US GDP Shrank Less than Estimates

(to be written)

Japan Unemployment: Points for Interpreting Report

Unemployment rate unexpectedly fell from 4.0 percent to 3.7 in October. However it might be another case showing single numbers, especially the headlines, usually give the least information about the state of the economy and may be even misleading.

Analysts believe that the fall in the unemployment rate reflects the disappointment from job-seekers when the disappointment itself may be just the sign that finding jobs has been increasingly difficult and this is far more consistent with other economic data that point to the recession in Japan.

As a supportive fact, the Job-to-Applicant ratio, which shows how plentiful the job opportunities are, fell to 0.80 at the same period; more than estimates and lowest since 2004.

Industrial Production also fell as much as 3.1 percent from September, showing that the recession might have been deepened. Exports negatively affected both from the sharp slowdown in global economic activity and the recent appreciation of the Japanese yen.

Japan is one of the major oil importers and it is reasonable to see the negative impact of weak economic data on oil prices. Following chart may show that relation.

U.S. CPI; the Source of Inflation/Deflation Matters

U.S. CPI fell as much as 1.0 percent in October when a 0.1 percent decline in the Core CPI, which excludes food and energy as volatile items, was even more impressive.

But what does it mean for the economy? The answer depends on the sources of inflation/deflation. Price pressures can ease by different reasons. Demand and cost are two main sources of changes in inflation headlines.

A significant decline in cost-structure, like the recent sharp drop in commodities prices, could result in an increase in output but at lower prices. But when prices are falling in response to lower demand, may be because consumers are pessimistic about the future and cutting back in spending, then falling output and rising unemployment could be more probable.

It is the first time since 1982 that the Core CPI declines, reflecting that the slowdown has not been limited to commodities prices but it is now the whole economy which faces the danger of deflation.

It means nothing but lower interest rates. Following charts show the market's reactions after the CPI report. U.S. dollar weakened against its major counterparts though some analysts believe that technical reasons could be also blamed for that excessive reaction.

Case Study: Canadian Dollar and Oil Price Decoupling

The correlation between the Canadian dollar and the price of oil became weaker and weaker since July after the oil price, along with other commodities, started to fall in response to increasingly slowdown in global economic activity.

Today's behaviors of oil and the loonie, as depicted in the following charts, can show that decoupling.

OPEC Extraordinary Meeting: Missing Signals in a Noisy Environment

OPEC's members gathered in Vienna on Friday to cut production level concerning about oil prices, which has fallen more than 50 percent from its July 147 $/b to about 63 $/b in the last week. However, I was probably wrong for giving it too much weight in my daily assessment.

They finally announced a 1.5 Mb/day cut, when it was almost clear that there would be no cut more than 2 Mb/day and nobody expected to see any significant reaction to such a small cut. In fact, I was too concerned about the possibility of a temporary rally in oil, which didn’t happened at all, and its consequences on the dollar.

I think it worked as a noise, making it difficult to discover signals in the market that otherwise might be very clear. Specifically, and in combination with other factors such as being personally tired, an opportunity was missed for selling sterling at a very cheap price ahead of the U.K. GDP report (see the chart).

However, I made money that night betting on the positive reaction from the Canadian dollar, and I was completely true in closing the position (long on CADJPY) on perception of fading technical signals.

NZ Retail Sales; Exploring Kiwi's Reaction

Retail sales in New Zealand rose 0.9 percent in June when analysts expected no change. However it is still showing a 1.5 percent decline on quarterly basis which is the first "back-to-back drop in a decade" and "the most in 13 years".

Recent data already showed that the economy contracted 0.3 percent in the first quarter, and another 0.5 percent decline is expected for the second quarter.

The data looks disappointing but the NZ dollar might have other reasons for its relatively positive reaction. I see it mostly in response to the decline in oil prices which continued from the last night through the Asian and European sessions and improved sentiment in equity markets. In addition, the University of Michigan Consumer Sentiment was expected to show improvement which could have worked in favor of high-yielding currencies as well as the Kiwi.

Dollar's Days!

Dollar continued to appreciate against all major currencies:

Euro-zone: Euro fell nearly 2 percent against dollar, touching 1.5005 and extending its weekly losses close to 4 percent, "the most one-day drop since September 2000". Selling euro accelerated after Trichet's comment on "materializing" risks to the growth, in addition to weak economic data from the euro-area.

