Euro rises as the US awaits its economic fate

The US dollar is down in early trading today against the Euro as the US markets wait for the results of the Federal Open Market Committee (FOMC) meeting. The FOMC have been meeting for two days and they conclude later on today while Broker trading firms look for signs of new ways that the Fed will be dealing with the economic crisis. The Fed, which usually is responsible for lowering interest rates has no room to move anymore on the rates as they are at rock bottom right now after last month’s reduction, so the investing and trading communities are not quite sure what to expect. At last trade the Euro was at 1.3251 against the greenback, up .7%.

While the Euro is making gains today against the dollar, the Yen is falling. Forex traders have been speculating that the recent flight from the Yen has to do with risk aversion, where the traders are feeling more comfortable with the situation that they can leave the relative safety of the Yen for things that might reap bigger rewards. This also has to do with the Bank of Japan (BOJ) not wanting the Yen to get too strong as a strong Japanese currency hurts their exports. The Euro is currently at 118.01 Yen in early morning trading, up .83%. Look for this trend to continue throughout the day and depending up what the US fed does. The rest of the week can be see a flight back to the Yen and an unwelcomed rise in the currency if the FOMC meeting results are not favorable with investors.

Part of the Japanese Yen’s issues today arise from the BOJ intervening in companies affected by the economic collapse. The BOJ interjected $16.7 Billion into a fund meant to help hurting companies. This move accomplishes what we have been expecting for a few weeks, that the Japanese government does not want to see the Yen get that strong and is staving off deflation using inflationary measures. Again, this will work for them as long as the US Fed does not do anything so offbeat that traders and investors need to run back to the Yen.

The US economy has more to worry about than what the Federal Reserve will do today. Consumer confidence hit an all time low yesterday and the trading and investing communities got their reality check on housing as well. Last week, home sales surprised everyone when it was disclosed that it was stronger than everyone expected, yesterday they found out why. Home prices fell by 18.2% in November of 2008. Of course more homes were bought with prices being so cheap – there was a report of a man in California that bought 7 homes at a foreclosure auction for less than $1 million, three years ago it would not have been possible to buy one of those properties for that price. Today’s Daily FX advice seems to be: watch out for the Fed and stay away from the dollar until they speak.

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More trouble for Europe means gains for the US

The flight to safety in the dollar was enhanced on Friday when the greenback reached a 22 year high against the British pound and a six week high against the Euro. Considering that the US economic woes are significant, this highlights how bad the Euro and British economic outlook is – at least from the perspective of the Forex traders. The pound sunk 1.4% to 1.361 against the dollar and the Euro fell nearly ½ a percent to 1.292 against the US currency. The tumble started after data released on Friday showed that the British economy tightened at a greater rate than was expected, 1 ½ percent to be exact, which confirmed on paper that the British economy was now officially in a deepening recession.

The Yen also made significant gains against the Euro and Pound on Friday, with the Euro closing down ½ of a percent to 114.66. The status of the US and Japanese currencies as a safe bet amongst Forex Brokers underscores the dire shape of the overall global economy. It is not a matter of who is doing well anymore; rather it is a factor of who is not doing as bad. The trading and investing communities are just looking for something to cling to as the Daily FX charts are becoming more and more confusing to traditional technical and fundamental traders.

The surge, or should it put, strength of the dollar was also helped by the US Treasury Secretary designate, Timothy Geithner, who commented in front of a Senate panel that a strong dollar was in the best interest of the US, prompting broker trading firms to speculate that once confirmed, he will do all he can to prop up the greenback. Considering the mountain of debt that the US economy needs to climb out of which grows each day by billions of dollars, it is difficult to see how any one man can accomplish this feat.

The week was capped off by a peculiar stunt by Canada’s ruling conservative party which pre-announced (it was an intentional leak) that when it reports its budget deficit projections on Tuesday the 27^th, it will show a $52 Billion (US) shortfall the next two years and will not return to positive territory for another five. The move was seen as Canada’s way of minimizing the short-selling and thus overall decline of the Canadian dollar in the Forex trading arena. Aside from this, we can read between the lines into the actual numbers and see a truly disturbing picture. Canada’s economy, and currency for that matter, are intrinsically tied to commodities, oil and metals to be specific.

A projected shortfall of this magnitude means that Canadian economists and actuaries are not too optimistic about a short term global recovery that everyone is hoping for. What this simply means is that Canada is looking at a two year period of global declines followed by a three year recovery period. This essentially puts the crisis in a situation where its affects last five years, a really gloomy scenario that Canada is using to set policy. We hope they are wrong.

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Current Moves in Forex Market

US-China talks yield little.

The US-China economic dialog talks seemed to have mostly centered on shoring up the stability of the financial system, an understandable worry on China's part after all of this turmoil, considering its enormous holdings of US debt. The talks ended with no substantive announcement on Chinese currency. Instead, measures were announced to allow freer access by Chinese banks in the US market and various other "agreements" were likely on electricity generation, environmental issues, etc.. The talks were unlikely to lead to much substantive with Paulson as the lame duck US treasury secretary. We will have to wait for Obama and Geithner and company to see whether the Strategic Dialog framework continues and how combative the president-elect remains on the Chinese currency, after using it as a populist issue in the campaign. Will the Chinese continue to keep the Yuan in this range just below 7.00, or will they allow some weakening of the Yuan to test the Obama team's resolve ahead of inauguration? This is a huge issue.

