Friday September 3, 2010 - 19:52:50 GMT
Share This Story
Foreign Exchange Analytics - www.fxa.com
US Deflation Risk Prevails Despite Fed's Guarded Optimism and Data (FXA)
Looking at the relatively large reversal in risk this week that sent stocks, commodities and currencies up sharply one would guess that the fundamental outlook had changed pretty radically. Well it has not as I discussed in an earlier email and all we have at the end of the week to hang the risk on trade on is US and China manufacturing PMIâ€™s advancing, pending home sales up, drop in jobless claims and a large upward revision to non-farm payrolls in June and July. Okay we could throw in Australia Q2 GDP for good measure.
The only other main event of the week that was meaningful and helps explain the direction if not the scale of the move in risk is the message from the Fed (goes to Bernanke on Friday in his Jackson Hole speech where his message was we are not in a rush to start QE2 and content to patiently wait for more data to get a clearer picture on the US economy â€“ is the economy double dipping or simply in a temporary soft patch? Fed Vice Chairman Kohn echoed this view this week as he prepared to retire from the Fed telling CNBCâ€™s Steve Liesman he would not describe the Fed QE decision as a hair trigger one â€“ this is a big decision requiring high degree of evidence, patience and a preponderance of evidence. One sell side firm quickly issued a note saying it forecast QE2 in Q1 2011 after this heads upâ€¦coincidental? Hardly.
So if the scale of the move in asset prices, commodities and FX is not explained in full by the marginal improvement in US data this week and some pushback from the Fed what does? Position, position, position. People were too much on the one side of deflationâ€¦yes I was among them. QE2 seemed imminent a week ago until Bernanke spoke. That was a misread. But the balance of risks is still squarely with deflation (or double dip).
I canâ€™t help but think that next week markets will stay with this weekâ€™s trade â€“ buying risk â€“ especially with China reporting its August data on Friday and the following Monday and a real absence of key US data next week (Beige Book, claims and trade about it and markets closed Monday). Also Obama will unveil a set of proposals to grow jobs next week and this may well draw on ideas that Republicans could have a hard time opposing like a temporary payroll tax holiday and tax credits to businesses for hiring which should add some lift to the risk trade.
But even with the market trying next week what worked well this week is no ticket to prosperity and given the still compelling story of the US economy in a soft patch and possibly quick sand, the upside in risk should be exhausted by the release of Chinaâ€™s data September 13. Then it is back to risk off and ultimately markets pressing last weekâ€™s risk off levels. We are a long way from out of the woods when it comes to deflation.
Look for USD, CHF and JPY to weaken more vs EUR. Like test of 1.2960 in EURUSD which is 50% of the move down from Aug high to low and then fade any run at 1.30. Meanwhile GBP canâ€™t buy a break higher â€“ weakens in risk off and risk on marketâ€¦maybe QE2 arrives in UK home port first.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."