Monday, May 2, 2011

Bin Laden Bounce!

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By Mike Conlon | May 2, 2011

Overnight it was revealed that Osama Bin Laden has finally been brought to justice and was killed by US forces. The sense of relief that came over the markets may be short-lived however as there are still many sources of risk in the global economy, each posing a different threat.

Oil sold off immediately on the news and stocks are higher to start the day and while this certainly is an important development, it may not be enough to reverse recent trends. Those trends of course are a weak US dollar and higher commodity prices, especially oil.

This week there are a few rate policy decisions that we need to keep an eye on: Australia on Tuesday and Europe and the UK on Thursday.

In addition, the US Non-Farm Payrolls report is due out on Friday and this leading indicator may show whether or not the economy is on the mend. It is expected that we will add 190K jobs and that the unemployment rate will remain steady at 8.8%.

With the end of QE2 coming next month, it will be interesting to see if the old market adage, “sell in May and go away” has any merit.

In the forex market:

Aussie (AUD): The Aussie is mostly lower despite the risk appetite in the market as home prices came in lower than expected. This comes a day ahead of the RBA rate policy meeting where it is expected that they will leave rates unchanged at 4.75%. The Aussie eclipsed 1.10 vs. USD earlier this morning. (Click chart to enlarge)


Kiwi (NZD): The Kiwi is mixed as well as the US dollar is picking up a little strength this morning as commodity prices are lower to start the day. Employment figures are due out in New Zealand on Wednesday.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back from recent highs on the Bin Laden news. However, it must be noted that oil is still trading above $112. Canadian employment figures are due out on Friday.

Euro (EUR): Euro zone PMI figures came in this morning better than expected and Thursday’s rate policy decision will be important as even though there is no change expected, the accompanying statement could provide more clarity into whether or not the ECB will tighten further in the ensuing months. (Click chart to enlarge)


Pound (GBP): The Pound is mixed this morning as home prices stayed steady in the UK, halting previous declines. The BOE rate policy decision on Thursday is also expected to yield no change but unlike the ECB, there will be no policy statement so this decision may have less impact than that of the ECB.

Dollar (USD): It is always good to get news that can give people hope however once the reality of current economic conditions comes back into focus, there could be continued worry. The Non-Farm payrolls report due out on Friday will be an important metric to watch, but stocks and commodities prices may ultimately tell the story.

Yen (JPY): The Yen is weaker across the board as some sense of risk-taking has reduced demand for the safe haven. The Nikkei average made it back to just over 10K for the first time since the natural disaster took place.

While it is definitely a bittersweet moment to know that Osama Bin Laden is no more, it would be a major mistake to think that terrorism has ended. There is still considerable risk in the world today, and the conflict in Libya and various other regions remind us of it daily.

While a slowing economy here in the US is a major problem, commodity price inflation due to loose monetary policy may be a bigger detriment. The US dollar has been the worst-performing currency over the last three months so this is no coincidence.

Whether or not the end of QE2 will bring about further declines is anyone’s guess at this point but one thing is certain: there may be some bumps and bruises to the economy once the training wheels are removed and it will be interesting to see if the economy can function on its own!

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