Forex: Tracking Central Bank Rate Hike Expectations

Wondering when a central bank is set to raise interest rates? Here’s what the market pricing in for each of the major central banks. As you can see, a full 25bp of tightening has not been priced in for the U.S. In contrast, the market expects 2 quarter point hikes from the BoE, ECB, BoC and RBNZ this year. Rate hike expectations can and will change with incoming economic data but these numbers explain why the dollar could under perform this year

Source: Barclays

Dollar Breaks Support, Falls 10 out of last 12 Augusts

The U.S. dollar may be rebounding this morning but I think the gains will be short-lived. August is a terrible month for USD/JPY – the currency pair has fallen TEN out of the last TWELVE Augusts. Although seasonality does not equal a certainty of USD/JPY weakness, it is worth noting that 83 percent of time, USD/JPY has ended the month lower by an average of 2 percent. Considering that USD/JPY started the month at 86.46, a 2 percent move would put it below its November low of 84.83.

The reason why there is strong seasonality in favor of USD/JPY weakness this month is because of the reinvestment of bonus payments received on Toshin investments in July and the repatriation of Treasury coupon payments in mid August. Also, there tends to be more hedging by exporters ahead of Obon week, which is one of the most important holiday seasons in Japan.

Also on a technical basis, the Dollar Index has broken below the 200-day Moving Average. The following chart shows how a break of the MA has represented a major shift in trend. For example, even though the dollar index had been falling between 2008 and the first half of 2009, the break below the MA triggered another 10 percent sell-off in the U.S. dollar.

Source: Bloomberg

Video: What to Expect from ECB, BoE and Non-Farm Payrolls

I was on Fox Business this afternoon talking about the overstretched positions in the euro and British pound as well as the outlook for the ECB, BoE and Non-farm payrolls report

If the video doesn’t load, watch it here Kathy’s Fox Business Interview

Currencies Cheer Bad Bank Plan

On Friday, in my Daily Currency focus for, I talked about the 3 Big Threats to the US dollar this week. One of them was a bad bank plan. This morning, Dow futures and higher yielding currencies are up sharply on news that Obama’s Administration has prepared a plan to create a bank that would absorb toxic bank assets. Here’s a recap of what I wrote on the plan and read the rest of the report for the other 2 major threats facing the US dollar.

Bad Bank Plan – There is no question that equities are still leading currencies for the time being and over the next few weeks, the Obama Administration could announce a plan to create an “aggregator bank” that would soak up the bad debt sitting on bank balance sheets. This would free up capital for the banks which would hopefully encourage lending and restore investor confidence. If Obama announces a bad bank plan, it could squeeze shorts in financial stocks and take the entire index higher. Since currencies are still moving in lockstep with equities, a rebound in stocks could help reduce risk aversion and take some of the steam out of dollar rally.

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US Dollar Sells Off on Concerns About NFP and GDP

Concerns about the US economy are growing as the Dow Jones Industrial Average erases all of its year to date gains, taking the US dollar down with it. The rally that we have seen in the first few days of trading will be difficult to sustain with all of the weak economic data that we expect in this month. Although the US government has thrown a lot of monetary and fiscal stimulus at the US economy, we may not see the fruits of their labor until the second quarter at the earliest. There is a major risk of a sharp drop in this month’s non-farm payrolls, retail sales and fourth quarter GDP reports and only after we have seen the last of depression like numbers can we begin to see a meaningful recovery in the US dollar.

ADP Signals Big Trouble for NFP

This is a big week in the currency market with non-farm payrolls due for release on Friday. The leading indicators for the pivotal labor market report are coming in and the latest report suggests that in the last 2 months of the year, more than 1 million Americans may have lost their jobs. According to the ADP private sector employment report, 693k jobs were lost in the private sector last month. This was much weaker than the market’s -493k forecast and suggests that non-farm payrolls could have dropped by more than 600k in the month of December. Layoffs also rose 274.5 percent according to the Challenger report with the biggest declines seen in the financial sector. Unfortunately big job losses will probably continue with Alcoa and Intel announcing more layoffs. The only silver lining is the rebound in the employment component of the service sector ISM report, which tends to have a very strong correlation with the non-farm payrolls report. With that in mind, we believe that job losses last month will be closer to 500k than 700k. Either way, both numbers spell big trouble for the US labor market. Q4 will be one of the worst quarters for non-farm payrolls that this generation has ever seen which is why the US dollar is weak and may remain weak going into the NFP report.

Forecasts for GDP, Unemployment and Deficit
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