Your forexlive.com ENewsletter

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• Economists: The data is good enough, the Fed is ready to pull-back
• The five initial key takeaways from Friday’s non-farm payrolls report
• New Zealand – more problems with meat exports to China?
• India tightens its grip on the country’s gold trade – bans credit card purchases of gold on an instalment basis
• Bank of America/Merrill Lynch – Based on Friday’s non-farm payrolls report, September tapering a done deal?
• China plans further capital market reforms – credit asset securitization
• Bank of Japan survey says consumers expect prices to rise
• China and Switzerland have signed a free trade agreement
• Bolivia the third country to offer Snowden asylum
• Barclays lowers near-term forecasts for euro and pound
• Noyer says forward guidance fits with ECB mandate
• Optimism is your worst enemy
• Carney playing a dangerous game to get the Conservatives re-elected
• Venezuelan President Nicolas Maduro has offered asylum to former U.S. intelligence contractor Edward Snowden
• ForexLive Americas wrap: Taper trade back on after strong US jobs report
• Portugal coalition parties to meet tomorrow, make statement
• CFTC positioning numbers delayed until Monday because of the holiday
• Violence escalating in Egypt
• Late rally in stocks boosts USD/JPY to a session high
• Best trade this week: Short cable

Economists: The data is good enough, the Fed is ready to pull-back Posted: 06 Jul 2013 06:01 PM PDT A non-gated article from the Wall Street Journal with comments from various economists: Economists React: Good Enough for the Fed to Pull Back Most economists saw the employment growth as strong enough to lead the Federal Reserve to start pulling back — "tapering" — its $85 billion-a-month bond-buying program this fall. Have a read of the forecasts … what do you think? (My thoughts are the Fed is not looking to the data for reasons to 'taper', they are looking at the data to see if there are reasons not to taper – so even if the data is just moderately good, expect tapering sooner rather than later. September is looking good – data dependent, of course).

The five initial key takeaways from Friday’s non-farm payrolls report Posted: 06 Jul 2013 06:00 PM PDT From the Wall Street Journal (non-gated article): Five initial takeaways from Friday's report: The 195,000 gain is above expectations and above the 182,000 average of the past year. Prior results were revised higher, a good sign for the economic recovery (see my post on Friday: Five things to watch for in Friday's non-farm payrolls report) 202,000 jobs added per month on average so far this year, above the 200,000 target some Fed officials have been citing The government sector remains a drag on employment, consumers are driving the recovery We're ahead of schedule for 'tapering' There are notes of caution and concern in the figures that are signs of a less than healthy jobs market

New Zealand – more problems with meat exports to China? Posted: 06 Jul 2013 05:58 PM PDT The New Zealand Herald reports that the NZ government only found out on Thursday about changes to certification rules which came into effect on June 1 This is the 2nd time in 2 months meat exports from NZ to China have been held up NZ will adopt these new regulations from Monday and is working to apply the rules to current consignments (More at the Wall Street Journal: China Holds Up Shipments of New Zealand Meat for Lacking Certificates (WSJ is often gated, so if you're unable to access the article try a search of Google news using the headline)

India tightens its grip on the country’s gold trade – bans credit card purchases of gold on an instalment basis Posted: 06 Jul 2013 05:57 PM PDT The Reserve Bank of India have introduced new regulations banning credit card purchases of gold on an instalment basis Over the past year the bank has hiked the import tax from 2% to 8% banned traders from importing gold on margin

Bank of America/Merrill Lynch – Based on Friday’s non-farm payrolls report, September tapering a done deal? Posted: 06 Jul 2013 05:56 PM PDT If the Fed were basing policy solely on the employment report, then September tapering is a done deal, says BoA/Merrill Lynch But, the Fed will be looking at a range of activity indicators, not just one report Boa/ML sees 3 possible scenarios for tapering: (1) The rest of the economy quickly converges to the employment data and the Fed starts a steady move to the exit in September. (2) The Fed decides reduced downside risks make the case for a one-time dial down in QE, so they taper in September but then pause for an extended period waiting for clear broad-based improvement. In other words, subsequent moves are more data dependent than the first. (3) The Fed decides to wait for broad confirmation in data and doesn't start tapering until December. Boa/ML favour option 3. eFX

