" SHOW ME THE MONEY "

Have you ever seen the movie “Jerry Maguire”? If you didn’t, you should! That’s a damn good movie. My favourite scene is when he is yelling in his office: “SHOW ME THE MONEY”!!!

This is something that I do too when I do not understand what the heck is happening in the market and I don’t see where the money are going. For example, since the beginning of this year I saw many investment banks and big investors saying that the 2014 will be the year of the USD. The rationality behind this argument is valid as FED continues to taper, reducing, after every FOMC meeting the QE with 10 bln $. The US economy is recovering and when is not, is because of the weather:) The unemployment dropped from 7% to 6.6% - very close to the FED’s target of 6.5%, while in Europe is above 12%. But….the USD is not strong. I’d say Goldman Sachs, Meryl Lynch, BNP Paribas or Societe Generale are not putting the money where their mouth is.

Last year, Ben Bernanke, that time FED’s president, spooked the emerging markets and created a tsunami with the investors selling even their pets and running away from countries like India, Turkey, South Africa or Brazil. So, the money are not going into USD, are not going in gold or silver and they definitely are not going into equities because this charthttp://screencast.com/t/9Wv9AhpB shows that the S&P500 - world benchmark for the equity market – is rallying on low volumes.

I am standing in the front of my trading platforms and yelling: “SHOW ME THE MONEY!”:) Believe it or not it works :) Here it is a chart that show where the money are going lately:http://screencast.com/t/atFU7r7MquB That ETF tells me that the money are getting back in the emerging markets. If you don’t believe it, call the pet shops in India, Turkey or South Africa and they will tell you that in the last two months the request for pets strangely increased.J I do not blame the investors: why the heck should we buy the USD and get 0.25% on our money, hoping that next year, maybe, we will get 0.50% while India pays now 8% or Turkey 12%. You don’t like India or Turkey? South Africa pays 5.5%, Russia pays 5.5% also, Brazil 10.5% - there is a wide choice.

I already told you that I’m in love with India this year and buying INR is proving it. I am considering to add ZAR and TRY to my portfolio.

USD/TRY daily chart: http://screencast.com/t/GQ0SrXuIfM

USD/ZAR daily chart: http://screencast.com/t/2UleyPLVgs

Look at the other currencies that offer good interest rates: NZD, AUD, RUB and many others – they all show that investors look for yields. They don’t care anymore about risks, FED or the weather in America. They want yields….higher the better :)

Non Farm Payrolls potential outcomes 10-Jan-2014

"+250k – Potential de-anchoring of front end US rates. Long USD vs. ZAR & BRL". 

"+220K – Rising short-term interest rates support the USD broadly as optimism over the US recovery is strengthened further. Long USD/JPY".

"+180K to +220K – This would broadly reflect an "in line with consensus" result. A broadly unchanged US outlook likely leaves longer-term, thematic trends in place. Short EUR/GBP & long USD/CAD".

"+130K to +180K – A modest disappointment but not negative enough to drive a significant shift in FOMC expectations, as the trend hasn't shifted. Long GBP/USD, long EUR/USD".

"+95K to +130K – Market optimism about the US employment situation takes a hit and US short-term rates likely decline. The falling interest rate differential provides relief for CAD and AUD. Short USD/CAD, long AUD/CAD".

"+95K or Lower – The USD likely weakens as the markets consider the possibility that employment gains in the US are slowing. Waning USD interest rate support may provide relief to CAD and TRY. A relief rally may propel USD/CAD lower, but the CAD may dip on a relative value basis because of the implications of a slowdown on the Canadian economy due to the trade ties between Canada and the US. Short USD/JPY, short USD/CAD and short USD/TRY".

