The Dollar Team: Is the Fed singing the September song?
FXstreet.com (San Francisco) - The Federal Reserve seems to have disappointed the market this week after avoiding immediate actions to boost economy during the last FOMC meeting held this week. But investors forgot about that Friday with the better than expected nonfarm payrolls and EFSF talks.
In the eurozone, European Financial Stability Facility (EFSF) has contacted members of its banking group for proposals on a series of credit facilities, Reuters reported Friday. The EFSF wants repurchase facilities, unsecured and secured loan proposals from banks.
Before, the Fed decided Wednesday to keep the target range for the federal funds rate at 0-0.25%, while reiterating that economic conditions are likely to warrant "exceptionally low levels" for the federal funds rate, at least through late 2014.
The lack of action was a surprise. Analysts had expected the Fed to push out its pledge to hold its benchmark federal funds rate exceptionally low, while others expected further stimulus measures.
11 out of 12 Fed officials voted to keep the central bank's accommodative policies in place. "The take away from the ECB and FOMC meetings is no immediate action but next month will likely be different," comments Marc Chandler, Global Head of Currency Strategy at BBH. "The door is more than ajar. Many issues comes to a head in September," points Chandler.
In the same line, James Knightley, senior economist at ING, comments that "the Fed has given a slightly stronger indication that it is going to push ahead with QE3 in September." In the statement, the FOMC said the Fed "will provide additional accommodation as needed to promote a stronger economic recovery." Knightley continues to affirm that "at the last FOMC statement they didn't use the world 'will,'" merely stating that they are "prepared to take further action".
"Moreover," continues Knightley, "the statement, in general, is more downbeat than the June 20 document with the Fed stating that the economy 'decelerated somewhat' in 1H12 after previously saying 'the economy has been expanding moderately'."
Chandler answers that "The mid-Sept FOMC meeting is seen as the last opportunity for the Fed to take action ahead of the US election as the October 24 meeting is seen as too close to it."
Following the topic, Yohay Elam, Forex Crunch's analyst in a Twitter conversation with Mauricio Carrillo from FXstret.com, said that "QE3 will do very little as long term yields are already low, and Bernanke said there are 'diminishing returns', but stock markets want QE3." Elam believes "that QE3 could come if the Fed targets GDP, or practically allows higher inflation," that it's "a radical change."
Carrillo noted that "If economy continues its slowdown, Fed won't have any other option," and he agreed with Chandler, saying that "It's electoral year, so Government will wait to launch artillery just two months before elections."
So, September seems to be the Fed's 'deadline' taking into consideration fundamentals. "The lack of action from either the Fed or the ECB this week stands in stark contrast with their dour economic assessments," explains Mr. Chandler. "The assessment and action will be brought into line, but not as soon as investors want."
Employment report: Good enough?
Early on Friday, the United States reported a better than expected nonfarm payrolls in July with 163.000 jobs added, the employment rate rises slightly from 8.2% in June to 8.3% in July. "The rest of the report isn't as good," said James Knightley. "The unemployment rate rose to 8.3% from 8.2% while the U6 rate, which includes those that classify themselves as underemployed rose a tenth of a percent to 15%. This is based off the household survey, which reported that employment actually fell 195,000. Wages growth was also weak, while the average working week duration remained at 34.5 hours."
Friday's figures were the highest NFP in five months, also the highest unemployment rate in 5 months. "Since the beginning of this year, employment growth has averaged 151,000 per month, about the same as the average monthly gain of 153,000 in 2011," said the official statement.
"The report confirms a picture of below-trend growth leading to a below-trend increase in employment and rising unemployment," commented Allan von Mehren, Chief Analyst at Danske Bank, "We believe growth will rise slightly to around 2% in H2, which suggests employment should pick up only slightly in coming quarters."
On the other hand "the bottom line is that the employment report shows a strong headline reading but as we believe that most people, and importantly the FOMC, will resort to digging beneath the headlines to focus on the enormous uphill struggle facing the labor market," pointed Andrew Wilkinson from MIller Tabak.
Miller Tabak and Danske analysts agree that the employment report figures suggest that "with growth below trend and a rise in unemployment, we expect the Fed to launch more stimulus in September," as von Mehren said. Wilkinson adds that "the report should do little to change expectations for a further move in September from the Fed and so one can understand why equities are happy to advance."