China plans further capital market reforms – credit asset securitization Posted: 06 Jul 2013 05:54 PM PDT Xie Duo, director of the People’s Bank of China said on Friday it would proceed with plans to introduce credit asset securitisation into financial markets (securitisation is a tool where various assets are pooled together and processed into marketable securities). Credit asset securitisation trials started in 2005 Yang Jiacai, assistant chairman of the China Banking Regulatory Commission, said this securitisation is likely to add new risks to the financial market, saying that although shadow banking is increasing, it needs to be well regulated

Bank of Japan survey says consumers expect prices to rise Posted: 06 Jul 2013 05:52 PM PDT A BOJ survey released Friday showed 80% of respondents expect price rises over the next 12 months Up from 74% in March The survey excludes the effects of a planned 3% sales tax rise in April next year This will be welcome news within the BOJ and government, who are trying to reverse what BOj Governor Kuroda calls the 'deflation mindset' WSJ (gated) IBT (not gated)

China and Switzerland have signed a free trade agreement Posted: 06 Jul 2013 05:50 PM PDT China has previously signed an FTA with non-EU member Iceland, and now with Switzerland This agreement between China and Switzerland may boost prospects for Swiss efforts to become an offshore yuan trading centre in Europe More importantly, it should make Toblerones cheaper in Beijing …. SCMP

Bolivia the third country to offer Snowden asylum Posted: 06 Jul 2013 09:19 AM PDT On Friday, Venezuela and Nicaragua declared Snowden would be free to live there. Now, Bolivian President Evo Morales says his country has "no fear" of the US and its European allies. Latin America was once an extension of American hegemony but the failed Washington Consensus and several CIA-led coups have turned the region into an enclave of anti-Americanism.

Barclays lowers near-term forecasts for euro and pound Posted: 06 Jul 2013 07:53 AM PDT Analysts at Barclays say the central bank decisions from the ECB and BOE have led to “fully justified” declines in EUR and GBP and have downgraded near-term forecasts. We expect weakness in both pairs to move forward to the near term (over the next 3m). This weakness is likely to remain further down the road, as the market moves from pricing in the Fed taper completely to pricing in the end of its low rate commitment.

Noyer says forward guidance fits with ECB mandate Posted: 06 Jul 2013 07:46 AM PDT Bank of France governor Christian Noyer spoke about strengthening regulation on Saturday and endorsed the latest move from the ECB. “Forward guidance is fully anchored to our mandate and in line with the two pillars of our strategy,” Noyer said, referring to the ECB’s inflation mandate and, for the pillars of the strategy, to real economy and monetary developments. Ho-hum, nothing to move markets there.

Optimism is your worst enemy Posted: 06 Jul 2013 07:12 AM PDT Conquering bad habits is the single most important part of becoming a great trader. Marketwatch tracks the terrible advice parlayed by experts just before the 2008 meltdown, the dot-com bubble and the 1929 crash. The symbiotic relationship between the brains of Wall Street gurus and the brains of average investors really is locked in our DNA and our history. Wall Street knows this, has you profiled, knows you're easily manipulated by happy talk and mindless optimism. Be pessimistic this weekend, my friends!

