FOREX: Dollar: What was the Catalyst for the Dollar Biggest Rally in Six Months and Will NFPs Keep it Going?

A long overdue correction was finally played out by the heavily battered dollar through Thursday’s session. For the short-term bullish trader, the ‘why’ is of little concern as move has been made.

Dollar Rally Looks for Fuel - Can NFPs Carry the Bull Run?

It seems that the dollar has put in for a critical reversal just ahead of the market’s most market-moving economic release. However, it is important to push back our speculative appetites to review the market with an objective eye towards fundamentals and capital flows. The first thing we need to appreciate is that regardless of the follow through on the greenback’s recent appreciation, it is still a tentative move.

USD Graphic Rewind: Trichet Ignites Biggest US Dollar Rally Since 2009; Bullish Outside-Week Forming

Forex: U.S. Non-Farm Payrolls Expand 244K, U.S. Dollar Rally Cut Short By Risk Appetite

The 244K expansion in U.S. Non-Farm Payrolls certainly sparked a rebound in risk appetite, with the higher-yielding currencies gaining ground following the larger-than-expected rise in employment, but the data ultimately generated a bearish reaction in the USD, halting the near-term correction across the major exchange rates.

Dollar Rallying A Bit; But Is The Rally Yet Another Set Up for Dissapointment?

The Greenback is once again attempting to mount some form of a comeback, and we explore whether this latest price action offers any compelling evidence that may actually legitimize the move..

U.S. Dollar Rally Gathers Pace, Speculation For Yen Intervention Resurface

The near-term correction in the U.S. dollar gathered pace on Thursday, pushing the Dow Jones FXCM USD index to a high of 9506.91, and the rebound in the reserve currency may gather pace going into the end of the week as risk aversion continues to flow into the foreign exchange market.

Better Than Expected April ISM Manufacturing PMI Sparks Risk Appetite Rally

The manufacturing sector in the US has been at the forefront of the US recovery, but today, data was expected to show activity cooling from its recent levels.

The ISM Manufacturing index hit a level of 61.2 in March, following a 61.4 reading in February, which was the best since May

Libya Fighting Calms Down as Stocks Around the World Rally

After yesterday`s important events were accounted for, markets looked to regain the bullish mood once again. The fall in U.S. home prices has not had a perceptible negative impact overseas, nor was the response in the U.S. strong enough to necessitate a reconsideration of long-term viewpoints. Perhaps traders are pleased that with the pressure on consumer net-worth exerted by falling house prices remaining in place, the Fed will be unwilling to adopt any radical measures to curtail speculative activity indirectly, or to fight inflation risk.

In the Middle East, a little bit of a stalemate is in place after the events of the past few days, and it is reported that while loyalist forces are too afraid to launch an open assault on rebels, due to Coalition airstrikes, the rebels remain too weak in terms of equipment and training to stage a major offensive against their enemies. Leaders of the Coalition against Colonel Gaddafi are worried about such a stalemate becoming entrenched, and there is increasing talk of arming the rebels coming from both sides of the Atlantic. In Syria, President Basshar Assad is expected to give a speech outlining his reform proposals, but it remains unclear how serious he is. His own supporters staged large demonstrations in support of the regime in many cities yesterday, and it looks like the rule of the Assad family is in no risk of a quick collapse anytime soon. Oil prices remain stable in response to these developments, with WTI a little lower, while Brent crude is slightly more expensive than yesterday.

In Asia, we are especially interested in reports of the new "copper as collateral" paradigm shaping the Chinese bubble, where it is reported that companies exploit latencies in supply and delivery of copper stocks in order to finance speculation. The article in the Financial Times blog is certainly worth a read for anyone curious about how the greatest bubble in the history of mankind is developing. While there is no sign yet that the game will be over soon, we believe that the PBOC and the Chinese Communist Party are committing a fatal mistake by refusing to restrain the creativity of China`s speculators more aggressively. It is especially worrying, and strange, that no precautions are being taken to prevent the diversified techniques of financial "innovators" in the country, in light of the fact that their deeds are counteracting the goverment`s tightening measures..