UK: British pound followed the same scenario even after policymakers decided to keep the interest rate unchanged. Nationwide consumer confidence declined and HBOS home price index dropped when falling oil (and other commodities) prices strengthened this view that the MPC could finally get the flexibility to cut interest rate.

Oceania: Both Australian and New Zealand dollars extended their losses when having even more reasons. In addition to weak economic data and recent comments from officials on the possibility of interest rate cuts in the near future, these so-called commodity currencies had no choice but depreciation as a response to the sharp decline in oil, gold, copper, and other commodities prices.

Oil: Today's 116 $/b oil may looks relatively cheap and it might be the most important reason behind the dollar's strength and also the rally in stock markets. According to the Bloomberg's analyst, "the decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

However there are people who believe that such reaction is mostly technical than fundamental. For example, falling euro below its 200 day moving average (around 1.5227) could have triggered euro-selling orders and resulted in a faster depreciation.

As a summary I want to quote an analyst's view from the Bloomberg: "The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. "None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

30 pip profit from the first position

I sold USDJPY yesterday, at 107.96 in about 4 hours before US markets close. It was when the GDP had been reported and dollar temporarily was strengthened thanks to dropping oil prices which itself was in response to possibility of lower demand.

The position automatically closed at 107.66. About 7 hours left to US Employment Report and I would prefer to reduce the size instead of closing it but if I had more flexibility. (background of this trade)

GDP, Oil, and Unemployment; Demand & Supply battle

Second quarter's GDP missed estimates when in Q4 (2007) revised to negative, and jobless claims climbed by 44K to 448000 which is usually considered a recessionary number. It is at the time that Employment Report, which is scheduled for tomorrow, may show that the economy lost jobs for seventh consecutive months.

The reaction to the report was interesting. Oil price dropped after earlier jump betting that the slowing economy would decrease demand. It helped dollar to pare its sharp losses against other major currencies. However, from the supply/demand perspective, it looks a little complicated for the dollar:

• From the demand side: Some economic data on Friday may show more weakness in euro-area. German Retail Sales may attract more attention which in expected to be declined in June. Oil price may extend its decline in response to any depreciation of Euro and such process could increase demand for dollar.
• From the supply side: It seems reasonable to expect that the current situation could bring more challenge for the greenback. Considering the increasingly deteriorated job market, the prospect for rising interest rate would be completely uncertain.

I think that taking a position ahead of tomorrow's US Employment Report could be a more difficult balancing act; so it would be necessary to be more cautious about technical data.

Oil passes 140 $/b; Experiencing a change in sentiment

Comments from Libya oil minister on possibility of 170 $/b in summer affected almost everything today. A generally weak dollar, possibility of raising interest rate in Europe as soon as July, and political dispute between US and some OPEC members have been mentioned as the reasons. Oil passed 140 $/b in New York for the first time, dollar depreciated against almost all majors, and more importantly the US equity indexes plunged about 3 percent in the worst June since the Great Depression.

The question to me is that whether conditions have started to change fundamentally and gradually or it is just a more psychological reaction to a daily comment; is it possible to see GBPUSD at 2.000 again or the current 1.9890 is the best time for selling sterling?

I think it may be right to expect that a relatively more stability in oil and other commodity markets is needed to ensure that day to day calculations are based on a solid ground.

Jeddah Summit, Euro PMI, German IFO; Betting on the limits

Some OPEC members showed willingness for limiting oil price, at least in their words, which could work in the short term, and selling oil is usually dollar positive. This Monday might is not a promising day for Euro when Purchasing Manager Index for France, Germany, and Euro-zone, in addition to German IFO Business Climate all are expected to show weakness in euro area. Anybody who wants to buy Euro may find it at a cheaper price in the next 10 hours.

So, I decided to sell EURUSD at 1.5634, when technical data looks relatively supportive.

UK' weakness might be lost in oil

Unemployment increased, TB deficit widened, GDP estimate come lower, average earnings missed estimates. It should not improve the outlook for the UK economy, but when you look at GBPUSD, which is 0.4% higher, it seems that a stronger factor works against the dollar. Today 6$ jump in oil price may be responsible, which also eroded the Wall Street confidence.