Carney playing a dangerous game to get the Conservatives re-elected Posted: 06 Jul 2013 01:10 AM PDT No matter what the ECB and BOE said this week, the bond bear market is still dominating my thoughts. I do not believe that in the UK at least, we are Turning Japanese, with deflation and zero interest rates forever. Like chocolate whilst on a diet, inflation is too much of a temptation for our austerity imposing political class. With inflation will come eventually, higher rates – there will be an end to ultra-cheap cash. So I have decided this week to talk bond mathematics (please don't stop reading now). In particular I want to explain the way that bond prices behave and that is called convexity. I am very lucky in that Ioan Smith has bought me a t-shirt: I can't wait for my t-shirt to be delivered (although mine is apparently in pink). My column last week was about rate tightening in both European and UK money markets. I'd like to think both Mario Draghi at the ECB and Mark Carney at the Bank of England had been reading my thoughts (albeit unlikely). However clearly the money market moves contributed to their decisions to use "forward guidance" of low rates for years. The effect of these statements reversed the implied tightening in the markets as you would expect. Carney's guidance in particular came as a surprise – it was only his fourth day on the job. However he is a political animal and an ex-Goldman investment banker. He has come here to make his reputation and will want to outshine, outwork and outthink all else. My view on his move this week? My tweet: Louise Cooper So we now know the Carney-Osborne deal. No rate rise until after election no matter what economy does. I think he is economically dangerous long term but the Conservative party want him to engineer a booming economy to get them re-elected in 2015 (without forcing them again into a Liberal Democrat coalition). The question is whether he can dominate the Monetary Policy Committee to ignore stronger economic date and high inflation to keep rates low. He has but one vote – can he persuade the rest to his way of thinking? His forward guidance statement on day four suggests he intends to dominate the MPC and has already had some success in doing so. However what is interesting is that the bond markets barely reacted at the long end. Initially they rallied but on the day, ten-year bunds and gilts were barely moved. Why? I think because bond markets already fear "The Big Exit", when it becomes apparent that rates are beginning the path to normalisation. And this fear, of the great bond bear market, has begun. This week we learnt that PIMCO's flagship bond fund had seen almost $10bn of redemptions in just the month of June – the largest outflow of money in its history. Boss, Bill Gross, of course sees no end in sight to the great 30 year bull market in bonds but then he has built his reputation, career, and vast wealth on it. Whenever the media want an explanation of the bond markets and what is going on, they find a bond fund manager who always will talk positively. So let me tell you the story they don't tell – the tale of convexity. So as we know, bond prices fall when interest rates rise. That is because the value of a 2% coupon bond for example will be much less if rates increase to 4% – the new bonds are issued paying twice the interest, so the old bonds must be worth less. However the relationship between bond price and yield is not linear. It is, in fact, for a simple bond, convex: So this chart shows the bond price on the y or vertical axis and the Yield (or interest rate) on the x or horizontal axis. As you can see as yields / rates increase (from left to right) the bond price falls (from top of graph to bottom) – the relationship is inverse. But what can be seen is that the relationship is not a straight line. It is convex. The gradient of the line shows how much a bond's price will move given a certain change in interest rates. This is called Bond Duration. But Duration (or the gradient) is not a constant – it varies – the line is convex and not linear. The lower the interest rate, the greater the bond price move (for a given change in rates). This can be seen easily on the chart. The red straight line is the bond's duration for a low interest rate – it is a very steep line showing that bond price will move a long way for a given change in rate. The green line is much shallower showing that the bond's price is much less sensitive to a rate change when rates are already high. The steep red line shows why Mr Gross and his bond buddies have loved Central Bank actions following the crisis. However, the higher the high, the further to fall. And the high has been extreme thanks to record low interest rates and QE. Convexity is great when rates are being cut, but awfully painful when rates rise. I wonder how many of retail investors (or even their advisers) understand this? As equity markets have struggled to return to their 1999/2000 highs, bond funds have become exceedingly popular. From the UK's Investment Management Association Statistics In May, June, July of 2012, corporate bond funds were still the top selling retail funds. Trillions have been piled into specialist fixed income funds. The pain of convexity (rather than the pleasure) is a lesson that will be learnt, the hard way (even if not the easy).

