FX News Trading For The Week Of April 22-And Beyond

How Things Look:

US Housing: There have been reports this week of new lines of credit being made available to sub prime lenders, Freddie Mac throwng about $20B into the sub prime pot and investors like Carl Ichan looking to buy.

What we are seeing here is the willingness of gov't and investors to further fund the system with credit. This will allow for the the continuation of the favorable rates and payment levels in the loans that have already been made. With the job market going well it's likely that these borrowers will continue to make their payments at their present levels. What this means is that the housing crisis in the sub prime sector will be contained, the problem is not likely to get worse and there will be no spill over or contagion to other parts of the economy.

Don't listen to me though, listen to Hank Paulson (sub prime contained) and Carl Ichan (buying real estate). Eventually, everyone else will.

Fed: With the sub prime problem largely contained and controlled, the economy is set to rebound in Q3 and Q4 just as the Fed has been predicting all along. While the core CPI has been trending down, the latest core PCE shows inflation still trending up. It will take months of flattening followed by downtrending before the Fed shifts to a neutral bias; rates will not be cut this year and if the core PCE continues to trend up with a growing GDP, look for an increase late in the year.

The $: There is still plenty of pressure on the $ as markets see a Fed cut and slower economic growth (they are wrong, but price won't reflect that yet). There could be a temporary boost vs the GBP if UK GDP prints lower then consensus, which is very likely. Further $ pressure will be seen towards the end of the week as the focus shifts towards US GDP. A print there at or worse then consensus followed by a lower print in the core PCE (no prediction there at this time) further intensifies the negative $ sentiments.

BoE: Will be moving to 5.5% at the next meeting and that will be all. UK inflation is projected by the bank to be trending down afterwards so a 2nd increase will likely not be needed. These are the BoE's own projections and the current thinking of the NIESR mirrors this.

ECB: Another increase highly likely at the next meeting. We'll see how it goes beyond that as EU expansion figures to slow somewhat after the recent rate increases. The ECB focuses heavily on M3; continued expansion there can prompt them to raise rates even if inflation looks good.

BoJ: At least one more increase is all but certain this year and there is a possiblily the Japanese economic expansion will allow two. The bank is on a course to normalize rates at a "gradual" pace that will be dictated by the data. There's a slew a data scheduled for release on Thursday with the industrial production number figuring to be the most important indicator of future BoJ moves.

World Economy: Looks to be in the 4-5% range for the year with China leading the way and the US at the bottom of the curve (but trending up as the year closes). The next increases from the BoE and ECB are likely to slow their expansions somewhat towards the last quarter. Japan looks to have the highest rate of growth in the G7 this year which makes sense because their monetary policy is the most accomodative and the Yen is low (which is supportive for Japanese exports).

I have observed London movement frequently before UK reports come out and i've come to the conclusion that at times, London traders have inside information on how some reports will print. It doesn't happen all the time, but it happens often enough-and if you can spot when this is happening you can really make some pips. Have a look at the chart and you'll see what happened on April 17 (UK CPI) from the London open at 4.00GMT to just before the report-The GBP got traded up by almost 90 pips thru the 12.00 candle and over 140 if you had held on an additional 1/2 hr.

The next big UK report is Wedneday's GDP. Can't wait to see what happens.

Here's another example that shows something even more significant: Price movement on the G/U that is going against the consensus and in the correct direction, as per the actual number.

4:30am GBP Industrial Production m/m http://forexfactory.com/images/misc/...mpact_high.gif -0.2% 0.2% 0.0%http://forexfactory.com/images/misc/...us_revised.gif


4:30am GBP Manufacturing Production m/m http://forexfactory.com/images/misc/...act_medium.gif -0.6% 0.3% -0.2%

Both reports came out much worse then consensus and look how GBP/USD moved from the London open to the release. Another case of trader's intuition worth a 100 pip sell-off? I don't think so!

Tnx for the info Matt keep it up!

National Association of Business Economics Q1 2007 Report:

This NABE report reflects first quarter 2007 results and outlook for the near-term.

“Nearly every indicator in the April NABE Industry Survey showed slower momentum in the first quarter than previously, with very cautious expectations for the near future,” said Ken Simonson, Chief Economist, Associated General Contractors of America.

