US Dollar: Post-NFP Rally Could Continue on Trend Breaks

The US dollar rocketed higher upon the release of the US non-farm payroll (NFP) report on December 4, which surprisingly showed that the labor market only lost 11,000 jobs in November, compared to forecasts for a decline of 125,000. Furthermore, this was the best reading since December 2007, when the US gained 120,000 jobs, suggesting the labor markets may be nearing a turning point. There’s no doubt that this was positive news, including the drop in the unemployment rate from 10.2 percent to 10.0 percent.

Going forward, though, it’s necessary to keep in mind that with 10 percent of the population unemployed (or 17.2 percent if you count marginally attached workers and those employed part time for economic reasons), there still isn’t as much impetus to fuel consumption growth as there has been over the past 26 years, especially when taking tighter credit conditions into account, suggesting that any economic expansion that occurs going forward may be mild from a historical perspective.

From a technical perspective, the DXY index closed Friday just above the 50 SMA and falling trendline resistance, both of which have been capping prices since July. This may ultimately indicate a change in trend for the US dollar, but uncertainty lies in the fact that closing prices were just barely above the noted resistance points. Furthermore, the currency’s move was fundamentally driven, but we’ve seen in the past that the currency often goes back to trading as a “safe haven” asset the following trading week.

Looking ahead to event risk in the coming week, additional signs of percolating consumption may hit the wires. On Friday, the Commerce Department is forecasted to report that US retail sales rose 0.6 percent in November, after rising 1.4 percent in October on the back of auto sales. Likewise, the retail sales index excluding autos is projected to increase by 0.5 percent, but looking at the International Council of Shopping Centers report, the results could be disappointing. The ICSC index showed that same store sales fell 0.3 percent in November from a year earlier, led by apparel and department store sales. However, with sales of jewelry and electronics reportedly up sharply to mark the start of the holiday shopping season on Black Friday, the upcoming advance retail sales report could reflect rising consumption trends through the end of the year. If the US dollar returns to trading in line with risk trends, positive results could actually weigh on the currency.

No movement in the twilight zone; obviously no orders near-by

All of the major pairings are stagnating at the aforementioned levels which obviously means that there are no stops close by; otherwise some razor-sharp dealer would be getting them triggered. There is still talk of some very solid buying interest in the EUR/USD at 1.4800 and I suspect that there will be a lot of trailing long stops just below that level.

German Retail Group: 2nd Holiday Shopping Week Better On Year

FRANKFURT -(Dow Jones)- The second week of holiday shopping was better than a year ago, the Association of German Retailers, or HDE, said Sunday, citing its survey of retailers.

"After a slow start, holiday shopping really began to take off last week," the association said in a statement.

In the coming weeks, retailers expect consumer spending to pick up as it has in previous years.

Among the popular purchases so far were sweets and small gifts such as books, CDs, DVDs, as well as more expensive items like netbooks and jewelry, HDE said.

Company Web site: http://einzelhandel.de

FX interbank open: majors unchanged from Friday’s close

EUR/USD is at 1.4860, USD/JPY 90.40, cable 1.6485 and AUD/USD .9145 in early interbank trade. The USD made a big comeback on Friday night, especially against the JPY where the short-term downtrend has now been broken, but it still needs to break support levels in the other major pairings, 1.48 against the EUR and .89 against the AUD, before the USD revival can be confirmed.

Forex: Service Sector Shows Unexpected Contraction In November

(RTTNews) - Activity in the service sector unexpectedly contracted in the month of November, according to a report released by the Institute for Supply Management on Thursday, with the contraction coming on the heels of two consecutive months of expansion.

The ISM said its index of activity in the service sector fell to 48.7 in November from 50.6 in October, with a reading below 50 indicating a contraction in the sector. Economists had been expecting the index to increase to a reading of 51.5.

Anthony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee said, "Respondents' comments remain cautious about business conditions and reflect concern over the length of time for economic recovery."

