Chicago PMI Surprisingly Rises to Nearly 4-Year High

The Chicago Purchasing Managers Index (PMI) surprisingly rose for a third month in December to a nearly four-year high of 60.0 from 56.1, indicating that business activity is growing at a faster clip. A breakdown of the index shows that prices, production, new orders, and employment have all been on the rise, providing a more optimistic view of activity than various measures of manufacturing sector activity, such as the Dallas Fed and Richmond Fed reports. Ultimately, this suggests that the services sector is leading the way to US economic recovery.  By DailyFX.com

Crude Oil Extends its Strongest Rally Since October as the Dollar Settles, Inventories Contract

North American Commodity Update

Commodities - Energy

Crude Oil Extends its Strongest Rally Since October as the Dollar Settles, Inventories Contract

Crude Oil (LS NYMEX) -  $79.26  //  $0.29 //  0.49%

Unusually cold temperatures for the eastern United States, ongoing political turmoil and a steady rebalancing of supply-and-demand has maintained oil’s advance long enough to mark the commodity’s most consistent bull wave in over four months. While much of Wednesday’s progress was founded on the momentum in the impressive 16 percent-plus upswing of the past three weeks, there were additional fundamental components to keep the market elevated. Among the more pressing factors for speculators today was the Department of Energy inventory reports. Analysts were projecting a fourth consecutive decline in crude stores in the period through December 25th; and the realized contraction was notably smaller than the Bloomberg consensus. According to the government’s statistics, crude inventories fell 1.535 million barrels through last week. In similar fashion, stockpiles of distillate fuels dropped 2.06 million barrels and those for gasoline eased back 336,000 barrels. Altogether, the recent trend in supply is encouraging; yet at the same time, the overall level is still well above the average of the past five years. What’s more, demand is still well off the pace needed to put a fundamental backing to a speculative run back towards record highs.

However, despite the persistent imbalance between supply and demand in the post-recessionary market, we are seeing the influence that other fundamental factors can rouse through speculative channels. For a demand outlook, the Chicago ISM’s national business gauge for the US rose to its highest level since January of 2006. A jump in employment and new orders further supports hope that this improvement is not simply superficial inventory rebuilding. Then there is also the short-term impact that weather forecasts have been known to have on speculation.  Following up on the blizzard and unusually cold weather of the past two weeks, the Eastern seaboard is expected to suffer from atypically frigid temperatures for the next two weeks. Geo-political events are also playing their part. The international response to Iran’s crackdown on political protestors this past week casts doubt over the output of OPEC’s second largest producer.

Commodities - Metals

Gold Settles into the Year-End Along with the Dow and Dollar

Spot Gold  -  $1,093.25  //  -$3.59 //  -0.33%

Though volatility and speculative trends are holding up relatively well for some other markets; gold seems to be going the way of equities and the dollar by closing out the year quietly. Volatility and trading were very light through the European and US trading hours, with a daily range that measured a meager $11 for spot gold. Considering the state of the fundamental drivers that back this market, it comes as little surprise that gold bugs are unwilling to establish a meaningful trend. As a hedge to the US dollar, the metal is tracking an anchored greenback. The currency has turned to a pattern of congestion the past week as the bulk of position unwinding has already been run through before liquidity fully drained. As its capacity as a counterbalance for inflation, speculative interests have faded into the closing days of the year, leaving the iShares TIPS index to establish a temporary floor for its reversal from its 16-month high at 103.50. Finally, gold traders are looking to avoid the effects that a thinned market will have on price action. Like any other speculative asset, the precious metal is running on reduced leverage. Aggregate volume on the active futures contract was already pushing a four-month low to start the week and the CBOE Gold Volatility Index is holding just above the three-month average at 24.5 percent.

Spot Silver  -  $16.81 //  -$0.29 //  -1.70%

Another bearish push for silver sent the commodity to its lowest close since November 3rd. However, despite the nearly five-percent swing so far this week, the market is still carving a very conspicuous range (between $17.75 and $16.75 per ounce) that befits the general liquidity conditions for the market this week. For speculative interests, aggregate volume has plunged to lows not seen since the rollover from 2008 to 2009. Furthermore, the lack of fundamental cross winds from the dollar and gold offer longer-term investors and short-term traders little to work with.

Written by John Kicklighter, Strategist
DailyFX.com 

British Pound Breaks Out of Narrow Range, Euro Remains Little Changed

The British Pound fell to a low of 1.5857 against the greenback, with the RSI slipping into oversold territory, and the currency may continue to trend lower over the remainder of the week as price action breaks below the narrow range carried over from the previous week.

Talking Points
•    Japanese Yen: Modestly Lower Across the Board
•    Pound: U.K. Pledges to Support Economic Recovery
•    Euro: Private Sector Loans Weaken for Third Month
•    US Dollar: Chicago Purchasing Manager Index on Tap

British Pound Breaks Out of Narrow Range, Euro Remains Little Changed

The British Pound fell to a low of 1.5857 against the greenback, with the RSI slipping into oversold territory, and the currency may continue to trend lower over the remainder of the week as price action breaks below the narrow range carried over from the previous week. Nevertheless, the drop in market liquidity is likely to produce difficult trading conditions, and we may continue to see choppy price going into the U.S. trade as investors go off-line ahead of New Years Day.