How FOMC Minutes Could Affect the Dollar

Since the beginning of the week, the U.S. dollar has been trading in a narrow range as investors wait for new direction from the Federal Reserve.  The central bank began the long process of unwinding stimulus last year and while Bernanke laid out a plan for tapering, his influence will be limited to one more meeting.  This makes it extremely important to understand the motivation and level of enthusiasm for last month's reduction because it will help us determine whether the central bank will stick to his proposal for cutting bond purchases by $10 billion at each subsequent meeting.  While the dollar traded higher on the back of stronger trade numbers, the drop in 10 year bond yields suggests that investors believe that under Yellen the central bank could be less aggressive.  That's a separate discussion that we will touch on later but more immediately, the focus is on the FOMC minutes and how it could affect the dollar.

Here's what we know about the last monetary policy decision:

1. Janet Yellen voter to taper
2. Taper nothing more than symbolic - $10B split between Treasuries and MBS
3. Fed changes forward guidance - Low rates now appropriate "well past the time that the unemployment rate drops below 6.5%"
4. Bernanke believes FOMC will taper QE probably at each meeting, $10B each time with end of QE before 2014 year end
5. Fed says tapering will be "in further measured steps at future meetings," determined "deliberately", data dependent
6. Bernanke stresses highly accommodative stance, emphasizes that purchases will go on at rapid rate even after taper
7. Decision was NOT unanimous - Rosengren voted to keep asset purchases unchanged
8. Majority of Fed officials see first rate hike in 2015
9. Low inflation is a problem - "more than a bit of a concern." Fed now sees PCE at 1.4%-1.6% in 2014
10. Fed tightens up GDP forecasts, sees faster drop in jobless rate, 6.3%-6.6% by end of 2014

If the FOMC minutes show a lot of enthusiasm for tapering with a chorus of central bankers supporting consistent reductions going forward, the dollar should rally taking USD/JPY up to 105 and the EUR/USD below 1.36. However if there are widespread concerns about the high level of unemployment and low inflation with policymakers emphasizing that a predetermined course is inappropriate and future decisions should be data dependent, the dollar will resume its slide driving USD/JPY below 104 and the EUR/USD towards 1.37. Aside from the FOMC minutes, ADP will also release its private payrolls report but this should take a back seat to the notes from the last central bank meeting.

Janet Yellen was confirmed as Fed Chair on Monday making her the first female to lead the world's most influential central bank. Having served as the Vice Chair of the Federal Reserve since 2010, she is not new to the FOMC but her voice will be heard much louder this year in the highly anticipated quarterly post monetary policy meeting press conferences. Yellen is a vocal dove that puts growth ahead of inflation but actions speak louder than words and her vote to taper asset purchases in December suggests that as Fed Chair, she may not be as dovish.  Every year, the makeup of the Federal Open Market Committee changes with previous voters rotating out and new voters rotating in.  This year's policymakers have the huge responsibility of determining the pace that asset purchases will be tapered and when Quantitative Easing will end.

Two major doves favoring easier versus tighter monetary policy (Evans and Rosengren), one moderate hawk who favors tighter policy (George) and one centrist (Bullard) will be rotating out of voting positions.  They will be replaced by Plosser and Fisher, two major hawks, Pianalto a moderate dove and Kocherlakota, who shares a similar bias as Yellen.  Former Bank of Israel Governor Stanley Fischer has been nominated to replace Yellen as Vice Chair and if confirmed, another hawk would be added to the roster. This would leave the central bank more hawkish and willing to follow Bernanke's proposal for reducing asset purchases by $10 billion at each subsequent meeting. So while the Federal Reserve will be replacing one dove with another as Fed Chair, on balance the FOMC contains more hawks in 2014, which is bullish for U.S. rates and positive for the dollar. Therefore Yellen's confirmation doesn't make the FOMC as a whole more dovish in 2014.

TIME TO SELL EUR/USD

"EUR/USD has been under pressure since the Fed’s tapering announcement on Wednesday and some
stronger sell signals have emerged that suggest the trend lower could extend.
  Fundamentally, we remain bearish on EUR/USD, and with only a handful of trading days left in 2013,
seasonal funding issues that have helped support the pair through November/December should be fading.
 Short term rate spreads, option market pricing, and the technical picture are all pointing lower, which means we may not see a better selling opportunity ahead of the New Year.

