Key News

 

* Chinese Banks Take Steps to Rein In Credit  (WSJ)

* S&P Puts Negative Outlook on Japan (WSJ)

* Sterling suffers after GDP disappointment (FT.com)

* South Korean growth slows (FT.com)

*Obama to Call for Three-Year Freeze on Some Federal Spending (Bloomberg)

The Event Agenda

Afternoon Run-Down

UK GDP disappointed … Japan’s outlook was downgraded … China continues to tighten up on lending … Eurozone fiscal deficit problems continue … And the U.S. is talking tighter regulation and fiscal constraint.  The storm of news is weighing on global stocks, commodities and currencies as investors are beginning to price in a less rosy outlook for the global economy.  With the developments at hand, the prospects for double dip recessions are becoming more revered or, at best, a slower more painful recovery period than what has been anticipated.

 

Sentiment has been a huge driver of asset prices and economic stabilization over the past 10 months, but is likely to suffer another blow.  And after enduring another round of pain, the appetite for risk will be far more difficult to regain.  That’s an ominous outlook for stock markets, particularly in the higher risk regions of the world.

 

Volatility has jumped in both stocks and currencies in the past week.  The VIX (a gauge of uncertainty about the future path of stocks) jumped over 60% higher since Monday of last week.  Global investors are looking for downside protection in stocks and foreign currencies … driving up the price of volatility in the options markets.

 

Today, the UK reported weaker than expected fourth quarter GDP.  The UK is the last major economy to technically emerge from recession, albeit barely.  And if South Korea is any indication, these countries that have achieved only tiny growth thus far look very vulnerable to a another bout of economic contraction.  South Korea was growing at 3.2% (ann’l rate) the prior quarter, but just barely eked out growth in the fourth quarter (+0.2%).  South Korea has been one of many beneficiaries of the massive stimulus and credit surge in China over the past year.  In the latest quarter, exports fell, a sign that the China engine is sputtering.  That’s not good for Australia or New Zealand … two countries whose currencies have soared in the past 10 months on the China demand angle.

 

On that note, China has been reining in liquidity in past weeks, fearing bubbles, and today’s reports indicate that they have frozen new bank lending.  That response follows the massive lending frenzy that took place in the first half of January.

 

The risk aversion bid continues to build as the market magnifying glass has turned away from the U.S. and is identifying the many ugly problems that remain from a global economy that was (and still may be) on the brink of depression.  That’s good for the dollar, and bad for practically everything else at the moment.

 

It will be important to keep an eye on the developments surrounding Bernanke’s reappointment as it pertains to the global stability picture. 

 

The Bank of Japan was unchanged on monetary policy today.  The Fed will decide on policy tomorrow … as will the Reserve Bank of New Zealand.  Both will likely continue the course with a cautious stance on their respective economies.  

 

Here’s a look at the charts…

 

Key Charts

China Bank Lending

Some Chinese banks have been ordered to suspend new lending.  China has been tightening the reins after reports say lending in the first half of January (the red highlighted area of the chart below) blew-out estimates for the month…

 

 

Hang Seng Index (Hong Kong stock market)

The China effect?  Stocks in Hong Kong have dropped nearly 15% in thirteen days since China has attempted to tighten up on liquidity…

Commodities

The thought of slower global growth has taken the steam out of commodities … breaking important trendline support, the line that represents the run-up in risk appetite…

…And the same for U.S. stocks…

U.S. GDP

We get a first look at fourth quarter U.S. GDP on Friday.  The number is expected to be big.  But the third quarter number was expected to show 4.6% growth … the final number was 2.2%.  Given the stimulus effect, it’s safe to expect variance from expectations.  Here’s a look at the recent GDP numbers…

 

 

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Key News

 

* Stocks, Commodities Fall on Obama, China; Emerging Markets Drop  (Bloomberg)

* GE Earnings Fall, But Its Optimism Rises (WSJ)

* US, UK to cooperate in unwinding troubled banks (Reuters)

* Pound Drops Versus Euro as Retail Sales Rise Less Than Forecast (Bloomberg)

 

The Event Agenda

Afternoon Run-Down

The financial markets are reeling from Obama’s speech from yesterday, which included tough talk on prospective restrictions on bank risk taking.  Stocks have sold off hard and the dollar gave up some of its early gains yesterday on the news — but is trading mixed against major currencies today. 

