Faith restored in Forex?

The US government has finally lost faith in Freddie and Fannie standing alone. With geo-political and capital market pressures mounting in Russia, combined with violent acts of nature bearing down on the US east coast; it’s difficult to predict what will be the driving force for today’s trading session. Volatility will be certain, but direction erratic!

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Friday’s data was not impressive for the US economy, but, the headline number was within the range that most analysts had predicted. It is the revisions that are tripping up last of the positive feelings. The US labor market is retreating at a quickening pace, as last months NFP data (-84k) combined with the revisions stretching back 2-months start to take its toll. The net effect has -244k jobs lost in the past 3-months (that a staggering 40% of the yearly total). The June number was aggressively revised down from an initial -51k to double that, while an extra -10k is being reported for July. It is never the headlines that hurt, but, the revisions! The US has successfully lost -605k jobs so far this year (that wipes out the +55% of last years gains). Digging deeper into Friday’s data, one notice that aggregate hours worked, declined for the 5th consecutive month amidst a huge destruction of full-time jobs only being partly offset by part-time job conversion. The number of full-time workers declined has pushed the unemployment rate up to +6.1% from +5.7%, m/m. While the unemployment rate for part-time workers moved up modestly to +5.7% from +5.5%. Wages were up +0.4% over the month, and +3.6% compared to a year ago. But, if you exclude inflation, real wages are very much flat which does not bode well for consumer spending in real volume terms and will eventually filter into GDP data. Government jobs once again rose and we may find further gains in the months ahead as the election begins (expect it to skew the numbers). Losses were pretty broad-based among industries. The goods-sector has now shed almost -600k jobs this year while the services sector has been more resilient.

Despite the initial positive equity reaction to the US government seizing the GSA’s, what will their actions do for capital markets? Apart from providing a boost to investor confidence, the initial reaction has been to put back on some of the carry trades that were reduced last week (investor hunger for higher yielding assets). Not surprisingly equity markets have also rallied as we have entered a phase of less ‘uncertainty’. The proactive actions of the US government and Paulson can only in the short term anyway, be seen as ‘a plus’ for the US economy and hence good for the ‘big dollar’. Will this ring true?

The US$ currently is higher against the EUR -0.35%, CHF -0.81%, JPY -0.83% and lower against GBP +0.10%. The commodity currencies are mixed this morning, CAD -0.16% and AUD +0.85%. Despite revealing better employment number on Friday than its southern neighbor, it certainly was not euphoric. Canada economy has some ways to go to reverse the losses of June and July (-60K combined). One cannot get too excited by growth of +15k jobs that still leaves the 3-month trend down by -45k. This data provides stronger evidence that Canada’s labor market has lost much of their positive momentum. All of the gains were in the private sector as public employment fell by -24k, erasing almost all of the gains of the previous month. While an increase in the private sector may seem to signal an improvement, taking the last 3- months into account shows that in fact overall, -55.5k jobs were lost rather than gained. The unemployment rate was unchanged at 6.1% (as in the US), despite a +22.5k increase in the labor force. The loonie remains within its trading range despite the greenback rallying aggressively once again and commodities threatening to extend their losses. Canada’s Conservative PM Harper has halted parliament and called a general election for Oct. 14, already a minority government, he believes that he can improve on that. Traders for the time being are better buyers of USD’s on pull backs.

The AUD rose vs. JPY and USD (0.8242) after the US government seized control of Fannie and Freddie, thus restoring confidence among investors about buying higher-yielding assets. The potential curbing of further credit market losses has encouraged the entering of the ‘carry trade’ once again.

Crude is higher O/N ($107.53 up +134c). Demand, demand and demand, it’s all about demand. Despite a bullish EIA report for crude prices last week, the market was unable to advance, highlighting the pressure that commodity markets remain under. Crude oil fell to a 5-month low on Friday as the greenback climbed once again vs. most of its major trading partners and NFP rose more than expected, signaling a slowdown in demand. Crude lost 8% of its value, is this sustainable with the onslaught of tropical storms and hurricanes to hit land soon? It seems that this is the only fundamental factor that’s keeping the ‘black stuff’ from trading below the psychological $100 a barrel. The market will have to contend with Ike, Hanna and Josephine over the coming days. Maybe the biggest factor this week will be the OPEC meeting, which commences tomorrow in Vienna. It looks like OPEC wants to maintain this downward pressure (they supply 40% of the world’s crude) by keeping their foot on the oil production peddle to maintain this record setting pace. All this despite some members (Venezuela and Iran) wanting to trim supplies. Gold has advanced during the London session ($813) as the greenback eases and crude prices strengthen increasing the demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 12,624 up +412. The DAX index in Europe was at 6,337 up +209; the FTSE (UK) currently is 5,440 up +199. The early call for the open of key US indices is higher. Yields of the US 10-year note backed up 10bp on Friday (3.70%) and a further 10bp O/N (3.81%). Treasuries prices fell as traders quite rightly predicted that the US Government would finally take control of both Freddie and Fannie. By default, this has reduced the appeal of government debt despite the weaker unemployment report.

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