The report showed that the non-manufacturing business activity index fell to 49.6 in November from 55.2 in October, reflecting contraction after three consecutive months of growth.

While the new orders index also edged down to 55.1 in November from 55.6 in the previous month, it still indicated continued growth.

At the same time, the ISM said the prices index jumped to 57.8 in November from 53.0 in October, indicating an acceleration in the pace of growth.

The employment index also edged up to 41.6 in from 41.1 in the previous month, although it continued to indicate a contraction in employment.

Rob Carnell, chief international economist at ING, said, "The very modest gain in the employment index from 41.1 to 41.6 is, we believe, more consistent with our small improvement in the payrolls figure to -165K, than with the -125K consensus expectation."

"If payrolls do turn out to be more negative than the market is thinking, as this survey suggests, then the tenuous risk-on stance of markets could be at risk, as too could euro strength, equities and gold," Carnell added.

On Friday, the Labor Department is due to release its report on the employment situation in the month of November, with economists expecting the report to show a decrease of about 125,000 jobs in November following a decrease of 190,000 jobs in October.

NEWS & ANALYSIS

2PM  Greenback Slides on Shift to Risk 2PM  Greenback Edges Higher 2PM  Jobs Data Disappoints, USD Edges Up 2PM  USD Edges Up Ahead of Jobs

The Economy and the Credit Market

The dollar was on the verge of collapse last Wednesday – and a late session break seemed to push the currency over the edge. However, this market-defining move proved more a reflection of liquidity than a meaningful revival of a long-term bear trend. Heading into the thin liquidity conditions that plagued the markets into the second half of last week, leave the skeleton crew with a scenario where the benchmark currency was on the verge of a massive breakout was deemed too dangerous; and a concerted effort was made to defuse the situation by forcing a break in the direction with the least resistance (or fundamental meaning) – a bearish break. Any doubts that this was a pressure release were quickly snuffed out by a sharp reversal in the dollar that would later be supported by the threat of a sovereign default in Dubai. And, while the potential credit event wouldn’t pan out; the market’s dramatic flight to safety perhaps reflects the doubt that is exists beneath the surface of optimism and capital reinvestment. Fundamental activity aside, the dollar is essentially in the same spot this week that it left off on the previous one. Today’s Fed Beige book reminds us that the US economy is performing relatively well compared its peers. Also, interest rate forecasts still put the Fed ahead of its ECB and BoE counterparts. The weight for the dollar therefore is still in risk appetite. Will sentiment deflate? Will the dollar’s funding currency status change? Will pressure for the Fed to deflate asset bubbles work? These are the questions to ask.

Dollar Holding the Line, But What Can Turn it Around?

The dollar was on the verge of collapse last Wednesday – and a late session break seemed to push the currency over the edge. However, this market-defining move proved more a reflection of liquidity than a meaningful revival of a long-term bear trend. Heading into the thin liquidity conditions that plagued the markets into the second half of last week, leave the skeleton crew with a scenario where the benchmark currency was on the verge of a massive breakout was deemed too dangerous; and a concerted effort was made to defuse the situation by forcing a break in the direction with the least resistance (or fundamental meaning) – a bearish break.

 

European Stocks Up Slightly; Oil Down On High Inventories

By Kimberly Vlach 
Of The Wall Street Journal 

European stock markets clung to modest gains Wednesday, after a higher-than-expected rise in U.S. crude and gasoline inventories sparked a late-session sell-off and a retreat into safer assets, such as the dollar. Oil and gold prices fell from earlier highs and the euro weakened. 

According to the U.S. Department of Energy, crude stockpiles rose more than twice what the market expected, up 2.1 million barrels, while gasoline stocks rose a whopping 4 million barrels, compared to the average forecast for a 700,000 barrel increase. 

