01/31/2010 – Risk is off the cliff and the unwind has just begun

January 30, 2010

* Risk is off the cliff and the unwind has just begun
* 4Q earnings better, not good enough
* US GDP in perspective
* EUR weakness not over yet
* Fundamentals still bearish for oil
* Cable, the path of least resistance
* Key data and events to watch next week

Last week we expressed caution that the risk sell-off that has characterized the month of January was at a tipping point. That point has been broken to the downside and we are now expecting a further unwinding of long risk positions, which should see stocks, commodities and the JPY-crosses (EUR/JPY, AUD/JPY, etc) extend recent declines more aggressively. The USD is likely to be the primary beneficiary of a further risk sell-off, gaining ground on both better US data and on safe haven appeal as risk aversion increases.

The fundamental backdrop remains the same as over the past few weeks–China enacting measures to slow its economy, undermining global growth outlooks; reduced expectations over the strength of the global rebound; and heightened credit/fiscal concerns in Europe (Greece-more below), the UK, and elsewhere–but we think long-risk positioning is now likely to exert a stronger influence. Long positions in gold, oil and other commodities continue to dominate, and we have seen only small reductions in the face of recent weakness, suggesting the exodus is yet to come. Numerous stock market analysts are pointing to January as a bearish reversal month after a nine-month uptrend, and we would note that the S&P 500 closed just barely below its daily Ichimoku cloud at 1074.82. Gold prices managed to hang on above the weekly Kijun line at 1078.45, but the daily picture looks more ominous, with a downside crossover of the Tenkan below the Kijun with price below the cloud, constituting a strong sell signal. We prefer to sell bounces in the commodity space, rather than chasing this move lower. Full text »

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Is the Jobs Situation Really Looking Better?

January 29, 2010

Looking at U.S. dollar support in currency trading

Economic data is very important to forex trading, since it provides insight into how much support a currency has. One country’s economy, in relation to another’s, can affect how those relative currencies interact on the FX market. And one economic indicator is the jobs market.

The labor market has been quite weak recently, and even the recent improvements have been reason for skepticism. The Fed appears ready to abandon some of its loose monetary policies, citing improved economic conditions and improvements (albeit small ones) in the jobs market. Additionally, the latest U.S. GDP figures are offering some hope for the economy.

GFT’s Kathy Lien explains in FX360 the reason that it is too soon to be overly optimistic about the jobs picture:

Meanwhile weekly jobless claims continued to fall. The number of people filing for unemployment benefits dropped from 478k to 470k. Continuing claims also declined from 4.659 million to 4.602 million. Given the recent layoff announcements by companies like Verizon, it is difficult to share the Fed’s optimism about the outlook for the U.S. economy. Even though the number of people receiving extended benefits also dropped, we are inclined to believe that this reflects the complete expiration of benefits for some Americans and not acquisition of new jobs.

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Is The Euro Zone Quietly Planning to Rescue Greece?

January 29, 2010

Euro down in forex trading on U.S. GDP

Even though the European Central Bank has stated publicly that it is not planning to stage a dramatic rescue of Greece’s economy, quietly euro zone leaders are contemplating their options. Greece is not so unimportant that the euro zone is ready to lose the country.

GFT’s Boris Schlossberg has information on a possible euro zone plan, and reports in FX360 on the options on the table for Greece:

Greece will not default. Please. In the euro area, the default does not exist," Mr. Almunia told Bloomberg TV. Asked if there was any possibility Greece would leave the euro zone he said: "no chance." Although Mr. Almunia stated publicly that there was no special European plan for Greece, privately European monetary and fiscal officials appear to be moving towards a consensus for some type of a rescue package for the Greek economy. Greek GDP comprises only 3% of total EZ output, but officials fear that the political cost of Greece’s exit from the European monetary union would be far greater than the economic numbers suggest. Officials worry that a default in Greek debt could trigger a domino effect for the possible exit of other southern European nations facing similar fiscal deficit problems.

The euro is already weakened in forex trading due to issues surrounding Greece, Portugal and other euro zone countries. The fact that U.S. GDP came in much higher than expected is not helping matters much, and the euro has now sunk through the 1.4000 mark and is struggling to find support at 1.3900.