“Demand for goods and services at respondent’s firms rose again in the first quarter on balance, but at fewer firms than at any time since early 2003. The percentage of firms with rising profits also shrank to a nearly four-year low. More firms raised prices last quarter than in the prior quarter, but an even higher percentage reported higher materials costs. The percentage of firms that added workers, on balance, was the lowest in three years. Fewer firms, on net, increased capital spending. As was the case three months ago, about two-thirds of respondents expect the economy to expand at a 2-3% rate in the first half, but fewer people now expect growth to top 3%. Respondents showed less optimism about being able to raise selling prices or find lower input prices in the next three months, expand hiring in the next six, or increase capital spending in the next 12. More than a third of respondents said they expect mortgage defaults to have an impact on their business in the next six months. On a more positive note, as in the January 2007 survey, 70% of respondents said their company had exceeded or met its business plan; the most-cited reason for success or failure to achieve a plan was the state of the domestic market.”

Most notably: Employment growth at respondents’ firms sagged in the first quarter, as the percentage of firms that added employees hit a three-year low. Fewer respondents than in January expect their firms to add employees in the next six months, and more respondents than in the previous four surveys said they expect reduced head counts, especially through attrition.

Obviously not a very good report. Inflation pressures are likely to remain, less jobs will be created and growth looks to be at trend levels to moderately below. Look for pressure to remain on the $.

It goes back to something I commented on a while back: The US economy is in a "stagflationary" phase; lower growth with higher inflation. The reason i'm still pointing to higher inflation is that while the coreCPI is trending down this year, the corePCE (the Fed's preferred measurement) is still trending up. Friday and next week will further determine the depth of this stagflatioary phase as the first Q1 2007 estimate of GDP is made and corePCE is released. Stay tuned.

I have just sent you a private message, pls , check it .

The BoE and the Big Rumor-But First Some News:

I regard March's drop in home sales as a pretty important number. The weathher was terrible in Feb and improved in March. This is the first time that home sales have decreased as the weather has improved from the prior month. The fact that it's down so much and at the lowest point in 4 years, really says something.

From BB:

The median price of an existing home fell 0.3 percent last month from a year ago to $217,000.
Another industry report earlier today showed a measure of home values in 20 metropolitan areas, the S&P/Case-Shiller home- price index, declined 1 percent in February from a year earlier, the biggest price drop since the index started in 2001.

Housing sales figure to stay low and housing prices look to be declining for quite some time to come. The glut of foreclosures will only add to the inventory and price pressure. They'll be less people available to buy because credit standards have tightened. It really has to get weaker before it gets better and even after it starts bottoming out, it won't look like 2001-2005 again for many years to come. Those days are gone. In the meantime, we'll see how new home sales look tomorrow.

On to the BoE rumor-and rememebr it's just a rumor:

It's about the next rate increase looking more like 50 basis points rather then the 25 everyone expects. No telling how rumors get started but there could be a profit oppurtunity here:

We'll have the UK GDP tomorrow. There's no point in guessing the outcome, but if it should happen to print high the 50 BP hike rumor could start gathering some momentum.

Let's see how it prints and let's see how price moves. A good print and a break of the high from last week might really mean something.

How About US GDP on Friday?

The consensus is realy looking for a lower number there, but I believe there is a good possibility to see something beter then what's expected.

Let's take a look at some of the main pillars of the GDP and how they're doing:

Housing: Set to be a drag on the GDP by anywhere from 1 to 1.5%.

Jobs: Making a strong contribuion.

Corp Earnings: Corps in the S&P 500 are earning nearly twice as much as expected this year. Corp earnings are also doing very well in other sectors so far this year. What's more, it's doubtful that indexes would have recovered after the Feb. rout if not for a continued favorable outlook for corp earnings.

Trade Balance: The reduction in the trade balance will have a net positive affect on GDP.

Consumer spending: Definately has held up well.

Here's something that I found interesing on 2 levels.