Prior to the release of the energy data, trading across nearly all asset classes in Europe was quiet as investors shrugged off a preliminary reading on U.S. payroll data from ADP, a payment processing firm. ADP's figures estimated that the U.S. is suffering still large but diminishing job losses. 

Many investors are bracing for key economic releases due out Thursday and Friday this week. On Thursday, purchasing managers data is released in the U.K. and the euro zone. Also in the euro zone, third-quarter gross domestic product figures and retail sales data are due. In the U.S., weekly jobless claims and the ISM services index will be released. 

The pan-European Stoxx 600 index closed up 1.2 points, or 0.5%, to 246.77. The U.K.'s FTSE 100 index added 0.3% to 5327.39, France's CAC-40 index climbed 0.5% to 3795.92 and Germany's DAX held onto a 0.1% gain at 5781.68. 

Meanwhile, strategists at Morgan Stanley in London offered an upbeat view on 2010. "We are bullish on growth for next year and as long as there are worries on the outlook, the market can go a little bit higher," said Teun Draaisma, European equity strategist. "We believe these little blips are dips to buy--if you are nimble enough to get out at the right time." 

That rosy view ran hard into the reality of rising energy inventories in America, an indication that growth may not be taking hold in the U.S. 

"We can talk a lot about China and its strong manufacturing data but the U.S. is still the world's largest energy consumer and it looks like it's having a hard time sucking down oil right now," Phil Flynn of PFGBest said. 

Light, sweet crude for January delivery was down $1.63, or 2.1%, at $76.74 on the New York Mercantile exchange at 1700 GMT. 

Activity picked up in the currency markets following the release of the oil data and the euro quickly fell in an otherwise quiet day of trade. Traders also noted that worries continue to mount over the Greek debt crisis, despite the Finance Minister's efforts to reassure investors and the European Union that the country's economy will return to trend. 

Late in Europe, the euro was at $1.5051 from 1.5085 late Tuesday in New York. The dollar advanced against the yen, last traded at 87.26 yen from 86.68 yen, while the U.K. pound rose to $1.6660 from $1.6619. 

Gold futures hit another intraday high in early European trade at $1218.40, but eased back during the session. Late in Europe, gold for February delivery on the Comex division of the New York Mercantile Exchange was at $1213.80, up from Tuesday's close at $1200. 

In major market action, wireless telecom giant Vodafone Group gained 2.2% to 143 pence, boosting the rest of the telecom sector. 

Credit Suisse lifted the firm's price target to 160 pence from 150 pence. "The stock remains at the low end of its historic price to earnings trading range and has yet to reflect a cyclical recovery which is already priced in to the rest of the stock market," the brokerage firm said. 

Rising gold prices helped miners to advance in Europe, with Rio Tinto shares up 2.6%. In addition, Vedanta Resources, up 2.5%, was raised to buy from neutral by Goldman Sachs. 

Spirits companies benefited from brokerage upgrades. Pernod Ricard shares climbed 1% and Remy Cointreau shares rose 1.3% after Morgan Stanley raised its ratings on the firms citing improved prospects in Asia. 

Valeo shares jumped 5%. Morgan Stanley started coverage on the French car parts group at overweight. 

"We believe the company is the best way to play global auto production recovery, particularly in Europe," the brokerage firm said. Bank of Ireland shares rose 1.2%. Goldman Sachs upgraded the lender to buy from neutral, citing valuation. 

Still, other banks were mostly lower, pressuring the broader market, with Deutsche Bank down 1.4% and BNP Paribas shares off 1.3%. 

Separately, UBS upped its rating on the European pharmaceutical sector to overweight from neutral. "With current sector valuation, the economic cycle starting to mature, and inflows into the sector, we expect outperformance," the broker added. 

Nokia declined 2.4%. The handset maker said that it expects global mobile phone unit sales would rise 10% next year. It also forecast an improvement in the operating margin at its main division and vowed to revamp its creaky user interface. 

