Saturday, September 08, 2007

Now, the Fed has to Cut....

So after a very disappointing Employment number yesterday the market is fully pricing in and expecting the Fed to respond on Sept 18 with a 25bp cut in interest rates. This is something I have been expecting for about a month but I am wondering if the Fed might be a little to late on this one. Yesterday's number was a shock to most, certainly me, the slowdown in employment is dramatic....or is it. A little hindsight research shows that non-farm payrolls have averaged about 44k per month over the last three months, not a very pretty picture. My question is should the Fed have been aware of this and moved sooner. I am a firm believer that perception is reality. As such a small cut at the beginning of this "crisis" might have been enough to lessen the blow we are currently dealing with. Sure a slowdown would still have occurred but possible not to this extent. There are already many many stories in the papers about job cuts at the big investment houses in the credit sector. Same for most of the big banks. I am convinced that the Fed is going to cut on Sept 18 (I was before the announcement and more convinced now)but what purpose will it serve. Will Banks begin to loan money again, will the yield curve (o/n-12mths) suddenly steepen out, I am not sure of that. I think it will give more opportunity for people to run for the exit and cover positions. There is more bad news ahead, most of the mortgages from Home Loan bankruptcies a few weeks ago have not hit the streets yet (at a steep discount) as such more losses are on the horizon. I am not a total doom and gloom guy as the more and more I read it seems there are to many on the band wagon (a sign of a near...but not to near...term end) but I think things get worse before they get better.

So what does that mean for traders. Well the selloff in the Euro that I was expecting never really materialized. The after cut rally certainly has. I would stay long if you already are and look for an area to buy if you are not. 1.3600 ish for an optomistic entry level. Target is +1.4000.

Look out for Mexican interest rates. Inflation numbers yesterday were basically as expected. If markets were "normal" they would have already raised rates. Under these circumstances I think the SHOULD hold off. Comments from Ortiz this week concerned about inflation have me on guard. He might throw the market a curve ball which would hurt everyone alot.

One last thought on the U.S. interest rate market before I leave you. A friend of mine at a large European bank told me yesterday "When traders are selling 10year Mexican swaps to raise dollars (as it is cheaper then paying o/r) there is something seriously wrong with the market.

Interesting huh?!?

Good Luck and Good Forex Trading

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