Worst is Not Over and Neither is Fed Easing

By: Ashraf Laidi | Tue, Apr 29, 2008
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Commentators and pundits alike have erroneously stated that last week's highs in US equity indices broke important technical levels. The Dow has not only failed to breach above a key trend line resistance of 12,920, prevailing since the October highs but also failed to breach the 50% retracement from the same high to the January lows. Similarly, the S&P500's major resistance stands at the 1,410 trend line resistance acting since the October 10 highs. We remind our readers that these recurring failures are no coincidence but instead a technical failure that is largely in synch with prolonged economic uncertainty.

The near bankruptcy of Bear Stearns has become a benchmark of market risk and fear, desensitizing market participants from what is likely to be a slow and long deterioration in US labor markets and an increasingly retrenched US consumer.

Friday's Jobs Report to Elucidate Economic View

We remind readers of the following facts in US labor markets. In the 2000-02 recession, there were as many as 15 consecutive months of negative payrolls between March 2001 and May 2002 producing a monthly average of 148K. In the 1990-91 recession, the longest streak of losing payrolls was 11 consecutive months --between July 1990 and May 1991-- producing an average of 147K. In the current slowdown (not yet officially declared a recession), we're only in the third straight monthly decline in payrolls, with the monthly average standing at 59K. Thus, to be consistent with previous recessions, payrolls will likely register negative readings for the rest of the year into Q1 2009. This also means that the unemployment's recent rise to 5.1% is here to stay and the rate is most likely to climb to as high as 5.9-6.0% by year end.

EURUSD has not shown the same kind of rebound that is typical of sharp oil gains as those of today mainly due to prolonged positive USD sentiment ahead of the Fed. Last week's bigger than expected decline in the IFO release has yet to show whether it was a one-month aberration. The week's array of US economic releases could display a host of disappointing figures, but markets are bracing for the more timely decision of the FOMC. A 25-bp rate cut may extend EUR losses to as low as $1.5530 and $1.5500 while no rate cut is expected to call up the $1.5430s. But we do warn of extensive post-Fed EUR selling due to the possible repercussions from what maybe another gloomy labor report on Friday.

USDJPY sees little action due to the extended Golden Week Holiday in Japan. Fed expectations combined with positive corporate earnings may prop the pair to as high as 104.65-70, but resistance is to remain in command at 104.90-95 until the Wednesday decision. US consumer confidence and Q1 GDP on Tuesday and Wednesday may prove potentially USD positive. Support holds steady at 104.00, backed by 103.65.

GBPUSD is expected to limit any further gains at $1.9935-40 as dollar momentum is expected to prolong throughput the US session, despite rising oil prices. We continue to stress traders' proclivity to sell the highs in cable, making the $1.9960 and 1.9980 considerable resistance levels.



Ashraf Laidi

Author: Ashraf Laidi

Ashraf Laidi
CMC Markets

Ashraf Laidi

Ashraf Laidi is Chief FX Strategist at CMC Markets and author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

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