Sunday, 4 August 2013

The Week in Forex - Review and Preview

Ralph Shell, Excel Analyst

Excel Markets Forex Demo Account Trading ContestLast week was a week when the markets were supposed to quietly await the the conclusions of the central bankers from the US, Europe, and Britain.  The central bankers, however, seemed ambivalent, and mostly wanted to wait for the economic data, before embarking on a new course. 

Most observers think the US economy is the closest to a recovery of sufficient strength, which might result in monetary tightening.  Bernanke, in his prepared statement and at his press conference, did not acknowledge there was a timeframe for reducing his monthly purchases of US bonds and other paper.

Despite his dovish comments, the bond market did not want to believe tapering of the bonds purchases would be postponed.  Some believe Bernanke, in the last six months of his tenure as Fed Chairman, is unlikely to alter his policies.  Despite this, bond rates have been appreciating.  The US ten-year climbed to about 2.75% before the NFP Report released Friday, 02 August.

Non Farm Payroll
Earlier last week, the US ADP Employment Report has forecast 200K new hires, but the NFP fell well short, only 162K.  The employment rate did drop one tick to 7.4%, but this is a result of people dropping out of the labor force.  There are now about 156M people in the US labor force, but almost 90M working-age people who have dropped from the labor force, unable to find work.

Further evidence the US recovery is feeble, and the mix of full- and part-time jobs, is quite vexing.  There have been 953K jobs created this year, and 77%, or 731K, are part-time.  The pending insurance costs of Obamacare for those employers with over 49 employees who work over 30 hours per week, is given as the reason for more part-timers. 

When the all important US jobs number was reported well short of expectations, there was then pressure on the USD.  While understandable, we wonder about the strength of the pending global recovery when it's leader lacks vigor, the Chinese economy remains suspect and Europe is still in a recession.

Recently, the Eurozone has had a respite from their many debt-related  problems.  This does not mean they are solved, rather they are merely postponed.  In a story today from the Financial Times, courtesy of zerohedge, they report an IMF study that says Spanish unemployment will remain high - at least 25% - until 2018, another five years.

Greece remains a problem.  It is reported by The Telegraph's Evans-Pritchard,

"...that public debt will reach 176pc of GDP this year, despite the haircut already imposed on pension funds, insurers and sovereign wealth funds (Norway for instance) who loyally stood behind Greece after categorical assurances by EMU leaders that Europe would never let an EMU sovereign state default."

Obviously this is far short of the 124% debt-to-GDP goal in 2020, a tall order for a country that has seen their GDP contract 25% since 2007.  It is obvious the Troika's rescue plan for Greece is not working.  More debt will need to be written off, but any discussion of the possibility prior to the German election is not permitted.

The single currency works much better for some countries than others, but the problems have been papered over.  The EURUSD (FXE UUP UDN) has been on a four-week rally, from 1.2755 four weeks ago to 1.3340 last week.  We note from the COT report, released Friday afternoon, that the large spec reduced their shorts by about 17K contracts.  The weekly candle for the pair is a doji, often the signal for a turnaround.

Recently, much of the news about the British economy has been positive.  Thursday 01 August, the UK PMI for Manufacturing beat expectations coming in at 54.6, greater than the 52.8, and the 52.5 at the last report.  Friday, the US HPI Nationwide was up 0.8%, better than last month's 0.3%.  The UK PMI Construction number was 57, a big jump from 51 last period. 

The pound was trading well on Friday, running up 200 pips, and trading late in the session close to the high.  But for the week the pound was trading down from last week's close.  On Monday 05 August, we get the important PMI for Services, expected to be 57.5, perhaps a hard number to beat.  On Wednesday, the new BOE Governor will speak.

Click to Enlarge GBPUSD Forex Weekly Chart
GBPUSD Weekly 02 August 2013, Excel Markets ECN Forex Broker

The new COT report released yesterdat shows the specs are still big pound shorts.  The pound short is 63.9K contracts compared to only 30.5K in the euro.  The open interest in the euro is much bigger, making the pound short even more interesting. 

The Australian retail sales report will be announced on their Monday morning.  Then, on Tuesday, the interest rate decision will be announced by the RBA.  It is expected there will be a 25 basis point reduction to 2.5%.  Their unemployment numbers will follow on Wednesday.  The total spec short at the CME increased to 95.2K as we traded in new low ground for the year.  Open interest in the A$, (FXA, AUDUSD) is quite large, approaching the OI in the yen.

Trading in the yen was subdued for the week.  It did strengthen versus the USD to 97.57, but lost ground on Thursday.  There does not appear to be any major reports coming next week.

Click to Enlarge USDJPY Weekly Forex Chart
USDJPY Weekly 02 August 2013, Excel Markets ECN Forex Broker

The third arrow of PM Abe's plan , now that he has control of both houses, involves fundamental changes, which as someone said will drag the vested interests screaming into the 21st century.  Change of this sort does not happen quickly.  We will be looking at some of this next week.  The COT Report shows specs have reduced their yen short marginally, but are still short over 110K contracts.
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