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London Session – January 29, 2010 6:19 AM

January 29, 2010

  Full text »

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Asia Session – January 29, 2010 1:38 AM

January 29, 2010

Today’s session could once again be dissected into two distinct parts, the risk adverse morning session, and the afternoon session where risk returned to the FX markets. With a trove of factors keeping traders on edge, including the continued troubles in Greece, falling equities, and fear over possible US bank regulations, risk aversion was a driving factor of the dollar and yen strength early in the day. EUR/USD made a six month low of near 1.3912, and EUR/JPY touched a low of 124.80 which represented a nine month low for that particular pair. AUD/USD dipped below the 0.8890 level on the dollar strength and the leek of a research report calling for the RBA to pause its future rate hikes. Full text »

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New York Session – January 28, 2010 5:53 PM

January 28, 2010

The US dollar was better bid in the NY session on the back of constructive economic data and the positive resolution to the Bernanke drama. US durable goods saw a weaker than expected headline print but the details of the report showed the “core” number jumping a higher than expected 1.3% in December on the heels of a more than 3% increase the prior month. Initial jobless claims were a touch worse at 470K, but down from the prior week nonetheless and in line with a gradual improvement in the employment picture. In aggregate, the data were positive for the US dollar and confirmed an economy on relatively better footing than others in the G-10. Full text »

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State of the Union Boosts Risk Trade in Currency Trading

January 28, 2010

Euro sees small boost in forex trading

The risk trade is seeing a bit of a comeback today in currency trading on the FX market. Last night, President Barack Obama delivered his first State of the Union Address and response was generally positive. As a result, risk currencies are gaining in forex trading. 

GFT’s Boris Schlossberg reports in FX360 on the reaction to the State of the Union Address:

Instant reaction to Mr. Obama’s message was overwhelmingly positive with CBS news poll showing 83% of the audience in agreement with his policy objectives. The State of the Union speech also appears to have boosted investor confidence. By focusing primarily on economic growth, President Obama spurred risk appetite in capital markets sending equities, commodities and high beta FX higher in early morning European trade.

Even the euro benefited from a bit of a bounce in forex trading. Confidence in the euro zone has been improving, but the euro still struggles. EUR/USD is still lower today, but it is not as low as was even earlier in the session.

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Confidence Improves in the Euro Zone

January 28, 2010

Euro still struggling in forex trading

Confidence is improving in the euro zone, according to the latest measures. This comes even though unemployment remains a problem in the region. However, it appears that members of the euro zone are becoming more confident in recovery, and that employment will eventually have to follow the rest of the indicators.

Also helping confidence in the euro zone is the fact that confidence is slowly returning in the U.S. Recent consumer confidence numbers showed improvement, and last night’s State of the Union Address from President Barack Obama is helping matters. On top of this, there are indications that the Fed may begin tightening monetary policy in order to combat possible inflation.

All of this points to a possible recovery in the euro zone as well. However, the euro still struggles in forex trading, unable to overcome some of the weakness seen in recent weeks.

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Is The Fed Ready to Abandon Loose Monetary Policy?

January 28, 2010

Interest rate hikes could come sooner than we think

Interest rate hikes could come sooner than we think, especially if the plans laid out by President Barack Obama in last night’s State of the Union Address actually pan out. Obama offered a plan to increase employment by offering tax breaks to businesses, as well as laying out positions on other matters of economic interest.

The State of the Union Address comes on the heels of a monetary policy meeting from the Fed, in which one member of the board dissented, reports FX Street:

Fed member Hoenig dissented in the vote; as he believed “that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted”.

This is an interesting turn of events that indicates that, perhaps, the Fed is going to start moving away from loose monetary policy. While this is unlikely to happen in the immediate future, if Obama’s plans work out and economic growth gets moving, we could see higher interest rates by the middle to end of 2010.

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London Session – January 28, 2010 6:23 AM

January 28, 2010

The bounce in stock market indices suggest that risk appetite is finally making a comeback.  Obama’s State of the Union address focused clearly on the issue of job creation, the lack of any firm detail on his banking proposals and his statement that he was not out to punish the banks overnight offered sufficient encouragement to the markets to extend the better mood.  Unsurprisingly the JPY is the biggest loser of the session, giving up gains across the board.  USD/JPY, however, has met with good resistance at 90.50.  In Asian hours the EUR pushed higher vs the USD in line with the improvement in risk appetite.  That said European investors have remained cautious on the EUR on the view that all is far from well in Greece.  EUR/USD was knocked off its morning high of USD1.4050 early in London session and has been trading lower into the US open.  Full text »

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