Meanwhile, U.K. Prime Minister Gordon Brown said that the government’s efforts to lower the budget deficit must be “sensible” and “fair” as the economic recovery remains “fragile,” and pledged to “reduce the deficit at a responsible pace, without choking off the recovery or damaging the frontline services the mainstream majority rely on.” As policy makers maintain the expansion in monetary and fiscal policy to encourage a sustainable recovery, the Bank of England is widely anticipated to hold the benchmark interest rate at the record-low of 0.50% in an effort to balance the risks for growth and inflation, and may look to extend its emergency program as the global financial system remains vulnerable to future shocks.

The Euro slipped to a low of 1.4306 during the Asian trade, but regained its footing during the European session to remain little changed from the previous day, and the single-currency may continue to trend sideways going into the following week as market liquidity slumps ahead of the new year. Meanwhile, the economic docket showed M3 money growth in the Euro-Zone unexpectedly fell 0.2% in November after expanding 0.3% during the previous, while the 3-month average increased 0.6% amid expectations for a 0.6% rise. The breakdown of the report showed private sector loans slumped at an annual pace of 0.7% to mark the third consecutive decline, and conditions may get worse over the following year as households face a weakening labor market paired with tightening credit standards.

U.S. dollar price action was mixed across the board, with the USD/JPY tipping higher for the third day to reach a fresh monthly high of 92.28, and the reserve currency could face increased volatility going into the North American trade as equity futures foreshadow a lower open for the U.S. market. At the same time, economic activity in the world’s largest economy is expected to expand at a slower pace in December as economists forecast the Chicago PMI to weaken to 55.1 from 56.1 in the previous month however; conditions are likely to improve throughout the following year as policy makers aim to encourage a sustainable recovery.

From the Dailyfx.com

Could a recuperating housing market help confidence?

Housing Prices could be an eye opener
Housing data in the U.S could add to the holiday spirits this week, as house prices are expected to drop by -7.10%, compared to a previous -9.36%. Even though parts of the housing market are now showing minor improvement - housing starts recently increased, showing impressive figures, other results such as New-Home Sales have sharply declined. Single-family homes declined 11.4% in November to a seasonally adjusted annual rate of 355,000 units.
One must note that recent improvement in leading parts of the economy have been fueling the Dollar rally, driving it to higher levels against counterparts, but as mixed signals continue to show a fragile housing market, investors will scrutinize the upcoming data, as a worse than expected figure could put pressure on the Greenback.
Consumer confidence is on the rise
In addition U.S consumer confidence is expected show a 52.7 figure, compared to a previous 49.5. Usually released on the last Tuesday of the month, investors watch this number closely as increasing confidence, often leads to personal consumption. Recent figures have been bouncing around the 50 mark, as Main Street remains dubious about the recent recovery. A higher than expected reading is normally considered to be bullish for the USD.

Posted by Etoro on Monday December 28, 2009 8:25 am

Asian Stock Markets Extend Advance on Growth Optimism; Hong Kong Exports Rise for the First Time in 13 Months

Asia Session Key Developments Japan’s Industrial Outputs Advance for Ninth Month Australian Markets Closed in Observance of Christmas/Boxing Holiday The Asian stock markets climbed to a three-week high on Monday as policy makers in China held an improved outlook for growth while former Bank of Japan Governor Toshihiko Fukui expects “stable and sustained” growth next year as the expansion in global policy continues to feed through the world economy. Meanwhile, industrial outputs in Japan rose for the ninth uninterrupted month, displaying signs that the economic expansion is accelerating as Asia leads the world economy out of the first recession since the Second World War. At the same time, Japan’s retail trade rose for the fourth time in the past five months, while labor cash earnings in the region slumped at an annual pace of 2.8% to exceed expectations for a 1.8% drop. Furthermore, Hong Kong’s exports in November rose for the first time in 13 months, with overseas shipments gaining 1.3% from a year earlier after tumbling 13.1% the month prior, while imports leaped an annualized 6.5%, which widened the trade deficit to HK$20.7B from HK$19.2B in October. Nikkei 225                          10,378.03 The Japanese equity markets advanced on Monday, leading the Nikkei 225 to gain 139.52 points (1.33%) and close at 10,634.23. All ten components pushed higher on the day, with consumer services leading the rally, rising 2.39%, which was followed by a 1.70% gain in oil & gas. Shares of Sharp Corp advanced 2.17% after the firm reached a patent cross-licensing agreement with Toyoda Gosei Co, while Nippon Oil Corp soared 4.80% as the firm announced plans to close three crude distillation units next year to lower costs. Meanwhile, Nippon Mining leapt 5.43% as Japan Energy, a unit of Nippon Mining, will process 5% more crude oil in January through March versus the same time period a year ago, while JFE Holdings advanced 1.37% as industrial outputs in Japan increased for the ninth month in November. Hang Seng                        21,480.22 Hong Kong shares pushed lower on Monday as the government sold two development sites below market expectations, leading the Hang Seng Index to shed 36.78 points (0.17%) and close at 21,480.22 as five of the nine components traded lower on the day. Shares of Sino Land advanced 0.55% after paying HK$10.4B with K Wah International to acquire two waterfront sites in Hong Kong’s New Territories, while Henderson Land Development slid 1.99% following the sale. Moreover, China Resources Power Holdings, the country’s fourth largest listed power company by market value added 0.82% as the company actively participated in coal mine consolidations in Shanxi Province, while China Petroleum rose 0.65% on the back of higher commodity prices. S&P/ASX 200 Index           4,790.90 Closed in observance of Christmas/Boxing Day Posted by CFDTrading on Monday December 28, 2009 8:28 am

