Wednesday, August 3, 2011

Forex Outlook 8/3/11

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By Mike Conlon | August 3, 2011

Talk about a disappointment! Yesterday, the markets tanked after the US Senate approved the debt-ceiling deal in a sign that once again, Washington can’t do anything right. All that was accomplished was essentially kicking the can down the road (yeah I said it) so that we can resume this debate in a few months.

Meanwhile, the Senate hasn’t produced a budget in 2 years, and it’s a shame that we have to go to the brink of disaster to get politicians to do their job. So the uncertainty persists, as the global economy contracts and this three-ring circus we call government hasn’t done a darn thing to help job creation and has in fact only done things to hinder it. This is confirmed by this morning’s Challenger jobs cuts which are increasing, though the ADP employment change came in slightly better than expected. It’s beginning to look and feel like we are on the next leg down, as the Dollar weakens because the markets may be starting to believe that QE3, 4, 5 etc. may be forthcoming from the Fed to try to keep the economy afloat as politicians continue to do their best to sink it.

As markets tanked yesterday, there was a major move into gold and the Swiss franc pushing both to new all-time highs. The move in the franc was so dramatic that this morning, the Swiss National Bank (SNB) popped a surprise interest rate cut on the market essentially saying enough is enough. This is a warning shot across the bow of speculators who have been pushing the franc higher, as a formal intervention may be on the horizon. This has weakened the franc temporarily, but may not be enough to reduce demand.

Gold is soaring to new nominal highs in the $1670 range, and the other safe-haven currency, the Japanese yen has avoided some of the demand as the BOJ is warning of intervention which could be coming shortly.Tomorrow the rate decisions from the BOE and ECB are expected to produce no change, but don’t be surprised if the BOJ decides to try to weaken the yen through either words of actions.

Friday’s Non-Farm Payrolls report may need to produce a better-than-expected number to allay market fears, otherwise the economic death spiral may begin.

It’s a sad, sad state of affairs here in the US as there is no confidence in this administration that things will get better. Things looks so bad here for the Dollar that even the Euro is attractive, despite the bond vigilante attack on both Italian and Spanish debt which could push one of those countries to seek a bailout.

While the US has barely avoided a credit downgrade from the ratings agencies, that tune could change very quickly. The volatility that has occurred as a result of all of this uncertainty is a trader’s dream, but an investor’s nightmare. So keep your trades to the short-term and wait for the dust to settle.

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