EUR/USD has seen some heavy trading in the aftermath of Wednesday’s Fed tapering announcement, and from a number of perspectives signals are flashing lower. Fundamentally, we have been bearish on EUR/USD for quite some time now, and the earlier start to Fed tapering only adds to that view. In the coming year, an ECB with flat or lower policy rates and that still threatens to add extraordinary stimulus should more clearly contrast a Federal Reserve that is reducing accommodative policies.
Through November and December we noted the seasonal funding issues that have tended to lift the pair into year-end over the past decade. With only a handful of trading days left in the
year though, that influence should be fading, and the high in EUR/USD may have already been set.
From a relative value perspective, a sharp move in short term German-US rate spreads in the USD’s favor suggests spot EUR/USD would be more consistent closer to 1.32 (upper chart to the right). Rate spreads have had a looser connection with spot EUR/USD over the past month or so, but a move of the
magnitude that we have seen since Wednesday is certainly worth noting (~5bps).
The options market also reveals investor concerns on the prospects for the bull trend that has built since November. EUR/USD risk reversals have shown a growing premium for protection against a downside move since Wednesday.
On the charts, the technical picture has also turned more bearish as we highlighted yesterday, which also suggests we have already seen the highs for the year.

Bottom line: We have been waiting for clearer topping signals for the past month in EUR/USD and the developments of the past few days may be as clear as it gets. We look to sell EUR/USD near the current spot rate in the upper 1.36 area, in a position that we think could have considerable downside legs in the weeks and months ahead."

FOMC Minutes at 19:00 GMT and what could be the outcome

Let the Federal Reserve debate end and see what they have to offer through its monetary policy announcement. Market had tried to focus and discuss on all issues related to jobs, growth, price stability, forward guidance, etc. Interestingly inflation, which is off target is the new topic and last hope that is being highlighted/focused by the Doves to come to their rescue, as they are well aware of the price of taper. 

Although I am not sure about the risks, as nothing has hindered the US economic activity. But the last word will come from FED that will matter. Whatever decision FED takes, market is now prepared for move that could be delayed by another 3-months if no announcement is made today. If announced, it is the size that would matter. 

The Maths is simple that if FED goes for taper then the size would initially play key role in moving the market. Though small size may not have sever immediate impact, but it ultimately it will lead to strong USD on believe that finally the move has occurred. No tapering would mean USD thrashing and boon for US Bond, EURO, GBP and Oil too could initially benefit, But Gold will take a big stride and could make $ 100-150 gain by year end. If FED give a future time period for tapering, initially USD may make tiny gain before market will start selling US Dollar and US Bond yield will tighten and Gold will glitter.

Meanwhile, prior to monetary policy announcement it is difficult to determine market direction, but lot will depend on the mood of market and hence, market will tilt accordingly. Ahead of policy announcement, German IFO will be released and some important announcement is due from UK too and ahead of FOMC decision US economic data's will be released.

Financial Market overview 2nd week Dec 2013

After impressive US Non-Farm Payroll data and Unemployment falling to 7 pct, there is certainly strong case to argue that FED should start tapering, as unemployment is only half-percentage away from 6 ½ pct target rate. Recent US economic performance goes in favor of US Central Bank’s bond purchase plan to reduce the amount.

It is evident that the labor participation is up averaging over 185.000 this year, earnings are up, and confidence in the economy has improved as consumers are looking confident. Earlier we saw sharp surge and upward revision of US GDP.

US mortgage rates are already hinting that the recovery has surely accelerated, though share market is showing unusual resilience and did not react to the tapering threat probably sensing that corporate profit will rise due to improving economic conditions. But do not be too optimistic about the share market growth as FED tapering also means withdrawal of cheap liquidity that should have adverse impact when implemented.