Japan Remains Mired In Deflation, Unemployment On The Rise Again

(RTTNews) -  Japan marked nine months of deflation in November while official data also showed that the nation's jobless rate is rising again, adding to worries that the recovery of the world's second largest economy is losing steam.

Japan's core consumer prices dropped 1.7% year-on-year in November compared to the 2.2% fall in the preceding month, the Ministry of Internal Affairs and Communications reported on Friday. That compared to expectations for a 2% decline. The annual rate of deflation has now decelerated for the third straight month.

Month-on-month, the core CPI, which excludes fresh food from the price basket, dropped 0.2% in November following the 0.1% fall in October.

BNP Paribas economist Azusa Kato said that the deceleration of the decline in core CPI was simply the result of a "technical error", namely the waning base effect from surging petroleum product prices through August of last year.

"Prices of petroleum products have actually fallen over the past two months, but diminished base-year effects associated with a sharp rise through August 2008 followed by a sudden retrenchment mean that the pace of year-on-year decline has actually slowed," he explained. "These technical factors aside, there is no indication whatsoever that deflationary pressure might be starting to abate."


November's CPI results are likely keep up the pressure on the Bank of Japan, which has been in a running feud with the government on how to tackle deflation. Earlier this month, the central bank said it was a "critical challenge" to overcome deflation and added that it "would not tolerate" annual prices at, or below, zero. The bank promised to keep interest rates low, but did not specify how it planned to combat deflation.

Meanwhile, core consumer prices in the Tokyo region for December, a good indicator of future movements in the price index, dropped 1.9% from a year earlier - the same rate of decline as in the previous month. Economists were looking for a 2% fall.

On a monthly basis, Tokyo core CPI dropped 0.2% in December, adding to the 0.1% slide in the preceding month.

Also on Friday, the Ministry of Internal Affairs and Communications reported that the unemployment rate climbed for the first time in four months in November. The jobless rate stood at a seasonally adjusted 5.2% in November, up from 5.1% in the previous month. That came in line with the consensus call of 5.2%.

In November, the unemployment rate was at 5.4% among males and 4.9% among females. The total number of unemployed persons declined to 3.31 million from 3.44 million. At the same time, the number of employed persons edged down to 62.60 million from 62.71 million in the prior month, while total labor force strength slid to 65.91 million from 66.15 million.

Dollar Finds Support On Labor and Durable Goods Data

The U.S. economy continues to show signs of recovery as initial jobless claims fell to its lowest level in 15-months and demand for long lasting goods increased. The labor market which is considered a lagging indicator has started to show a pulse with November’s Non-farm payroll report showing the country lost only 11,000 jobs.

The U.S. economy continues to show signs of recovery as initial jobless claims fell to its lowest level in 15-months and demand for long lasting goods increased. The labor market which is considered a lagging indicator has started to show a pulse with November’s Non-farm payroll report showing the country lost only 11,000 jobs. Therefore, the economy may have generated jobs in December for the first time in two and half years. The improving job market is starting to translate into greater consumption from Americans which was evident in the 0.2% improvement in Durable Goods orders. The 2.0% gain in the ex-transportation is a sign that broader demand is improving. A look at the breakdown shows rebounds in machinery to 3.5% from -7.5% and computers/electronics to 3.7% from -1.9%. The dollar gained as the improving fundamentals raised the outlook for U.S. interest rates ending its two day slide.

Written by John Rivera
dailyfx.com

U.S. Dollar Gains on Aussie for 6th Straight Session

With growing investor demand for the U.S. Dollar, the Australian Dollar slipped in Asian trading today, closing lower for the 6th straight trading session and striking a new 11-week low. As reported at 5:00 p.m. (AEDT) in Sydney, the Australian Dollar traded at $0.8759; on Tuesday, it closed at $0.8794. The greenback strengthened in advance of the release of key economic data from the United States, including consumer spending, new home sales and personal income. Although GDP figures released yesterday showed that the American economy’s growth was at a rate less than forecast by analysts, it was enough to give market players confidence about the overall prospect of the U.S. recovery.

