FOREX TRADING

U.S. Review

The Fourth Quarter Ended on a Weak Note

• We raised our estimate of fourth quarter real GDP growth to a 5.6 percent pace based on recent data on business inventories and international trade.
• December economic data continue to come in below expectations. Retail sales declined 0.2 percent and sales excluding motor vehicles fell 0.3 percent.
• The Fed’s Beige Book and the National Federation of Independent Business survey showed conditions continuing to deteriorate across much of the country.
• Consumer prices rose 0.1 percent in December.

Caution Remains the Buzz Word

Businesses and consumers remain exceptionally cautious and will not likely be phased by a blowout real GDP number for the fourth quarter. We have recently raised our estimate for fourth quarter real GDP growth to a 5.6 percent annual rate. A substantial slowdown in the rate of inventory liquidations will account for the overwhelming majority of that gain. Final demand remains exceptionally weak and, while the worst of the layoffs appear to have passed, there is little sign hiring is set to pick up. Three major reports, the National Federation of Independent Businesses (NFIB) Small Business Optimism Index, the BLS Job Openings and Labor Turnover (JOLTS) report, and the Fed’s Beige Book reiterated this point this past week.

The NFIB Small Business Optimism Index fell 0.3 points to 88.0 in December. Plans to hire increased modestly but remain in negative territory, rising to -2 percent from -3 percent. In addition, fewer businesses said they were able to raise prices and fewer planned to boost inventories. The one positive aspect of the report is the number of firms stating they planned to boost capital spending rose slightly, climbing 2 points to 18 percent.

The lack of any clear sign that hiring is picking up is particularly discouraging following last Friday’s weak employment report. Job openings in the November JOLTS report fell back to their series low of 1.8 percent. The number of hires and number of total separations both increased in November but total separations still outnumber hires, indicating employment declined on a net basis. There has been a slight improvement in hiring over the past five months. The number of people hired each month peaked in July 2006 and fell by 1.7 million by June of 2009. Hiring has since increased by 257,000 per month.

Total separations, which include quits, layoffs and retirements, rose in November but have generally been trending lower. The combination of fewer hires and fewer separations means that businesses are reducing their workforces more through quits and retirements today than by layoffs. The data also provided the missing link as to why the drop in weekly first-time unemployment claims has not translated into a net increase in nonfarm payrolls.
The Fed’s Beige Book also noted weaker economic conditions and relatively few districts had anything positive to say about the employment outlook. Most districts said layoffs continued but most also noted there has been some reduction in the number and size of cutbacks and that more firms are opting for hiring freezes or reducing hours instead of making large-scale cuts.

The other major disappointment this week was November’s retail sales report, which showed a 0.3 percent drop for December. Earlier reports had indicated that chain store sales were up for the month, so expectations for the Commerce Department’s retail sales figures were high. The Commerce Department sales figures are adjusted for both seasonal and holiday day changes and this year’s earlier Thanksgiving means that more holiday shopping took place in November and sales were thus pulled forward. On a net basis, holiday sales still show modest gains from last year.

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Inflationary Levels Subdued Over the Short Term, Rising on the Long Term

The cost of living in the U.S continues to rise on the long term whereas the yearly Consumer Price Index reported today about the month of December showed rising inflationary levels on the long term while on the short term it is still below the Fed’s target rate.

The Commerce Department report, Consumer Price index inclined in the month of December by 0.1% compared with the previous rise of 0.4% while markets were expecting 0.2%, while on the yearly scale the index rose by 2.7% compared with the previous 1.8% and the expected 2.8%.

As for the Core CPI; which excludes food and energy prices, the index rose during the same month by 0.1% compared with the previous flat reading and the expected 0.1%, while on the yearly scale the Core CPI dipped slightly to 1.7% which came in below the previous and the expected 1.8%.

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U.S. Dollar Trading (USD) weak Retail Sales left the dollar offered against most of the majors especially as the stock market shrugged off the data and continued to track higher. December Retail Sales were at -0.3% vs. 0.5% previously. Weekly Jobless Claims were at 444k vs. 437k forecast. DJIA +29 points closing at 10710, S&P +2 points closing at 1148 and NASDAQ +8 points closing at 2316. Looking ahead, December Core CPI is forecast at 0.1% vs. 0.0% previously. Also released, December Industrial Output forecast at 0.6% vs. 0.8% previously.

The Euro (EUR) remained inside the defined weekly trading range as the ECB held rates at 1.0% and President Trichet was quite Dovish in his outlook for the Eurozone. This countered the weak USD and the pair ended at the key 1.4500 level. Overall the EUR/USD traded with a low of 1.4445 and a high of 1.4558 before closing at 1.4500. Looking ahead, December EU inflation is forecast at 0.3% vs. 0.1% m/m.