 

Important to watch in currencies, the yen caught a bid on the news … the natural knee jerk reaction for a steep slide in U.S. stocks.

But even if stocks go lower (which I think they will, dramatically), the fundamental divergence between Japan and other major economies, given the deflation fight being levied by the BOJ, should keep the yen on a weakening course.  The yen carry trade has gone through a 2 ½ year unwind.  If the forced unwind is over, the yen should go lower.

 

Market participants have tried to sort out if the Obama proposed bank regulation speech is a game changer.  To me, it seems like an obvious political ploy, without grounds in reality.  The idea that proprietary trading can be extracted from the banking business doesn’t seem to do anything positive for financial market stability.  In fact, it would reduce liquidity and increase volatility.  We’re seeing that reflected in the VIX already. 

 

Major global banks are in the risk taking business.  They make markets in a vast array of financial instruments to provide a service to clients, and in doing so they take on risk.  It seems nearly impossible to break out what’s a simple proprietary bet from risks being taken as liquidity providers for their customers.

 

In the end, the proposal seems like another attempt to pacify the angry masses on the back of another strong earnings report from former TARP recipient Goldman Sachs.  Goldman trading revenues attributed 76% of total revenues for the firm last year.  But don’t forget the competitive landscape shrank dramatically in 2009 and Goldman paid back TARP early, giving it a competitive advantage to see more trading deal flow … and make wider spreads.  “Principal investments” only accounted for 2.6% of revenue.

 

Overall, the news of recent weeks points to the perception of tighter regulation and tighter fiscal constraint … which means lower standard of living in the developed markets.  For the export-centric emerging market space, when the stimulus dries up and the economic engine has to start running itself again, you have to ask the question:  To whom do they plan to export?

 

Overall the moves in China to rein in liquidity, along with the political surprises in the U.S. (Massachusetts election and Obama bank reg proposal) have volatility moving higher, sovereign debt risk moving higher, and optimism about growth prospects diminishing.  Growth-negative news should be dollar-positive.  Under a slower, more fragile growth scenario – and one with looming threats to derail it — what are the better alternatives to holding dollars?

 

Here’s a look at the charts going into the weekend…

 

Key Charts

Dollar Index

On Thursday, the dollar index surpassed its December highs (and breached the 200 day moving average), confirming an impulsive C-wave of a corrective A-B-C Elliott Wave structure. This particular indicator projects a move to at least 81.50. That’s 4 percent higher from current levels and nearly 10 percent higher from the November lows.

 

Euro

The euro trades well below its 200-day moving average, which broke on Tuesday at 1.4308.  That should provide resistance and any retracements in the euro weakness should be well capped by the January 13 high of 1.4579.

Canadian dollar

The Canadian dollar continues to trade very closely with the U.S. stock market.  After closing in on October highs this week, the Cad made a sharp reversal trading 3.7% off of its highs against the dollar for the week as U.S. stocks fell.

New Zealand dollar

I showed this chart earlier this week.  The New Zealand dollar had yet to respond to the move lower in commodities.  After some weak inflation data on Tuesday night, the kiwi started playing catch up.  It’s now the worst performing currency of the weak, down almost 4%. 

VIX

The VIX (stock market volatility) has fallen all the way back, nearing levels of July 2007—just prior to the Bear Stearns hedge fund blow up.  That’s indicative of the level of optimism the markets have been pricing in about recovery.  Now, with the prospects of tighter bank regulation (less market liquidity provided by banks) the VIX has climbed 47% in four trading days.