US employment report

Another fearsome US employment report is on tap for today, as the US economy may have lost more jobs in one month than at any time since the early 1980's. Expectations for the Change in non-farm payrolls are running for a drop of well over 300k. The unemployment rate is expected to jump again, this time to 6.8%. There is nothing to suggest any chance of upside surprise on this data. The question is how dependent the USD is on economic data after yesterday's attempt at a reversal.

CAD under pressure

CAD fell sharply across the board yesterday on another wave of capitulation in crude oil prices and on developments in Canadian politics: as PM Harper convinced the Governor General to suspend parliament until late January in a bid to save his government from a confidence vote and attempt to refocus the legislature on the budget. This was an unprecedented move. Also, the bottom fell out of the Canadian Ivey PMI yesterday, which registered its lowest level in the near 10-year history of the survey. It would appear that a test of the 1.3000 level in USDCAD may be in the works soon.

Market action

Equities sold off sharply later in the US session, and this took the JPY stronger again after the short squeeze earlier in the day had driven the JPY sharply weaker. These markets are indeed treacherous as directional signals last mere minutes before reversing course. CHF also woke up and got back on its old safe haven horse briefly, and EURCHF dipped to test its 21-day moving average again before easing back higher overnight as the equity sell-off failed to turn into a rout. We really need a breakout of some kind that holds to get a better directional indicator.

The parabolic drop in US yields at the long end is due to the clear intention by the Fed and Treasury to try to control the long end of the government yield curve, in an effort to shore up the housing market. The dramatic fall in mortgage rates (due to outright purchase of GSE mortgage debt announced previously and the indication that the Fed will likely monetize debt down the road) has seen a boom in refinancings. US yields are plummeting relative even to European yields all along the curve, and thus not really providing any support for the USD in terms of interest rate differentials. This action looks downright panicky and unsustainable.

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Market Overview by Finexo.com

US Economy

The US government was forced to ride to the rescue of the Citigroup over the weekend, as it became clear of the course of last week that the bank would fail without prompt action from the authorities. The details of the rescue package are unique compared to recent measures, but then again, the US Treasury, Fed and other financial authorities have been forced into a lot of creativity and changes in tactics since the entire credit implosion debacle began. Citigroup was a horribly mismanaged company during the later phases of the credit bubble and put on enormous risk in its later phases, when risky assets were already ridiculously overpriced. Citi was clearly too big to fail.

Many have talked up the risks to the US economy due to the two-month transition period between presidents and lack of action until Obama takes the reigns, and it appears that Bush and Obama are trying to address this - Obama with a stimulus package on the order of $500 billion designed for signing on the day he goes into office and signals that plans to raise taxes on the wealthy will be delayed, and Bush's man Paulson now indicating that he will swing into action with the second half of the TARP rescue fund after signaling as recently as last week that he was going to leave these funds for the next administration to deal with. Paulson's plan will supposedly try ease household borrowing and further stem foreclosures, though there were no specifics. The negative momentum in the data doesn't seem to showing many signs of slowing and we wonder what the employment situation will look like in the retail sector in the US after the Christmas shopping season is behind us, as it is likely that many are retailers are on life support and could look to shut down or slash costs after what is shaping up to be an ugly and cold (literally, with record cold recently in many parts of the US) end of the year for sales.

US equity markets supposedly took heart that the NY Fed governor Geithner was named as Obama's Treasury Secretary, but we wonder whether this was just an excuse for the late Friday rally. Mr. Geithner is considered a key figure in many of the responses brought by the Fed so far in this crisis. It makes eminent sense that Obama chooses someone from the Fed rather than from the financial services industry, as no bank has remained untainted in this crisis.

Anything to like about GBP?

UK Chancellor Darling is expected to announce an emergency budget today at the so-called pre-budget report today, with new measures including a temporary reduction of the VAT from 17.5% to 15.0%. Other measures are also on the table, but the FT is also reporting that Darling is also out talking up tax increases on the wealthy, so the signals are a bit mixed. One potential bullish development for GBP was a story out Friday about a potential tax change on corporate taxes in the UK that could see massive repatriations of overseas profits. This is a story worth watching, especially as GBP has been the punching bag of the G7 and any new positive spin on the pound could really shock market positioning.

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Dollar Loses its 7-Month High and high volatility seen.

According to the news update I read today at FINEXO the dollar lost ground against the yen, thus retreating from its 7-month high achieved due to the fall of oil prices to a 3-month low. Many of the traders preferred to sell on the profits of the previous day, in which the oil's drop beneath $120 a barrel supported stock gains and investors are willing to take more risks after yesterday's new found support in the dollar.

When investors are willing to take more risks, this usually means the renewed investment in low yielding currencies like the yen in order to profit from higher interest rates somewhere else, also known as carry trading. Despite this short-lived profit-taking, analysts believe that the dollar will continue its rise.
My growing concern is about the Japanese economy, which might increase dollar buying. The yen is under pressure due to a series of data suggesting that Japan's postwar economic growth might be coming to an end. This supports views that the Bank of Japan would probably leave interest rates unchanged at 0.5% in the near future.
Market players are closely monitoring the yen to see if it can break above the 109.95 yen resistance, the highest in almost 6 years. The dollar eventually stabilized at 109.40 after a drop of 0.4 percent. The previous day's 7-month peak was of 109.89.

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