FOREX TRADING

HIGHLIGHTS OF THE WEEK

• The U.S. economy scrapped 131K non-farm jobs in July.
• If it continues to create jobs at the speed it has showed since the labor market bottomed in December 2009, it would take roughly seven years to fully absorb the 8.4 million jobs lost to the recession.
• A research paper written by Federal Reserve FOMC member James Bullard reignited the debate on the prospects of further Quantitative Easing.
• Following six months of strong gains, Canadian employment fell by 9,300 in July, and the unemployment rate inched up to 8.0%, from 7.9% in the prior month. The majority of the jobs lost were in full-time positions (-139,000) where almost half the decline was in education services.
• Canadian Building permits rose to 212,000 units in June, up from 208,500 units in May. Despite the slight uptick, building permits are below levels seen at the end of 2009, indicating a continued drop in construction activity.
• This week we got a preview into July’s existing home sales for major Canadian markets – where sales fell well below the record levels from a year ago.

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The deficit monster continues to tear through Europe, as today we see that the budget deficit in the United Kingdom rallied the most which meant that the annual budget widened the most since World War II as a result of lower tax receipts while retail sales tumbled.

Starting of with retail sales excluding auto fuel for March worsened to 0.2% from the revised prior reading of 2.0% from 1.6% which is lower than the projected 0.5%. On the year retail sales slipped to 4.0% from the revised prior reading of 5.0% from 5.4%.

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The dollar traded lower across the board as increased risk-appetite helped the Loonie extend gains to the 0.9956 mark and the euro climb to 1.3677. The Nasdaq led today’s gains, trading higher by nearly 1.3% while the Dow Jones and S&P 500 edged up by around 0.8%. Crude oil bounced by around 2.4% to trade above the $86-mark on Wednesday as EIA inventory data released earlier today posted an unexpected draw on the week with crude supplies decreasing by 2.2 million barrels.

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• USD: Lower, retail sales beat expectations, inflation remains subdued, inventories rise
• JPY: Higher, improving risk sentiment, BOJ to maintain easy policy as the economy improves
• EUR: Higher, industrial output rises, Moody’s warns of a possible downgrade of Greek debt
• GBP: Higher, campaign promises to reduce the UK budget deficit
• CAD and AUD: AUD & CAD higher, equity and commodity markets rally, revaluation of the SGD

Overview

The USD traded lower Wednesday pressured by improving risk appetite and in reaction to report that Singapore has revalued the SGD. Improvement in risk appetite is attributed to firmer equity market trade sparked by report of better than expected earnings at Intel and J.P. Morgan Chase and strong US retail sales data. The revaluation of the SGD confirms improving economic outlook in Asia and that the impact of the global financial crisis has passed. EUR underperformed with gains limited by a statement from Moody’s that there is greater than 50% chance of a Greek rating cut in the next 12 to 18 months. GBP traded higher supported campaign promises to reduce the UK deficit. Commodity currencies traded higher supported by firmer equity markets and in reaction to spillover from revaluation of the SGD. USD traded lower despite speculation that the Fed may be moving closer to changing its policy guidance and dropping the "extended period" language from its policy statement. The Medley group suggests that the Fed may soon change its policy guidance and the Fed’s discount minutes suggest that some members seek 25bps hike in the discount rate. In his prepared statement before the Congressional Economic Committee Fed chairman Bernanke made no reference to the "extended period" language. The USD traded to the days lows after Bernanke’s testimony as he gave no indication the Fed is planning a change in it "extended period" language. Bernanke said that US growth is still restrained. US economic data was mixed with retail sales rising much more than expected and core CPI flat. Business inventories rose to the highest level since July as business’ restock to meet improving demand. Today’s US economic data is a mixed bag for Fed policy outlook. The strengthening of the retail sales and inventory demand may encourage Fed rate hike speculation but with inflationary pressures subdued the Fed can maintain low yields for long time. Focus turns to Thursday’s release of US jobless claims and manufacturing and industrial activity.

Today’s US data:

March CPI came in as expected at 0.1% .The core inflation rate was unchanged at 0.0%. March retail sales rose by 1.6%, a rise of 1.2% was expected. Ex. autos retail sales rose by 0.6%. Business inventories for February came in at 0.5%, a rise of 0.3% was expected.