Friday’s reaction to the US jobs data was very unusual, as there was no positive re-action to the US unemployment data. Market chased trend by avoiding economic factor. US bond market is the best example, as 10-year bond yield after a brief surge, fell back to 2.86 pct. Allan Greenspan once warned that “when the bond market begins to move, FED might not be able to control it”.

In my view, we could soon be heading for a sharp move. What may have stopped US Dollar gain is the absence of FED official’s statement on the recent US economic pick-up. In recent past we have seen them defending tapering against jobs condition and growth, both have showed remarkable recovery.

The biggest challenge for US Central Bank is that it has to seriously consider start easing up its conventional and controversial stimulus program that is pumping USD 85 billion a month. Further delay will question FED’s credibility, as it has earlier in June declared that it may end up tapering by March 2014 based on fundamentals, which is as per projection, since unemployment has hit 7 pct and GDP is on the rise. Housing market continues to flourish.

Furthermore, all indications are that next month’s economic data will show better economic performance due to holiday season that should inflate demand. Therefore, there is no reason to further delay tapering. If FED is no rush and decides to continue its bond purchase program, then it should tell the market that why it is misguiding by deviating from its earlier (June) announcement when it is meeting its target and why is Fed unable to implement tapering. Low inflation was never its target and this could be a lame excuse.

It is very surprising that the Dovish FED officials have once again failed to read the US economic trend correctly and have been constantly trumpeting fearing economic slowdown and needs for more liquidity injection. So far estimates are FED has injected nearly USD 3 Trillion.

While, earlier on Thursday, the unexpected did not happen as ECB went for hold, but following monetary policy announcement in his press appearance ECB President Draghi answered with confidence, despite European Central Bank struggling for economic recovery and making poor future projection for the Euro-zone region.

Euro to my surprise did not weaken despite hint if slowdown in European and good economic recovery in USA. I still believe this could be false up move. If market believes that tapering and early rate hike is priced in then this is wishful thinking because once tapering is announced, no matter whatever may the size, market will become nervous and jittery. Remember this is not going to one time tapering, liquidity injection will gradually halt that has many strings attached. One hitch that may have hindered US Dollar’s rally could be the legislative factor that has deadline date for a Budget deal of December 13.

However, keep a close watch on emerging markets that should show signs of nervousness, as prior to any move its stock market will once again start melting and currencies will come under pressure and do not trust US bond market as holder of US treasuries could soon start losing its patience. More importantly, this time speeches from FED official should provide the real lead. 

GBP/USD 28-11-2013

GBP/USD moment of truth is here. What brought us to present 1.6300 levels was a steady rise in UK interest rates supported by 2 year Gilts since last February in a more healthy UK repo market. This situation would wholly explain consistency in great UK economic data and GBP's rise. Its a fascinating insight how this works but more importantly is why wouldn't Carney take the job. Its literally a no brainer decision since the UK is working wonderfully on all cylinders.

  Now UK interest rates currently sit 0.001 above yearly averages while 2 year Gilt yields sit at 0.427. Gilts in terms of overnight Bank Flow Reports hit stratospheric purchase levels all week so our rally may be in for a correction. If the 2 year Gilt Yield falls below 0.425 thereabouts and  interest rates drop below current prices, the big GBP short is here. Inversely, if levels hold, we go higher. I fault again these idiotic analysts abdication of their responsibilities to not bring this info to all at fxstreet dot com and dot net.

 Levels to watch today is the range between 1.6332 - 1.6246. What separates this range is an MA line at 1.6290 that decides Long/Short. Higher prices must break and hold exactly above 1.6332. That occurrence allows a clear path to 1.6637 and 1.6647. A failure to break and hold may see a test to 1.6045. Look for the range 1.6332 - 1.6246 to hold today but watch closely the 11 - 12 hour for any price changes / range breaks.

 We reach extreme prices: 1.6345, 1.6371, 1.6385. Watch closely 1.6345 if seen on a range break. That;s a perfect short point if seen for today. This price level tells me if a range break is seen it could very well be a false break. Interesting price developments for GBP but caution is still advised until confirmation of direction