TRICHET

Trichet, known as a celeb around interest rate decisions took center stage on Thursday, releasing his economic outlook. The central bank left yet again their rates a 1%, but stated this time round that they intend to proceed with their 60 billion Euro plan to buy covered bonds on the first and secondary market. Following the decision the President mentioned that even though they do expect further contraction this year, it should be much less than the previous two quarters and the Euro-zone could see sparks of improvement during 2010. Trichet’s speech had a positive effect on the markets and the on the Euro, as the chairman stated that further aid will come to economy once economic data starts to show improvement and current policies leak through the system. The Euro also dropped last week closing with an average loss of -1.8%.

NFP Shock the Markets

When we were just starting to become accustomed to those large 500 numbers, the Bureau of Labor Statistics had to surprise and release an unbelievable change in employment figures.
As always, on the first Friday of each month, the major-market-mover is released showing how many new jobs were created or in our current situation, how many jobs were cut due to economic contraction. In addition the unemployment rate is released simultaneously to the NFP result, showing the percentage of the total labor force that is unemployed but actively seeking employment and willing to work in the US. Last week’s numbers shocked analysts, as the NFP result showed that during the month of May the employment rate had dropped by only 345k. Even though the unemployment rate didn’t show such an encouraging number climbing to a whopping 9.4%, the dramatic change in Non-farm Payrolls had a major impact on the markets increasing volatility during Friday’s session.

Where to Now?

From a fundamental and historical point of view, the markets should continue higher, especially due to Friday’s impressive NFP figure. Friday’s immediate reaction from stock traders was to drive the indices to higher ground. The result diverged by such an extent, from analyst expectations, that throughout the session stocks lost their steam as many questioned the surprisingly good report. On the Forex market the Dollar index saw a dramatic change, as the Dollar jumped against counterparts, the Dollar/Yen pair soared during Friday’s session climbing by over 200 pips. While it might seem strange that the Dollar increased against counterparts, especially as it has acted as a safe-haven over the last couple of months, recent movement came down to a combination of profit taking and higher U.S bond yields.

As mentioned above Friday’s numbers gave the markets a green light regarding the strength of the U.S economy. On one hand, currencies should continue on their normal path, which means that the GBP/USD, EUR/USD and USD/JPY could see higher ground in the long term. On the other hand, the Dollar could gain strength in the short term as investors are now rushing into the green back due to the following;

• 1. Traders are now pricing in a high chance of a rate hike, towards the end of the year- this is attracting foreign money into the Dollar.
• 2. Profit taking after Dollar counterparts presented an impressive rally.