Unstable Forex Market... Hoping for some corrections soon

Market Speculation

Today is central bank day for Europe, with the ECB, BOE and Riksbank all on tap for rate decisions. The Riksbank brought their meeting forward by two weeks in order to chop rates at today's meeting, and for good reason: our models show that Sweden is one of the most rapidly decelerating economies in the developed world right now. Its exports are plummeting and its banking system is under siege from ill advised loans to especially Baltic countries. Baseline expectations are looking for a 100-bp cut to the rate.

Speculation is mounting that the BOE will chop by 150 basis points rather than the 100 bps baseline consensus. The ECB baseline is moving to 75, but if the ECB can surprise, then today would be the day to do it, considering the rapidly mounting horrors taking place in the economy. As a side note, it seems more than a touch silly to fret about the size of the cuts here. All major central banks are moving towards zero to 0.50% by mid next year anyway...

The setup for the US job report on Friday looks increasingly bleak, and we have a hard time understanding the apparent attempts to find optimism on equity markets, despite the old-fashioned wisdom that stocks like to climb a wall of worry. Yesterday's Non-manufacturing ISM was a record low for the 11 year history of the survey and far worse than expected. The news headlines are showing layoffs from every corner and the ADP number out yesterday was far worse than expected. Employment is a lagging indicator, but increasing unemployment also dangerously reinforces the power of the negative cycle, especially now that central banks efforts are geared toward damage control from deleveraging, as the game of economic stimulus by interest rate manipulation was over a long time ago. The employment fall out in the services sector after a weak Christmas shopping will yet another problem for the incoming Obama administration to tackle in the new year.

Upset China Economy

The US' Paulson is in China over the next couple of days for talks. PBOC chief Zhou was out trying to tell the world that US overconsumption was to blame for the crisis, but this is an absurd statement, as US overconsumption was simply a product of the global imbalances that were developing for years and were to a great degree enabled by China's suppression of its currency and buying of US treasuries which kept US interest rates artificially low. The trajectory of the Yuan in the short term will be very interesting for the USD: will the Chinese attempt to maintain a steady course or will they look to keep their currency weaker in the coming time frame to boost exports now that commodity pricing pressures have eased so sharply?

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