Upcoming US data:

On April 15th April Empire Manufacturing Index will be released expected at 23.75 compared to 22.78 last month along with initial jobless claims for the week ending 04/10 expected and 451k compared to 460k last week. March industrial production, capacity utilization and the April Philly Fed will also be released on April 15th. Industrial production is expected to rise by 0.4% compared to 0.1% last month. Capacity utilization is expected at 73.1 compared to 72.7 last month and the Philly Fed is expected at 19 compared 18 in March. On April 16th March housing starts, building permits, and April University of Michigan consumer sentiment will be released. March housing starts are expected at 590k compared to 575k last month with building permits expected at 620k compared to 612k last month. Michigan consumer sentiment is expected at 74 compared to 73.6 last month.

JPY

JPY initially traded lower pressured by improving risk appetite as equity markets rally and by dovish comments from BOJ Governor Shirakawa. JPY turned higher for the day as Bernanke made no reference to "extended period" language in hiss testimony before Congress today Equity markets rallied in reaction strong earnings reports at a number of major US companies including Intel and J.P. Morgan Chase and better than expected US retail sales. Shirakawa says that the BOJ will maintain easy policy as the economy improves. Shirakawa says that the Japanese economy is improving due to the recovery in global trade. There are reports that the BOJ may revise up its CPI forecast for 2011/ 2012 in April 30th BOJ economic outlook release. Today’s report of better than expected US earnings and retail sales fuels speculation that the Fed may soon change its policy guidance. A change in the Fed’s policy guidance could set the stage for an earlier Fed rate hike. With the BOJ committed to maintaining easy monetary policy yield differential is moving in favor of the USD. Bloomberg carried a report which says that analysts at SBI Liquidity Market see the possibility the USD may rise to 105 JPY as the Fed increases interest rates. JPY downside was limited by report that Singapore revalued the SGD. The SGD revaluation may encourage speculation that China may soon revalue the Yuan. In theory revaluation of Asian currencies will make Japanese exports more competitive and may increase demand for the JPY.

On April 15th revised February industrial output will be released expected to fall by 0.9% compared to a 2.7% rise in the original report.

Key technical levels to watch in USD/JPY include support at 92.57 the April 13th low with resistance at 94.27 the April 7th high.

EUR

EUR traded higher but underperformed despite report of improving EU industrial output and risk appetite. EU February industrial output rose by 0.9%, a 0.1% rise was expected. EUR gains were limited by ongoing concern about sovereign debt risks in southern Europe. Moody’s says there is a greater than 50% chance of a Greek sovereign debt rating cut in the next 12 to 18 months. Focus is shifting to fiscal risks in Portugal. EU officials said that there is a risk that Portugal’s deficit could reach 90% of GDP by 2013 and that Portugal must take additional actions to bring its deficit back in line with the EU stability pact. In addition, German press reports that a number of German professors plan to protest against the Greek rescue package in the constitutional court. Despite today’s report of stronger EU industrial output the ECB is expected to maintain accommodative policy to offset the risk to the EU recovery from reduced deficit spending in peripheral European nations. Yield differential is moving in favor of the USD as the ECB is seen on hold for the remainder of 2010 and the Fed may be considering dropping its extended period language and shifting its policy giant guidance in preparation for an earlier rate hike. In his testimony before Congress Bernanke made no reference to a change in the Fed policy statement and the EUR rallied to the days high.

On April 14th EU industrial production will be released expected flat compared to a 1.7% rise last month. On April 16th EU March CPI will be released expected at 0.9% compared to 0.3% last month along with the February trade balance expected at -1bln compared to -8.9bln in January.

The technical outlook for the EUR is mixed as EUR holds above 1.3600. Expect EUR support at 1.3545 the April 13th low with resistance at 1.3692 the April 12th high.

