August 10th, 2010 21:33:22 GMT

The big question still remains, which currency should we be buying

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  • The USD still looks mightily unattractive after last night’s FOMC meeting and will probably remain friendless in the FX community for another while yet.
  • EUR and GBP are at very elevated levels already after rallies of over 10% in the last two months;
  • the AUD is directly linked in the market’s eyes to all things China-related so worries about property bubbles, the upcoming election and the already high AUD/USD spot rate are certainly potential negatives there;
  • Sovereign names keep selling CAD and I’m not going to fight them
  • which leaves the CHF and the JPY. We saw strong moves on the crosses overnight with EUR/CHF falling over 100 pips and EUR/JPY likewise.

Conclusion: If in doubt, buy CHF and JPY.

August 10th, 2010 20:51:38 GMT

Overnight trade saw China selling EUR/USD and BIS selling USD/JPY

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There might be a EUR/JPY trade in there somewhere! The giant panda was spotted selling rallies in EUR/USD last night and the BIS was spotted selling rallies in USD/JPY.

Resistance in EUR/JPY is at yesterday’s 113.65 high and support is at a 61.8% retracement level around 111.80.

August 10th, 2010 20:38:24 GMT

ForexLive Asian market open: Little change after FOMC

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As Gerry mentions below, there was lots of noise but not a lot of movement with most of the majors close to where they were yesterday. The early European rush to buy EUR crosses has been reversed and USD/JPY is once again close to the pivotal 85.00 level. At least in USD/JPY we should see some volatility.

Good luck today.

August 10th, 2010 20:35:49 GMT

Analysis: FOMC Move a Signal of Alarm About Econ, Infl Outlk

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By Steven K. Beckner

(MNI) – Panic? Or just precaution?

Take your choice of “P” words, but there’s no question Federal
Reserve Chairman Ben Bernanke and all but one of his fellow policymakers
took a calculated risk in deciding to go in for what amounts to some
additional monetary stimulus at their Aug. 10 Federal Open Market
Committee meeting.

In deciding not to allow the natural shrinkage of the central
bank’s balance sheet that otherwise would have taken place, the FOMC was
basically announcing to all the world that it has lost confidence in the
economic recovery. It was not only signaling that the downside risks to
economic growth have intensified, but also, implicitly, that
deflationary threats have worsened.

It’s a doleful admission.

Although the immediate, somewhat surprised, market reaction was
largely favorable, only time will tell how the FOMC’s decision affects
investor and consumer confidence and behavior — and how inflation
expectations will be impacted.

If the Fed is worried enough about the economy to swing from talk
of exit strategy to purchasing more bonds, one might well ask, then what
does that say about the outlook for investing, for hiring, for pricing
and so forth?

Bernanke, ever the activist student of the Great Depression, was
not satisified merely to ask his colleagues to maintain the status quo.

The FOMC has been saying for months that it would “continue to
monitor the economic outlook and financial developments and will employ
its policy tools as necessary to promote economic recovery and price
stability.” And Bernanke told Congress last month in his Monetary Policy
Report that, given an “unusually uncertain” outlook, “we remain prepared
to take further policy actions as needed to foster a return to full
utilization of our nation’s productive potential in a context of price
stability.”

Bernanke, in fact, told the Senate Banking Committee on July 21,
that one option the FOMC would be considering, was reinvesting the
proceeds of maturing mortgage backed securities in Treasury securities,
which is what has now been done — and in a relative hurry.

In a matter of a very short time, he has led the FOMC from the mere
hint of possible additional stimulus to rather assertive action. It’s
fairly striking in the annals of U.S. monetary policy. It’s the kind of
thing that became customary during the depths of the financial crisis,
but until very recently, the tack being taken by Bernanke and his
colleagues was a desire for normalization.

Now, an apparently alarmed Fed has taken a modest but still
substantial step back into crisis mode.

With Kansas City Federal Reserve Bank President Thomas Hoenig
dissenting even more emhpatically than he has before, the FOMC kept the
federal funds rate near zero and renewed its pledge to keep the key
overnight rate “exceptionally low … for an extended period.”

But that’s not all. Since halting its purchases of mortgage backed
securities to pull down long-term interest rates in March, most of the
talk has been about when the Fed might start selling those assets and
raising rates. It has not been reinvesting the proceeds of maturing
mortgage bonds, thereby permitting a shrinkage of the Fed’s balance
sheet and the amount of bank reserves.

Now, the Fed says it will reinvest the proceeds of those maturing
mortgage bonds in Treasury securities to prevent any such shrinkage.