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Key News

 

* Euro Drops to Almost Four-Month Low as German Confidence Ebbs (Bloomberg)

* UK Consumer Prices Post Largest Jump on Record (WSJ)

* Japan Airlines files for bankruptcy (Financial Times)

* China Yields Rise For 2nd Straight Week  (WSJ)

 The Event Agenda

Afternoon Run-Down

Some country specific news and elevated risks pushed the dollar higher against nearly all currencies today, except the pound.  The dollar index has experienced a shallow retracement following the aggressive December rally, and is now moving higher again, a constructive technical sign and evidence for a prospective new bullish trend. 

 

The pound is stronger against most currencies after hotter than expected consumer price data.  Inflation is running above the Bank of England’s 2% target.  But don’t get too excited on the interest rate front.  The BOE acknowledged in its November Inflation Report that inflation was likely to make some short term blips above the target, but the excess capacity in the UK economy would likely keep the more sustained rate of inflation below target through 2012.  Those expectations will keep the BOE’s foot on the pedal for loose monetary policy—prepared to add more asset purchases when needed.

 

Another key factor underpinning sterling (GBP) is being merger related.  U.S. based Kraft appears to have won a four month battle for shareholder support for a takeover of UK based Cadbury.  The offer values Cadbury at 13 times 2009 EBITDA.  The deal was more lucrative than the previous bid … by an additional 1.7 billion pounds and consists of more cash than was previously offered.  And the required UK currency to execute the deal created demand for pounds on the announcement.

 

The pound has been favored over euros in recent weeks, but with this M&A activity out of the way I expect the pound to start playing catch up to the weak euro.

 

The euro has broken below its 200-day moving average on the growing sovereign debt risks within the Eurozone.  The once thought contained debt problems in Dubai are now building into a storm for Europe.  Greece continues to be under pressure to present a viable plan to reduce its budget deficit and ratings agencies are stepping up scrutiny elsewhere in the Eurozone … today Fitch warned on Spain, the UK, and France.  This escalating situation exposes the reverberations from the global financial and economic crisis, which will likely prove to damage global risk appetite—a negative for global equities, commodities and foreign currencies.

 

Adding to the elevated risks, the Japan Airline bankruptcy sends a message.  The Japanese government didn’t provide a safety net for a “too big to fail.”  That’s yen negative.  Also, China continued to pull in the reins on liquidity increasing speculation about asset bubbles in China—risk appetite negative.

 

Next week we have three central bank meetings: Japan, the U.S. and New Zealand.  And we get more Q4 GDP data from the UK, the US and Canada.

 

Here’s a look at the charts…

 

Key Charts

 

 

Kraft/Cadbury

Kraft bought Cadbury for 19.5 billion dollars, $2.7 more than its initial bid.  Cadbury shareholders got an extra 3% premium from Monday’s close on the announcement of the deal—a 46% premium from where the shares were trading in September when the takeover intentions were first announced.

 

 

British pound

Here’s how the M&A speculation has affected the pound…

 

 

New Zealand dollar

Commodities were down 4% last week following a crops report that showed a record supply build in some areas, damaging the bullish argument for agricultural commodities … yet the highly correlated New Zealand currency has not responded with weakness.  It will be important to watch the inflation data tonight and central bank meeting on rates next week.  If the market doesn’t get hawkish language from the RBNZ, expect the kiwi to drop sharply.

 

USD/JPY

I showed this chart last week, projecting a shallow retracement in USD/JPY to the area where a convergence of technical support resided … the 38.2% Fibonacci retracement of the recent climb from the November lows, along with the 50 and 100 day moving averages.  This area held nicely this morning and the uptrend in dollar trend appears to be resuming.

