NZD: New Zealand Dollar is in the focus of traders

Forex analytics: The New Zealand Dollar rate remains at the low level at the Forex currency market at the beginning of the week, because market has not any interest in risky positions. External background is still complex, which prevents from regaining from the previous sales.
Forex forecast: MACD indicator is in the positive area for the pair NZD/US, however it goes down, giving a pair sell signal. Stochastic ...

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RBA Raises Inflation Forecast as Traders Raise Rate Expectations

Crude Oil, Gold Decline as Traders Begin to Position for the Expiry of QE2

Crude oil, gold and silver prices pushed lower as traders seemingly began to reposition for a world without QE2, weighing on inflation bets and sapping risk appetite.

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.

Tunisia Seeks the Arrest of Former President; Questions About QE3 Remain in Trader's Minds

Tunisians are not satisfied with just toppling their corrupt and brutal dictator Zine El Abidine Ben Ali, but would like to recover him from his place of refuge, and subject him to a trial in which he can be questioned on his numerous crimes. It is possible that he will get the death penalty unless it is abolished by that time, although nowadays the death penalty is rarely executed.

Protests have been continuing in the Arab World today, with bloody confrontation between security forces and demonstrators in Egypt claiming some lives. Egypt`s benchmark stock index fell by 6.1%, bringing this year`s fall to some 12% already, CDS rates rose by 15 bps to 344, and 10-yr  bond yields rose by 7 bps to 5.89%. Investors are apparently alarmed by the turmoil, and no doubt the Israelis and the U.S. administration are even more distressed by the possibility of lasting instability in this turbulent and critical region.

Interestingly enough, Secretary of State Hillary Clinton was on the side of the Egyptian protestors with her comments today, calling for restraint from both sides, but emphasizing "that the Egyptian government has an important opportunity at this moment in time to implement political, economic and social reforms.”  This stance makes sense, since the remaining lifetime of the dictatorship in Egypt is probably limited by now even if it were to survive the recent clashes through some wonderous turn of luck, especially as the decade promises a lot of fluctuations in commodity and forex prices, creating a heavy burden on the already severely pressured Egyptian nation.

Among other things today, some are speculating on the possibility of another recession if the Fed stops its purchases in June, but that seems unlikely to us. We only need to recall that the current program was only launched because of unease in the markets and stagnation in the domestic economy. When the Fed Chairman announced the purchase program he made it clear that it was only in consequence of the commitment to "do whatever it takes" to prevent a depression that the central bank was engaging in  quantitative easing. He never hinted that the program would be final, or that he would be unwilling to supply more of the same if the economy failed to respond as it had been anticipated.

As long as Ben Bernanke remains in control at the Fed, we will have his clear commitment to keep printing unlimited amounts of money to depend on as we assess the future direction of the U.S. economy and the market. Since the Fed doesn`t depend on us, the Congress, the President, or anyone beyond itself in determining what to do with monetary policy, we have great clarity on which indicator we should be following while trying to decide if there will be a QE3 or not. This indicator is the Fed itself, its minutes, and statements, which alone have the power to decide whether there will be a further bout of easing. The Fed will almost certainly engage in another leg of quantitative easing in case it is found out by June that the economy will go into a deep plunge once stimulus is withdrawn. With much of the emerging market world growing at a much slower pace by then due to unavoidable interest rate rises, it is likely that the Fed will extend the term of its bond purchase program, even if it decides to wait a while before doing so. Perhaps the August-September period would supply the catalysts for such a course.

Elsewhere, the committee set up to investigate the causes of the subprime debacle has finished its 550+ page report and among its findings we will be reporting that shoddy mortgage lending, excessive securitization of loans and speculative gambling on such securities triggered the crisis, according to the New York Times. The report will assign part of the blame to Ben Bernanke and his predecessor Mr. Greenspan, while criticizing the Bush administration and Henry Paulson for adopting haphazard, ad-hoc solutions and failing to bail out Lehman. These conclusions are generally agreed to by the market, and we only disagree that a Lehman Bailout would have made much of a difference. The whole financial system was burdened with worthless mortgage paper, and counterparty risk, and if it were not Lehman, the nerves of the public and the administration would have snapped at some other firm. With hindsight, it does appear that a takeover similar in strategy to the Bear Sterns deal could have been adopted delaying the breakdown of the system in September 2008, but this would never have satisfied the short-sellers, or the bears in the market, since, as we noted, the whole system was infected with the disease, and a collapse was almost inevitable. Further, while we may have ideal scenarios in our minds about government officials acting like corporate bosses, it is not sensible to ignore the fact that their responsibility is not only towards the economy, but also to the people at large. A degree of subservience to popular will is inevitable in a democratic system, even though this sometimes leads to difficult and painful results. This analysis doesn`t consider the viewpoint that bailouts are morally and fundamentally wrong, since the case for this position has been made many times by others, and there is no need to repeat it here once more.

With respect to the Obama Administration`s deficit reduction plan, our opinion is that unless similar restraint is shown by the Federal Reserve it is like plugging one hole in the ship while it keeps leaking from three others. The impact on the USD, gold, and the economy is dependent, to a large extent, on the Fed`s choices, since, as it is widely acknowledged by markets, the monetary policy of the United States is determined by the FMOC. This is different from the situation in China where the PBOC is not at all independent, or Japan, or the UK, where the central bank is expected to coordinate its actions with those of the government, even as it retains a great degree of independence. The President`s plan makes sense in many ways, but before we can speak of a real reversal in the fortunes of the dollar, or the gold market, we have to first see the Federal Reserve restrained, and brought under closer supervision so that its chain of exotic experiments is brought to an end.  

FOREX: Dollar Gains as Traders Look for US Growth to Outperform in 2011

The Dollar advanced in Asian trade, bucking its safe-haven profile to rise along with the region’s stock exchanges as traders positioned for strong US growth in 2011.