GBP

GBP traded higher supported by improving risk appetite and campaign promises to reduce the UK deficit. Stronger earnings at Intel and J.P. Morgan, strong US retail sales and firmer equity markets helped to boost risk appetite. Bloomberg reports that promises by UK labor leader Brown and the conservative challenger Cameron to take action to reduce the record UK budget deficit may help to limit selling pressure of the GBP. The Bloomberg report however notes that neither party has detailed how they plan to tackle the UK budget deficit. The latest UK election polls suggest that the election will result in a hung parliament with neither party winning a majority. The UK election will be held on May 6th and the UK sovereign debt rating is at risk for a downgrade if the election results in a hung parliament and a hung parliament fail to take action to reduce the UK budget deficit. The head of the conservative party Cameron made reference to the speculative attacks against the Greek markets because of Greek fiscal troubles and he stated that his party will start earlier and go faster and further than the Labor Party to make needed budget cuts. In addition some analysts indicate that even if the election ends in hung parliament it may not necessarily derail budget cuts as coalition of parties could work together to reduce UK spending. UK election uncertainty contributes to uncertainty about the outlook for BOE policy. If the UK election results in more aggressive action to reduce spending the BOE may increase accommodation to offset the economic drag of reduced government spending. Recent UK economic data suggest that the UK economy is improving and inflation rising. Tuesday the UK reported a 9.5% jump in exports and 0.9% rise in house prices. Earlier in the week the UK reported a sharp jump in input prices. The improvement in the UK economic outlook and rising inflation may encourage the BOE to end its asset purchases and move towards normalization of monetary policy.

The technical outlook for GBP is positive as GBP holds above 1.5400. Expect near-term support at 1.5335 the April 13th low with resistance at 1.5575 the February 23rd high.

CAD

CAD traded higher supported by improving risk appetite, firmer equity markets and spillover from the revaluation of the SGD. The improvement in risk appetite is attributed to better US earnings reports and strong US retail sales data. Firmer equity market trade is fueled by optimism about the global recovery and encourages demand for growth led currencies like the CAD. The revaluation of the Singapore dollar reflects an upgrade of growth estimates in Singapore. The upgrade of growth estimates in Singapore point to stronger Asian growth. Stronger Asian growth is positive for commodity demand and Canadian exports. CAD was also supported by gains in cross trade to the EUR with EUR pressured by concern about a possible downgrade of the Greek debt rating and fear that strikes in Greece may derail the Greek government’s effort to reduce its deficit. There were no major Canadian economic reports released in today’s trade. Tuesday Canada reported a surge in its trade surplus as imports and export sales rise. The trade balance report confirms improving outlook for the Canadian economy. Monday Canada reported improvement in housing starts. The improvement in Canada’s trade surplus and housing data may increase speculation that the BOC may move the time table forward for tightening of monetary policy. Last month BOC Governor Carney said that he was open to consideration of a rate hike as early as June 1st. The BOC pledged to maintain record low yields until June as long as inflation remains in check.

On April 16th February manufacturing shipments will be released expected at 1.6% compared to 2.4% last month.

The technical outlook for CAD is mixed as USD/CAD holds above1.0000. Look for near-term support at 0.9870 the May 30th low with resistance at 1.0105 the April 8th high.

AUD

AUD traded higher supported by SGD revaluation and improving risk appetite as equity markets firm. The revaluation of the SGD reflects stronger growth outlook in Singapore and the revaluation points to stronger Asian growth. Australia is a major exporter to Asia and improved outlook for Asian growth is a positive for the Australian economy. Stronger than expected US retail sales and better than expected earnings at Intel and J.P. Morgan contributed to improving risk appetite fueling demand for growth led currencies like the AUD. AUD was also supported by a surge in metals prices. There was little reaction to report that Australia’s April Westpac consumer confidence index declined by 1% to 116.1 or speculation that the Fed may soon change its policy guidance. Tuesday Australia reported that its business conditions index rose to the highest level since January 2008. Despite the improvement in Australia’s business conditions index recent Australian economic data as been mixed. Monday Australia reported that housing finance came in weaker than expected. AUD is trading a 19 month high versus the USD despite uncertainty about RBA policy outlook. The RBA’s Debelle said interest rates are close to normal levels. Debelle’s comments may dampen RBA rate hike speculation. Recent AUD strength has been partly a reflection of RBA rate hikes and RBA rate hike speculation. Last week the RBA raised interest rates 25bps to 4.25% and left the door open for future rate hikes. Debelle’s comments and mixed Australian economic data suggest that the RBA may elect to pause in its rate hike cycle. RBA policy uncertainty has been offset by optimism about the global recovery and improving risk sentiment.

The technical outlook for the AUD is positive as the AUD rallies above 9300. Expect AUD support at 9273 the April 14h low with resistance at 9389 the April 12th high.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.