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Key News

 

* PBOC Reserve Requirement Shift Rattles Currencies (WSJ)

* U.K. Retailers Show Optimism  (WSJ)

* BOE Should Pause Bond Plan as U.K. Recovery Looms, BCC Says  (Bloomberg)

* Kan Appointment Raises Fiscal Discipline Concern, Moody’s Says  (Bloomberg)

 

The Event Agenda

Afternoon Run-Down

The employment data on Friday has triggered some profit taking in the dollar- disrupting the speculation for an earlier Fed rate hike.  A month ago, the market was pricing in a 36% chance of a 25 basis points Fed rate hike by June this year.  Now the market has lowered expectations, pricing in only a 25 percent chance.

 

While the payroll data was on the low extreme of expectations, the report still shows some stabilization on the jobs front—nothing material to damage the recovery scenario.  Nonetheless, it provided a reason to take profits on long dollar positions, particularly in light of some technical boundaries that were being tested.  The euro bounced higher off of its 200-day moving average and USD/JPY turned lower after hitting its 200 day moving average, nine month trend line resistance and completing the corrective ABC structure from the November lows. 

 

The pull back in the recent dollar surge should present a good opportunity to buy dollars.  Although the ramped up expectations for a Fed move has been knocked off path a bit by the weaker jobs data, there continues to be a dollar positive market dynamic, driven by the better growth prospects for the U.S. relative to other major developed economies.  Meanwhile, the threats to the economic recoveries bode well for the safety appeal of the dollar.

 

On that note, the risk front, the news of some belt tightening in China has market participants worried about a souring of the China growth story.  After a slew of hot data in focus yesterday:

 

Ø   Exports spiked by 17.7%, the most since October of 2008,

Ø  New loans amounted to $600 billion in the first week of January, almost twice as much as the monthly average in the second half of 2009.

 

…The PBOC increased the reserve requirements for banks today by 50 bps. 

 

Also effecting global risk appetite, earnings seasons kicked off with an earnings miss from Alcoa.

 

In the euro area, The European Commission said the Greek data on the budget deficit has severe irregularities, making the stated deficit reported by Greece unreliable.  This is for a country that already has the largest budget deficit in among the euro members and the lowest sovereign credit rating. 

 

EU officials have said there will be no bailouts of weak euro member states.  Portugal was noted yesterday in an FT article as vulnerable to a downgrade by Moody’s.  The continued elevation of weak spots in Europe is putting pressure on the euro after its sharp two day climb. 

Also of note, an official from China Investment Corp., the $300 billion sovereign wealth fund, said the dollar “is at its bottom.”

Key Charts

USD/JPY is retracing, after running into resistance at the 200 day moving average and the trendline of the nine month downtrend.  But it looks like a buying opportunity.  The sharp v-shaped reversal in late November following the crisis-driven move in USD/JPY below last year’s lows– in a thin holiday market– was significant.  If that marked a bottom in USD/JPY and a trend change, then we should expect the first correction in this new uptrend to be shallow.  A shallow correction would be marked by a 38.2% Fibonacci retracement, which comes in right around the 50 and 100 day moving average—in the 90.30 area.

 

The Euro also traded into its 200-day moving average and bounced on profit taking following the weaker U.S. jobs report… 

Another reminder than sustainability of economic recovery is a huge question mark.  Last Friday, the report on U.S. consumer credit plunged to record lows…

Market expectations for Fed rate hikes soared in the latter part of December, but have fully retraced…

The climb in crude oil that started in late December has dragged the Canadian dollar and other commodity currencies higher.  Today’s tightening in China finally stalled the momentum in commodities and global stocks…expect the Cad to follow lower.

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Key News

 

* Japan finance minister likely to quit (FT.com)

* Pending Sales of U.S. Existing Homes Dropped 16% (Bloomberg)

* Kraft Adds Cadbury Cash; Buffett Opposes Share Issue  (Bloomberg)

* Fed may re-enter MBS market later in 2010 - Market News (Reuters)

 

The Event Agenda

Afternoon Run-Down

Climbing commodities and speculation about when and how global policymakers will reverse rock bottom interest rates in 2010 are influencing financial markets in early New Year trading.  Currencies are continuing to break away from the risk correlation (dollar one way/ everything else the other), trading mostly mixed with relative strength shown in the commodity currencies …. weakness in the euro, pound and yen.

