Forex Market Update & Analysis 06/07/10

by Henry Liu on June 7, 2010

This is what I wrote in my Weekly Outlook this week…

I usually don’t post much from my Weekly Outlook to my blog, this is to protect my paying subscribers, but with the NFP on Friday and current market condition, I feel that everyone will benefit from a closer look… So here it is:

The headline is that NFP (nonfarm payroll) missed expectation and came out at:

NFP 521K(E) 431K Unemployment. 9.8(%) 9.7%

As I’ve pointed out before the release in my newsletter, since the expectation for NFP is set at such a high standard, it will be difficult to impress but extremely easy to disappoint. A closer look at this release we also see that private sector hiring were only 41K, which is a far cry from the 180K estimated.

The only seemingly news was the Unemployment Rate at 9.7%, but upon further examination, you would see that over 320K people ended their search for jobs, or dropped out of the work force in May, that the real unemployment figure is actually over 10%…

Another interesting but hidden fact of the NFP release is the amount of census hiring that was attributed to the 431K of release, and it is 411K… which makes the 431K figure 95% government temporary jobs… And this will surely cause concerns in the market as traders were counting on the “better than expected” growth in the U.S. to save world economy.

Therefore, to sum it up, the NFP release was truly disappointing. With Census hiring winding down in the next few months, based on the current market condition, it is not out of the realms of possibility that the jobs number could turn negative again, and that would shift sentiment and confidence towards risk aversion, which will make JPY a much stronger currency.

Market overreacted during last Friday’s NFP release, partly because of the Hungarian news about possible sovereign default, but with Hungary not being a member of the Euro Zone, one has to wonder why did the market react the way it did? The short answer is that the situation in the Euro Zone is wind up so tight, any catalyst could set off a chain reaction; the whole scare was attributed to the lack of confidence in the region and investors’ blind flight to safety.

Although Hungary later on retracted the possible default statement, the damage was already done and no one could stop the market with EUR/USD already broken the 1.2000 psychological handle.

The direction for the EUR is now clear; investors will push this pair down to a new equilibrium. We have no idea where that would be, but it would take days, weeks, even months to reach that level. GBP will probably do a little better than EUR, but it would be dragged down as well… and when the market starts to focus on the GBP, it will be volatile. Don’t be fooled by the strength you are seeing in Sterling now against USD, it will collapse.

With U.S. jobs number and the latest Hungarian surprise, market is already spooked. Any other risk aversion news is likely to set off another sell-off… Therefore, I would be very careful watching the market for these kinds of releases.

However, one word of advice, market is not YET at the brink of collapse. What took place on Friday will need a period of consolidation. Market never moves in a straight line, and after a strong move, usually we’d see some minor correction… Although the overall trend is set for further risk aversion, the best entry may not be now, but after the consolidation, whenever that takes place.

Furthermore, even though the U.S. Job data is inflated artificially (by census hiring) as some may argue, it is still over 431K jobs created when you put everything in perspective. These are temporary governmental jobs granted, but those employed aren’t getting paid with monopoly money. So to some extent, this is still rather positive news and we should not lose sight of that…

Moreover, with Japan’s Naoto Kan set to be the next PM, market is likely to take that as positive, or risk appetite event as Kan is very vocal about how a weaker JPY makes a more competitive Japan. This has been the reason why JPY still traded par against USD.

And with G20 failing to reach an agreement on bank taxes and most countries keeping their stimulus packages in play, market is likely to see that as positive and less growth hindering.

And don’t forget the loan guarantee out of the EU. 750 Billion Euro of guarantee may not seem positive right now, but when push comes to shove, this will stop further contagion fear in the region.

One last note has to do with Fed. Hoenig stating that before the end of summer the FOMC should raise rates to 1.00%, or about 0.75% of hike. This is largely ignored by the market as Hoenig has been a bull on where he stand over FOMC’s policy. But for him to come out and say stuff like this and being a voting member of the FOMC, who is to say that 1.00% is not possible?

As a conclusion, I’d like to caution on selling low and buying high. As we are seeing the market leaning towards risk aversion, instead of chasing the trade at the bottom, it is probably best to wait for some reversal and sell from the top of the reversal. As long as the trend stays intact, a little patience will go a long way.

UPDATE: I’ve called 2 trades selling from the top, 1) SELL GBP/USD 1.4520 2) SELL GBP/JPY 133.40… Both have reached over 50+ pips by the end of the day on Monday… Market could still play in the ranges, therefore I’d still be looking to SELL from the top.

{ 5 comments… read them below or add one }

Ricki June 8, 2010 at 5:50 am

Henry, Thank You for your professionalism !

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Peter June 8, 2010 at 4:09 am

Dear Henry I thought I’d write to say thank you for you market comments…..I never really considered the meanings behind any of the market moves before, since I only look at the price action on the chart….your thoughts on the NFP have made me think twice. Being a merely a visual person with an Artists background I don’t know whether I have the mental capicity to rationlise the thought process as cleary and succintly as you do.

I am resolved to the fact that to learn more I must read your blog more…with gratitude in helping me realise my short comings through your free blog.

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Henry Liu June 8, 2010 at 8:19 pm: Thanks Peter. I think anyone can learn fundamental analysis, just need to pay attention to the news that really matters.

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Gabor Havasi June 8, 2010 at 12:35 am

Hi Henry,

Hungary is member of the EU indeed. Update your blog before more people would spot the mistake. Check the supporting document: http://europa.eu/abc/european_countries/index_en.htm

Best regards,
Gabor

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