FXstreet.com (San Francisco) - The Federal Reserve seems to have
disappointed the market this week after avoiding immediate actions
to boost economy during the last FOMC meeting held this week. But
investors forgot about that Friday with the better than expected
nonfarm payrolls and EFSF talks.
In the eurozone, European Financial Stability Facility (EFSF) has
contacted members of its banking group for proposals on a series of
credit facilities, Reuters reported Friday. The EFSF wants
repurchase facilities, unsecured and secured loan proposals from
Before, the Fed decided Wednesday to keep the target range for the
federal funds rate at 0-0.25%, while reiterating that economic
conditions are likely to warrant "exceptionally low levels" for the
federal funds rate, at least through late 2014.
The lack of action was a surprise. Analysts had expected the Fed to
push out its pledge to hold its benchmark federal funds rate
exceptionally low, while others expected further stimulus measures.
11 out of 12 Fed officials voted to keep the central bank's
accommodative policies in place. "The take away from the ECB and
FOMC meetings is no immediate action but next month will likely be
different," comments Marc Chandler, Global Head of Currency
Strategy at BBH. "The door is more than ajar. Many issues comes to
a head in September," points Chandler.
In the same line, James Knightley, senior economist at ING,
comments that "the Fed has given a slightly stronger indication
that it is going to push ahead with QE3 in September." In the
statement, the FOMC said the Fed "will provide additional
accommodation as needed to promote a stronger economic recovery."
Knightley continues to affirm that "at the last FOMC statement they
didn't use the world 'will,'" merely stating that they are
"prepared to take further action".
"Moreover," continues Knightley, "the statement, in general, is
more downbeat than the June 20 document with the Fed stating that
the economy 'decelerated somewhat' in 1H12 after previously saying
'the economy has been expanding moderately'."
Chandler answers that "The mid-Sept FOMC meeting is seen as the
last opportunity for the Fed to take action ahead of the US
election as the October 24 meeting is seen as too close to it."
Following the topic, Yohay Elam, Forex Crunch's analyst in a
Twitter conversation with Mauricio Carrillo from FXstret.com, said
that "QE3 will do very little as long term yields are already low,
and Bernanke said there are 'diminishing returns', but stock
markets want QE3." Elam believes "that QE3 could come if the Fed
targets GDP, or practically allows higher inflation," that it's "a
Carrillo noted that "If economy continues its slowdown, Fed won't
have any other option," and he agreed with Chandler, saying that
"It's electoral year, so Government will wait to launch artillery
just two months before elections."
So, September seems to be the Fed's 'deadline' taking into
consideration fundamentals. "The lack of action from either the Fed
or the ECB this week stands in stark contrast with their dour
economic assessments," explains Mr. Chandler. "The assessment and
action will be brought into line, but not as soon as investors
Employment report: Good enough?
Early on Friday, the United States reported a better than expected
nonfarm payrolls in July with 163.000 jobs added, the employment
rate rises slightly from 8.2% in June to 8.3% in July. "The rest of
the report isn't as good," said James Knightley. "The unemployment
rate rose to 8.3% from 8.2% while the U6 rate, which includes those
that classify themselves as underemployed rose a tenth of a percent
to 15%. This is based off the household survey, which reported that
employment actually fell 195,000. Wages growth was also weak, while
the average working week duration remained at 34.5 hours."
Friday's figures were the highest NFP in five months, also the
highest unemployment rate in 5 months. "Since the beginning of this
year, employment growth has averaged 151,000 per month, about the
same as the average monthly gain of 153,000 in 2011," said the
"The report confirms a picture of below-trend growth leading to a
below-trend increase in employment and rising unemployment,"
commented Allan von Mehren, Chief Analyst at Danske Bank, "We
believe growth will rise slightly to around 2% in H2, which
suggests employment should pick up only slightly in coming
On the other hand "the bottom line is that the employment report
shows a strong headline reading but as we believe that most people,
and importantly the FOMC, will resort to digging beneath the
headlines to focus on the enormous uphill struggle facing the labor
market," pointed Andrew Wilkinson from MIller Tabak.
Miller Tabak and Danske analysts agree that the employment report
figures suggest that "with growth below trend and a rise in
unemployment, we expect the Fed to launch more stimulus in
September," as von Mehren said. Wilkinson adds that "the report
should do little to change expectations for a further move in
September from the Fed and so one can understand why equities are
happy to advance."
European markets have jumped on Friday on the back of EFSF and US
Data after collapsing Thursday. The most important indices in
Europe have closed with hard gains. DAX has posted 3.93% increases,
FTSE added 2.21%, Italian MIB jumped +6.34%, CAC 40 rose 4.38% and
Madrid closed 6.00% up. Wall Street is closing also higher today
with gains around 2.0% so far today.
The Euro, in its side, is rallying 1.60% so far today against the
Dollar with the pair heading toward 1.2400. "The EUR/USD is seeing
an interesting surge," comments Valeria Bednarik from FXstreet.com.
The rally of the euro against the dollar has found an interim top
at the 1.2390 area where it peaked after rising over 210 pips
throughout the day. However, as the week comes to an end, interest
is fading following wild movements in the wake of major central
banks decisions and the US nonfarm payrolls reports.
Goldman Sachs is "bearish on both USD and EUR" according to a
recently published report, "EUR-USD is the usual market proxy for
the performance of both the USD and the EUR. So, with the fall in
the EUR against the USD, the USD is rallying right? Wrong. What
seems to be happening is that the market is selling both the EUR
and the USD."
"Looking at the Broad Dollar index, excluding the move in EUR-USD,
we see that there is wide-spread selling of the USD," continues
Goldman Sachs' report. "Likewise, the decline in the trade-weighted
EUR index, since the beginning of July, shows that the EUR is also
being sold. Both are down roughly 2% since June against their main
This phenomenon "would help also explain the compression in yields
in the EM world," continues Goldman Sachs, and "why GBP/USD is so
high despite a deteriorating economic backdrop."
"This move out of EUR and USD could also shed light on why the AUD
remains extremely buoyant despite rate cuts, a Chinese slowdown and
a fall in commodity prices," concluded Goldman Sachs.
On the other hand, Deutsche Bank says it is time to turn bullish
EUR and recommends buying EUR vs. ZIRP currencies. "It's now time
to turn tactically bullish EUR vs the other ZIRP currencies: USD,
JPY and GBP," says DB in a research note. "Target 1.27 in EUR/USD,
100 in EUR/JPY and 0.81 in EUR/GBP."
DB explains that it has become more optimistic in the near-term for
three reasons: (1) "Yesterday's ECB announcement was significant,"
(2) "Expectations are too low, market is too short euros," and (3)
"Markets approaching 'theme fatigue' threshold."