“To help support the economic recovery in a context of price
stability, the Committee will keep constant the Federal Reserve’s
holdings of securities at their current level by reinvesting principal
payments from agency debt and agency mortgage-backed securities in
longer-term Treasury securities,” the Fed said in its policy
announcement.

“The Committee will continue to roll over the Federal Reserve’s
holdings of Treasury securities as they mature,” it added.

After the FOMC announcement was released, the New York Federal
Reserve Bank issued its own statement, declaring that the open market
trading desk will seek to maintain the value of outright holdings of
domestic sedcurities at around $2.054 trillion — the amount held as of
Aug. 4.

“In the middle of each month, the Desk will publish a tentative
schedule of purchase operations expected to take place through the
middle of the following month, as well as the anticipated total amount
of purchases to be conducted over that period,” said the New York Fed.
“The anticipated total amount of purchases will be calibrated to offset
the amount of principal payments from agency debt and agency MBS
expected to be received over that period.”

The New York Fed said “the Desk will concentrate its purchases in
the 2- to 10-year sector of the nominal Treasury curve, although
purchases will occur across the nominal Treasury coupon and TIPS yield
curves.”

“The Desk will typically refrain from purchasing securities for
which there is heightened demand or of which the SOMA already holds
large concentrations,” it said.

Explaining its decision, the Fed says “the pace of recovery in
output and employment has slowed in recent months.”

Though not dramatic, the impact of the FOMC decision is hardly
inconsequential.

Back in March, Brian Sack, head of the New York Fed’s Open Market
Trading Desk, estimated that $200 billion in agency MBS will mature or
be repaid by the end of 2011, and another $140 billion of Treasury
securities in the Fed’s portfolio will mature.

By preventing the System Open Market Account, and in turn bank
reserves, from being drawn down the Fed is not merely preventing a
monetary tightening by default, it is arguably effectively easing
policy, at least relative to market expectations.

More significant than the sheer amount of the net new Treasury
purchases which this even-keeling policy will yield, though, is its
potential psychological impact on market participants and the broader
public.

Last week this reporter posed the following questions which FOMC
members would need to ask: “Does the FOMC really want to send a signal
of alarm about the economy’s prospects at this point? Does it really
want to risk aggravating deflation fears and destabilizing inflation
expectations and price stability in a downward direction? ”

And, given the fiscal policy implications, this reporter asked,
“Does it want to also appear to be trying to accommodate record Treasury
borrowing more than it already is by holding interest rates near zero?
So close to an election?”

At a time when the fate of the Bush tax cuts, which are due to
expire one minute after midnight on Dec. 31, is unclear, one might also
have asked whether the FOMC’s action to stop MBS from running off is
intended to compensate for letting those tax cuts run off?

Hoenig this time not only dissented against the “extended period”
language. The statement also records that “given economic and financial
conditions, Mr. Hoenig did not believe that keeping constant the size of
the Federal Reserve’s holdings of longer-term securities at their
current level was required to support a return to the Committee’s policy
objectives.”

Clearly, though, Bernanke and the majority were not content to let
the recovery just run its course in wake of recent data, which include a
deceleration of second quarter GDP growth to 2.4%, a 131,000 July drop
in non-farm payrolls and other discouraging indicators.

Whether this turns out to be a wise move remains to be seen. One
suspects it could become subject to some major second-guessing,
depending on how economic and financial conditions — in particular
inflation expectations — unfold.

What makes Tuesday’s action a bit surprising is that Bernanke
couched the actual implementation of additional stimulus measures in
terms of fairly dire economic circumstances in last month’s
congressional testimony. And he did not significantly change his
rhetoric in a speech just over a week ago.

“Further policy stimulus might become appropriate if the outlook
were to worsen appreciably,” he said on July 21. And after observing
that “monetary policy is currently very stimulative,” he said “if the
recovery seems to be faltering then we will at least need to review our
options.”

Has the economy “worsened appreciably?” Is the recovery
“faltering?”