Venezuelan President Nicolas Maduro has offered asylum to former U.S. intelligence contractor Edward Snowden Posted: 05 Jul 2013 07:01 PM PDT Venezuelan President Maduro has offered asylum to Edward Snowden. Said Maduro: He is a young man who has told the truth, in the spirit of rebellion, about the U.S. spying on the whole world. It was not immediately clear how Snowden would react to Maduro’s offer Nor how he will reach Venezuela if he accepted The White House has so far not commented on Maduro’s offer via Reuters

ForexLive Americas wrap: Taper trade back on after strong US jobs report Posted: 05 Jul 2013 01:29 PM PDT Forex headlines for July 5, 2013: Non-farm payrolls 195K vs 165K expected Revisions add 70K to prior NFPs Unemployment rate 7.6% vs 7.5% expected Canada employment -0.4K vs -7.5K expected, large decline in full-time jobs Canada unemployment rate 7.1%, as expected Canada Ivey PMI 55.3 vs 58.3 exp S&P lowers Portugal's outlook to negative from stable Royal Bank of Scotland's rating may be cut by Moody's S&P 500 up 1% to 1648, up 1.6% on the week US 10-year yields rise 22bps to 2.72% — highest since Aug 2011 Gold down $26 to $1223 USD leads, NZD and JPY lag The market was looking for an upbeat non-farm payrolls reading after the ADP and ISM numbers on Wednesday but data still hit like a sledgehammer and the dollar soared. EUR/USD was at 1.2870 when the number was released and fell as low as 1.2806, a fresh low since May. Bids ahead of 1.2800/1.2797 stalled the selling and the pair bounced to 1.2831. After NFP it was whisper quiet in this trade in a slow, sideways drift. One exception to the quiet afternoon action was USD/JPY. The kneejerk in the pair was up to 100.10 followed by a slide back to 100.75 but from there it was a steady creep higher. Part of the reason was the gyrations in the stock market. After a strong open, stocks briefly turned negative on worries about tapering. Eventually, economic optimism won out and the S&P 500 closed at the highs of the day. USD/JPY also closed at the highs of the day at 101.20. AUD/USD is usually one to benefit from better risk appetite but there was no going back after the initial fall to 0.9120 from 0.9170. As the mood soured in stocks, the fall continued until 0.9049. That’s just ahead of the 0.9037 cycle low set on Wed. The rebound in stocks did nothing and the pair finished at 0.9058. Cable closed near 1.4900 after falling as low as 1.4858. Support at the March low of 1.4832 provided some life but it’s the lowest weekly close since 2010. USD/CAD touched a fresh 21-month high at 1.0612, breaking the big figure for the first time since Oct 2011. The Canadian jobs numbers were weaker than the headline suggests because all the losses were full time (-32K). It’s not a big surprise because it comes after some strong months but it was another reason to dump the loonie. Overall, however, CAD was strong on the crosses.

Portugal coalition parties to meet tomorrow, make statement Posted: 05 Jul 2013 12:50 PM PDT At this point, the market is 95% expecting an agreement to continue with the government but they may make some concessions on austerity. That most-likely won’t rankle the Germans but the ratings agencies and bond market won’t like it. In any case, the euro showed this week that political problems in Portugal won’t hurt the currency.

CFTC positioning numbers delayed until Monday because of the holiday Posted: 05 Jul 2013 12:46 PM PDT In case you’re wondering where they are. They often get pushed back due to holidays.

Violence escalating in Egypt Posted: 05 Jul 2013 12:28 PM PDT The sun is down in Egypt and I fear it could be a violent night. Reports of 10 dead and 210 injured. It’s not a good idea to riot when the military has launched a coup. There are frequent explosions on the live video.

Late rally in stocks boosts USD/JPY to a session high Posted: 05 Jul 2013 11:53 AM PDT The S&P 500 is back near the highs of the day as once again the taper fears are replaced by excitement about a stronger economy. That’s the right call. USD/JPY is piggybacking on the move, up to a session high of 101.17. Not much room to rally from here with strong offers at 101.25.

Best trade this week: Short cable Posted: 05 Jul 2013 11:29 AM PDT GBP/USD lost 2%, or 304 pips, this week. The pair was up 70 pips through Wednesday but the dovish rhetoric from Carney led to a two-day rout. The weekly chart now shows a broken series of higher lows after 1.5000 broke. In all likelihood, this will be the lowest weekly close since 2010. Critical support is at the March low of 1.4832. Cable weekly chart If the Fed continues to talk about tapering and Carney sticks with the dovish agenda, we could be talking about the low 1.40s very quickly.

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