Despite the rise in the U.S. Dollar, specifically versus the Aussie currency, further gains will likely be harder to achieve. According to one currency strategist in Sydney, the gains in the U.S. currency are more likely attributed to unwinding of short U.S. Dollar positions than to investor confidence. Since mid-November, the Australian Dollar has lost nearly 7% versus the greenback; however, it should be noted that the Australian Dollar remains strong versus other major currencies. Analysts suggest that a reversal of the Aussie’s downtrend will likely emerge with the coming of the new year.
By: Barbara Zigah

Japan MOF: Big Co Oct-Dec Index -1.9 Vs 0.3 Jul-Sep

TOKYO (Dow Jones)--Large Japanese companies are more pessimistic about the economic conditions during the October-December quarter than they were during the previous period, a survey by the Ministry of Finance showed Thursday. 

The quarterly business outlook survey's large company business sentiment index, which measures the percentage of firms saying the economy will improve minus those saying it will worsen, was minus 1.9 in the fourth quarter, down from 0.3 in the July-September period. 

Thursday's data also showed that large firms expect economic conditions to deteriorate. The index was at minus 3.5 for the January-March period, followed by an improvement to 0.1 for the April-June quarter.

Home Sales Optimism Sets Greenback to Record High

The U.S. currency touched a three-month high versus the European common currency as another favorable report, this time in the real estate sector, attracted more investment towards the recovering North American currency.

The dollar gained the most versus the euro and the pound as an existing home sales report beat estimates touching 6.54 million units, an advance from the previous month reading and another evidence that the pace of recovering in the U.S. is accelerating.

EUR/USD traded at 1.4254 as of 20:28 GMT from a previous reading of 1.4296 yesterday.

Japanese Yen to Fall Against US Dollar on Bond Yields Outlook

The US Dollar pushed sharply higher against the spectrum of major currencies last week as markets reacted to a decidedly upbeat interest rate announcements it from the U.S. Federal Reserve. Most significantly, Ben Bernanke and company said “deterioration in the labor market is abating,” which traders took as validation of the boost to the priced-in Fed rate hike forecast over recent weeks that was set off by better than expected outcomes for November’s non farm payrolls  and retail sales reports. The US central bank is widely expected to look at the jobless rate as the key gauge for timing a reversal of its ultra-loose monetary stance, and a Credit Suisse gauge now shows that the market is pricing in 81 basis points in monetary tightening over the next 12 months, up from just 52bps at the beginning of December.

Meanwhile, the Bank of Japan struck a decidedly dour tone, saying the current momentum of self-sustaining recovery is insufficient and warning that overcoming deflation is a critical challenge, with the bank unwilling to tolerate CPI at or below 0%. The bank added that although the economy is picking up, the pace of improvement will be moderate until the middle of the 2010 fiscal year. This suggests the Japanese central bank may be starting to cave in to pressure from the Ministry of Finance to continue on with its liquidity-boosting asset purchase programs, a prospect that promises to underpin domestic bond prices and keep yields contained as the government issues a record amount of debt to finance the gargantuan fiscal deficit.

On balance, this monetary policy landscape seems to point to gains in USDJPY. Japan’s savings rate is high relative to other developed countries, reflecting the expense of living on an island with limited space and scarce home-grown resources. This translates into Japanese investors’ preference for safe, liquid assets that offer stable income over a long period of time. Typically, this means government bonds. While both Japan and the United States will have to introduce a good bit of new supply to finance their deficits, the latter will not have a central bank that is actively supporting prices and keeping a lid on yields. Indeed, the Fed ended its purchases of US Treasuries in October and looks to be laying the groundwork to begin raising borrowing costs next year. USDJPY is now 81.3% correlated with the yield on the benchmark 10-year Treasury note, suggesting that the currency may gain as traders digest last week’s updates to the US-Japan monetary policy balance.     ~dailyfx.com

EUR/USD falls sharply in very thin trade

First we had a stop-loss run higher in the AUD/USD and now it's the EUR/USD which is on the move, only this time the move is lower. EUR/USD closed in NY at 1.4335 but is now at 1.4285 and dealers say that liquidity is very poor, even for a Monday morning. Support is at the 1.4260 low from Friday.
~forexlive.com

Forex Weekly Outlook – December 21-25

After a wild week of raging dollar bulls, we have a short and rather calm week ahead. Before Christmas comes in, we have final GDP releases from the UK and the US, important housing figures from the US, and a few more notable events that will move the markets. Here’s the weekly outlook:

Ben Bernanke’s mixed message in the FOMC Statement will continue to shake the markets for quite some time. He managed to keep the markets balanced for a short period of 6 hours, before the bulls began to rage. OK, let’s start the review:

Monday, December 21st: Japanese Trade Balance is the first notable event of the week, and it will be followed by the BOJ Monthly Report.

In Canada, Retail Sales are predicted to rise at a more moderate pace than last month. The core figure is expected to follow. The Canadian dollar held strong against the greenback’s strength, with rising inflation numbers.

In New Zealand, Current Account will impact the kiwi – it’s expected to turn negative this time.