From BB:

Toyota Motor Corp. surpassed General Motors Corp. in first-quarter sales of cars and trucks, threatening GM's 76-year reign as the world's biggest automaker.
Toyota's first-quarter sales rose 9.2 percent to a record 2.35 million vehicles, the company said today. GM's sales gained 3 percent to 2.26 million vehicles, also a record, the Detroit- based automaker said last week. GM outsold Toyota 9.1 million to 8.8 million for all of last year.
Toyota overtakes GM 50 years after exporting its first passenger car to the U.S. The Toyota City-based automaker is relying on record imports and six North American plants to gain on GM in its home market. GM, after losing $12.4 billion in the past two years, is ceding lower-margin U.S. sales to rental-car companies and cutting incentives as it tries to return to profit.

On the first level-the fact that Toyota has overtaken GM in the 1st quarter is amazing enough, though some might say inevitable. Try to imagine how it was 50 years ago when we were 15 years removed from Pearl Habour and here come these little crappy little cars to take on Caddy's and Chevy's. Who would have ever dreamed they would ever outsell GM? Inconcievable at the time.

On a second level-take a look at their sales figures-both at a record. Now the article doesn't mention how much of these sales are from North America-but i'm sure it's a lot. So bad can the economy be when Toyota and GM are selling so many cars?

So the likely first Q1 2007 estimate is likely to be a bit better then the consensus. Just my opinion though...

I have sent you a private message

Further US Info:

New home sales were nowhere near what economists were looking for. Economists expected the warmer weather in March would result in a better number.It's a continuation of an on-going story: Housing looking to be a drag on an economy that is otherwise doing well.

Everyone is thinking two things:

1. When will the lack of asset appreciation in housing and the loss of home equity refinancing turn up as reductions in consumer spending? It hasn't so far, but many are waiting for the enivitable shoe to drop.

2. When will the loss of residential construction jobs start hurting the NFP? It could soon, but there are several factors to take into consideration. There is an acute shortage of skilled workers and there is continued demand in commercial construction. How many residential construction workers can be used or absorbed into other sectors is a determining factor for how much the loss of residential contruction jobs affects overall employment.

Theoverall Durable Goods Number was better then expected, but when traspotation is stripped out (which is what a lot of analyists do) the !.5% gain wasn't so inspiring.

Still, there are several areas where the US economy looks to be doing quite well and corporate profits is definately one area. Or is it?

Which companies are doing well and which are not? The big multinationals have enjoyed some very strong profits lately while the more "domestic" companies have not. Why might that be?

One of the main reasons for the recent success of the Multi Nationals is the weak dollar. A weak $ helps a Multi National in two important ways:

1. A weak $ means their products are cheaper in the oversea markets they serve. These markets currently have economies that are expanding, so the effect is multiplied.

2. They get more $'s when they repatriate profits. Obviously if they are paid in Euros and the Euro can buy more $'s...

The more domestic companies like retailers and home builders aren't doing as well. The US economy is softer and the profits are getting squeezed.

Today's reports (and the one's that came before) are likely to have no effect on Fed policy; Their inflation bias will remain and their outlook on growth and GDP shouldn't change either.

What About This Equity Rally?

Here's something I found really interesting. It took over 2700 days for the DOW to go from 11,000 to 12,000, but it took only 180 days to go from 12,000 to 13,000. 7 years vs. 6 months. The rate of growth is really fast, but is this rally worthy of all the bullish sentiment?

This rally is based on something real-corporate profits. Earnings in the S&P500 are about twice as much as economists estimated. The internet rally 6-7 years ago was basically based on pie-in-the-sky promises of profits to come.

As long as corporate profits keep surprising to the upside-why shouldn't a rally continue? Companies are becoming more valuable as they become more profitable.

Already, 230 companies in the Standard & Poor's 500 have reported first-quarter earnings, and 158 of them have beaten earnings expectations, with 32 in line with consensus and 40 missing earnings expectations...

The companies that operate on a truly global scale will obviously do the best.
Multi nationals will continue to look good as long as the $ stays relatively weak and global economies look strong.

Speaking of the $, it's bound to pick up some momentum. The US economy, while still looking to grow slower then other G7 economies might not turn out as weak as people were thinking. All of these corporate profits and jobs, not to mention a reduced trade balance will certainly add to GDP. You're not gonna have a rate cut with a 4.5% UE rate and corePCE above target. The Fed is counting on a slower rate of growth to reduce inflation by the end of the year and if that doesn't happen...the market will be then talking rate hike.