Singapore dollar revaluation

The government of Singapore decided on a modest revaluation of the Singapore dollar, which jumped a little over 1% vs. the US dollar and therefore to the strongest level since before the crisis hit in 2008. The move is seen as a response to stronger inflation readings in Asia as China’s commodity demand has seen prices for key commodities rise as much as 70% over the last year. The magnitude of the "revaluation" was not particularly great, but the Singapore authorities are clearly not against further appreciation of their currency as growth is expected to surge past previous expectations. The Monetary Authority of Singapore said it would seek a "modest and gradual appreciation" of the SGD against a basket of currencies. This pushed the USD a bit weaker in Asia, and commodity currencies a bit higher (is this a preview of the kneejerk reaction that awaits if the Chinese try to revalue?) but later the EURUSD was back lower, and the market must also consider the argument of whether less pressure on reserve diversification from trying to maintain currency pegs or managed floats is a Euro negative.

Risk rally

Of course, commodity currencies are stronger not just on the Singapore news, but also because risk appetite remains robust after the market liked what it saw from the key chip company Intel yesterday after the US equity markets closed. Sales, profits and guidance were all positive and Nasdaq 100 futures are trading at a new high for the cycle, having rallied almost 100 percent now from their lowest levels after the crisis, and even more remarkably, now only a little over 10% from the 2007 highs. Crude oil also survived a test of support below 84 dollars a barrel and Gold rebounded from its two-day sell-off. The kiwi was a reluctant participant in the commodity currency rally, since its retail sales numbers saw an ugly dip in February, against expectations for reasonably strong expansion.

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The US retail sales and CPI releases will attract attention on Wednesday. The data overall should provide some dollar support on yield expectations with the potential for stronger than expected data. The dollar will need a signal from Fed Chief Bernanke over a potential policy and language shift in order to secure strong buying support, especially as defensive dollar demand will remain weaker for now. There will be some speculation over a hint over a further discount rate hike. Bernanke has usually disappointed such market expectations and the best strategy looks to be to buy USD/JPY ahead of the US data and aim to run with a tight stop loss into Bernanke’s testimony.

There was significant Euro support above the 1.3550 level on Tuesday as there was a reluctance to sell the currency aggressively given the potential for a further squeeze on short positions. (more…)

Good morning from beautiful Hamburg and welcome to the Varengold Daily FX Report. After the first two days of the week were driven by the news related to the rescue package for Greece today some important economic data releases moving into the market focus. The U.S. reports will show the latest consumer confidence and retail sales which may allow a conclusion to the rate decision of the Federal Reserve next week. However, we wish you a successful trading day.

Markets review

The JPY declined against a basket of major currencies on concern a report may show that the U.S. retail sales rose the most in four months. The JPY fell versus the USD from the strongest level in two weeks and the EUR/JPY climbed to 127.45 at its highest level as signs the global economy recovering boosted demand for higher-yielding assets. The GBP increased versus the EUR as a report showed that the U.K. exports surged in February and house values strengthened. Exports rose about 9.5 percent and helped to cut the trade deficit to 6.2bln pounds, the least since June 2006. The GBP also rose against the USD and climbed near to the strongest level since February. In contrast the U.S. trade deficit widened, the gap increased 7.4 percent to $39.7bln from a revised $37bln deficit in January, the Commerce Department said on Tuesday in Washington. The Federal Reserve Bank of Richmond President Jeffrey Lacker said that the U.S. economy will probably expand at a moderate pace for the rest of this year as spending by consumers and businesses picks up. (more…)

CPI

US March CPI will be released on Wednesday, April 14th at 8:30 AM EST. The CPI report is important to the Fed policy outlook. The FOMC expects inflationary pressures will remain subdued because of significant slack in the US economy. The subdued level of inflation will allow the Fed to maintain low yields for longer time despite the recent pick up in the US economy. The longer US interest rates remain at record low levels the less risk that the US economy will experience a double dip recession. Keeping rates low may also increase the risk of inflation. Hoenig is the lone dissenting voice at the FOMC. Hoenig wants the Fed to drop its ‘extended period’ language and replace it with rates will remain low for ‘some time’. According to Hoenig this change in Fed policy language will afford the Fed more flexibility on monetary policy and avoid the risk that if yields are kept low for too long inflation pressures may accelerate. Tuesday Reuters carried a report that an influential think tank believes that the Fed will soon change its policy guidance. Despite the fact that the US economy is showing signs of improvement inflationary pressures remain subdued. A change in the Fed’s policy guidance is less likely if inflationary pressures remain subdued. (more…)