Tuesday, December 22nd: The GfK German Consumer Climate is expected to remain stable, while the Belgium NBB Business Climate is predicted to improve significantly. The ZEW survey was the first indicator to hit the Euro last week, and certainly not the last.

The British Current Account is expected to improve to a smaller deficit, and also therecession in Q3 is expected to be revised upwards to only 0.1% in the final release of British GDP.

American Final GDP isn’t expected to move from the second release. It’s predicted to show an annualized growth of 2.8% in Q3.

American Existing Home Sales are predicted to continue the leap that was reported last month and rise even more – to 6.31 million. This expansion will get a warm welcome.

New Zealand closes a day full of GDP release, with a rise of 0.4% in Q3 GDP, following a 0.1% growth rate in Q2.

Wednesday, December 23rd: British MPC Meeting Minutes will be of interest to cable traders. It will be interesting to see if one of the members supported the expansion of the QE program. Also in Britain, BBA Mortgage Approvals are expected.

Canadian monthly GDP is expected to rise by 0.3%, after a 0.4% rise last month. This is the first indicator of Q4 GDP.

In the US, Personal Spending will be of interest – it’s expected to rise by 0.6%. New Home Sales is the complementary release of Tuesday’s existing home sales, and it’s also expected to post a nice rise to 442K.

Japan closes the day with the BSI Manufacturing Index and the Monetary Policy Meeting Minutes from Friday morning’s meeting.

Thursday, December 24th: Most of the world is already on holiday on Christmas Eve, but important American figures are released.

Durable Goods Orders are expected to rise by 0.4% while Core Durable Goods Orders, no less important, are predicted to rise by 0.9%. Both figures have fallen last time.

Weekly Unemployment Claims are expected to drop to 471K, after rising too much last month.

Friday, December 25th: On Christmas day, only the Japanese are working. Household Spending is expected to rise, while the Tokyo Core CPI is expected to show continuing deflation. Japanese Unemployment Rate is expected to edge up to 5.2%.

That’s it for the major events this week.

Seven U.S. Banks Fail, Raising Tally This Year to 140 as FDIC Expects More

Dec. 19 (Bloomberg) -- Seven U.S. banks were seized by regulators, bringing this year’s total of failed lenders to 140 as financial companies are tested by the recession and the Federal Deposit Insurance Corp. anticipates more shutdowns.

Banks with $14.4 billion in total assets were closed yesterday in six U.S. states, the FDIC said in statements on its Web site. The agency is overseeing the dissolution of banks at the fastest pace in 17 years.

Two of the closures were in California. The assets and deposits of Federal Bank of California in Santa Monica were bought by closely held OneWest Bank, which acquired IndyMac Federal Bank this year. Imperial Capital Bank was bought by City National Corp., the Beverly Hills-based parent of City National Bank, which expanded in Southern California with the purchase.

“Imperial Capital Bank is a very good fit for City National, given that eight of its nine locations are in communities we serve,” City National Chief Executive Officer Russell Goldsmith said in a statement. “We’re pleased to contribute to the increased stability of the banking system.”

Federal Bank was the biggest lender seized yesterday, with $6.1 billion of assets and $4.5 billion in deposits, according to the FDIC. Based in La Jolla, Imperial Capital had assets of $4 billion and $2.8 billion in deposits.

Earlier this week, the FDIC boosted its 2010 budget by 56 percent to $4 billion to manage further shutdowns. The total budget will increase from $2.6 billion and the set-aside for bank failures doubles to $2.5 billion over this year, according to a proposal approved by the FDIC board. The agency staff will increase to 8,653 next year from 7,010 this year.

‘Larger Number’ of Failures

The budget “will ensure that we are prepared to handle an ever-larger number of bank failures next year, if that becomes necessary,” FDIC Chairman Sheila Bair said in a statement. Yesterday’s bank closings will cost the agency about $1.8 billion, according to the FDIC statements.

U.S. lenders are buckling under the weight of loans tied to commercial real estate, which is plummeting in value. Prices have dropped 43 percent from their peak in October 2007, Moody’s Investors Service said last month.    ~By D. Reichl

Stocks Rose on Friday in the U.S.; Dollar Pullback From Multi-week Highs

Wall Street managed to ends with gains on Friday after spending most of the session in the negative side. The Dow Jones rose 0.20% and the Nasdaq gain 1.45% boosted by Oracle an Research in Motion 3Q results. For the week, stocks finish mix but main indexes hold near year highs.

Crude oil ended the week on a strong note despite being unable to hold above $75 a barrel. Gold managed to stay on top of $1,100 an ounce but fell for the third week in a row as it continues to move away from record highs.