Stocks around the world are higher before U.S. open, while risk sentiment among currency traders is somewhat more mixed. News of an apocalyptic tone continue to come from Japan, and no end to the crisis appears to be in sight. Attention is focused on tomorrow`s NFP release, where anything less than a solidly bullish number indicating an employment gain in the 200k range will be regarded as a disappointment, although the short term price reaction remains as unpredictable as ever.

China PMI Rises, Payrolls Expand, Markets Rally

NFP rose by 216,000 workers in March after a revised 194,000 gain in February, according to numbers released today, mostly in line with expectations. The jobless rate dropped to 8.8 percent from 8.9 percent in February.

The numbers show that the public sector added 14,000 people last month, indicating depressed hiring at the local level, while Federal government increased payrolls by 1,000. Factory payrolls improved by 17,000, which is less than the survey forecast of a 30,000 gain.  Services employment rose by 185,000 in March, which is the highest monthly gain since May 2010, while construction payrolls fell 1,000 and retail trade employment increased 17,700.

On the whole these numbers show that the Fed`s effort to encourage U.S. Consumers to maintain their earlier habits has had some success, since the improvement in services hiring would be hard to explain in the absence of a matching improvement in overall economic data. The data also suggests that the U.S. Government`s pressure on the Chinese to appreciate the USDCNY will be less of an urgent focus in bilateral relations, now that the old regime of economic relationship shows signs of being resuscitated, albeit temporarily.

In that light, it is not surprising to learn that China’s Purchasing Managers’ Index rose to 53.4 in March from 52.2 in February, registering its first increase in four months. Even as the Chinese government`s attempts to cool down the economy bear some fruit, the economy appears to be benefiting from better U.S. performance. Chinese stocks responded positively to the release, but Japan underperformed on the back of continuing uncertainty about the nuclear issue.

In a sign of what is driving the U.S. economy in the aftermath of the Fed`s aggressive actions last year, today`s news reports show fixed income investors flocking to high-yield as investment grade debt of all kinds deliver historically low returns. Speculators of varying backgrounds are believed to have channelled some $14.4 billion into high-yield mutual funds so far in 2011. That is compared with $31.5 billion in all of 2010, bringing yields lower as returns of about 88 percent since the end of 2008 is more than double the gains of the S&P 500 stock index.

Markets received the Chinese PMI data positively, and coupled with a rebound in Europe, the optimism in Asia was enough to lift stocks around the world. The USDJPY was lower, while pairs where the dollar serves as the funding currency were higher, in response to stronger market sentiment.  Libya remains in an uncertain situation, but the victory of the loyalist forces against the rebels near the oil producing town of Ras Lanuf seems to have boosted the price of oil and commodities today, in spite rising inflation risk.

Forex: U.S. Dollar Rally To Gather Pace, Euro Searches For Support

The U.S. dollar rallied against its major counterparts on Wednesday as fears surrounding the European sovereign debt crisis weighed on market sentiment, and the greenback may continue to appreciate going into the North American trade as investors scale back their appetite for risk.

Gold Facing Formidable Headwinds After Ten-Year Rally

ECB Governor Trichet Presents a Confusing Picture and Markets Fall First, then Rally

As Trichet's actions and comments have shown today, the Europeans do not possess a large list of options for dealing with the market. They have a large and varying set of economies with greatly differing growth potentials, and uncommon definitions of optimum performance. What seems like a great boon to Germany, is the bane of Greece or Spain, and vice versa. To manage these, they have the ECB, and the various pacts and agreements that they have signed over the years in order to streamline economic performance and regulations in the region. These tools have been proven to be inadequate to the task by the Greek scandal, and the subsequent disarray of the European sovereign debt market. Now that the major powers of the region hesistate about accepting the inevitable burden that they have to shoulder in order to ensure that the European project survives, traders are turning their eyes to the ECB and the bureaucrats to do something to prevent the Euro's demise, yet fail to find anything of much value.

