Ralph Shell @ 1:56 PM, Friday December 03 2010
There is nothing like a Friday US Non-Farm Payroll Report to re-shuffle the equity in Forex accounts. Great expectations that the economy had created 130K jobs were expected but the actual number 39K was a downer. The unemployment rate went up to 9.8%, and the underemployed rate is now 17%. Weak economic data is giving us a lower USD as we head to the week end.
During difficult economic times, those countries with the fewer worries have currencies that perform better, though the markets perception tends to be fickle. For weeks the Bernanke's QEII was a major worry, and weighed heavily on the USD. We cannot measure the forex trade, but the futures traders amassed short positions in the USD of over 280,000 contracts according to the COT report of October 19th. With the announcement of the $600B QEII plan, central bankers grumbled, but the USD shorts decided the news was out and it was time to cover.
Moving to the top of the currency worry agenda then became the issue of the peripheral debt problems in Europe and the possibility of contagion. This put pressure on the euro, and the pound, because of the British banks large loans to Ireland,. The sell off was exacerbated as the USD shorts covered their positions.
Finally, by the middle of this week, it looked like the ECB stepped forward, began buying some of the questionable debt, and for the moment, quashed the run on dubious euro dominated debt. This activity is, in a fashion, similar to QEII, but the size and intentions of the ECB are unknown. Yesterday, it was revealed that the Fed loaned massive amounts to British and European Banks during the financial crises. During the crises, the Fed also loaned billions to the auto industry. In addition to Ford GM, and Chrysler, they gave $6.2B loan to BMW, and a $4.6B loan to Toyota. Is it possible that these revelations about the Fed's massive loans during the financial crises, will give the euro central bankers the courage to be less penurious in the future?
If the ECB continues to buy debt and enhance their balance sheet, this might again help the relative strength of the euro at the expense of the USD. The US data today confirms the tepid recovery. Unfortunately, the Washington crowd, who claims their major concern is more jobs, fail to realize it is their actions, that have aborted job creation. Small business has long been the creator of jobs and it is the taxes, rules, regulations, and obligations imposed on small business by Washington, that is halting the recovery. No amount of loose monetary policy will overcome those destructive policies.
The inability of the current Congress to determine next years tax rates handicaps business planners, both large and small, and hinders job creation. The decision of the administration to oppose further oil drilling in the Gulf of Mexico, is another example of Washington compounding existing problems. How many jobs would that activity create? With oil imports accounting for $25B+ of our $45B monthly trade deficit, does it not make sense to use our own oil? Will weak and misguided Washington leadership continue to hinder the US economic recovery and the value of the USD?
The pound has been tarnished with the euro because of geography and the debt problems in Ireland. The market action this week, making a Tuesday low of 1.5483, followed by a recovery above the 1.57 handle is showing signs of a reversal. Economic news from Britain has been not robust, but OK, and they do have some economic rehabilitation plans, unlike the Washington group. We do not favor new trades on a Friday, but will be looking for a long entry point next week.
Have a great weekend!
Ralph
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.