The Dollar rose across the board on Friday but during the second half of the American session pulled back from multi-month high against European currencies. The Euro was the worst performer among majors.

http://www.fxstreet.com

ForexLive US wrap-up: Another day, another big number for EUR/USD

ECB won't change collateral rules for Greece: Papademos A Moody's downgrade would make Greek government bonds ineligible to be used as collateral at ECB ECB ups estimates for bank write offs Iraq confirms Iranian incursion; calls it breech of sovereignty; seeks peaceful, diplomatic solution US equities rally 0.6%, US 10-year notes edge higher, up 6 bp to 3.54% Gold recovers from dip below $1100, ends at $1112; Oil rally fades, up only $0.40 EUR/USD extended its December swoon, falling as low as 1.4262 after the London afternoon fixing. Once that selling was out of the way, prices rebounded into the 1.4340 before stalling. Fundamental jitters regarding whether Greek government debt will be eligible for use as collateral at the ECB if it is downgraded by Moody's and comments from the ECB that banking write-downs will likely be larger than earlier thought helped weigh on the single currency intraday. USD/JPY spurted up to 90.91 as EUR/USD plunged to its lows but was unable to sustain the break of the important resistance at 90.70 for long. The firmer US bond yields were supportive overall as USD/JPY ended at 90.40 after one of the wilder sessions for that pair in sometime. Cable was volatile today as well, falling late in the London session to a new trend low at 1.6053 as London wrapped up trading. US investors are beginning to hedge long currency exposures as evidence by the increased dollar purchases at the fixings late this week. AUD ended near sessions highs, around 0.8910 after The spike low during the US session at 0.8840 was well above the panic low set in Sydney at 0.8809. CAD firmed up in recent ranges, ending at 1.0663, once again failing to hold above the 1.07 level. That's it for us. Have a great weekend all!     ~~FXStreet.com

Canada Consumer Prices Top Forecast, USD/CAD Hits Fresh Monthly High

Consumer prices in Canada increased 0.5% in November to top forecasts for a 0.3% rise, which pushed the headline reading for inflation 1.0% higher from the previous year, ending the longest streak of falling prices since 1953. Moreover, the core rate climbed 0.4% after rising 0.1% in the previous month, while the annualized rate slipped to 1.5% from 1.8% in October, led by a 6% drop in car prices.

The breakdown of the report showed transportation costs jumped 1.8% during the month as gasoline prices surged at an annual pace of 14% to mark the fastest pace of growth in eight months, while food prices rose 1.2% after contracting 0.2% in October. However, as prices pressures continue to hold below the Bank of Canada’s 2% target, the central bank is likely to hold a dovish outlook for future policy and maintain its pledge to keep borrowing costs at the record-low throughout the first-half of the following year as the marked appreciation in the exchange rate hampers the prospects for a sustainable recovery.

Meanwhile, the USD/CAD pushed higher for the third-day, with the exchange rate crossing above the 100-Day SMA (1.0688) to reach a fresh monthly high of 1.0747 on the back of U.S. dollar strength however, the overnight rally looks to be losing steam as the hourly RSI falls back from overbought territory. Nevertheless, as this week’s rally remains supported by the 50-Day SMA at 1.0553, a close above the 100-Day favors a bullish outlook for the near-term, giving the rising trend in the 10 and 20 Day moving averages, and the USD/CAD may continue to push higher over the remainder of the month on broad based greenback strength.

Despite the US Dollar's Rally, Underlying Risk Appetite has yet to Break

Over the past two weeks, the US dollar has surged across the board. And, considering this currency has stood as the primary funding currency to a burgeoning carry trade, it makes sense that the greenback’s performance could be interpreted as a sign that risk appetite is toppling. However, cause and effect do not connect here – at least not yet. Instead risk trends have extended the congestion that has set in since October/November; and the period of consolidation has allowed the world’s reserve currency correct speculative and fundamental extremes on its own. Yet, that should not be taken to mean that investor optimism, and the leveraged positioning it has encouraged, will not go uncontested.

 

•    Despite the US Dollar’s Rally, Underlying Risk Appetite has yet to Break
•    How Significant a Threat are Sovereign Defaults and Bank Write Downs in 2010
•    Yield Forecasts are Deteriorating Rapidly as Economic Reality Setting In

Over the past two weeks, the US dollar has surged across the board. And, considering this currency has stood as the primary funding currency to a burgeoning carry trade, it makes sense that the greenback’s performance could be interpreted as a sign that risk appetite is toppling. However, cause and effect do not connect here – at least not yet. Instead risk trends have extended the congestion that has set in since October/November; and the period of consolidation has allowed the world’s reserve currency correct speculative and fundamental extremes on its own. Yet, that should not be taken to mean that investor optimism, and the leveraged positioning it has encouraged, will not go uncontested. In capital markets’ aggressive rally throughout 2009, volatile speculative interest has overwhelmed comparatively stable investor inflows. There is a critical distinction between these two categories. Speculators (or traders) are looking for capital appreciation and will need to eventually book profit on their outright positions. In contrast, investors are looking for long-term appreciation, dividends or some other form of consistent interest income. This dichotomy helps expose the tension that has developed behind the scenes recently. Primary barometers for risk appetite like the Dow Jones Industrial Average and the Carry Trade Index - instead of correcting before the drain in liquidity that occurs at year-end - have developed tight ranges. This presents considerable tension for a market that is looking at potentially volatile conditions in the near future but not enough depth to establish a true trend.