I really don't see the GDP coming out too bad on Friday and I don't really see much downside to the $. All I hear about is negative $ sentiment while price stays where it is. I don't see any enthusiasm for taking the $ lower right now...

GBPUSD started the week at 2.0060.

We had 1 Good UK GDP 0.7% vs 0.6% Expected. From experience, this should have been a good 50 pip rally. But it did not punctured 2.0060 resistance.

We had also 2 very BAD US Housing Data yet it did not push GBPUSD beyond the 2.0060 barrier.

We did see a very good US Durable Goods Data but DGO number is not as heavy as New Home Sales.

What does this tell me? Short GBPUSD. I was waiting with a sell limit @ 2.0060 but my broker went up to 2.0059 only. Nonetheless, I am in the game with a 2.0024 and 1.9971 shorts. I should have even added a 1.9950 if I have known this is a strong support line.

The event to watch is the US GDP Data this Friday. Expected to come out 1.9%. Housing has been the biggest concern and big component of GDP. Housing industry as you know includes a lot of things such as furnitures, home improvements, appliances as well as Labor. Up/Down Housing prices implies all these too.

At 1.9% vs previous GDP results, this one is a LOW Estimate. Check DOW. Its moving beyond 13000, and companies are reporting record earnings breaking expectations after expectations: US companies are doing great.

However, DOW is just a handful of the economic basket. It does not include the small retail stores, the small labor market and such that were not "BIG" enough to be listed. But overall, you get the picture how the big companies are doing.

I appreciate if anyone could come out and post some magic numbers on housing data; ie, i am interested to know the average housing prices since July 2006 to March 2007. With that, I can extrapolate the possible GDP numbers this friday.

Housing is most likely going to be a continued 1-1.5% drag on the economy.
Consumer spending, Trade balance, jobs and corp profits should be supportive.

Avg house price is $217,000.

The 1st Q1 2007 estimate of GDP showed that the economy grew at the slowest pace in four years. Home construction and a bigger trade deficit were the main negatives on GDP. Be aware these are preliminary figures that will be revised in each of the next two months.

The 1.3% figure follows a 2.5% fourth-quarter reading. Core PCE printed at a higher reading then before (2.2 YoY vs 1.8 YoY).

First indications-further evidence that the economy is in a stagflationary phase. When growth is lower and inflation is higher-stagflation exists. It makes for a difficult set of circumstances for Fed policy, because both ends of the spectrum look to be a problem. It sets up a further longer-term bearish market for the $.

Consumer spending is still holding up, while housing has now had 6 quarters of slowing. Business investment improved but the Trade Balance worsened.

On a nominal basis, the economy expanded at a 5.3 percent annual pace last quarter, up from 4.1 percent.

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The consumer sentiment reading dropped to a seven-month low in April (to 87.1 from a previous 88.4). The report indicated that consumers were worried about the price of gas, inflation and also that home values have decreased.

The danger here is how a drop in sentiment may affect overall spending. Generally, consumers tend to spend less as confidence decreases and inflation fears worsen. The Fed keeps a close eye on inflation expectations, as noted in the minutes.

Consumer spending is the big prop holding the economy up. Spending accounts for 70% of the overall economy and with the GDP estimate as weak as it is, decreases will have a serious consequence.

Economists around the world are going to look at these reports and see further weakness for the US economy ahead. Nations that depend on exports to the US will also have to think about the effects on their exports.

I really see nothing positive in these reports. There will be a real test of the Fed here; market participants will be screaming for a rate cut, even as the Fed predicts growth to be turning up. A cut by the Fed will look extremely unlikely given the Fed's present inflation bias and recent inflation readings. A Fed Gov last night used the "R" word, while still saying growth would rebound and inflation woulds trend down. They are holding onto their previous forecasts and only time will tell who will be right.

Just a quick addition. Last night Janet Yellen, the S.F. Fed bank president said that she had upped her risk assessments for US growth this year. She also noted other banks had not as yet. While she did say she still expected growth to pick up as the year goes on, it would be to a lower level then previously estimated.

An update on the $ short positions taken at the close of trading on March 30 because of the US Tariffs applied to China.

GBP/USD 306
EUR/USD 293
USD/CHF 102
USD/JPY Initially was a short position that lost 229. The position was switched to a long and that has gained 72

Total so far is 544.