The Fed seems to be telling us just that. Plan accordingly.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$$CR$,M$U$$$,MMUFE$,MGU$$$,MFU$$$,MT$$$$,M$$BR$]

August 10th, 2010 19:54:49 GMT

ForexLive N.American Wrap: Busy day, but no huge change

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  • Federal Reserve leaves rates on hold.  Announces QE lite
  • Canadian July housing starts 189.2k, down from revised 192.3k in June
  • US Q2 non-farm productivity -0.9% vs Q1 +3.9%, worse than median forecast of +0.2%. Negative for first time since Q4 2008. Biggest decline since Q3 2008
  • US Q2 non-farm unit labor costs +0.2% vs Q1 -3.7%, below median forecast of +1.3%
  • Canada June new housing prices +0.1% from previous +0.3% and versus median forecast of +0.2%
  • US chain store sales rise 1.2% in August to date vs July. Rise 3% in week ended Aug 7 vs year ago
  • IBD/TIPP economic optimism index falls to 43.6 in August vs 44.7 in July, weaker than median forecast of 45.5 and lowest since October 2008
  • US June wholesale inventories +0.1% vs +0.5% in May and lower than median forecast of +0.4%
  • Greece Jan-July budget deficit narrows 39.7% y/y vs target of 39.5% 

Busy day, but at the end of it all there’s not a huge amount of change in the majors.

EUR/USD at 1.3190 from early 1.3165.  Inbetween the pairing came under fairly intense pressure as general risk aversion picked up.  Stops tripped through 1.3100 on way to session low 1.3075.  Much talk of buy orders lying in wait at 1.3050/70 and that helped recovery.

We sat just above 1.3100 as FOMC announced the results of its’ deliberations.  News of QE lite undermined the dollar and we got above 1.3200 in double quick time.  China then stepped in and sold above 1.3210 and that really was pretty much that.

Talk of decent sell orders out of Asia lying in wait up at 1.3250.

Cable up at 1.5855 from early 1.5755.  At once stage cable got as low as 1.5712, but talk of decent buy orders at 1.5700/10 lent support.  The pairing will have to survive event risk double whammy tomorrow in form of BOE quarterly inflation report/King press conference and JUne jobs report.

USD/JPY down at 85.30 from early 85.90. In between got as high as 86.24.  BIS sold above 86.20 and then large US automaker sold decent amounts helping send the pairing back under 86.00.

The announcement of QE lite by the Fed hit the pairing as US yields came lower.  We reached session low of 85.19 before marginal recovery.  Defence of 85.00 barrier interest still alive and kicking so it would seem.

USD/CAD rallied early. Started around 1.0330 and got as high as 1.0388.  However a large US custodial was seen very notable seller around the highs and that was that.  Then the same US automaker who sold USD/JPY turned up and clumped USD/CAD and we finish down at 1.0320.  Obviously the Fed’s QE lite weighed on the pairing as well.

August 10th, 2010 19:45:31 GMT

US House Sends Obama $26B Aid Bill W/ Teacher, Medicaid Funds

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–House Approves Aid Package on 247 To 161 Vote
–Legislation Now Goes To President Obama For His Signature

By John Shaw

WASHINGTON (MNI) – The House returned to Washington Tuesday for a
one day session in which partisan barbs were exchanged before the lower
house passed a $26 billion aid package to help state governments with
their Medicaid expenses and to retain up to 145,000 school teachers.

The House passed the bill on a mostly party line, 247 to 161 vote

The Senate passed the measure last week.

So House passage of the bill sends the package to President Obama
for his signature. Earlier in the day, Obama urged the House to pass the
bill, saying it included important provisions to help cash-strapped
states.

Obama said the bill would “save hundreds of thousands of additional
jobs in the coming year.”

House Republican leaders derided the package as a “bailout” of
state governments.

The bill provides $10 billion to states to prevent teacher layoffs
and $16 billion for the Medicaid health insurance program for the poor.

It is paid for by tapping funds from an innovation program, cuts
from the food stamp program, and scaling-back a foreign tax credit used
by multinational corporations.

The House, which interrupted its August recess for the vote, will
return to Washington on Sept. 13.

Both the House and Senate are expected to be in session only for
about three weeks before adjourning on Oct. 8 until after the Nov. 2
mid-term elections.

Congressional debate on the fate of the 2001 and 2003 tax cuts will
dominate the fall agenda, with action on taxes likely to occur in
September.

Neither the House nor the Senate has passed any of the 12 spending
bills for fiscal year 2011 which begins on Oct. 1. Congress is likely to
pass a stop-gap spending bill in September funding most of the
government at this year’s spending levels until after the election.

During the Lame Duck session, Congress is likely to assemble the
various spending bills into one large omnibus spending bill or several
smaller packages.

It is unclear what other measures might be considered by Congress
this fall.

** Market News International Washington Bureau: (202) 371-2121 **

[TOPICS: M$U$$$,MFU$$$,MCU$$$,MGU$$$,M$$CR$]

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