FOREX: Euro Volatility Likely Amid Mixed Cues Ahead of ECB Rate Decision

The Euro is likely to turn volatile as the ECB delivers its interest rate decision as conflicting indicators cloud the outlook for monetary policy over the coming months.

Egypt Concern Drives Oil Higher; Markets Mixed

Today is a mixed day for equities and currencies as the robust rally of the past few days becomes digested. In the uncertain environment of the moment traders seem to be determined to sticking to what they believe in, the bullish momentum that has been in place since Ben Bernanke`s hot money promise a few months earlier. Only oil seems to be directly impacted by the events far away in the Middle East.

Meanwhile, in Egypt events continue to progress in an unpredictable fashion, as President Hosni Mubarak`s point man and spymaster Omar Suleiman tries to find a graceful way out of the mess that his employer has placed him in. He seems to be appealing to the fears of the Egyptian people about a breakdown in peace and order, and focusing on the chaos that could break out if the protests go on without a compromise attempt by the opposition.

The regime has done everything in its power to maintain the appearance of a constructive partner, and not an obstructor to the democratization process, and at times even attempted indirectly to characterize the recent turmoil as the natural consequence of its liberalization program which, cynics would say, has been advancing slower than a snail for the past few years. And even that lacklustre program was in fact the consequence of the Bush Administration`s continuous pressure on its authoritarian allies in the Middle East; Hosni Mubarak was not the only one singled out for "guidance" by the Americans, with Jordan`s and Saudi Arabia`s monarchies getting their fair share of hints and suggestions about what should be done to prevent the emergence of a region-wide wave of extremism. That did not work out quite the way Washington had hoped, of course, since we doubt that they had any great excitement about getting the Muslim Brotherhood to power.

The absurdity of the situation in Egypt, and the speed and chaotic nature of events can be seen with greater clarity if one considers the fact that the Egyptian authorities` main partner in the talks, the Muslim Brotherhood, is in fact a banned group even now. Yet they are debating with Omar Sulaiman and his people about how to manage a peaceful transition of power. Power balances are shifting so fast that it is impossible to speak meaningfully about where the country is headed. It is not at all impossible that Egypt will transform into  a free but chaotic emerging market democracy, the scenario favored by most western observers. Yet it could also be overtaken by various more radical forces with extremely serious implications for the entire Middle East. We don`t claim to have any clear insight on where exactly events will proceed at this stage. 

Elsewhere, we have gold and oil appreciating, the latter more strongly on the back of Middle East concerns, while the USD remains without a clear direction against most majors. The momentum trade is still in place, and for now it seems like its drivers will not give up unless a really big shock comes out of the Egypt crisis.

NFP Shows a Mixed Picture, Traders Focus on the Unemployment Rate

Stocks are universally higher today, and currencies like the AUD and TRY are performing well on the back of the anticipated improvement in U.S. unemployment picture, as well as the generally improved sentiment in Asia for the past weeks due to the stronger and stabler performance of the USD. Gold is also higher after rising by more than $20 yesterday.

Among today`s releases we are most attentive to the improvement in the manufacturing sector reported in the NFP release, which is fully in line with the long-term perspective of a U.S. economy that depends a lot more on manufacturing than it used to do in the past decades. The trend is in place, and will probably intensify in the coming years, since the depreciation of the USD, although slow, promises a great improvement in profitability of the sector. 

Euribor rises to 1.88%

Due to the uncertainties surrounding the future course of action of the ECB, and, to a much greater extent, the nature and scope of future bailouts, 3-month Euribor rate is higher by one basis point today, and is expected to go higher in the next months. The Euribor trend currently in place stretches all the way back to April 2010, coinciding with the beginning of the Greek crisis, and we expect it to define the Euro interbank market until a resolution is found.

The Germans and the French are experiencing some difficulties in finding a common ground over the size of planned bond buybacks, with the Germans generally opposed to greater commitment of funds, while the French support far greater flexibility in the availability of bailout cash.  Ireland and other bailout partners have been requesting less punitive interest rates, but this is opposed by the Germans who would like to see severe punishment discourage future errors.

January payrolls rise by 36,000; unemployment rate falls to 9%

U.S. NFP rose by a very modest 36,000 which is the smallest gain of the past four months, versus projections by analysts foreseeing a jump of about 146,000 for December. Construction, transportation jobs and the manufacturing sector are understood to have been badly impacted by the cold weather in the north, with some 707,000 workers reported having been prevented from going to work as a consequence, but even with this caveat the fact remains that the economy is still struggling to stage a significant improvement in the labor market. Excluding government jobs, the total rise in payrolls was 50,000.

At the same time the unemployment rate, which is calculated from a different sampling, fell to 9% against forecasts expecting it to come  between 9.2% to 9.6 percent. The household survey showed a fall of 590,000 in the number of unemployed. Revisions to the previous NFP numbers reaching back to 2006 have also been released, showing that the economy has lost around 8.75 million jobs in consequence of the recession, while adding 909,000 for 2010.

The report allows both the bulls and the bears enough room for revising and reforming their viewpoints, confirming that the labor market remains  very weak, but at the same time providing a more positive reading if one focuses on the household survey. On the whole, the report is unlikely to change anyone`s analysis to a great extent, especially because we know through Bernanke`s statements that the Fed is committed to maintaining its program for now. PIMCO`s Bill Gross is reported as saying that the Fed is unlikely to raise rates for the next 12 months, and we agree with this viewpoint, seeing a slim chance of any rate rise provided that the Fed is not forced to move in that direction by the bond market.