• USD: Mixed, trade deficit widened more than expected, import prices rise less than expected
• JPY: Flat, BOJ may revise up its CPI forecast, corporate goods prices post a modest rise
• EUR: Lower, strong demand for today’s Greek T- bill auction
• GBP: Higher, trade deficit narrows as exports surge, retail sales and house prices rise
• CAD and AUD: AUD & CAD lower, Australia’s business conditions rise, Canada’s trade surplus improves

Overview

The USD traded mixed Tuesday with downside limited by report that the Fed may change its policy guidance. GBP traded higher supported by report of a narrowing of the UK trade deficit and a surge in UK exports. GBP was also supported by report of stronger UK retail sales, rising house prices and a pledge from the Conservative party to take quick action to reduce the UK deficit. EUR traded mixed with downside limited by strong demand for today’s Greek T-bill auction. The Greek bill auction was oversubscribed which is seen as an endorsement of yesterdays announcement of an IMF/EU rescue package for Greece. AUD opened higher supported by report that Australia’s March NAB business conditions rose to their highest level since January 2008. CAD traded mixed initially supported by report of a larger than expected improvement in Canada’s trade surplus. JPY traded higher supported by report that the BOJ may revise up its CPI forecast. US economic data was mixed. The US trade balance widened by slightly more than expected and import prices rose by slightly less than expected. Excluding oil prices import prices declined. US bond yields and the USD drifted lower after the release of the import price report. US trade gap with China held to its lowest level since March 2009. The narrowing of the trade gap with China may help to reduce some of the tensions over the value of the Yuan. USD downside was limited by weaker equity markets and weaker commodity prices. USD turned higher for the day in reaction to a Reuters report that an influential US think tank says the Fed may soon change its policy guidance. Focus turns to Wednesday’s release of US CPI and retail sales. (more…)

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 Off Lows, Retail Sales Beat Expectations

• USD: Lower, Yellen appointed to the Fed, retail sales post unexpected rise, consumer sentiment dips
• JPY: Lower, BOJ may double QE, threat of intervention
• EUR: Higher, Greek debt fears fade, talk of German/French Greek rescue package, industrial output surged
• GBP: Higher, house prices jump, Conservatives expand lead in the polls
• CAD and AUD: AUD mixed & CAD higher, Canada’s employment growth beats expectations

Overview

The USD traded at a three week low Friday pressured by announcement that President Obama will nominate Janet Yellen as vice chair of the Federal Reserve. Yellen is a policy dove and her appointment will likely mean that the Fed will keep interest rates low for much of 2010. USD was also pressured by improving risk appetite as global equity markets rally. The EUR traded higher supported by diminishing concern about the Greek debt crisis and in reaction to report that Germany and France may be considering a $55bln rescue plan for Greece. GBP traded higher supported by report of a jump in UK house prices. Commodity currencies traded higher supported by stronger equity markets and improving risk sentiment with CAD supported by report of stronger than expected Canadian employment and BOC rate hike speculation. AUD gains were limited by speculation the RBA will pause in April. JPY traded lower pressured by report that the BOJ may double the size of its quantitative ease to ¥20trln and in reaction to increasing threat of BOJ intervention. US economic data was mixed with retail sales reported stronger than expected, Michigan consumer confidence posted a slight drop. Business inventories were unchanged. USD came off its lows as US equities turned lower after the release of today’s data. Focus turns to next weeks Fed policy meeting on March 16th. No Fed policy change is expected. Investors will be looking to see whether the Fed makes any changes in its policy statement in regard to the language of "extended period" for low rates.

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The dollar is under pressure to end the week after words from a powerful investment house jolted investors expecting further decimation of the single European currency into a spin by warning that the next 10 cents for the euro is more likely on the upside than the downside. An unexpected jump in retail sales has provided a lifeline to an ailing dollar on Friday morning, but in my mind the die has been cast in that the rationale for remaining short the euro has just become more perilous than ever.

