but dropped language in its policy statement that inflation risk is “tilted to the downside.” JPY edged higher supported by better than expected January unemployment and report that Japan’s finance minister calls on the BOJ to consider targeting inflation. USD experienced light short covering ahead of tomorrow’s Greek budget plan announcement. USD downside was limited by hawkish comments from the Feds Hoenig. Hoenig said that zero rates are not sustainable and the Fed must be prepared to hike rates while unemployment rate is still high. Hoenig is seen as a minority voice on the FOMC but his comments helped to limit today’s USD selloff.

Focus turns Thursday’s ECB and BOE policy meetings and Fridays release of US unemployment. The ECB is expected to remain on hold and there is uncertainty about whether the BOE will maintain its current level of asset purchases. US February unemployment is expected to post a modest rise with nonfarm payrolls unchanged from last month. (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…)

The dollar rose on Friday for a third consecutive day, pressuring stocks and commodity prices for a third day. US nonfarm payrolls declined a modest 20K in January with the unemployment rate falling to 9.7%. The S&P 500 gained 3.08 to 1,066.19 and erased earlier large losses as US consumer credit declined less than forecast and support at 1050 held. The yen fell versus the dollar but rose against most other key currencies on carry trade unwinding. The euro declined amid ongoing concerns about the fiscal stability in the PIGS countries and concern that efforts by Greece, Portugal and Spain to reduce their deficits will hurt the fragile economic recovery. Sterling fell despite higher-than-expected producer-price inflation. The oversold Australian and Canadian dollars rose. The Canadian dollar was supported by an unexpected drop in Canada’s unemployment rate and stronger-than-expected employment growth. The Swiss National Bank reportedly intervened in the FX market to prevent the Swiss franc from further appreciation against the euro after the EUR/CHF fell to the lowest level since October 2008.

The dollar index rose for a third straight day and touched the highest level since July 9. The appreciating dollar is increasing deflationary pressures, depreciating risky assets and may end the US/global fragile economic recovery. The dollar index rose about 9% since the beginning of December. There are support in the 79-area and important resistance at the 81 area. We expect a consolidation between the support and resistance.

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USD Higher, US Unemployment Rate Drops to 9.7%

• USD: Higher, unemployment rate posts an unexpected decline, nonfarm payrolls below expectation
• JPY: Lower, Toyotas CEO says the company is in crisis, risk recovers on better US employment report
• EUR: Lower, concern about EU fiscal troubles
• GBP: Lower, producer prices rise more than expected
• CAD and AUD: AUD lower & CAD higher, Canada’s unemployment rate drops jobs, growth rises by 43k

Overview

US January headline unemployment posted an unexpected decline to 9.7% from 10% last month and nonfarm payrolls dropped by 20k. The average workweek increased to 33.3 hours from 33.2. 8.4mln jobs have been lost since the start of the recession in December 2007 compared to the 7.2mln originally reported by the Labor Department. The number of long-term unemployed rose to 6.3mln. December nonfarm payrolls were revised to -150k from -85k, October nonfarm payrolls revised to -224k from -127 and November nonfarm payrolls were revised up 64k from up 4k. The US economy continues to shed goods producing and construction jobs with jobs increasing in services and retail.  Government hiring down slightly.  The USD initially pared overseas gains and the JPY traded lower after the release of better than expected US headline unemployment. USD resumed its rally as US equities traded lower and the unemployment report failed to lift market gloom. Despite the drop in headline unemployment the US still shed 20,000 jobs last month and the data failed to boost risk appetite.

Ahead of today’s release of US January unemployment the USD traded higher with the EUR trading at an eight month low. USD is supported by a spike in risk aversion sparked by concern about debt troubles in Europe and worries about the global recovery. European credit default spreads continued to widen. Expanding EU budget deficits are seen as a threat to the European recovery. Recent tightening of lending conditions in China generates concern about the global recovery. Risk aversion is the major driving factor for the financial markets and Forex trade. Report of a sharp decline in German industrial output adds to negative sentiment towards the EUR. EUR down side was limited by report of SNB intervention. The SNB is rumored to have intervened as the EUR/CHF cross traded at a 15 month low. GBP traded lower with downside limited by report of higher than expected producer prices in January. Commodity currencies traded mixed pressured by the spike in risk aversion with CAD downside was limited by report of an unexpected drop in Canada’s unemployment rate and stronger than expected jobs growth for Canada in January. The trade will continue to monitor the direction of equities to gauge risk sentiment with focus on EU response to the debt crisis. (more…)

USD Higher, Jobless Claims Post an Unexpected Rise

• USD: Higher, jobless claims rise, productivity beats expectations, labor costs fall more than expected
• JPY: Higher, supported by a spike in risk aversion and EU debt troubles
• EUR: Lower, credit default spreads widen in Europe, German industrial orders drop, ECB on hold
• GBP: Lower, BOE to pause asset purchases, left open for future QE if economy deteriorates
• CAD and AUD: AUD & CAD lower, Australian retail sales decline, commodity prices slide

