The Week In Forex

Reports on the US labor statistics continue to portray the economy in a recovery mode. Since expectations for job growth were a smallish 85K, the 146K was a friendly number. The unemployment number – 7.7% – likewise sounded great, down from 7.9%, until you look at the details. The unemployment rate dropped because 540K, unable to find work, dropped out of the labor force. The participation rate in the work force is now only 63.6%. Almost 89 million people who are of working age are unable to find work and have given up their employment search.

The headlines are good enough, however, to maintain USD strength after the NFP report, especially when compared to European economies that have slipped into a recession. We wonder if the numbers will influence the Bernanke speech to be delivered Wednesday after the release of the Federal Open Market Committee notes. There had been rumors Bernanke was going to embark on more QE, a consequence of poor numbers. This report may mean QE 3, which would be USD bearish, is now on hold.

EURUSD. We are currently trading near the 1.29 area. Friday was the last trading day for December options, and as we pointed out earlier last week, traders like to pin the price of a contract at a strike price. The OI is the biggest in the 1.29 strike, so that was probably their goal.

The daily chart clearly shows a triple top in September, October, and again last week. If the size of the current decline equates to the two previous ones, there is more to go after the reversal last week. A conservative target would suggest we sell off to 1.28; however, it may just continue to under 1.27.

Markets rarely make a straight dash in one direction for very long. In addition to random economic events, there is no shortage of dysfunctional political leaders on both sides of the Atlantic. Much of the focus last week was on Greece, and the release of the next bail-out tranche. In the US the fiscal cliff looms, and it remains my view we are not headed for a settlement by the end of the year. The uncertainty should continue to produce volatility.

Click here to view EURUSD chart.

USDJPY. As we have noted several times, the open interest in the yen futures has been soaring to where it has exceeded the OI in the euro. Part of this increase in trade is ahead of next weekend’s election. Abe, the candidate who wants to aggressively increase the balance sheet of the Bank of Japan, is the front runner. Versus the USD, the yen has weakened, but is now stuck in the 82/82.50 range.

Today, Sunday the 9th of December, there will be a number of Japanese reports coming out. The Q/Q GDP report is expected to be a negative 0.8%, confirmation that they are entering a recession. The trade balance numbers will need to be examined closely. A negative trade balance is bearish on the yen.

We like the short side of the yen, but with the many uncertainties coming from Washington,  we have chosen to buy the A$ rather than the USD versus the yen. Since the trade is quite large in both the A$ and the yen the trade must be monitored closely.

Click here to view USDJPY chart.

USDCAD. It was reported Friday there was an 59.3K increase in Canadian employment; this the biggest monthly increase since April 2012. The Canadian unemployment rate dipped to 7.2%. Prior to this, trade in the C$ has been listless, at a slight premium to the USD.

We note that the commodity currencies have been popular, but interest in the C$ is not as brisk as the Aussie. Perhaps fears of the closeness with the US economy is a partial reason. The Canadian economy is also dependent on manufacturing which is handicapped by the strong loonie. The reports Friday favor the C$ and we will be exploring a place to get long the currency this week.

Click here to view USDCAD chart. Click here to view AUDJPY chart.

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