The US Dollar appears to be mixed with the majors today.  The Euro is pulling away and becoming bullish on assurances from G7 officials that the credit crisis would be resolved.   The Pound has become bullish and is just about testing short term resistance levels.

1.  The G7 meeting gave an indication that  it would ensure Greece will tackle its deficit issues.  Euro zone finance ministers are expected to endorse Greece’s fiscal goals.   Any talk of a bailout for Greece is premature.   

2.  China’s money market conditions have eased. Expectations for appreciation in the Yuan, has moderated. Chinese officials issued a partial ban on new IPOs by targeting listed companies seeking to raise equity for paying down debt.   This week China will rease loans, trade and CPI data.  Chinese markets are closed most of next week for the New Year celebration.

Commodities indicate that Gold hit a new high and the US Dollar is trading with a softer tone today.  Most major currencies are staying within yesterday’s range, but the Euro attempted to rise above the $1.50 area, but it ran out of steam. 

The Euro zone account deficit rose to EUR5.4 bln, but it had little impact on the Euro.  

The Bank of England discussed a cut in the deposit rate on reserves, but it did not seem to affect teh Pound very much, as it remains within yesterday’s range.

The U.S. Dollar is finally gaining a bit of ground against most major currencies today.  As noted in earlier posts, the unique inverse relationship between a U.S. Dollar rally or retreat and the equity market is still occuring, as we can see by a softer tone in the equities and commodities markets today.  An attempt to take the Euro back above the $1.50 area has failed, as well as the attempt for the Pound to move above its 15-day high.  A Euro zone trade surplus seems to have had little effect on pushing the Pound higher, even though exports rose by the most since January 2008. ulnerability of some euro zone countries may be encouraging profit taking on short dollar positions.  The Aussies appears to be one of the worst performers today.

Our GBPUSD position is now in the money by 261 pips!

Bought the GBPUSD pair on Friday (13th) for a price of 1.6590.  We are still in the trade and it’s in the money by 220 pips!  We may stay in a bit longer.

The U.S. Dollar is beginning to stabilize a bit.   Analysts believe that the main forces undermining the U.S. Dollar are mainly cyclical and not structural.

Three indicators that helped identify the U.S. Dollar’s bottom were the following: technical factors, short-term interest rate differentials and the status of risk on/risk off trades.

Below, we review these three indicators:

Technical Factors
The U.S. Dollar may be in the process of becoming somewhat more supportive.   The sentiment is that most will not be positioned for the potential dramatic turn that the U.S. Dollar could take.  We had told you earlier in the month that options buyers are paying the largest premiums of the year for Euro puts (the right but not the obligation to sell Euros) over calls, suggesting the perceived need for insurance.  However, judging from the futures market and currency ETFs, it may not be too extreme.

Momentum indicators are showing bullish Dollar divergences and the highs in the Euro have not been confirmed by the RSI, suggesting downside risks may be growing.

Interest Rate Differentials
In the global and currency (forex) markets, interest rates help shape the incentive structure for many participants. Short-term U.S. rates remain below similar Euro zone rates.  This means that one is paid to be short the U.S. Dollar against the Euro.

The interest rate differential has moved further against short-term U.S. interest rates, which are still below those in the Euro zone, as indicated by Eurodollar and Euribor futures contracts.   In August, the December 2010 Eurodollar and Euribor futures contracts were at the same level.   Now the Eurodollar contract yields 44 basis points (annualized) less than the Euribor contract, having set a 7- month peak in the first week of November.

Three months ago, the market was anticipating that 3-month Eurodollar rates would be well above (almost 50 basis points) Euribor at the end of 2011.   Although the market had been reconsidering its assessment for some time, it was not until earlier this month that the U.S. rates were pushed back below the euro zone rates. What all of this means is that interest rates are not able to support a sustained U.S. Dollar recovery, as of yet.

Risk On/ Risk Off Trades
A current characteristic of the foreign exchange market is the Euro appreciating against the U.S. Dollar while stocks rally. You can see this correlation by comparing the Euro to the S&P 500 as a percentage of change.   This would indicate that a U.S. dollar rally would be accompanied by a drop in equities, in the current conditions.

This correlation could change, but it seems to be the norm for the time being.

Discussing what is contributing to the euro’s weakness, with Mitul Kotecha, head of global FX strategy at Calyon Hong Kong, speaking with CNBC’s Martin Baccardax & Chloe Cho.    Watch Video

The Euro appears to have lost some ground, after reaching above $1.5000 overnight.  The currency has now dipped below our 1.4955 level, meaning it will continue to slide downwards, with a 1.4910 level to watch for support.  Should the pair break below the 1.4875 level, it may signal a deeper correction lower for the pair.

Today’s Euro zone industrial production data was a disappointment, rising 0.3% m/m in Sept (0.5% exp), although it is identified as the fifth consecutive month of increase.  With new orders and capital goods rising, output should increase.

On another note, German output jumped 3% in September, which could lead to a smaller GDP contraction for Q3 than previously thought.

Spain’s GDP came in somewhat better than expected at -4.0% y/y vs. -4.1% exp and vs. -4.2% in Q2.  If the jobless claims improve, it may encourage traders to take on more risk, which would be a negative for the US Dollar.