Overview

USD traded higher Thursday supported by EU sovereign debt risk, weaker equities and declining commodity prices. Credit default swaps widened to a record level in Portugal and continued to widen in Greece and Spain. It’s becoming more expensive to buy protection against debt defaults in Greece, Spain and Portugal. European sovereign debt risk is the main focus of FX trade. The ECB elected to hold monetary policy unchanged as expected and the BOE decided to pause its asset purchase program. In the press conference following the ECB meeting ECB President Trichet said the interest rate level remains appropriate, inflation outlook risks broadly balanced, and EU economy to grow at a moderate pace. Trichet also said that high debt puts burden on monetary policy and he thinks Greece is moving in the right direction on its deficit reduction plans.Trichet also warned that all EU countries must respect the EMU growth pact. The EMU growth pact includes restrictions on GDP debt ratio for countries that join the EUR traded to the day’s lows as Trichet discussed European fiscal imbalances. EU debt troubles may delay ECB exit plans. The BOE left the door open for future expansion of quantitative ease if economic conditions deteriorate. Commodity currencies traded lower pressured by a spike in risk aversion as global equity markets decline pressured by global debt worries. AUD weakened in reaction to report of weaker than expected Australian retail sales and a sharp rise in New Zealand’s unemployment rate. JPY traded  sharply higher supported by safe haven demand sparked by a spike in risk aversion. US economic data was mixed with jobless claims posting an unexpected rise. Unit labor costs declined more than expected and productivity came in stronger than expected. USD remained higher after the release of the jobless claims and productivity data. Factory orders were reported slightly higher than expected. Focus turns to Friday’s release of US January unemployment and nonfarm payrolls. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive. (more…)

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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USD Higher, ADP Job Cuts Smaller than Expected

• USD: Higher, ADP employment beats expectations fueling recovery hope, non-manufacturing ISM rises
• JPY: Lower, pressured by improving risk sentiment and selling in cross trade
• EUR: Lower, EU commission endorses Greek debt proposals, services PMI revised higher, retail sales flat
• GBP: Lower, UK consumer confidence improves, services PMI posts an unexpected decline
• CAD and AUD: AUD & CAD lower, Australia trade deficit improves, China’s mortgage rates rise

Overview

USD traded mixed to firm Wednesday supported by report of above expectation January ADP employment report. EUR initially traded higher supported by report that the EU has endorsed the Greek proposal to reduce its deficit. EUR was also supported by report of stronger than expected EU January services PMI. GBP traded mixed with early support from report of a jump in UK consumer confidence. GBP gains were limited by report of an unexpected decline in UK services PMI. Commodity currencies were mixed with AUD posting a modest improvement in overseas as Australia reports improvement in its trade balance. CAD drifted lower despite report that economists have upgraded Canada’s 2010 GDP forecast with selling attributed to a modest setback in crude and the price of gold. A report that some Chinese banks have hiked mortgage rates dampens demand for commodities. JPY weakened in reaction to improving risk sentiment and selling in cross trade. US economic data was mixed. The challenger job survey said job cuts increased for the first time since July with January layoffs 59% higher than December of 2009. The surge in layoffs is due to downsizing in retail and telecommunications. The ADP employment report for January shows that employment dropped slightly less than expected and the decline in December was also revised lower. The ADP report suggests that US January nonfarm payrolls will turn positive. The USD edged higher after the release of the ADP report. Non-manufacturing ISM for January came in higher but slightly below market expectation. The non-manufacturing ISM index came in above 50 which suggests the service sector of the US economy is entering an expansion phase. USD consolidated its ADP gains after the non-manufacturing ISM release. FX markets remain range bound.

Focus turns to central bank policy meetings in Europe Thursday and Friday’s US January unemployment report. The ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm may turn slightly positive. (more…)

USD Higher, Q4 GDP Expanded By 5.7%, Best In Six Years

• USD: Higher, US Q4 GDP confirms faster growth, bond yields rise, consumer sentiment beats expectations
• JPY: Lower, Japan’s deflation accelerates, pressure on BOJ to ease, threat of intervention
• EUR: Lower, concern Greek fiscal troubles may spread, EU unemployment and CPI rise
• GBP: Lower, S&P says UK banking system less stable, UK house prices rise
• CAD and AUD: AUD lower & CAD mixed, India hikes its reserve ratio 75 bps

Overview

USD traded mixed ahead of today’s release of Q4 GDP. JPY was pressured by report of accelerating deflation in Japan and comments from the BOJ governor which suggests that the BOJ is ready to act against potential market turmoil. European currencies were mixed initially pressured by fresh concern about sovereign debt risk in non-core European countries with the GBP pressured by an S&P report which says UK banks are less stable. EUR downside was limited by report that the EU may be preparing a bailout for Greece. GDP downside was limited by report of rising UK house price. CHF rallied in reaction to report of better than expected KOF leading indicators. Commodity currencies traded higher rebounding from initial pressure sparked by weaker Asian equity market trade with support from statement from Chinese officials that they will keep monetary policy loose despite rising price pressures and better than expected GDP reports in the US and Canada. AUD gains were limited by speculation the RBA may be nearing a pause in its tightening cycle.

US economic data was positive with advanced Q4 GDP confirming faster US growth at the end of 2009 and Chicago PMI rising more than expected. Despite the acceleration of growth in the fourth quarter economists are concerned that the economic rebound may not be sustainable as fiscal and monetary stimulus is withdrawn and recent economic data shows the recovery in housing and retail demand slowing. Much of the improvement in Q4 GDP was due to increased auto production and rebuilding of inventories. Consumer spending and business investments remain weak. USD traded higher after release of stronger than expected GDP. The GDP report may have some analysts looking for an earlier FOMC rate hike. The GDP deflator however came out below expectations which suggest that inflationary pressures remain tame despite improving growth. Focus turns to central bank policy meetings in Australia Tuesday and Europe Thursday and Fridays US January unemployment report. The RBA is expected to hike rates 25 bps to 4%, the ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm payrolls may turn slightly positive. (more…)