 

A couple of key news items of interest that address the threats to the improving growth them…

 

In the asset bubble category:  Bloomberg reports, emerging markets are attracting more money from initial public offerings than industrialized nations for the first time ever.

 

And in the rising geopolitical risk category:  European Central Bank policymaker Lorenzo Bini Smaghi upped the pressure on China in an FT editorial…

 

“Policymakers have urged parts of Asia to allow their dollar-pegged currencies to strengthen to ease imbalances posed by big current account surpluses in countries such as China and large deficits in the United States and elsewhere.

 

“The removal of these rigidities would contribute to a better-balanced world economy, with benefits both in surplus and deficit countries,”

 

But … “Overall, the global crisis seems to have strengthened the influence of those parts of society favoring a continuation of the current regime and weakened the voice of those asking for much-needed reform.”

 

“The same short-sightedness that prevailed in the run-up to the crisis is once again in evidence.”

 

“This is an additional risk for international policy co-operation and for the recovery of the world economy”

Key Charts

Pimco says it will be a net seller of UK bonds this year.  That puts a bid under Euro/GBP as fears grow that the UK may be headed for its first sovereign debt crisis since the 1970s.

 

The move in crude oil is important to watch.  The surge began in mid December and is now challenging its October highs.  A break above $82 would open up a move to $90.  That would put more upward pressure on the commodity currencies (Australian dollar, New Zealand dollar and Canadian dollar).  Meanwhile metals made a strong move higher yesterday and continued higher today giving a bounce to gold and silver and taking copper to highest level since 2008.

The below chart shows the change that has taken place in short term rates from the end of ‘08 to the end of ‘09.  Despite the magnitude of change or absolute level of current yields, currencies tended to perform throughout the period based on the reversal of the risk aversion trade as opposed to yield– i.e. capital flowing back out of the $ and into the rest of the world, particularly emerging markets.

That’s the yield side.  On the growth side…this data is from the Economist magazine…

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Key News

 

* Strong Euro Causing Chaos (Telegraph)

* Greece’s Credit Rating Cut to A2 by Moody’s on Debt (Bloomberg)

* Existing Home Sales Rise to Highest Level Since 2007 (Bloomberg)

*U.S. Economy Grew at 2.2% Annual Rate Last Quarter  (Bloomberg)

 

The Event Agenda

Afternoon Run-Down

 

The dollar continues its climb.  USD/JPY reached its highest levels since October after the Bank of Japan Governor said they intend to keep interest rates near zero to fight deflation.  The yen has now lost 8% to the dollar in just 18 trading days. 

 

Final third quarter GDP in the UK disappointed.  The consensus expectations were for a 0.1% contraction.  The actual number was 0.2%, for a year over year decline of 5.1%.  The UK has yet to emerge from recession even as its major economic counterparts have.  Since concerns about Greece have emerged in recent weeks, the pound has been lagging the recent weakness in the euro as traders have used the opportunity to sell euros against everything, including the pound.  But the pound is now catching up, breaking below 1.60 overnight against the dollar … and trading through its 200 day moving average.

 

Greece sovereign debt was downgraded overnight by Moody’s, but just one notch.  A more severe downgrade would have threatened the collateral value of Greek government bonds used to secure loans from the European Central Bank.  The euro is trading at new three-month lows this morning.

 

Despite the weaker than expected final third quarter GDP out of the U.S. this morning, the dollar remains bid and the Treasury market continues to price in a rosier picture for economic recovery.  The spread between 2yr and 10yr Treasury yields reached record levels yesterday, signaling expectations for a stronger economic turnaround ahead.

 

Here’s a look at some key charts….

 

Key Charts

 

US 2-yr/10-yr Yield Spread

 

British Pound

The pound broke below its 200 day moving average.  The next key level of support comes in at the October lows of 1.5708.

