Forex - Fed's Evans suggests a Price Level Target

From Chicago Fed President Charles Evans: Monetary Policy in a Low-Inflation Environment: Developing a State-Contingent Price-Level Target
I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S. ... There are quite a number of academic studies of liquidity trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies; and yet, central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term.
In my opinion, much more policy accommodation is appropriate today. In a speech two weeks ago, I stated that I believe the U.S. economy is best described as being in a bona fide liquidity trap.
...
In this setting, even a moderate expansion without a double dip will not lead to appropriate labor market improvement. Accordingly, highly plausible projections are 1 percent for core Personal Consumption Expenditure Price Index (PCE) inflation at the end of 2012 and 8 percent for the unemployment rate. For me, the Fed’s dual mandate misses are too large to shrug off, and there is currently no policy conflict between improving employment and inflation outcomes.
[CR Note: the currect FOMC forecast is for the unemployment rate to be in the 7.1% to 7.5% range in 2012, so clearly Evans is even more pessimistic]
...
If the Federal Reserve decided to increase the degree of policy accommodation today, two avenues could be: 1) additional large-scale asset purchases, and 2) a communication that policy rates will remain at zero for longer than “an extended period.”

A third and complementary policy tool would be to announce that, given the current liquidity trap conditions, monetary policy would seek to target a path for the price level. Simply stated, a price-level target is a path for the price level that the central bank should strive to hit within a reasonable period of time. For example, if the slope of the price path, which I will refer to as P*, is 2 percent and inflation has been underrunning the path for some time, monetary policy would strive to catch up to the path: Inflation would be higher than 2 percent for a time until the path was reattained. I refer to this as a state-contingent policy because the price-level targeting regime is only intended for the duration of the liquidity trap episode.Evans suggests committing to low rates until the price level target is achieved. That way investor know that rates will stay low even with an increase in inflation. Once the price level is achieved, the Fed will move back to a 2% inflation target.

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U.S. stock market looks for firmer view of economic recovery

NEW YORK (MarketWatch) -- The U.S. stock market's tepid two-week advance could pick up steam or falter altogether in coming weeks, depending on what a sizeable flow of economic reports has to say about the state of the recovery.
"Everybody is waiting to see the next couple of weeks of numbers so we can have a better idea of what is going on in the economy," said Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors.
"The numbers are a touch more encouraging, and next week we'll start to see some numbers that tell us very clearly how things went in August," said Johnson.
The less-dark view was illustrated on Wall Street, where the major stock indexes on Friday eked out a second consecutive week of gains, supported by reports that U.S. wholesale inventories rose the most in two years and that Japan's growth slowed less than forecast, brightening prospects for the global recovery.
Up 1% for the week, the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,463, +47.53, +0.46%) added 47.53 points, or 0.5%, to end at 10,462.77, with the blue-chip index ending back in the black for the year for the first time in the holiday-shortened week.
The S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,110, +5.37, +0.49%) added 5.37 points, or 0.5%, to 1,109.55, leaving it up 0.5% for the week, while the Nasdaq Composite /quotes/comstock/10y!i:comp (COMP 2,242, +6.28, +0.28%) added 6.28 points, or 0.3%, to 2,242.48, a rise of 0.4% from the week-ago close.
As equities climbed Treasurys fell, pushing the 10-year yield /quotes/comstock/31*!ust10y (UST10Y 2.80, 0.00, 0.00%) to a one-month high. Read Bond Report.
Crude-oil futures for October delivery climbed 3% to $76.45 a barrel, the highest finish in a month, as Chinese trade numbers pointed to a rise in crude imports and a pipeline between Canada and the U.S. was closed due to a leak. See Futures Movers.
Gold dropped for the commodity's first weekly decline in more than a month, with the contract for December delivery down 0.4% to $1,246.50 an ounce. Read Metals Stocks.