European markets have jumped on Friday on the back of EFSF and US Data after collapsing Thursday. The most important indices in Europe have closed with hard gains. DAX has posted 3.93% increases, FTSE added 2.21%, Italian MIB jumped +6.34%, CAC 40 rose 4.38% and Madrid closed 6.00% up. Wall Street is closing also higher today with gains around 2.0% so far today.
The Euro, in its side, is rallying 1.60% so far today against the Dollar with the pair heading toward 1.2400. "The EURUSD is seeing an interesting surge," comments Valeria Bednarik from FXstreet.com.
The rally of the euro against the dollar has found an interim top at the 1.2390 area where it peaked after rising over 210 pips throughout the day. However, as the week comes to an end, interest is fading following wild movements in the wake of major central banks decisions and the US nonfarm payrolls reports.
Goldman Sachs is "bearish on both USD and EUR" according to a recently published report, "EUR-USD is the usual market proxy for the performance of both the USD and the EUR. So, with the fall in the EUR against the USD, the USD is rallying right? Wrong. What seems to be happening is that the market is selling both the EUR and the USD."
"Looking at the Broad Dollar index, excluding the move in EUR-USD, we see that there is wide-spread selling of the USD," continues Goldman Sachs' report. "Likewise, the decline in the trade-weighted EUR index, since the beginning of July, shows that the EUR is also being sold. Both are down roughly 2% since June against their main trading partners."
This phenomenon "would help also explain the compression in yields in the EM world," continues Goldman Sachs, and "why GBPUSD is so high despite a deteriorating economic backdrop."
"This move out of EUR and USD could also shed light on why the AUD remains extremely buoyant despite rate cuts, a Chinese slowdown and a fall in commodity prices," concluded Goldman Sachs.
On the other hand, Deutsche Bank says it is time to turn bullish EUR and recommends buying EUR vs. ZIRP currencies. "It's now time to turn tactically bullish EUR vs the other ZIRP currencies: USD, JPY and GBP," says DB in a research note. "Target 1.27 in EURUSD, 100 in EURJPY and 0.81 in EURGBP."
DB explains that it has become more optimistic in the near-term for three reasons: (1) "Yesterday's ECB announcement was significant," (2) "Expectations are too low, market is too short euros," and (3) "Markets approaching 'theme fatigue' threshold."
In the eurozone, European Financial Stability Facility (EFSF) has contacted members of its banking group for proposals on a series of credit facilities, Reuters reported Friday. The EFSF wants repurchase facilities, unsecured and secured loan proposals from banks.
Before, the Fed decided Wednesday to keep the target range for the federal funds rate at 0-0.25%, while reiterating that economic conditions are likely to warrant "exceptionally low levels" for the federal funds rate, at least through late 2014.
The lack of action was a surprise. Analysts had expected the Fed to push out its pledge to hold its benchmark federal funds rate exceptionally low, while others expected further stimulus measures.
11 out of 12 Fed officials voted to keep the central bank's accommodative policies in place. "The take away from the ECB and FOMC meetings is no immediate action but next month will likely be different," comments Marc Chandler, Global Head of Currency Strategy at BBH. "The door is more than ajar. Many issues comes to a head in September," points Chandler.
In the same line, James Knightley, senior economist at ING, comments that "the Fed has given a slightly stronger indication that it is going to push ahead with QE3 in September." In the statement, the FOMC said the Fed "will provide additional accommodation as needed to promote a stronger economic recovery." Knightley continues to affirm that "at the last FOMC statement they didn't use the world 'will,'" merely stating that they are "prepared to take further action".
"Moreover," continues Knightley, "the statement, in general, is more downbeat than the June 20 document with the Fed stating that the economy 'decelerated somewhat' in 1H12 after previously saying 'the economy has been expanding moderately'."
Chandler answers that "The mid-Sept FOMC meeting is seen as the last opportunity for the Fed to take action ahead of the US election as the October 24 meeting is seen as too close to it."
Following the topic, Yohay Elam, Forex Crunch's analyst in a Twitter conversation with Mauricio Carrillo from FXstret.com, said that "QE3 will do very little as long term yields are already low, and Bernanke said there are 'diminishing returns', but stock markets want QE3." Elam believes "that QE3 could come if the Fed targets GDP, or practically allows higher inflation," that it's "a radical change."