Euro

The euro is closing in on its 200-day moving average of 1.4181.  The 61.8% retracement of the nine month uptrend comes in at 1.3484.

Australian dollar

The Aussie dollar continues to fall following last week’s disappointing GDP report and the RBA’s indication that they are done normalizing rates.

New Zealand dollar

The kiwi (NZD) and the Aussie have had equivalent declines in percentage terms since mid November (down 6.8% vs. the dollar).  Given New Zealand’s fundamental weakness relative to Australia, the current break through prior multi-month lows, in the chart below, should open up a faster decline for the NZD.

Chinese Yuan

China’s central bank chief comments sent the yuan (non-deliverable forward market) to nine month highs after highlighting a focus on the country’s international balance of payments.  The market is now pricing in a 2.7% move higher in the yuan over the next twelve months.

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Key News

 

* BOJ Keeps Rate at 0.1% as It Assesses Lending Program (Bloomberg)

* Banks to be hit by harsh new global rules on capital (Telegraph)

* Cracks in EU Governance Let Debt Problems Slip By (WSJ)

*Fed’s Fisher: Sees ‘Limited’ Chance Of Faster Than Expected Rebound (WSJ)

 

The Event Agenda

Afternoon Run-Down

More uncertainty surrounding Greece and other Eurozone countries (Portugal, Ireland, Italy, Spain) are elevating the risk environment.  That and a burgeoning shift in market focus toward some relative growth and interest rate advantage prospects for the U.S. have underpinned fuel for the dollar on the risk taking front and on the risk aversion front.

 

The Fed statement on Wednesday added more fuel.  And I think it’s still being overlooked when people are looking for reasons for why the dollar is continuing higher.

 

The Fed recognized the signs of improvements in the employment situation and some signs of life in the consumer.  That’s a positive comment on the economy and that bolsters this idea that maybe the Fed can move on rates little sooner— dollar positive.

 

But another big area in the Fed statement:  Here is the excerpt….

 

“The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1.”

 

By closing currency swap lines with foreign central banks, the Fed is essentially withdrawing dollar liquidity (dollar supply) from the world.  That’s dollar positive.  And after the dollar chopped around following the statement in the NY session on Wednesday, the markets overnight took the message and bought dollars aggressively sending it sharply higher.

 

Here’s a look at the charts we looked at last week going into the weekend.  The continuation of dollar strength is supporting the recent technical developments I noted last week.

 

Key Charts

 

Dollar Index

The dollar has clearly broken out of this nine month downtrend.  The 61.8% retracement of the March highs to the November lows comes in at 83.72 on the index…another 8% higher.

 

Euro

The euro extended its fall following the Fed statement.  It’s now approaching the 200-day moving average (1.4181) which should provide some short term support.  But considering the thin holiday markets this move could get slippery.  The 61.8% retracement of the nine month uptrend comes in at 1.3484.

Gold

The accelerating trend over the past year in gold is testing trendline support.  With a bearish outside month in play, the $1000 level looks like it will be tested where there is a confluence of support….1) the psychological 1000 level which proved difficult to break on the way up (resistance becomes support), 2) trendline resistance of the nine month trend, and 3)the 200-day moving average is converging.

 

 

USD/ Yen

A corrective ABC Elliott Wave structure projects a move above 94 for dollar/yen.

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Key News

 

* Dollar Rises to One-Month High as Retail Spurs Fed Rate Outlook  (Bloomberg)

* ECB Nowotny:No Bail Out For Troubled Euro-Zone States (WSJ)

* WORLD FOREX: Dollar, Euro Rise Vs Yen On Strong China Data (WSJ)

 

The Event Agenda

 

Afternoon Run-Down

 

After meetings from the Bank of Canada, Reserve Bank of New Zealand, the Swiss National Bank and the Bank of England this week, there was only one major surprise.  Though the New Zealand central bank maintained its guidance to keep rates are current low levels, it bumped forward the date for a possible first rate hike to mid 2010.  That, combined with better data in Australia put a short term bid under the New Zealand dollar and commodity currencies in general.

