Daily Forex Brief London: Tuesday 21st February 2012

Yet another all-nighter in Brussels

These days, one of the strongest-performing sectors in Europe is catering - supplying food and drink to the cognoscenti at all of these meetings of European leaders in Brussels. It was another all-nighter for finance ministers, resulting in a statement being issued at around 4:00am. Greece has apparently won a second bailout from Europe worth EUR 130bln, with private sector bond-holders supposedly accepting a haircut on their Greek holdings of around 75% in net present-value terms. There is much to be done in a very short time before this deal can be said to be actuated. For instance, bond-holders must accept the terms of the debt swap, and each of the eurozone's individual parliaments must sanction it post-haste. A lot can, and probably will, go wrong. But for now, markets are prepared to suspend disbelief and buy the politicians' hyperbole. Invariably, this response results in regret later on, usually very quickly. Watch this latest deal unravel over coming days, as it inevitably will.

Also in today's Daily Forex Brief:

• As good as it gets for risk assets
• Record trade deficit adds to yen woes
• Britain's two-tier housing market

Daily Forex Brief London: Monday 6th February 2012

Do not be fooled by US short-termism

Once again, the latest US jobs numbers were, at first glance, better than expected with a significant upward revision in the annual benchmark review also adding a supportive tone to the data. The reaction of the dollar has been understandable, the dollar index up 0.5% on the perception that further QE is now less likely. Furthermore, both November and December jobs growth were revised higher by 60K, and the unemployment rate fell to 8.3%, the lowest reading for nearly three years. Of course, for some this sits uncomfortably with the Fed's pledge to keep rates close to zero for nearly the next three years. Looking at the bigger picture however, and on closer examination of the data, it's not that difficult to square the circle. Firstly, there is the state of the labour market so far during this recovery. Whilst the economy may have passed its pre-recession peak in output, the labour market still has to see employment expand another 4% on the payrolls measure to achieve the same. The other stand-out feature of this report is the sharp fall in the participation rate, the largest monthly decline for just over two years, although this was down to the population control effects from the annual revisions. What they are showing is that just 63.7% of the working age population is either in work or looking for work. So whilst this report has been positive for the dollar and painted a decent picture of the labour market relative to where we thought it was beforehand, it should be considered in the context of the overall recovery and the extent of labour force participation. The latter remains particularly disappointing and goes a fair way to explain the stagnation of median incomes over the past decade. The closer the US gets to the presidential election the more short-termist politicians will become in relation to these the numbers.

Daily Forex Brief London: Thursday 2nd February 2012

Safe-haven stress

One of the more remarkable developments during January was the relatively strong performance of the traditional safe-haven currencies, principally the yen and Swiss franc. We wrote about this during the course of last month, but the Swissie is particularly under the spotlight, given the proximity of EUR/CHF to the 1.20 floor imposed by the SNB last September. The Swissie only needs to appreciate another 0.5% vs. the euro to reach the 1.20 level, so the market is becoming increasingly nervous of further intervention by the central bank. The remarkable thing is that this has come at a time when the euro has been subject to some fairly severe short-squeezes, a function of the stretched short positions which lie beneath (see comments below). Once positioning becomes more neutral on the euro the SNB is likely to have an even tougher time defending the line in the sand it has drawn. Bear in mind also that creating so much liquidity is not a costless exercise in terms of its impact on the domestic economy. At some point in the not too distant future things could get rather messy for the Swissie and for the SNB in particular.

Also in today's Daily Forex Brief:

• The ECB pressure on peripherals
• Seeking data justification
• A merciless euro short-squeez

Daily Forex Brief London: Wednesday February 1st 2012

Dollar still sliding on more Fed QE

After a relatively encouraging first month of the New Year, the dollar index has fallen by 3% since mid-January, in part due to the Fed's surprising endorsement of more quantitative easing. Last Friday's GDP numbers were remarkably weak, confirming the prognosis of a number of Fed officials who feel that the economy could do with some further assistance. In addition, the dollar has been sold as a counterpart to the sharp short-covering rally in the euro; recall that two weeks ago, euro shorts registered a record high. The EUR had another look above 1.32 yesterday but ran into heavy selling traffic once more. Of interest is that the likes of the pound and the Aussie have essentially been steady against the single currency since mid-January, confirming that this is mostly about the dollar. It could well be temporary weakness, especially if the economy shows some resilience again. Friday's January payrolls figures could re-shape this debate

Also in today's Daily Forex Brief:

• Chinese economy holds up in January
• Greece buffeted by new troika demands
• Portugal peers over the precipice
• The difficulties of lending to the IMF

Daily Forex Brief London: Thursday 26th January 2012

Ben warns more QE may be necessary

In a surprisingly (but also refreshingly) candid admission, Fed Chairman Bernanke declared last night that another round of quantitative easing may well be necessary to alleviate "high and persistent unemployment in an underperforming economy". With inflation still low and Europe a potential drag on the economy, the Fed Chairman clearly feels that more asset purchases are a risk worth taking if it helps the recovery become more self-sustaining. Also disconcerting was the fact that Fed officials lowered their growth expectations for this year, a shock for many who had become more confident in the outlook for the US economy. Despite recent pronouncements from various Fed officials suggesting that more QE may well be required, Bernanke's statement caught dollar longs completely unawares, with the dollar index down more than 1%. For the army of euro shorts, there was an even greater flurry of position-squaring, with the single currency soaring to 1.3125 after languishing under 1.2950 at the start of the New York session. Bernanke's dovish tone helped both stocks and bonds, with the S&P up 2% from the low for the day and the yield on five-year treasury notes falling to a record low of 0.76%. Big Ben did the gold bugs a huge favour as well – the price is above USD 1,710 this morning, up from USD 1,650 before his statement. QE is becoming the preferred tonic of choice for policy-makers – both the Fed and the MPC signalled their intentions to use it again yesterday.