Monday 16 January 2012

Forex Market Outlook January @2012


Well we made it through another weekend after Friday's sell-off in risk currencies despite the fact that the Non-Farm Payrolls (NFP) came in much better than expected.  In Friday's discussion, I mentioned that even if the numbers exceed the official estimates there could be disappointment.  To be honest, the number was extraordinary and the market sold off anyway.  This means that it was very unlikely that any number could have satisfied the market and the Euro debt crisis is still the dominant economic story.

For further proof of this, look no further than the fact that another record was set for banks leaving money on deposit with the ECB, which is a sign of fear.  Another measure of this fear is that German short-term debt no has a negative interest rate.  In other words, there is so much demand for German paper that people are willing to pay to lend them money, and not receive interest.  This last happened here in the US back in 2008 during our banking crisis so the similarities are telling.

Enter Merkozy to the rescue!  Today's meeting between the French and German leaders is intended to hammer out the details of the fiscal rules that they agreed to last month and what further actions need to be taken in order to save the Euro.  Among these topics are the potential to increase the size of the bailout facility and how big of a haircut Greek bondholders may be required to take.  This could exceed the 50% losses that have already been discussed.

Meanwhile, the ECB is going to have their interest rate decision on Thursday and the speculation that Monti may try to emulate Bernanke's maneuvers is starting to pick up, as there is some thought that further monetary accommodation could be necessary to stave off a liquidity crisis.  This doesn't seem likely at this point and perhaps they will wait until the news out of the Merkozy meeting which they claim is going well at this point.

There is not a lot of news coming out of the US this week on the data front, but we are going into stock earnings season, which could have an effect on the US dollar if the correlations remain in tact.  But recently, it seems as though the correlations have been breaking down a bit so the impact could be lessened.

The Japanese markets were closed overnight for a holiday, and in the Euro zone German trade balance figures came in much better than expected on stronger exports, though industrial production figures came in worse than expected.  Later this week we will get the German Real GDP growth report on Wednesday, followed by CPI data and the rate policy decision on Thursday.

The Bank of England will also be releasing their rate policy but are not expected to have made a change.  Recall that the ECB decision also comes with an accompanying statement, whereas the BOE decision does not.

In Switzerland, the unemployment rate ticked slightly higher than expected to 3.3% from an expected 3.2% and retail sales figures came in better than expected showing a gain of 1.8% vs. the expectation of a .2% gain.  This comes in the midst of a minor scandal involving the currency trading prowess of the SNB honcho Hildebrand's wife, which is reminiscent of Hillary Clinton's commodities trading activity.  While this is likely much ado about nothing, there could be changes coming at the SNB.

Lastly, the Fed has the "dog and pony" show this week with a lot of Fed speak from various officials in different venues essentially trying to allay fears but you never know when one wrong statement can send the markets spinning.

And of course let's not forget the noise coming out of Iran and the potential oil supply disruptions that they threaten but likely won't act on.  Should the scene over there escalate then we could see oil spike higher.

So the markets are flat to slightly higher this morning, with US dollar weakness and the Euro bouncing off of lows that saw the Euro trade a 1.26 handle vs. USD.  If the Merkozy meeting produces positive results than this could quell the markets for a bit as the focus shifts to corporate earnings and the potential good economic story taking place here in the US.  So it may be risk-on again until the weekend where investors may want to lighten the load.

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