 

But the story of the week is the unusual (within the environment of past months) resilience of the general strength in the dollar.  The buck is winning on two counts…on a safe have bid from rising concern over sovereign debt conditions and on a relative growth and interest rate bid from better than expected economic data.

 

Here’s a look at the charts going into the weekend…

 

Key Charts

 

Dollar Index

The dollar bounce was initiated by the Thanksgiving Day Dubai debt restructuring and the momentum is continuing.

Euro

The euro has broken nine month trendline support and is trading at two month  highs.  The 61.8% retracement of the March low to November high comes in under   1.35.

Gold

Gold has been in a steady decline in December.  First support comes in around 1,100, then 1,000.  Most importantly, a bearish outside month is in play for gold.

Yen

Japan is rolling additional monetary and fiscal stimulus, disagreements among the Japanese Finance minister and Prime minister over limits on new debt issuance, and prospects for better relative rates in the US are all weighing on the yen.  A corrective ABC Elliott Wave structure projects a move above 94.

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Key News

 

* Yen’s Biggest Drop in Decade No Anomaly With Options   (Bloomberg)

* ECB Trichet: Stronger Asian Currencies Would Aid Global Econ (Market News Intl)

* U.S. Treasury Says TARP to Cost $200 Billion Less  (Bloomberg)

* U.K. Bank Loan Write-Offs Hit Record Highs (WSJ)

The Event Agenda

Afternoon Run-Down

 

Friday’s better than expected payroll number shifted the market’s focus.  Perhaps the Fed’s first move on interest rates could be sooner than what has been communicated.  At least that what’s traders started placing bets on … and that narrows interest rate differentials for the US v most of the world … and widens the differential between the U.S. and those countries that share zero interest rate policies.

 

The move in commodities showed the connection between sentiments about easy policy induced liquidity being put to work in commodities investments.  When the prospects for U.S. rates nudged higher, commodities took a hit.  Gold is down 7% in 3 days … crude oil is down 6% from its highs last week breaking down technically below $75.

 

The biggest loser on Friday in currencies was the yen.  After getting a report that showed the National YOY CPI number was falling at a record pace, the BOJ went into an emergency meeting and came out announcing that they would be injecting more liquidity in the banking system.  That widens the prospective liquidity gap between the U.S. and Japan per that announcement relative to the market response to the better U.S. employment data.  That, in part, is why USD/JPY has rallied sharply off the Dubai scare-induced lows the day after Thanksgiving.  The dollar rose 7% over the past six trading days against the yen.

 

The dips in the risk trade that have been bought so aggressively in recent months, will not likely find the same support going into year end.  Buying a dip in December is not only a risk to performance but it’s a business risk for many managers.  Don’t  be surprised to see liquidity dry up sooner than normal this month (going into the holidays) and to see dramatic moves in currencies as a result.

 

We have four central bank meetings this week out of Canada, New Zealand, the UK and Switzerland.  All will remain on hold on interest rates.  New Zealand is expected to hold the line until late 2010.  The confirmation of a cautious stance could put more pressure on Kiwi. Its Aussie counterpart has now hiked three times and the U.S. speculation from payrolls narrows the interest rate differential prospects with New Zealand.  Other areas of interest will be the Bank of England’s outlook on their quantitative easing program and, for the SNB, their outlook on curbing strength in the Swiss franc.    

 

Key Charts

 

The Nonfarm Payroll number on Friday showed the fewest job losses since December of 2007…

Interest rate expectations spiked 13 basis points following payrolls on Friday but are retracing this morning.  The below chart is the June Eurodollar contract which prices market expectations for short term interest rates by June of 2010 (lower Eurodollar= higher rates)…

USD/JPY made a sharp V-shaped recovery after dipping below last year’s lows..

Gold and Yen relationship since 2007…

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