All that is needed to tip risk trends into a tailspin is a definitive catalyst. We have plenty of potential threats to global, financial stability; but optimism or greed for greater returns has helped the markets weather most of tremors. This likely means that we need a market-based event. A particularly large withdrawal of capital from the speculative arena or the seizure of a critical node in the broader financial market could certainly spark a panic that leads to a cascade selling event. Ironically enough, the best opportunity to force the Dow below 10,250 or pitch the carry interest into a bleak bear trend is during the low liquidity-period that is approaching. While there is not enough market depth to maintain and develop a reversal; the low liquidity means it will be easier to unbalance sentiment. Therefore, we need only keep a vigilance on the already incubating fundamental troubles that have developed over the past few months and be ready for a new shock to catalyze price action itself. Among the key trends to watch, the threat of defaults on a corporate and national level is particularly troublesome. Not long ago, the IMF warned that the world’s banks have only accounted for half of the losses they will ultimately suffer from following the worst financial crisis since the Great Depression. Now, we are seeing downgrades on sovereign credit ratings that is further taxing an already fragile market that is now seeing some of its ‘safe’ assets degrading. Investors could weather this if the government maintained its support of the global economy and markets; but this safety net is already being rolled in. As stimulus and emergency aid is rolled back, the markets will increasingly have to support its own weight. And, considering how high valuations have run and the lack of true fundamentals to support recent heights; the outlook is fragile indeed.

US Fed Forces Dollar Volatility on Rate Decision

The Federal Open Market Committee forced considerable US Dollar as they predictably left interest rates unchanged, committing to “Exceptionally low” rates for an “Extended period”. Yet the Fed likewise recognized that “economic activity has continued to pick up and that the deterioration in the labor market is abating.” Yesterday’s surprisingly high Producer Price Index inflation numbers seemingly had little effect on long-term inflation forecasts and monetary policy, and officials stated “substantial resource slack [is] likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for quite some time."

The net result of the Fed’s actions was not immediately clear, as the US Dollar initially fell sharply but subsequently rallied against the Euro and other key counterparts.

Euro Slides to 2 1/2 Month Low

The greenback was higher against the majors, edging up to just shy of the 90-level versus the yen and a 2 ½ month high against the euro. The US economic reports released this morning saw producer prices climb higher than anticipated with the headline figure up 1.8% in November from 0.3% in the previous month while the annualized figure reversed the previous year’s 1.9% decline, instead increasing by 2.4%. Core PPI climbed by 0.5%, larger than estimates for a 0.2% increase from a 0.6% decline a month earlier. The NY Fed manufacturing survey sharply missed estimates for an improvement to 24 in December from 23.51 in November, instead increasing by only 2.55. Industrial output for November improved to 0.8% from 0.1% while capacity utilization edged up to 71.3% from 70.7% a month earlier. Meanwhile, the NAHB housing market index missed calls for an increase to 18 from 17 in November, slipping to 16.

Traders will shift focus to the FOMC monetary policy decision, due out tomorrow at 2:15 PM. A barrage of economic reports will also be released, consisting of November CPI, building permits, real earnings, housing starts and the Q3 current account balance.

Stocks fell in the U.S. for the first time in five days; Dollar consolidates gains

FXstreet.com (Córdoba) – A sell off in the last hour of trade sent stocks lower in the U.S. The Dow Jones lost 0.47% and the Nasdaq fell 0.50% . Crude oil is back above $70 a barrel and gold has moved away from the lows. The Dollar is consolidating important gains across the board. 

Greenback’s rally eased during the American session after reaching the highest price in two month against the Euro and the Swiss Franc. EUR/USD found support at 1.4500 after falling from 1.4650. GBP/USD trades above 1.6265 and is erasing previous losses. Cable is among the best performs of the day. The Yen is falling across the board but currently is retreating from the lows of the day. 

Investors are concerned that the Federal Reserve will begin sooner to take back economic stimulus.