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USD Gains Versus EUR, JPY Rallies on Weak US Retail Sales

• USD: Mixed, jobless claims up, retail sales down, business inventories rise
• JPY: Higher, tracking risk sentiment, machinery orders fall sharply
• EUR: Lower, Trichet calls for strong USD, EU Greek bond spreads continue to widen
• GBP: Higher, Moody’s expressed confidence UK will tackle its deficit, BOE may pause its bond buy program
• CAD and AUD: AUD & CAD higher, Australia’s employment report beats expectations

Overview

USD traded mixed Thursday with the main focus on report of improving Australian employment growth and Fed policy outlook. AUD traded higher supported by report of better than expected Australian employment growth. Australia’s employment report helped to boost demand for Asian equities and risk appetite. Growth led currencies continue to outperform. The Fed’s Dudley said that short-term interest rates in the US may rise in six months or may not rise for as long as two more years depending on the strength of the recovery and employment outlook. The ECB left rate policy unchanged as expected and the EUR traded lower pressured by ongoing concern about sovereign debt risk in Greece. In the press conference following ECB policy meeting ECB President Trichet said current rates are appropriate, price developments are expected to be subdued, data suggest improvement in economic activity, EU economy to grow at a moderate pace in 2010, unemployment expected to rise somewhat further, risk to inflation outlook broadly balanced and the ECB will keep phasing out unneeded policy measures. (more…)

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…)

Retail Sales Rise Better than Forecasts as Auto Sales Rise, While Manufacturing Activity Ease in November!

Retail sales rose in October amid a huge increase in auto sales, though the “cash for clunkers” program has ended, as the program helped in boosting auto sales indeed, yet still with unemployment levels standing at a 26-year high we should still expect consumer spending to suffer, meanwhile activity in the manufacturing sector seems to have eased slightly, though manufacturing activity is still expanding.

Retail sales increased in October by 1.4% more than median estimates of 0.9% and following a prior revised drop of 2.3% back in September according to the U.S. Commerce Department, while retail sales that exclude autos rise by 0.2% down from the prior revised rise of 0.4% and below median estimates, and retail sales that excludes both autos and gas sales rose by 0.3% inline with the prior revised and median estimates as well.

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Dollar Weakens Late In The Session

Overall, the price action seen during the U.S. session was fairly muted despite numerous high level reports being released. The only pairs to make significant changes on the day were the cad, which strengthened by 0.79 percent, and the pound which weakened by 0.55 percent. Manufacturing in the New York region has increased during September while retail sales surged during August, exceeding analysts’ initial forecasts.

The euro (Eur/Usd 1.4663) bumbled along the neutral pivot point at 1.4595 for most of the U.S. session. However, the dollar started to weaken near the middle of the session which pushed the euro above the recent ceiling at 1.4652 to test the R1 level at 1.4673. The pair was rejected shortly thereafter and began using the previous resistance at 1.4652 as support. (more…)

Retail Sales Increase on Cash for Clunkers, While Inflation Ease over a Slowing Pace!!!

Retail sales in the United States jumped in August by the most in three years due to a jump in auto sales, as consumers used the government’s “cash for clunkers” program, meanwhile inflation continued to show easing signs though the pace of drop eased noticeably compared with last year, as seemingly the recent rise in economic activity will prevent the economy from a disinflationary phase.

Retail sales increased in August by 2.7% more than estimates of 1.9% and following a revised 0.2% drop back in July, while retail sales that exclude autos increased by 1.1% more than estimates for a flat estimate following a 0.5% drop back in July, as auto sales increased by the most in 8 years. (more…)

Canadian dollar hikes sharply in early US session on the back of much stronger than anticipated retail sales from Canada. Headline sales arose 1.0% mom in June against anticipation of a -0.1% fall. Ex-auto sales also managed to rise 1.0% mom, much better than consensus of 0.1%. Also, crude oil firms up in early US session and is set to extend recent rally, which provides additional support to the Loonie. One thing to note is that Canadian dollar has regained some strength broadly since last week following the sharp rally in crude oil. For instance, the EUR/CAD’s recovery should have completed at 1.5695 after hitting 55 days EMA and the development dampens the case that choppy fall from 1.7499 has completed at 1.5183 in July. Instead, we are looking at the prospect of a new low below 1.5183 as the down trend resumes. (more…)

From trough to peak (March 10 – August 5), the Cable British Pound appreciated by a whopping 25%, its strongest performance in such a short period of time since 1985. The Pound has fallen mightily since then, and most factors point to a continued decline.

