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Forex Market Outlook 11/2/11

How does one get invited to that ultra-ritzy resort town of Cannes, France? Apparently by upsetting G-20 leaders as you potentially re-neg on a deal that may be the most important economic event of the past year. Yet that’s where Greek PM Papandreou will be as he has been “summoned” to the G-20 meeting to explain what the heck is going on in Greece.

For the record, Greece is not part of the G-20 so his presence is unwelcome to say the least. Both European and G-20 leaders have been blind-sided by the referendum vote in Greece and it has the potential to derail all of the wheeling and dealing that has taken place over the last month as the Euro debt resolution was announced. Picture this—say you owe a lot of money and your creditor agrees to reduce the amount you owe by 50%. What to you do? You take it of course and say ‘thank you’. What you don’t do is say let me get back to you.

Yet that’s exactly what Greece has done, which is essentially a slap in the face to Euro zone leaders and by proxy, the rest of the world. If Greece does not back away from this action or mitigate its impact, then the rest of the world may suffer. Don’t be surprised if this referendum turns into an “opinion poll” which has little consequence. Yet this may go down as one of the biggest idiotic blunders in the history of geo-politics.

Despite this SNAFU, the markets are up-beat to start the day as anticipation of today’s FOMC meeting may give markets hope that there is more free money on the horizon. It is unlikely to produce any change to policy, as the last change dubbed “Operation Twist” hasn’t had enough time to work. But, Bernanke may officially open the door for QE3 if he deems the economic environment to be worsening. So far, the Fed has been way behind the curve and their economic forecasts and estimates have largely missed the mark. This can be problematic when you consider that they use these estimates to make policy.

In the meantime, economic data is trickling in and is mixed. In Germany, PMI manufacturing figures came in better than expected, but the unemployment rate ticked higher to 7% from an expected 6.9%. Italian PMI figures were a lot worse than expected.

Tomorrow the ECB is having its first rate policy meeting with their new chief Draghi at the helm. Will this produce a change of policy? Market expectations are that there will be no change, but if they fear a weakening they could be prompted to cut rates. This is one of those times that a rate cut might make sense, so I’m a bit surprised more people aren’t talking about it. A rate reduction in Australia just took place, so we could begin to see the start of some ratcheting down.

But the most important data to round out the rest of the week is on unemployment figures, with New Zealand reporting later tonight and Canada reporting on Friday. Today marks the first day of the US employment reports with Friday’s Non-Farm Payrolls report being the most important of the bunch.

This morning, the Challenger jobs cuts figures came in better than expected, as did the ADP employment change figures. The ADP report shows private payrolls changes and today’s report of 110K net new jobs was better than the expected 100K.

However, one cannot make a direct correlation between today’s ADP number and Friday’s NFP. Friday’s figure is the official government report and takes into account both government and private payrolls. So it will be interesting to see what that figure is, as it is one of the most significant economic barometers we have. Expectations are for a gain of 95K with unemployment rate to remain stubbornly high at 9.1%.

For now, the markets are content to drift higher and hope for some Fed love later today and are also hopeful that the G-20 summons for the Greek PM will remove the uncertainty surrounding the deal. Should Bernanke fail to produce or should the G-20 fail to change Greece’s intended course of action, then we could slip back into risk aversion mode in a heartbeat.

As a result of these uncertain prospects, I am content to keep the trading to short-term and am not looking for the home-run trade

By Mike Conlon,

Market Snapshot