Ralph Shell @ 1:02 PM, Thursday September 02 2010
Preceding the long Labor Day weekend we get the NFP report, which always seems to be a market mover. Predictions are for a job loss of 101K down from 131K in the previous period. In addition we will receive the unemployment rate, forecast to be up to 9.6%. These two numbers give politicians something to brag or complain about depending upon the party. November elections, a scant two months away, make these numbers even more significant, and the many retroactive "adjustments" make this number subject to suspicion they are managed for political reasons.
It has long been our contention that small business, the precursor of any recovery in employment, finds the current administration hostile to their needs. The threat of higher taxes and regulatory fees, questions about the costs and obligations of their employees as determined by Obamacare, and the yet to be determined government rules of the new financial regulation act, all serve to seriously deter new small business hires.
Reduced tax receipts by city, state and local governments are another major problem. The need for additional revenue will result in additional local taxes and fees, another burden on small business. Smaller local tax revenues are causing state and local governments to reduce the size of their work force, another negative for the NFP number.
Logic would suggest the NFP number will show a bigger decline than the guesstimated 101K, but what happens if some of the bad news is camouflaged by adjustments? Only much later, will the real number be revealed. How would a small number shake up the market? Will bearish US economic news help the USD?
Yesterday's US equity rally on the first day of Black September alerted traders. Since years ago, when I first figured out that you could make money by selling first and buying later, September has been one of my favorite trading months. But will the equities market trick traders this time?
The practically non-existent fixed income return makes equities a lot more interesting. If a manager of a defined benefit retirement fund has a choice of 10 year US Treasuries yielding 2.62%, a heavier allocation to equities seems likely, especially if the rate of return had been anticipated to be 8% when the plan was initiated.
There are some other problems with the notes and bonds. Interest rates are likely to remain low for years because the massive amount of global sovereign debt means the central bankers want to keep the rates low and the money supply ample to finance this debt. Well run global companies have a going enterprise value that will allow them to survive in many environments, so fairly priced equities have merit.
So how does all this relate to the forex markets? Well first, do you really need to trade in front of a NFP report on the Friday before a three day weekend? If so, the key to making money is not losing too much on one trade, so why not take a look at the yen. With Japanese government officials and business all yammering about the harm caused by the high priced yen, it seems like some one will do something. Until recently the paradigm for trading the yen was that weak stocks meant a strong yen. The decoupling of this relationship has been confusing to market participants, but in the 84 area we wish to buy the USD and sell the yen. There is a long week end coming giving the Japanese officials lots of time to deliberate, talk, and maybe even act.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.