On nearly every front, the Pound is being buried under a mound of bad news. UK economy is presently one of the weakest in the world, particularly compared to other industrialized countries; on a quarterly basis, UK economy is contracting at the fastest rate in over 60 years. Forecasts for UK economic growth are commensurately dismal: “Median estimates in Bloomberg economist surveys see the U.S. shrinking 2.6 percent in 2009 and expanding 2.2 percent in 2010, compared with a 4.1 percent contraction followed by 0.9 percent growth in the U.K.” (more…)

Asia session trading saw Reserve Bank of Australia Governor Glenn Stevens use sharper rhetoric in discussing the sure thing of arising the overnight cash rate from “emergency” levels. This comes just hours before CPI data from half-way around the world, is expected to point toward deflation. Unexpected growth in the Euro-Zone, nevertheless, might derail this estimate and may cause inflation to actually publish in positive territory.

Key Overnight Developments

• RBA’s Stevens Conjures ‘Emergency’ Rate Increase Speculation
• New Zealand Retail Sales Unexpectedly Gain in June

• Some Bank of Japan Members Wanted to Extend Program (more…)

The British Pound is likely to look past an upswing in Retail Sales and a continued rebound in Home Loans data to fall in with trends in risk appetite as another round of key earnings reports crosses the wires in European hours. Japan’s trade surplus expanded for the third month in June as imports continued to tumble.

Key Overnight Developments

• Japanese Trade Surplus Grows as Imports Continue to Tumble
• Euro, British Pound Little Changed Despite Overnight Stock Gains

Critical Levels

The Euro tested below 1.42 and rebounded as high as 1.4243 but stands little changed ahead of the opening bell in Europe. The British Pound followed a similar dynamic, oscillating around the 1.6470 level.

Asia Session Highlights

Japan’s Merchandise Trade Balance surplus expanded for the third consecutive month, rising to 508 billion yen in June from 298.2 billion in May. We argued the likelihood of such an outcome in our Japanese Yen weekly forecast, noting that the abysmal job market will surely continue to weigh on imports. Indeed, inbound shipments tumbled -41.9% from a year before while exports shed -35.7%. More of the same is likely in the months ahead as unemployment continues to push higher: a survey of economists conducted by Bloomberg suggests the jobless rate surpassed 5% in the second quarter and will approach the 6% mark by the second half of 2010 while minutes from the last meeting of the Bank of Japan revealed policymakers expect consumption to remain weak as “the employment and income situation [is] likely to become increasingly severe”.

Euro Session: What to Expect

UK Retail Sales are set to swing back into positive territory in June, growing at an annualized rate of 2.1% after shrinking -1.6% in the year to May, the most in 17 years. A rebound in retail spending seems to bolster expectations from NIESR, a closely watched London-based think thank, that forecast the economy probably shrank just -0.4% in the second quarter, the smallest drop in a year. NIESR has argued that “the U.K. economy is now stagnating rather than continuing to contract at a sharp pace.” Notably, the apparent signs of stabilization may not translate into meaningful gains for the British Pound. Retail sales figures have exhibited extraordinary volatility since the beginning of this year: annualized receipts grew 2.6% in January, dropped -1.5% in February, then gained 0.9% and 2.7% in the following two months before plunging again in May. This suggests traders will be wary of taking even a sharp improvement at face value, waiting for a discernable trend to be established. Cues from the labor market seem to point to subdued retail activity for the time being, with the jobless rate to approach 9% by the end of next year for the first time since 1994, trimming disposable incomes and weighing on spending.

Separately, BBA Loans for House Purchases will probably continue to rebound in June, extending a move higher that began after the metric set a record low in November 2008. The metric closely tracks the GfK measure of consumer confidence; indeed, indeed, 24-month rolling studies show the two are 96.6% correlated. Consumer confidence rose to a 14-month high in June, suggesting the BBA report will follow.

On balance, risk trends are likely to remain as the primary driver of forex price action. A number of notable earnings releases are on tap in European hours: ABB Ltd, the world’s largest maker of electricity grids, and Cie. de Saint-Gobain SA, Europe’s top supplier of construction materials, are set to report that profits fell by a staggering 42% and 83% respectively in the second quarter. Credit Suisse, Switzerland’s largest bank by market value, may help support shares in the Financials sector with expectations calling for the second consecutive quarter of profits driven by trading revenue.

Written by Ilya Spivak, Currency Analyst
Article Source – British Pound to Look Past Retail Sales, Home Loans Data to Trade on Risk Appetite (Euro Open)