Nokia has faced intense competition recently from Apple's iPhone and a growing number of devices based on Google's Android operating system. Google said recently that it will launch Google Maps Navigation with its Android system, a move that sent shares of Dutch handheld satellite navigation technology firm TomTom tumbling. TomTom shares fell another 3% on Wednesday. Nokia Siemens Networks also said it has submitted a new $810 million cash bid for the optical and Ethernet assets of bankrupt Nortel, challenging Ciena's cash-and-stock offer of $769 million. 

NEWS & ANALYSIS

2PM  Greenback Slides on Shift to Risk 2PM  Greenback Edges Higher 2PM  Jobs Data Disappoints, USD Edges Up 2PM  USD Edges Up Ahead of Jobs

British Pound Remains Bid Following BoE Comments, Euro Approaching Yearly High

The British pound continued to retrace the sell-off from the previous week and crossed back above the 20-Day SMA (1.6636) to reach a high of 1.6684, and may hold a broad range throughout the remainder of the week as investors weigh the outlook for future policy.

Talking Points
•    Japanese Yen: Policy Makers Talk Down Speculation for Intervention
•    Pound: BoE’s Spencer Dale Holds Hawkish Outlook for Inflation
•    Euro: Producer Prices Rise on Higher Energy Prices
•    US Dollar: Treasury Secretary Geithner, Fed’s Beige Book on Tap

British Pound Remains Bid Following BoE Comments, Euro Approaching Yearly High

The British pound continued to retrace the sell-off from the previous week and crossed back above the 20-Day SMA (1.6636) to reach a high of 1.6684, and may hold a broad range throughout the remainder of the week as investors weigh the outlook for future policy. Meanwhile, Bank of England Chief Economist Spencer Dale held a hawkish outlook for inflation and said that the expansion in the asset purchase program paired with record-low interest rates “increases the likelihood that asset prices may move out of line with their fundamental values.”

As a result, Mr. Dale anticipates price pressures to rise “sharply” over the near-term and went onto say that “it is quite possible that the governor (Mervyn King) will have to write a letter to the chancellor (Alistair Darling) early in the New Year explaining why inflation is more than 1 percentage point above the inflation target.” At the same time, the chief economists said that economic activity has “begun to stabilize” and sees the nation “moving into a period of renewed expansion” as policy makers take unprecedented steps to stimulate the ailing economy. Meanwhile, the economic docket showed building activity in the U.K. weakened at a slower pace in November as the PMI reading increased to 47.0 from 46.2, and conditions are likely to improve going into the following year as the central bank sees the nation emerging from its worst recession since the post-war period.

The Euro advanced against the greenback for the third-day to reach a high of 1.5111, and looks poised to test the yearly high at 1.5146 as the single-currency continues to benefit from the rise in risk appetite. As the rally remains well-supported by the 50-Day SMA at 1.4858, we may see the EUR/USD continue to retrace sharp decline from August 2008 as market sentiment improves. Nevertheless, producer prices in the Euro-Zone increased 0.2% in October amid expectations for a flat reading, while the annualized rate slipped 6.7% from the previous year after tumbling a revised 7.6% in September to mark the tenth consecutive monthly decline. The breakdown of the report showed the cost of energy increased 1.0% during the month to lead the index higher, while prices for non-durable goods slipped 0.3% after falling 0.1% in September.

The U.S. dollar weakened against most of its major counterparts as market participants moved into higher-yielding investments, and the rise in risk appetite is likely to drive to drive the greenback lower going into the North American trade as the it remains the most popular funding-currency, next to the Japanese Yen. Nevertheless, the ADP employment report for November is expected to show a 150K drop in private payrolls following the 203K decline in the previous month, while Treasury Secretary Timothy Geithner is schedule to testify in front of the Senate Agricultural Committee on the over-the-counter (OTC) derivatives market at 14:30 GMT. Moreover, the Fed’s Beige Book will cross the wires at 19:00 GMT, and comments from the central bank are likely to move the currency market as investors weigh the outlook for future policy.