US Dollar Making Progress on a True, Bullish Reversal

There is a trend developing. The US dollar has produced notable rallies at the end of each of the past four weeks. The past two advances are the most notable. Both have come on the back of exceedingly strong economic data – the drive on the 5th was the product of strong NFPs and a drop in the unemployment rate; while the rally on the 12th would come through the merits of a strengthening consumer on sentiment and spending. This would seem a straightforward reaction to data, right? Actually, this would contradict the normal pace that the market has carved for the greenback for the past nine months where strong economic data has bolstered risk appetite and directly weighed on the dollar as a safe haven currency. So, what does this mean? Is the dollar’s role in the risk appetite backdrop changing? Is sentiment actually weaker than just the US data would suggest? Both are likely true. With the dollar looking for strength through various market conditions, the currency may be developing a meaningful bullish trend. However, playing on the well-established, fundamental roles that have been in control for over a year; a collapse in broad investor sentiment is still the most accessible catalyst for a true dollar bull trend.
As has been the case for the full year, the primary fundamental concern for the US dollar going forward is the general bearing and force of risk appetite. From this, there are two concerns. As always, identifying and measuring the influence of potential catalysts is of primary importance; but now, we also have to gauge the currency’s relationship to risk appetite itself. In the past few weeks, while the dollar’s advance has been somewhat choppy and more prominent in certain pairs (EURUSD being the most remarkable example); it has come on strong local data and developed despite stability in other key risk-sensitive markets. This is a natural development considering markets held to congestion for nearly two months now at the top of an unprecedented rally; and the dollar has carried the brunt of the burden in funding this drive. Beyond just a general dissolution of correlations, though; there are fundamental reasons for the dollar to move up the yield spectrum. The United State’s economic recovery is among the strongest in the industrialized world, the Federal Reserve is actively reducing its stimulus and the financial stability in the US markets is comparable (if not more established) to its global counterparts. All that being said, a collapse in risk appetite that balances speculative interests through profit taking is still the most capable driver for the dollar. Not only would capital return to the safety of US Treasuries and money market funds; but it would be drawn out of emerging markets and other risky areas and put into the more liquid but yield-bearing instruments in the US.

For the more definable sense of risk in this coming week’s economic docket; there is plenty of data to feed the more established fundamentals trends. For interest rate forecasts, the market is targeting the Fed’s first hike around the middle of the year – in line with Governor Bernanke’s time frame. However, such projections are not set in stone by policy makers and traders know this. The FOMC rate decision on Wednesday will offer an update on how close a hike may be. Also, interesting in this event will be any mention of more measured changes to policy like the slow withdrawal of stimulus. Realistically, stimulus and interest rates can be adjusted separately. If financial aid is maintained and rates raised, it could support the economy, help dampen any inflation that may pop up and revive the dollar. Other noteworthy indicators on deck included the CPI stats, industrial production, housing starts and the vote to lift the deficit limit.

Trade Desk Thoughts: Why Do Shares Decline On Positive Data?

Price action has been strange over the last two weeks. First, it was the NFP report, which despite the excellent numbers, has failed to move the market anywhere higher. Moreover, the market actually saw a short-lived sell-off in the days following the labor market report.

Fast-forward a week to last Friday, the currency market entered in to a strong risk-aversion mode, while the equity market failed to move anywhere, despite another very bullish report: U.S. retail sales. Therefore, the big question is, why is this happening since equities should surge while the dollar tumble on signs that the economy is improving?

Before answering this question, we need to go through a little financial theory. In the options market, traders use the Black–Scholes and the binomial model to find the theoretical price for a Call or Put. In the bond and futures markets, the price is determined based on future cash flows. A similar approach is used for the equity spot market, the current theoretical price is based on its future cash flows, meaning that the price of a share is dependent on upcoming dividends, but at the same time, it depends on how much the company has to pay to obtain capital. As such, the world of financial theory has come up with the Gordon growth model, used to find the theoretical price for companies.

P = D/(k-g)

Where P is the current theoretical price, D is the dividend paid by the company, k is the cost of capital, while the g is the dividend growth rate. From the formula, we can extrapolate that the bigger the cost of capital k is, in ratio to the grow dividend rate g, the smaller the price of spot share is. In another words, a higher interest rate (the cost of capital) puts downside pressure on the value of shares.

Returning to our story regarding why good news does not send the equity market higher is simply because the market is considering that, the economy is improving at a faster pace than previously thought, something that will allow the Fed to raise faster. This increases the cost of capital that companies have to pay, thus putting downside pressure on stocks. However, a very big exclamation sign is needed here: in the equity market, this is only a short-lived effect because positive reports (thus an expanding economy) will also increase the dividend growth rate and the dividend by itself, thus raising the value of the company.

On the other hand, in the foreign exchange market the case is completely different. Since March the dollar index has been in a strong downtrend because investors were thinking that the interest rate spread between the dollar and the other G-10 currencies will remain negative, meaning that investors will incur negative costs for carrying dollar positions.

All this has changed over the last few weeks since the U.S. economy is showing strong signs that it is emerging faster than the Euro-area or than the U.K. from the global slump. This means that the interest rate spread between the dollar and the euro needs to readjust accordingly to the current market’s expectations, higher interest rates coming from the U.S.

In particular, this does not necessarily point to a long-term downtrend on the Eur/Usd yet, but it does show that the market is in a retracement mode for the time being. Now it is too early to provide specific data on when the market is going to turn around, or if it is ever going to turn around, but unless the Euro-area economy shows some sings of growth on its own, the trend will remain short lived.

It is very interesting to see how the market’s discount mechanism works. The current dollar strength started on Dec 03 09, just one day ahead of he NFP report. Since then the

Eur/Usd has shed 400 pips (2.6%), the Gbp/Usd lost 400 pips (2.4%), and the Aud/Usd lost 130 pips (1.4%), while the Usd/Cad stood still.

Interestingly, trying to value the current economic strength, we could obtain a similar ranking. The Euro-area and the U.K. economies appear the weakest, the Australian economy is looking very robust while the Canadian economy is now walking hand in hand with the U.S. economy.