This is not suprising. After all, Europe is old, its population is old, and the way it conducts itself is old-fashioned, rigid and conservative in comparison to the U.S., or the rising nations of the world. Right now events necessitate bold trade-offs and courageous sacrifices on the part of the Europeans, both of which naturally demand leadership and moral strength in order to be brought to life. If it were that by doing nothing the Europeans could deliver the necessary remedies for the Euro, as they did during the Iraq crisis, the Georgian Crisis, or in the course of the Israel-Palestine conflicts, they would have done so once again, and pretended afterwards that they are only being disciplined and principled by not taking action to react to market events. Unfortunately for them, this time markets demand action, and quiet a lot of it, and no amount of rhetoric, or moral pontification, which were amply provided by the ECB chief today, will satisfy them into trusting the E.U.'s future.

We are a bit surprised at the ostrich-like complacency of European authorities, as they seem to genuinely believe that by doing nothing they can wish the crisis out of existence, or by merely declaring loudly that they are "aware" of the gravity of the situation, they can somehow avert its turning into a region-wide contagion that threatens the survival of the union. On the one hand, official after official expresses his "utmost and unshakable confidence" in the future of the Eurozone and the currency, yet the same officials refute time and again the accusation, as they apparently perceive it, that they are plannning something significant enough to ensure their survival. And it is a little strange that they can at times be victims to the illusion that, after repeatedly assuring everyone that Eurozone's creditors are safe from losses and restructurings, they can make the same creditors agree to a share in the burden just out of a sense of altruism towards politicans, or from a sense of civic responsibility towards nations and economies of which they are not even citizens. In any case, markets are not renowned for charitable generosity, and the PM of Europe's largest nation should at least be aware of this much when she makes her opinion known to the rest of the world.

Today's ECB news conference has led to little more than confusion in the market which seems to be staging a rally right now after being battered over the past weeks. Mr. Trichet did not appear particularly alarmed, probably on the notion that fundamentals in the region are strong enough to withstand bond sales by frightened investors or greedy speculators. Perhaps by looking at the large budget cuts enacted by various government over the past months, and the size of the EFSF, he is assuming that any Euro breakup scenario is outlandish speculation by overexcited traders who are known to be bipolar in their behavior. But even if that were all true, he should be alert to the fact that the past three years have provided sufficient evidence that a conventional analysis of facts may not always represent the hidden and incalculable risks that lead to very surprising market behavior. Caution, and not pink glasses would serve the ECB Governor better now as he seeks to ensure the stability of his domain of responsibility.

U.S. Bourses Rally on Strong Data, Asian Markets Weaker on China Uncertainty

Trading is reported to be quiet today, and especially so in the usually less-liquid CDS markets. Consumer confidence numbers, and trade balance data have boosted sentiment on the USD, and led to some improvement in the performance of U.S. stocks. Europe also performed satisfactorily, while Asia was weaker once again on the back of worries about new Chinese interest rate rises.

US Exports registers the largest jump in records reaching back to 1985

The blog section of Financial Times is drawing attention to the large improvement in the U.S.-China trade balance.

As it can be seen in the list, exports to China registered a big jump in October, bringing the bilateral deficit significantly down, and contributing to the final tally resulting in today`s positive U.S. Trade deficit. Although we strongly believe that the U.S.trade deficit peaked in the Bush years, as the Financial Times says, the sudden jump is too large and disproportionate to the improvement in the American position against any other trade partner during the same period to be explained as a simple part of this process. In absolute dollar terms, the jump is the largest since 1985.

The newspaper offers no explanation, for now, to the improvement, and we wonder if it is possible that the Chinese government will actively shift the purchases of state-owned companies to U.S. based firms from, for example, European firms in order to actively reduce the deficit while keeping the yuan stable. Such a scenario is purely speculative, of course, and wouldn`t make sense in a liberalized economy, but it does provide meaningful benefits to the Chinese without burdening them with the unpredictable costs of a rapid yuan appreciation.