A weak US Dollar remains, as it hovers around a 15 month low, partly due to consensus that interest rates will remain low.

On another note, the Pound was hit hard after Fitch said that the UK was highest on a list of four economies for losing their AAA rating.

The trend for US Dollar weakness remains, especially since there is no other evidence present that would allow investors to move it higher.

The euro quickly reversed a dip in price, after a German ZEW survey showed investors some weak numbers and a gloomy outlook.

With fiscal and monetary stimulus in place, analysts believe the US Dollar weakness will continue.

It is expected that US interest rates will stay near zero, well into next year.  This has allowed investors to use the US Dollar to fund carry trades in assets that are higher yielding.

Yesterday claimed the biggest one day fall for the US Dollar since July.  It will be interesting to see what the option strike prices are for the EURUSD pair above the resistance level of 1.5020.

The Aussie remains steady after a brief rally based on strong business confidence data.  The rally stopped just shy of a 15 month high of $0.9330.

Officials from the Federal Reserve are scheduled to speak today about the outlook for interest rates and the schedule for withdrawal of monetary policy measures.

Most major currencies are fairing better than the US Dollar today, after the G20 appeared to show little concern for the FX world markets.  To many, it indicated a move to sell the US Dollar.  The Euro is now trading near the $1.50 level. Risk traders will most likely look for a Euro pull back before adding to long positions.  These traders will be looking for a pull back toward $1.4945 before they begin buying again.  The GBP has extended gains to the highest level since August, which could have been boosted by the Kraft takeover of Cadbury, which has a deadline of today.  A jump in New Zealand milk prices has helped the New Zealand Dollar become a top performer today.

The U.S. dollar is firmer this morning, suggesting that as markets remain sensitive to swings in risk appetites, ‘bad news’ for the economy can still be ‘good news’ for the U.S. currency. While the October U.S. payrolls report could be seen as mixed overall, markets are focusing on the psychologically important jump in the unemployment rate into the double-digit territory. The combination of a stronger Japanese yen, stronger U.S. dollar, weaker equities and lower bond yields points to a familiar ‘risk aversion’ reaction in the markets. Given that the unemployment rate is a lagging indicator, we doubt that much has changed in the economic outlook, while yesterday’s strong productivity data suggests the turnaround in the labor market may not be too far away. Overall, the currency markets reaction to the flurry of central bank policy meetings and data has been remarkably underwhelming this week, perhaps an early indication that markets are starting to settle into a more cautious year-end trading mode.

Regional Highlights

Asia/Pacific

The Australian dollar firmed overnight after the Reserve Bank of Australia upgraded the economy’s growth outlook in its quarterly Monetary Policy Statement. Policymakers now expect GDP expansion of 1.75% in 2009 with strong growth in exports and business investment. The NZ dollar continues to lag behind, after this week’s sluggish employment numbers and cautious central bank comments. The Japanese yen is steady today, while most emerging Asian currencies are stronger. The upcoming G20 finance ministers meeting this weekend is probably of most relevance to the regional emerging currencies with some expectations among analysts that the meeting will add to pressure on the Asian governments to allow their currencies to appreciate.

Europe

European currencies have seen a steady session within narrow ranges before the U.S. payrolls report, with little impact from regional economic data releases overnight. Germany’s September factory orders rose by the 0.9% m/m, an encouraging seventh straight increase. In other news, U.K. output PPI accelerated to 1.7% y/y in October, Norway’s industrial production rose by 0.9% m/m in September, and Swiss unemployment rate held steady at 4.1% in October. The euro and the pound were weaker after the U.S. payrolls report, reflecting weaker risk appetites and equity market sentiment as the markets reacted to the jump in the unemployment rate.

Americas

The U.S. October non-farm payrolls fell by 190,000, slightly worse than expected, although “fell” by only 99,000 taking into account revisions to the August-September data. The workweek was unchanged at 33.0 hours, while earnings rose by a firm 0.3% m/m. The unemployment rate rose to ‘double-digit’ territory at 10.2%, a number that is likely to be of some psychological significance to the markets, boosting the dollar in the immediate aftermath of the report. North of the border, jobs news was also somewhat disappointing. The Canadian economy lost 43,200 jobs in October as the unemployment rate rose to 8.6%. However, the details of that report were more encouraging with losses entirely attributable to part-time employment, while full-time positions actually expanded during the month. Nevertheless, the Canadian dollar is underperforming today, as are the Mexican peso and the Brazilian real, which are probably reacting to a weaker tone in equity markets after the U.S. jobs data.
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Market Summary provided by Wachovia (a Wells Fargo company)

This morning’s jobs report indicated that the October jobless rate hit a 26 year high of 10.2%.  This is an indication that employers cut more jobs than forecasted (jobless rate forecasted at 9.9%) and the labor market continues to struggle as the rest of the economy slowly emerges from the recession. 

Nonfarm payrolls fell by 190,000 last month, with the hardest hit industries in construction, retail and manufacturing.

Based on the jobless news, the Euro spiked upwards against the US Dollar, but has decided that it is overbought and sellers are coming back into the market.

With companies continuing to shed jobs, it is unlikely that any of the companies being affected by the recession, will do any hiring in the upcoming holiday months and they will most likely wait until the first quarter of 2010 to re-review positions that may need to be filled.