It's the economy, stupid

Economic reports in coming days will include figures on retail sales for August, and gauge of manufacturing activity in the New York region during September. The latter part of the week brings the government's count of initial claims for unemployment benefits, with the most recent count falling, including the four-week average.
"If the numbers come in with enough consistency to increase confidence then volume will pick up. What is lacking is confidence, and I don't think you build it on the back of one number," said Johnson.
A large portion of the summer had Wall Street veering from one dismal economic report to another, a scenario underscored by the worst August for stocks in nine years.
Yet September, historically the worst month of the year for equities, has so far had stocks on the mend as reports on the labor market, manufacturing and business activity came in better than expected, lifting sentiment a bit.
And, with November elections approaching, the economy and politics are in play, with President Barack Obama on Friday maintaining the U.S. economy is coming out of the worst recession in decades, while acknowledging the progress has been slow and conceding many Americans may fault him when they vote in November. Read about who filled vacancy on Obama's economic team.
"He's quite right that the economy is in an expansion, and he's quite right that he wishes it were expanding more rapidly," said Johnson.
And, while the peak earnings' weeks are done, a few companies are scheduled to report results in the next few weeks, with six slated to announce quarterly results in the days ahead.
On Monday, Discover Financial Services /quotes/comstock/13*!dfs/quotes/nls/dfs (DFS 15.90, +0.19, +1.21%) reports, followed by Pall Corp. /quotes/comstock/13*!pll/quotes/nls/pll (PLL 37.55, +0.10, +0.27%) , Best Buy Inc. /quotes/comstock/13*!bby/quotes/nls/bby (BBY 33.88, +0.32, +0.95%) and grocer The Kroger Co. /quotes/comstock/13*!kr/quotes/nls/kr (KR 21.25, +0.24, +1.14%) on Tuesday.
Global shipper FedEx Corp. /quotes/comstock/13*!fdx (FDX 84.16, -0.12, -0.14%) and business software titan Oracle Corp. /quotes/comstock/15*!orcl/quotes/nls/orcl (ORCL 25.05, +0.72, +2.96%) are on tap for Thursday. Oracle, which recently hired ousted Hewlett-Packard /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 38.28, -0.54, -1.39%) executive Mark Hurd, is expected to report sharp gains in profit and sales. Read what analysts expect from Oracle.
Through Thursday, blended share-weighted earnings for the S&P 500 for 2010's second quarter stood at $200.3 billion, above the prior week's $199.8 billion, according to research compiled by Thomson Reuters analyst Christine Short.
Of the 496 companies in the S&P 500 that have reported earnings for the quarter, 75% have posted earnings that topped analyst expectations.

Swiss Franc Touches Record High, Nears Parity

In the year-to-date, the Swiss Franc has risen 3% against the Dollar, 15% against the Euro, and more than 5% on a trade-weighted basis. It recently touched a record low against the Euro, and is closing in on parity with the USD. Since the beginning of the summer, the Franc has rallied by an unbelievable 15% against the Greenback. I don’t think I’m alone in scratching my head in bewilderment wondering, What could possibly be behind the Franc’s rise?

By this point, everyone is familiar with the safe-haven phenomenon. Basically, concerns of a double-dip recession have ignited a flare-up in risk aversion and spurred investors to shift capital into locales and investment vehicles that are perceived as less risky. Switzerland and by extension the Swiss Franc, have both benefited from this phenomenon: “Anxious investors searching for a haven from fears about the health of Europe’s banks, which knocked equities and sent peripheral eurozone government bond spreads higher, dumped the single currency. The Swiss franc benefited.” Enough said.

At the same time, the Dollar and Japanese Yen are also considered safe-haven currencies, and as you can see from the chart below, the three have hardly traded in lockstep. In other words, there must be something distinguishing the Franc. Economists point to a strong economy: “Gross domestic product rose 0.9 percent from the first quarter, when it increased 1 percent. ‘The underlying economics of Switzerland are very, very healthy. Concerns about deflation have subsided.’ ” The consensus is that the Swiss economy will expand by close to 2% on the year. However, this is hardly impressive, especially compared to other industrialized countries. In addition, Swiss interest rates remain low, which means the opportunity cost of holding the Franc is high. There must be something else going on.

 In fact, it looks like the Swiss Franc’s rise is kind of self-fulfilling. For most of 2009, the Swiss National Bank (SNB) spent nearly $200 Billion to artificially hold down the value of the Franc. During this period, the Franc remained stable against the Euro and depreciated against the Dollar and Yen. Having finally broken through the “line in the sand” of €1.50, however, the Franc is now appreciating rapidly. Why? Because the SNB no longer has any credibility. It lost $15 Billion (due to the Euro depreciation) trying to defend the Franc, and in hindsight, the mission was a complete waste of time. As a result, a fresh round of intervention is out of the question. The currency markets have also dismissed the possibility of new intervention, and it seems they are punishing the SNB (via the Franc) for even trying.
According to analysts, the markets have also come to see the Franc as a reincarnation of the Deutschmark, due to its “strong economy, massive foreign reserves, traditional haven status and close links with the German economy.” Those that fear a Eurozone collapse and/or want to make exclusive bets on Germany are now using the Franc as a proxy. I don’t personally understand the logic behind this strategy, but where perception is reality, it’s more important to understand that other investors see the connection rather than seeing the connection for oneself.
Going forward, there is mixed sentiment surrounding the Franc. One analyst warned clients, “I would be cautious about chasing it too far in the short term. There’s still a huge number of headwinds out there.” According to another analyst, “We expect the franc to remain strong throughout the decade.” Personally, I’m inclined to side with the former point of view. From a fundamental standpoint, there isn’t a whole lot to keep the Franc moving up and its recent surge is probably running on fumes. At the very least, I would expect a correction in the near-term.

Euro Falls Heavily

U.S. Dollar Trading (USD) mild risk aversion and heavy EUR/USD selling helped the Dollar gain against most pairs. In US stocks, DJIA -107points closing at 10340, S&P -12 points closing at 1091 and NASDAQ -24 points closing at 2208. Looking ahead, July Consumer Credit is forecast to fall -3.8bn vs. -1.3bn previously.