The improvement in the U.S. trade balance is a favorable development for the USD, but taken in the context of the Fed`s actions, it is unlikely to have a significant impact on market direction. At the same time, we expect the dollar to rally into the year-end and perhaps beyond, so it is possible that the data will boost dollar-bullish sentiment in the meantime.

China easier than the Fed, analyst says

Today Bloomberg has published an article on which of the Fed orthe PBOC is easier on monetary policy. We quote the relevant sections.

China’s economy is history’s biggest bubble and may be headed for collapse, according to Richard Duncan, chief economist at Blackhorse Asset Management Pte., who predicted a credit boom would trigger a global recession.

A more than 50 percent surge in China’s money supply since 2008 helped fuel economic growth in excess of 9 percent per year, even as trading partners sank into recession. The expansion also saddled the country with factories that produce three times more goods than can be bought by China’s workers, 80 percent of whom make less than $5 a day, said Duncan.

“China has the greatest economic bubble in history,” said Duncan, author of “The Dollar Crisis” first published in 2003. “There’s a real risk it’s going to collapse in a Great Depression-style scenario.”

“It’s hugely hypocritical for the Chinese to say anything about the U.S. doing quantitative easing because they’re the kings of quantitative easing,” Duncan said in a phone interview this week from Bangkok.

Premier Wen Jiabao’s government has been creating about $250 billion worth of yuan each year “out of thin air,” Duncan said. To keep its currency from appreciating, the People’s Bank of China has been printing yuan to offset the dollars flowing in from a trade surplus that expanded to $27.2 billion in October, the most since July.

China’s gross domestic product will by expand by 9.2 percent this year, according to the median estimate of 17 economists surveyed by Bloomberg News, poised to overtake Japan as the world’s second-largest economy.

Readers of this site are familiar with our pessimistic point of view on the political economic stability of China in the next decade or so, and we strongly agree with the terms of Mr. Duncan`s analysis.  At the same time, of course, the monetary policy of the Chinese is that of a developing nation, and is only surprising because of the large size of the country, and its economy. Developing nations are generally expected to pursue more inflationary policies to finance their larger modernization needs in many fields, so it may not be altogether fair to pick on China`s monetary policy alone to the exclusion of most other developing economies. The Chinese are only following the common Asian export-based model which helped Korea and Japan reach world power, and the problem is really rooted in central banks` calculation of CPI numbers from which asset price inflation is excluded, leading to the extreme monetary policy choices of our day. The question of who is easier with rates and money supply is akin to the chicken-and-question, and is not very productive at the moment. That the Asian model seems bankrupt at the moment further complicates the picture.

The future of China is not only critical for stock markets and risk sentiment, but it is also crucial for  the gold price, since the market has been rallying over the past year, at least in part, on the momentum created by Chinese demand and rumors about the reallocation of Chinese reserves. The role of China in the overall commodities market is of course well-known to anyone with a little knowledge of the finance world. A Chinese downturn is, in short, a critical sign for anyone involved in the short-dollar, long-risk trade, and it is one of our main indicators of global economic performance, in addition to the interest rates of major nations at the moment.

The week is over, and after next week it is possible that trading activity will become even more subdued as we had to 2011, and market actors reevaluate their positioning and strategies. For now, however, we will keep our eyes on the dollar and the stock market in anticipation of a corrective dollar rally that may ensue towards year-end.

Will a Rise in Services and a Strong U.S. Labor Report Ignite a Dollar Rally?

The U.S. non-farm payroll and ISM non-manufacturing reports will look to continue the string of strong fundamentals results from the world’s largest economy. A brighter outlook for domestic growth has started to generate greenback support and signs that the service sector which accounts for 70% of GDP and the labor market are improving could be a catalyst for a bullish rally. Canadian manufacturing and German employment data will also be potential market moving events during the upcoming week, as traders look to see if their recoveries are sustaining.

Stocks, Currencies Rally as Markets Focus on Year-End

Bourses have been doing very well today, as European stocks outperformed U.S. equities. Asia is also showing a strong performance, with Japan being the main weakness in the region. Low volumes, and lack of meaningful data has been exploited by those few who are active in the market in order to drive prices higher. Bigger actors are probably evaluating the year and keeping trade volumes to at a minimum.