U.S. Dollar – Despite predictions for a February slide in U.S. retail sales, the out turn was a healthy 0.3% rise as electronics sales jumped. Ex-autos, sales rose 0.8% proving that winter blizzards and car recalls failed to dampen the spirits of consumers. A smaller than forecast decline in job losses last week may have also played a role, while one could equally argue that rising confidence among newly hired workers bodes well for the March employment report amid a spring thaw. We’ll also get the latest reading for consumer confidence later today from the University of Michigan in its sentiment survey, which is predicted to rise from 73.6 to 74.0.

The dollar index is lower after Goldman Sachs predicted that dollar strength is tomorrow’s story, but that its performance against the euro is more likely to result in a medium term revisit to $1.45 so long as it remains above $1.35. The dollar also weakened on viable rumors that President Obama was about to nominate San Francisco dove Janet Yellen as vice chairman at the Federal Reserve. She recently stated that if she could vote for negative rates, indeed she would.

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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 Higher, Chinese Rate Hike Sparks Risk Aversion

• USD: Higher, China hikes reserve rates, stocks and commodities decline
• JPY: Lower, Nikkei closes higher before the China rate announcement
• EUR: Lower, doubt about the Greek rescue, EU growth slows
• GBP: Lower, downside limited by gains in cross to EUR
• CAD and AUD: AUD & CAD lower, pressured by spike in risk aversion, China rate hike

Overview

USD traded at a seven-month high Friday supported by a spike in risk aversion sparked by news that China’s central bank raised its reserve ratio by 0.5% and in reaction to doubt about a Greek rescue. The Chinese reserve ratio hike was a surprise and the second rate hike from China this year. Tightening of monetary policy in China sparked selling of equity and commodity markets and generates fear about the global recovery. There are conflicting reports from Europe about whether or not there will be a rescue package for Greece with the latest report that German Chancellor Merkel has rejected a call for Germany to fund the Greek rescue package. Other EU sources indicate that it is unlikely that the EU will add additional measures to support Greece at this time. The EUR was also pressured by report of slowing growth as EU industrial output falls more than expected and Q4 GDP posted a small rise. GBP traded lower but remains range bound with downside limited by gains in cross to the EUR. CHF traded lower pressured by rumors of SNB intervention. Commodity currencies traded lower pressured by a spike in risk aversion and concern that the Chinese rate hike will hurt the global recovery. US economic data was mixed with retail sales slightly stronger than expected and Michigan consume sentiment came in slightly lower than expected. Business inventories posted an unexpected drop. (more…)

USD Higher, Jobs and Durable Goods Data Disappoints

• USD: Higher, jobless claims declined less than expected, durable goods rise less than expected
• JPY: Mixed, pressured by improving risk appetite, retail sales declined more than expected
• EUR: Lower, Greek fiscal concern, rumors of Greek bailout denied, business confidence at a 10 month high
• GBP: Mixed, Chancellor Darling says UK plans to halve its deficit over the next four years
• CAD and AUD: AUD & CAD higher, Australia may speed up spending cuts, hawkish RBNZ

Overview

USD, JPY and EUR traded lower with GBP and commodity currencies trading higher Thursday. The decline in USD and JPY is attributed to improving risk sentiment sparked by President Obama’s proposal in the State of the Union address to reduce taxes on businesses to boost growth and in reaction to the FOMC January statement which says the US economy is in recovery. The FOMC also indicated that it plans to begin withdrawal of extraordinary stimulus measures. EUR was pressured by concern about sovereign debt risk in Greece as the Greek EU ten year bond spread is at its widest level since Greece adopted the EUR in 2001 and China’s central bank says the nation should not buy Greece’s debt. GBP continued to outperform and rallied to a five month high versus the EUR supported by comments from UK Chancellor Darling that the UK has the most aggressive deficit reduction plan amongst the industrialized nations. Commodity currencies traded higher tracking improving risk appetite, firmer equity market trade and in reaction to hawkish comments from the RBNZ. RBNZ governor says that the central bank will begin to withdraw stimulus mid-year. US economic data was mixed. Jobless claims declined by less than expected and durable goods posted a smaller than expected rise. These reports may generate concern about the strength of the US recovery and raise questions about the FOMC’s optimism about the US economic recovery. USD edged higher after the release of these reports as equity markets traded lower. The trade awaits news on Fed Chairman Bernanke’s nomination and focus turns to Friday’s release of US advanced Q4 GDP. (more…)