Notes From Underground

Let me state out again as to why the FOREX markets are going to be a difficult investment in 2011. The emerging markets and commodity-based currencies have been the repositories of global capital seeking to take advantage of the Chinese and India growth phenomena without having to actually invest in the countries themselves. If you like China, buy the Australian equity or currency as it provides a proxy on Beijing’s growth policies: A classic case of providing picks and shovels rather than mining yourself.

Food prices are surging as global diets change so BUY Brazil. The story is similar in many other regions of the world but this global flow of money has led to some EMERGING CURRENCIES to appreciate so fast that it’s impacting the economic policies of many nations.

Earlier in the week, the CHILEAN government announced that it was going to stem the rise of the CHILEAN PESO by actively buying U.S. DOLLARS during the next 30 t0 40 days, thus intervening to a set $12 BILLION. The CHILEAN PESO has been the yield-based play on global COPPER prices as the Chileans certainly benefit as being one of the world’s largest COPPER producers. It has been regularly reported that the Brazilians have been unhappy with the REAL‘s appreciation as HIGH Brazilian interest rates and a robust natural resource base have made Brazil a magnet for attracting capital.

In today’s Financial Times, there is a story about Japanese investors having poured money into Brazilian Investments. The reporter, Lindsay Whipp, does a nice job of detailing the best currency carry trade for the last two years. The new Brazilian president is not happy about the impact these hot money flows are having on Brazilian industry so I will be watching for further efforts by the Brazilian Central Bank to stem the inflow of capital. Interesting though, that three months ago the JAPANESE were voicing great concerns about Chinese purchases of Japanese debt and its influence upon the YEN. Now, here we have an EMERGING MARKET NATION pointing to the Japanese investors as having a similar impact. The bottom line is that the FED‘s policies have a global effect as well as a domestic effect as QUANTITATIVE EASE forces global investors to rebalance their portfolios.

The EURO currency was the weak link in the GLOBAL CURRENCY markets as continued uncertainty about sovereign and bank debt in the EUROZONE is causing flight from the world’s second-largest reserve currency. Yesterday, the Swiss National Bank let it be known that it would not take Irish Sovereign Bonds as collateral. Furthermore, there is more talk about forcing investors to take a hit on any BANK DEBT, thus basically forcing the issue on DEFAULT AND RESTRUCTURING. Again, we wonder if the European policy makers are ever going to step up and make some hard decisions. As I often remind traders, markets don’t like uncertainty and the EU is all about equivocation.

The result is that the EURO currency is being sold by central banks and other long-term holders because of a failure to craft a credible plan for the PERIPHERALS. Unfortunately, HOPE is not an effective policy. If the EUROPEAN CENTRAL BANK were to name GERMAN AXEL WEBER as its next president, I think the Germans would get more comfortable that a responsible plan would emerge and the Bavarian Burghers would be more forthcoming in aiding the PIIGS. It’s time for European policy makers to get serious for their options are eroding with time decay.

Oh well, let’s take a quick look at tomorrow’s unemployment number. First, the Canadians report at 6 a.m. CST. The consensus is for a 19,000 job gain and a rate of 7.7 percent. Today, the PMI was released in Canada and although a weak number, the currency held up very well. It seems that the PMI isn’t seasonally adjusted so some analysts felt it had limited importance. But look for a more robust JOBS number tomorrow. If the U.S. is really starting to exhibit better growth it should be reflected in the Canadian manufacturing sector, so pay attention for a preview into what could be a healthy U.S. unemployment number. As financial watchers know, yesterday’s large ADP number sent all the WALL STREET ECONOMISTS back to their computers as they revised their earlier predictions. The CONSENSUS is for 155,000 NFP gain with some small losses from state and local governments.

The work week is expected to have a 0.1 percent gain and average hourly earnings are projected to be up 0.2 percent. I think the market is now thinking of a 200,000-plus and anything below that would be a disappointment. The S&Ps and currencies will tell the tale for if the number is more than 200,000 and the EQUITIES can’t hold a rally we will know that a very robust number was built-in. The CURRENCIES will be a similar indicator for if the DOLLAR cannot continue its recent rally on a strong jobs number it will be very telling. Remember, the FED has placed itself in a very tenuous position with QE2. If job growth begins to really accelerate, the FED will have to make a decision on further purchases of U.S. Treasuries. If the FED halts its purchases, how will it affect the S&Ps and the prescribed WEALTH EFFECT?

Mr.Bernanke, how and when will we know that enough is enough? If the NFP number and rate were to be much better than consensus, watch the 10-year note closely. If the 10-year were to break hard–check support levels on the MARCH 11 futures–hold and begin to rally, then the market will interpret that the FED may hold off and the BOND VIGILANTES would applaud potential FED restraint on QE2. It OUGHT to lead to a significant flattening of the 2/10 curve for if U.S. growth picks up, the 2-year note is way overvalued. As always, be prepared and have your technicals done to be able to utilize the markets’ volatility to your advantage.

Tags: ADP, Australia, Axel Weber, Bernanke, bond vigilantes, Brazil, Canada, Chile, Chilean peso, China, copper, currencies, Dollar, Equities, EU, Euro, European Central Bank, Eurozone, Fed, Forex, Germany, global currency, Japan, jobs, Nonfarm Payroll, PIIGS, PMI, QE2, Real, U.S., Wall Street Economists

This entry was posted on January 6, 2011 at 10:04 pm and is filed under Brazil, Canada, China, Currency, Germany, Japan, Switzerland, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.