The Euro (EUR) came under pressure for most of the day with the market focused on a WSJ article that questioned the European Banking Stress tests and also the German Banking Association reported that German Banks would need 100bnin more capital if new global banking rules get passed. EUR/USD traded with a low of 1.2675 and a high of 1.2821 before closing at 1.2690. Looking ahead, German Trade Balance forecast at 12.9bn vs. 12.3 bn.

The Japanese Yen (JPY) USD/JPY slipped below Y84 on heavy crosses led by the EUR/JPY but the moves were not drastic and support was found at Y83.50. The BOJ held at 0.1% but given it was the second meeting in two weeks the market was not expecting fireworks. Overall the USDJPY traded with a low of 83.50 and a high of 84.28 before closing the day around 83.75 in the New York session. UPDATE July Machine Orders at 8.8%.

The Sterling (GBP) was weaker against the greenback but made good gains against the souring Euro. Cable Found support at 1.5300 and bounced in the US session. Overall the GBP/USD traded with a low of 1.5294 and a high of 1.5427 before closing the day at 1.5360 in the New York session. Looking ahead, July Industrial Output is forecast at 0.3% vs. -0.5% previously m/m.

The Australian Dollar (AUD) was pushed lower on neutral comments from the RBA after they held at 4.5% and news emerged that Labor would be forming a new government along with its proposed mining tax. Overall the AUD/USD traded with a low of 0.9090 and a high of 0.9181 before closing the US session at 0.9120.

Oil & Gold (XAU) gold surged in the US to test $1260 on global financial concerns.Overall trading with a low of USD$1244 and high of USD $1260 before ending the New York session at USD$1256 an ounce. Oil held up well in a risk averse environment. WTI Oil Closed -$0.30 at $73.80 a barrel.

Euro – 1.2685

Initial support at 1.2588 (Aug 24 low) followed by 1.2434 (61.8% retrace of 1.1877-1.3334). Initial resistance is now located at 1.2933 (Aug 12 low) followed by 1.3000 (Big figure Resistance)

Yen – 83.70

Initial support is located at 83.52 (Sept 7 low) followed by 81.85 (May 1995 low). Initial resistance is now at 85.23 (Sept 3 high) followed by 86.36 (Aug 13 high).

Pound – 1.5365

Initial support at 1.5125 (July 21 low) followed by 1.4906 (0.618 of 1.4231 - 1.5999). Initial resistance is now at 1.5492 (Sept 1 high) followed by 1.5713 (Aug 12 high).

Australian Dollar – 0.9115

Initial support at 0.9055 (Sept 2 low) followed by the 0.8771 (Aug 25 low). Initial resistance is now at 0.9222 (Aug 6 high) followed by 0.9389 (Apr 12 high).

Gold – 1256

Initial support at 1232 (Aug 31 low) followed by 1210 (Aug 24 low). Initial resistance is now at 1265 (June 21 high) followed by 1300 (round number).

Oil – 73.70

NFP Shows Solid Private Job Growth, Yen Tumbles, Commodity Currencies Soar

The Japanese yen is sharply lower in early US session after release of better than expected non-farm payroll report from US. Commodity currencies also soar broadly on risk appetite. European majors are relatively steady and Swiss Franc is indeed dropping sharply following yen. The headline non-farm payroll number showed -54k contraction only comparing to expectation of -105k. Prior month's number was also revised up to -54k. More importantly, private sector job market showed 67k expansion versus expectation of around 40k while prior month's data was also revised up to an impressive 107k. Unemployment rate climbed from 9.5% to 9.6% as expected and is ignored by the markets. Markets will now face another test of ISM services later in US morning.
Release earlier today, UK PMI services dropped more than expected to 51.3 in August and sent sterling lower against Euro. Eurozone services PMI was revised mildly up to 55.9 in AUgust. retail sales grew 0.1% mom , 1.1% yoy in July. Swiss CPI was flat mom, rose 0.3% yoy in August.
CAD/JPY follows risk appetite in US session and jumps sharply. Consolidation above 78.52 is still in progress and more upside should be seen to 82 and above. But after all, we'd still expect upside to be limited by 83.48 resistance and bring resumption of the whole fall from 94.46.

Swiss Franc are Heading to Parity with Dollar on Swiss GDP

The Swiss franc is heading to the parity with the US dollar as the pace of Switzerland’s economic growth was faster than the economists estimated. The currency also gained against the euro.
The Swiss gross domestic product grew by 0.9 percent in the second quarter of this year, following the 1.0 percent advance in the previous quarter. The median estimate was the 0.8 percent growth. Now, as the threat of the deflation considered being gone and the Swiss National Bank is unlikely to intervene, the talks emerge about the possible franc’s parity with the dollar.
USD/CHF dropped from 1.0156 to 1.0115 today as of 11:26 GMT. EUR/CHF declined from 1.3008 to 1.2980.