The Forex Market has been quiet for the start of the week as risks are balanced on both sides of the Atlantic. Friday's better-than-expected US unemployment rate did not live up to the declines in recent recoveries. The unemployment fell to 8.9% despite a 60k jump in the labor force. Considering the $1.2bn expected to be utilized through QE1 & 2, one would expect the rate of decline to have been more significant. Fed President Bernanke's has underlined the employment rate as a key determinate of QE's success - which so far doesn't instill us with that much confidence. The USD's prolonged decline continues to be a function of widening interest rate differentials since the market has been focused on US anemic growth and Bernanke's dovish comments.
On the other side of the Atlantic, Trichet's strong vigilance comment has all but assured the markets that a rate hike is coming on the April 13th policy meeting. In addition, there seems very little in the way of economic data which could derail this current thinking. European benchmark rates continue to lead the selloff in global fixed income. Expectations of rate hikes in Europe by the ECB, BoE and SNB will increasingly embolden interest rate differential traders and make the USD one of the best funding currencies. (The Swiss National Bank (SNB)'s Jordan admitted that deflation risks have basically vanished and that interest rates would need to climb in the medium term; see last week's articles for BoE justification).
The USD dollar has further ground to give to Europe despite Trichet's impassioned and empty statement that a solid and credible USD is in the interest of the international community. While concerns over events in the Middle East/North Africa and European sovereign debt will continue to pop up over the coming months, the longer term trend for the Greenback should be to the downside. The rate of deprecation will depend on the news cycle and data.
Over the weekend, fighting between Gaddafi's forces and opposition rebels increased in Libya with Misrata and Zawiya being the main areas of violence. While equity (although slightly lower on Friday) & FX markets for the most part shrugged, oil prices remain elevated with WTI trading comfortably around $106.00. EURUSD was able to clear the 1.4000 barrier which illustrated that the safe haven trade has run out of momentum with political disruption semi-relegated to in Libya.
In a surprise to most European traders - Moody's downgraded Greece to B1 with negative outlook from BA1. Moody's stated that the likelihood of a Greek default has risen since its last downgrade. The credit agency referenced serious risks and roadblocks to restructuring existing Greek debt. The unexpected downgrade highlights the lingering sovereign risk to Europe without a comprehensive rescue plan. While in the short and midterm we are USD bears, there is still reason for concern that in the extended long term - the lack of sustainable growth in the EU peripherals will force Germany to make some real changes to the EU - musical chairs anyone?
As for this week, we will be watching US retail sales on Friday for evidence that the US consumer is still heavily and willing to participate in the US's recovery. A weaker-than-expected figure will weigh heavily on the USD and increase speculation that further fiscal and monetary stimuli may be coming. In Europe, German factor orders and EU industrial orders should support market confidence that overall, the aggregate European economy is coming back to life - giving more momentum and creditability to our predicted ECB rate hike on April 13th.