Carrillo noted that "If economy continues its slowdown, Fed won't have any other option," and he agreed with Chandler, saying that "It's electoral year, so Government will wait to launch artillery just two months before elections."
So, September seems to be the Fed's 'deadline' taking into consideration fundamentals. "The lack of action from either the Fed or the ECB this week stands in stark contrast with their dour economic assessments," explains Mr. Chandler. "The assessment and action will be brought into line, but not as soon as investors want."
Employment report: Good enough?
Early on Friday, the United States reported a better than expected nonfarm payrolls in July with 163.000 jobs added, the employment rate rises slightly from 8.2% in June to 8.3% in July. "The rest of the report isn't as good," said James Knightley. "The unemployment rate rose to 8.3% from 8.2% while the U6 rate, which includes those that classify themselves as underemployed rose a tenth of a percent to 15%. This is based off the household survey, which reported that employment actually fell 195,000. Wages growth was also weak, while the average working week duration remained at 34.5 hours."
Friday's figures were the highest NFP in five months, also the highest unemployment rate in 5 months. "Since the beginning of this year, employment growth has averaged 151,000 per month, about the same as the average monthly gain of 153,000 in 2011," said the official statement.
"The report confirms a picture of below-trend growth leading to a below-trend increase in employment and rising unemployment," commented Allan von Mehren, Chief Analyst at Danske Bank, "We believe growth will rise slightly to around 2% in H2, which suggests employment should pick up only slightly in coming quarters."
On the other hand "the bottom line is that the employment report shows a strong headline reading but as we believe that most people, and importantly the FOMC, will resort to digging beneath the headlines to focus on the enormous uphill struggle facing the labor market," pointed Andrew Wilkinson from MIller Tabak.
Miller Tabak and Danske analysts agree that the employment report figures suggest that "with growth below trend and a rise in unemployment, we expect the Fed to launch more stimulus in September," as von Mehren said. Wilkinson adds that "the report should do little to change expectations for a further move in September from the Fed and so one can understand why equities are happy to advance."
European markets have jumped on Friday on the back of EFSF and US Data after collapsing Thursday. The most important indices in Europe have closed with hard gains. DAX has posted 3.93% increases, FTSE added 2.21%, Italian MIB jumped +6.34%, CAC 40 rose 4.38% and Madrid closed 6.00% up. Wall Street is closing also higher today with gains around 2.0% so far today.
The Euro, in its side, is rallying 1.60% so far today against the Dollar with the pair heading toward 1.2400. "The EURUSD is seeing an interesting surge," comments Valeria Bednarik from FXstreet.com.
The rally of the euro against the dollar has found an interim top at the 1.2390 area where it peaked after rising over 210 pips throughout the day. However, as the week comes to an end, interest is fading following wild movements in the wake of major central banks decisions and the US nonfarm payrolls reports.
Goldman Sachs is "bearish on both USD and EUR" according to a recently published report, "EUR-USD is the usual market proxy for the performance of both the USD and the EUR. So, with the fall in the EUR against the USD, the USD is rallying right? Wrong. What seems to be happening is that the market is selling both the EUR and the USD."
"Looking at the Broad Dollar index, excluding the move in EUR-USD, we see that there is wide-spread selling of the USD," continues Goldman Sachs' report. "Likewise, the decline in the trade-weighted EUR index, since the beginning of July, shows that the EUR is also being sold. Both are down roughly 2% since June against their main trading partners."
This phenomenon "would help also explain the compression in yields in the EM world," continues Goldman Sachs, and "why GBPUSD is so high despite a deteriorating economic backdrop."
"This move out of EUR and USD could also shed light on why the AUD remains extremely buoyant despite rate cuts, a Chinese slowdown and a fall in commodity prices," concluded Goldman Sachs.
On the other hand, Deutsche Bank says it is time to turn bullish EUR and recommends buying EUR vs. ZIRP currencies. "It's now time to turn tactically bullish EUR vs the other ZIRP currencies: USD, JPY and GBP," says DB in a research note. "Target 1.27 in EURUSD, 100 in EURJPY and 0.81 in EURGBP."
DB explains that it has become more optimistic in the near-term for three reasons: (1) "Yesterday's ECB announcement was significant," (2) "Expectations are too low, market is too short euros," and (3) "Markets approaching 'theme fatigue' threshold."
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