Data from the U.S. continues to be positive in line with our generally U.S.-positive outlook for next year, although this does not imply that the USD is a good choice for safety and stability. The U.S., like Japan, is going through a period of recuperation and readjustment, which, by definition, does not involve radical changes and upheavals. The shocks and scandals are mostly over. The GSEs are nationalized, Madoff is in jail, investment banks are no more, government intervention is ubiquitous, the private sector is continuing to cut costs, while the consumer is  cautious about risk taking, after seeing what happened to the foreclosed neighbor, or the laid-off worker. None of this is good from a growth perspective of course, but slumber is better than panic or intoxication, two states between which the rest of the world seems to oscillate as a great deal of effort is made to place events and actors into context.

In many ways, the U.S. is benefiting and will benefit from being the first to suffer the consequences of the global speculative bubble that developed, in large part, after the goobal interest rate cuts at the beginning of the century. Yet there can be no doubt that no nation will be isolated from the consequences. Imbalances are not troublesome for those in deficit, they are also troubling for lenders, as the spate of foreclosures in the U.S. has demonstrated to great effect.

No one has ever thought that big banks would be fine while borrowers defaulted just because they happened to be on the opposite side of the mortgage transactions. What  would convince us, then, that just because China and the Asians are creditors, they will fare better than the borrowers in the Western World. If Citibank or Bank of America suffer when homeowners default, why do we believe that the Chinese will be fine, when they are the real lenders, after all, to cause all the massive bubbles and balloons on this side of the ocean?

The Chinese can no longer inflate America  and its markets in order to create demand like they did in the past, so the wise government there is now applying its addictive medicine to its own economy in order to create the same fake demand that all but destroyed the U.S. economy during 2007Q3-2009Q1. Just like most speculators were blind to the mortage bubble back then, they are blind to the domestic Chinese bubble now, believing that, because the Chinese have huge cash reserves and a strong export sector, they can weather any storm. This argument is in fact very similar to that advanced in defence of Merril Lynch, Lehman Bros, and others, when they had almost incredible profits during the boom years. Yet those profits did not prove sufficient to save them from bankruptcy, because of the crucial term, "leverage". And so, what makes us believe that the Chinese will be able escape the cataclysmic consequences of their own bubble blowing, once their gigantic edifice of leverage and monetary inflation collapses, as it inevitably will?

The developing world story is a real story, and in spite of all the risks, the gains that have been made over the past two decades are real and will lead to a real convergence in performance around the world. We are convinced that the days when certain parts of the world were permanently backword are over for now. The immense improvement in communication technologies, the widespread availability of  information at all levels has accelerated the pace at which knowledge is shared around the globe, and, as most people believe, permanently improved the growth capacity of the world as a whole. But none of this excludes the possibility that bubbles will develop, and none of it implies in any way that people, investors, or voters have become any wiser. All that it means is that they have become more similar, and their actions and choices are easier to analyze with a single set of data that is applicable to very different geographies and cultures. The fact that few nations, perhaps with the exclusion of sub-Saharan Africa, for now, will be left behind in technological and scientific advancement of the human race does not mean that the human race as a whole cannot go through difficult and turbulent phases. Indeed, the basic law of oscillations makes us think that the more momentous the upward swings are, the more momentous the downward movements will be.

These facts remain facts as long as the global economy is run by people who are delighted to  see citizens enjoy the fruits of temporary bubbles and dreams. Emotional approaches towards economic issues is bound to yield disastrous consequences, as history has shown us time and again, but let`s allow our hearts the freedom to have more hope these days, as the year approaches its end.

Forex: Euro, British Pound Rally As U.K. PMI Manufacturing and Euro-Zone CPI Estimate Tops Expectations

The British pound pared yesterday’s losses against the greenback as the U.K. PMI manufacturing report in December rose to 58.3 amid expectations of 57.2 to mark the highest reading in 16 years.