NEWS & ANALYSIS

2PM  Greenback Slides on Shift to Risk 2PM  Greenback Edges Higher 2PM  Jobs Data Disappoints, USD Edges Up 2PM  USD Edges Up Ahead of Jobs

Euro Poised to Test Yearly High, British Pound to Hold Broad Range

The Euro rallied against the greenback for the second day to reach a high of 1.5084, and the single-currency looks poised to test the yearly high at 1.5146 as the economic docket reinforces an improved outlook for future growth.

Talking Points
•    Japanese Yen: BoJ Holds at 0.10%, Offers JPY 10T in New Lending
•    Pound: U.K. Manufacturing Expands at Slower Pace
•    Euro: Unemployment Rate Hits 11-Year High
•    US Dollar: ISM Manufacturing, Construction Spending on Tap

Euro Poised to Test Yearly High, British Pound to Hold Broad Range

The Euro rallied against the greenback for the second day to reach a high of 1.5084, and the single-currency looks poised to test the yearly high at 1.5146 as the economic docket reinforces an improved outlook for future growth. Manufacturing activity in the Euro-Zone expanded at a faster pace in November, with the index rising to 51.2 from 50.7 in the previous month, while the PMI reading for Germany increasing to 52.4 from 51.0 in October.

Moreover, the German economy unexpectedly added 7K jobs in November, which lowered the annual rate of unemployment to 8.1% from a revised reading of 8.2% in the previous month, while retail consumption increased 0.5% in October to top forecasts for a 0.4% rise. The breakdown of the report showed sales excluding cars rose at a nominal rate of 0.6% during the month, while discretionary spending on clothing and shoes jumped 8.5% after advancing 2.9% in September, and the conditions are likely to improve going into the following year as the expansion in monetary and fiscal policy works its way through the real economy. Meanwhile, the jobless rate in the euro-region held steady at an 11-year high of 9.8% for the second consecutive month in October follow the revision in the previous month’s reading, and expectations for higher unemployment may continue to drag on the outlook for future growth as policy makers see a risk for a protracted recovery.

The British Pound halted the three-day decline against the U.S. dollar and bounced back to reach a high of 1.6579 during the European trade however, the lack of momentum to cross back above the 20-Day SMA at 1.6628 could hold the GBP/USD within a narrow range over the remainder of the week as investors weigh the outlook for future policy. Meanwhile, the Nationwide house price index increased 0.5% for the second consecutive month in November, while the annualized rate increased 2.7% from the previous year versus forecasts for a 2.4% rise, and the data reinforces an improved outlook for the U.K. housing market as the government takes unprecedented steps to steer the economy out of recession. However, manufacturing activity in the U.K. unexpectedly expanded at a slower pace in November, with the PMI slipping to 51.8 from a revised reading of 53.4 in the previous month, and businesses may keep a lid on production going into the following year as policy makers hold a weakened outlook for private sector spending.

The greenback weakened against most of its major counterparts following the rise in risk appetite, and the reserve currency may face increased selling pressures going into the North American trade as equity futures foreshadow a higher open for the U.S. market. Nevertheless, manufacturing activity in the world’s largest economy is anticipated to expand at a slower pace in November as economists forecast the ISM index to weaken to 55.0 from 55.7 in the previous month, while construction spending is expected to contract 0.5% in October after advancing 0.8% in the previous month. At the same time, pending home sales are projected to fall 1.0% after surging 6.1% in the previous, and the data could spark increased selling pressures for the dollar as investors weigh the prospects for a sustainable recovery.

US Manufacturing Cools from Three-and-a-half Year High

Bullish economists and market participants have had to look for fuel to a sustainable recovery outside the purview of consumer spending. American’s consumption habits account for approximately 75 percent of overall growth; and the burden of a 26-year high in unemployment, shrinking wages and anemic levels of confidence do not set a precedence for a strong return to expansion heading into 2010.