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Daily Forex
Commentary
By Jack Crooks
Key News
US employers probably added 225,000 workers to their payrolls in
February, the most since October, economists said before Friday's government
report. The forecast is the median estimate of 70 economists in a Bloomberg
News survey and follows a January gain of 146,000. (Bloomberg)
Key Reports due Friday(WSJ)
8:30am: February non-farm payrolls. Consensus: +225K. Previous: +146K.
8:30am: February unemployment rate. Consensus: 5.2%. Previous: 5.2%.
9:40am: January University of Michigan consumer sentiment index. Consensus:
94.5. Previous: 94.2.
10am: January factory orders. Consensus: +0.3%. Previous: +0.3%.
Quotable
"To be sure, imbalances can arise, and they may even act as tipping points.
However, there's a strong internal corrective mechanism in free-market
economies. Prices serve as signals, telling businesses to produce more and
consumers to buy less. The real problems arise when government, always under
the guise of making things better, interferes and exacerbates the problem. In
so doing, the economy doesn't get a chance to correct - and learn - from its
own mistakes."
- Caroline Baum, Bloomberg
FX Trading
Below an excerpt from "EUR/USD Downside Risks from Record High Employment ISM
Index", an excellent research piece, dated March 3, by Monica Fan, global head
of FX strategy at the Royal Bank of Canada (RBC):
"The non-manufacturing ISM Employment Jobs Index surged to 59.6 in February, to
its highest level since the series inception in 1997. This points to
significant upside risks to Bloomberg consensus forecasts for 225K (RBC: 240K)
growth in non-farm payrolls tomorrow, after the lackluster 146K increase in
January. Non-farm payrolls could be biased significantly to the upside and
non-farm payrolls could print above the current range of forecasts of 150K to
303K."
The RBC strategy piece was forwarded to me by a well-connected trader friend.
So I am sure many traders are well aware of the potential for non-farm
payrolls. This makes the following email I received from one of Black Swan's
extremely perceptive clients so apt:
"Buy the rumor, sell the fact could be playing out right now ... market is set
up for disappointment if payrolls don't live up to 300K plus ... I have cut
back on some dollar longs [taken profit], tightened up stops [stop profits] on
the rest, and expect after tomorrow we will see opportunity to re-establish
some new dollar longs."
He is right. But the practical problem we have with placing stops in any
seemingly logical fashion around the non-farm payroll number is that prices
move so quickly in one direction, then often reverse and reverse again. A cynic
would say: "First the dealers take out the stops on their books; then they move
the market in the 'right' direction'." (Note: But because I am rarely cynical
about the forex trading community, I won't say that - a least until it appears
to happen to me another 10 or 15 times.)
So, other than those now looking up and down at the order books, we are all in
the same boat together as the non-farm payroll number approaches. It is a
guessing game. Lay down your money, and take your chances. But here is what we
do know that may provide some reference if the number comes in anywhere near
consensus (which would be a real coup for the economists who seem to miss this
number with increasing regularity):
1) The US is hiring. Europe is firing.
2) The Fed is raising rates. Europe is on hold.
Of course, those "knowns" are already in the market price too. But what is not
in the market price, I don't think has a lot to do with what Steven Vames,
writing for The Wall Street Journal on Friday morning, said this about the
"carry trade":
"In the second half of 2004, a falling dollar and comparatively low US interest
rates made the dollar an ideal currency to borrow, or fund, the trade ... More
recently, a long list of factors have been unraveling the attractiveness of
such trades. Among them have been the durability of the early-2005 dollar
rally, rising US interest rates, a more shaky outlook for the Australian
dollar, traction in the Japanese economic recovery and the potential
revaluation of the yuan by China."
I would add to Steven's list the potential for a devaluing Chinese yuan. (Gulp!
Gasp!) I found this interesting factoid in an article titled "Let it Ride" by
Kenneth Rogoff, economic columnist for Foreign Policy magazine:
"If the costs of flexible exchange rates are hard to detect, the risks of
trying to stabilize currencies are all too obvious. China, for example, has
shown that it can stabilize (indeed, fix) the yuan-US dollar rate, but only
through a draconian system of capital controls that severely punishes ordinary
citizens seeking to invest their money in something other than the country's
bankrupt banking system. Although some left-leaning economists seem to
think heavy-handed financial controls are wonderful, the truth is that they
just don't work well for more-developed economies that need sophisticated and
competitive financial markets to channel savings toward productive investments.
Unfortunately, if China were to suspend its capital controls without allowing
its exchange rate to float, it would almost surely suffer a massive speculative
attack, a la Mexico in 1994 or Asia in 1997 and 1998." (emphasis added)
If we couple Rogoff's view with what Morgan Stanley's Andy Xie has been telling
us for a while about the hot money speculation in China being predicated on
easy money as far as the eye can see, and add in the remnants of money still
playing the carry-trade game, we have the makings of something I don't believe
is "in the price". And I think it could be something lingering in the
background should we get a blowout jobs report Friday: the possibility the Fed
starts taking 50 basis point ladles of punch away from the bowl. It could be a
catalyst for a significant flow of money back into the buck that is now
unaccounted for.
Is everything in the financial world just "one degree" away from Alan
Greenspan? It sure seems like it. Tighten down on those helmets and be careful
out there.
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com
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